Disclosures – What Happens if You Don’t Mention Those Pesky Details

Last week, I shared the importance of disclosing what are called “material facts,” information a seller knows or should have known that could influence a buyer’s decision to buy—or the amount they’d be willing to pay. Disclosures cover everything from natural hazards to underground utilities, storage tanks, septic systems, short sales, mother-in-law units, proximity to agriculture or industry, naturally occurring asbestos, and more.

Disclosures cover such a wide range of topics and can be so detailed and complex that there are whole companies that do nothing but deal with them. They’re called Natural Hazard Disclosure Companies (NHDs), and even they don’t deal with all the disclosures legally required by some real estate transactions. Because there are literally hundreds of potential disclosures, many may seem inconsequential to the seller. After all, you’ve gotten used to the noise that the neighbor’s dog makes. And since you and your neighbor (who happens to own a liquor store) are friends who often enjoy a glass of wine together, you’re not likely to complain about Fido the yappy schnauzer.

Since the prospective buyer is a teetotaler who is unlikely to socialize with the wine-drinking neighbor, he may not find Fido’s quirky but constant yapping so endearing. The point of all this is, as a seller, you need to think of disclosures through the eyes of prospective buyers. It is critical that even seemingly irrelevant issues are disclosed. As I indicated last week, if it changes the buyer’s mind regarding the sale, it was “material.” If it doesn’t affect the buyer’s decision to purchase the property, it doesn’t hurt to make the disclosure.

So what happens if the sellers do not disclose a material fact (in writing!) they should have? Nothing good, I can assure you. You may wonder why it is so essential to note every pesky detail. After all, the prospective buyer tours the property and hears the schnauzer for himself. Let’s fast-forward eight months. Your buyer just found out he has been transferred to New Mexico and it’s mid-2007. The property value just dropped 10 percent and the buyer is now looking for a way to undo the sale. He’s looking for a plausible way out. For example, he wouldn’t have purchased the property if he had known that the neighbor had an obnoxious dog who barks incessantly.

Will you, the seller, win this lawsuit? Maybe yes, maybe no. Will you spend some sleepless nights and help fund your attorney’s child’s college education? Almost certainly, yes. Just the letter from your attorney telling the buyer he has no case (which may or may not be true) will probably cost $300-$500. If a lawsuit is filed and the case never even gets to court, add at least one zero ($3,000-$5,000). If the case goes to court, add another zero. And that is assuming you win. Losing may mean damages or a rescission. You get the house back and the buyer gets the purchase price back plus and money he spent on taxes, improvements, and interest minus the fair market rental value while he lived there. The buyer may also be entitled to damages for the pain and suffering of listening to Fido’s yapping.

So, the rule is this: when it comes to making disclosures, mention every pesky detail, no matter how small or seemingly insignificant.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

Disclosures – Might as Well Tell the Truth

In the dictionary, “disclosure” is defined as the action of making new or secret information known. Having recently written a column about selling properties as-is, I thought I’d elaborate on the disclosures sellers are required to make in Mendocino County. Selling a property in its current condition isn’t the same as hiding information about its faults.

The state requires sellers to disclose any “material facts” that would affect a buyer’s decision to purchase the property or the price they would pay. It’s a bit vague, but since any material facts the seller doesn’t mention prior to the close of escrow can become the basis of lawsuits after the escrow closes, I always tell sellers to disclose anything they think might possibly be of interest to the buyers. If the information changes the price the buyers agree to pay, or if the buyers back out of the sale completely, the information was material. If not, no harm was done in disclosing the information.

To help define the information sellers should disclose, Mendocino County Realtors have collaborated with our state professional association to create an 11-page document outlining everything from whether the property is within 300 feet of an industrial or agricultural site, to whether a property is in foreclosure (and therefore a huge pain to deal with). If you’re thinking of buying or selling a house, here are a few issues to consider. For a comprehensive list, talk to your Realtor.

The Mendocino County disclosure starts with an acknowledgement that buyers receive booklets about toxic mold, lead, earthquake safety, and energy ratings. And it only gets more exciting after that. As dull as some of this information may seem, it is essential to carefully review it.

Be sure to pay attention to the disclosure about proximity to industrial or agricultural properties. Be aware that your dream of a quiet, peaceful homestead could be shattered by the clanking of a harvester at 6:00 am or bright lights flooding your bedroom in the middle of the night from a factory’s 24-hour work cycle. If your property is near an agricultural site, the standard disclosure says you may be “subject to inconvenience or discomfort arising from use of agricultural chemicals, and from the pursuit of agricultural operations including, but not limited to, cultivation, plowing, spraying, pruning, harvesting, crop protection, which occasionally generate dust, smoke, noise and odor, and protecting animal husbandry from depredation.”

Being close to an industrial site has similar downsides. The disclosure says you may be “subject to inconvenience or discomfort arising from the use of machinery, and from the pursuit of industrial operations including, but not limited to, assembly, manufacturing, cutting, drilling, machining, metalworking, milling, punching, “tapping”, soldering, transportation of materials and goods, and welding. All of these activities, and others not mentioned in the non-exclusive preceding list, may generate light, glare, dust, smoke, noise and odor, all of which may occur 24 hours a day, 7 days a week.”

If your property is in the middle of nowhere, far from farming or industry, it may be harboring endangered species or include dead or diseased trees, both of which can lead to significant costs. The disclosure says, “The presence of a listed [endangered] plant or animal on the property can have serious consequences…including but not limited to prohibition or limitations on building, remodeling, grading, landscaping, and agricultural, livestock, and equestrian activities, and costs relating to governmental requirements for environmental mitigation of the effects of buyer’s plans or activities.”

You can see, there’s a lot to think about and I’ve barely scratched the surface. I haven’t even begun to talk about issues related to sewer laterals, underground utilities, storage tanks, septic systems, short sales, mother-in-law units or naturally occurring asbestos. As I said, talk to your Realtor for details.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

Sonoma Clean Power Comes to Town

 

If you live in an unincorporated part of Mendocino County, or in the cities of Fort Bragg, Willits or Point Arena, you should have received a letter from Sonoma Clean Power (SCP) in June, letting you know they’re taking over for PG&E as the region’s electricity supplier. PG&E will continue to maintain the wires and manage the grid, but thanks to California Assembly Bill 117 back in 2002, local governments can choose to purchase electricity on behalf of their communities.

If you compare rates, you’ll see that SCP’s electricity is slightly less expensive than PG&E’s for both their standard electricity and their extra environmentally friendly option, and that more of SCP’s standard electricity comes from renewable sources.

PG&E offers a standard program and a program called Solar Choice, which produces 100 percent of its electricity via solar energy. The standard option costs $0.24138/kWh, while the Solar Choice program costs $0.26748/kWh.

SCP’s standard offering is called CleanStart, and it costs $0.23925. Its extra environmentally friendly program is called EverGreen, and it produces 100 percent of its electricity from geothermal power. EverGreen costs $0.26425/kWh. For the average customer, the premium for EverGreen is 2.5 cents more per kWh, or about $13 more per month than the standard CleanStart. option

With SCP you will save $0.00213 per kWh or about $1.10 per month on a $120.00 bill. If you opt for SCP’s EverGreen over PG&E’s Solar Choice, you’ll save almost $2.00 per month on a $130.00 bill.

Like most people, I’m happy to pay less for electricity, but I was not happy about the fact that I received a letter from SCP in June—the same month the change to SCP occurred (the change-over happened on customers’ June meter-read date). To stay with PG&E, I would have had to opt out of the SCP service. Otherwise, along with everyone else in the region, I was automatically moved over. If you want to go back to PG&E, you needed to do so within 30 days of your switch over or pay a fee.

SCP touts its strengths as providing cleaner energy, lowering greenhouse gas emissions, and offering more local control (with public meetings for rate setting and customer program design, among others). SCP is a not-for-profit public agency “independently run by the participating cities of Cloverdale, Cotati, Fort Bragg, Petaluma, Point Arena, Rohnert Park, Santa Rosa, Sebastopol, Sonoma, Willits, Windsor, and the counties of Sonoma and Mendocino,” serving Sonoma County customers since May 2014. The fact that it is a not-for-profit organization means it reinvests revenues into the company rather than paying shareholders in an effort “to keep rates stable, build reserves, and to fund local customer programs,” according to company literature.

Because PG&E is still delivering the electricity via its poles and wires, our bills will continue to be from PG&E. Apparently, PG&E will then pay SCP their share of the money. If you have questions about SCP, you can check out their website at sonomoacleanpower.org or call them at (855) 202-2139.

I think this is probably a net gain: cheaper energy from more renewable resources. As long as that remains the case, we may all be in good shape.

However, here’s a thought to consider: how much do PG&E and their stock holders pay in taxes, be they federal income taxes, state income taxes, or local property taxes? As a not-or-profit, SCP pays fewer, if any, taxes. Is SCP actually cheaper or is it just transferring costs from your utility bill to your tax bill? If a government agency sees reduced revenue in one area, do you really think the agency won’t collect the revenue from you somewhere else?

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

Buying Existing Loans

 

Last week, I shared information about hard-money loans, which are loans that often work when conventional loans won’t. This week, I’ll talk about buying and selling notes secured by real estate, a close cousin to real estate-backed, hard-money loans.

If you sold a property and carried the financing, you are now the proud owner of a note secured by a deed of trust. The note outlines the terms of the obligation, including length, monthly payments, interest rate, and when any associated balloon payment(s) will come due, among other things. (A balloon payment is a payment that amounts to more than double the value of a regular payment, and is usually planned as the final payoff at the end of the loan.)

The main job of the deed of trust is to tie the specific loan to the real estate that secures it. In a seller carry-back situation, the real estate is normally the property you sold. When you sold the property and carried the financing, there may have been good reasons to do so: a higher sales price, a faster sale, a better return on investment than was available from other investment sources; or maybe the sale could not have happened at all without seller financing. Now, however, things have changed. Your princess may be about to graduate from high school and hoping to go to college, or perhaps you want to remodel your home or take advantage of an exciting investment opportunity.

Whatever the reason, you’re currently in a position of needing cash. Happily for you, that note secured by a deed of trust is a negotiable instrument. That means you can sell it.

Depending on a number of factors, you will usually get something less than the outstanding balance owed. If the financing you provided was at a low rate or had an especially long term, the note’s sales price will almost certainly be less than the outstanding balance. If the loan-to-value (LTV) ratio is high—calculated by dividing the total loan amount by the value of the property—you can also expect to sell the note for less than the outstanding balance. Still, cash in your hands may be worth more than the value of the note.

If you choose to sell the note, these transactions are typically handled by a licensed broker who charges a commission for arranging the sale. Like a real estate transaction, it should be handled in a professional manner, making sure all escrow instructions are carefully drafted and followed, and title insurance is secured.

As a buyer of this note, you should have your broker verify that the value of the property supports the loan, and that fire insurance and property taxes are accounted for. And most importantly, confirm that the seller does, in fact, own the note—and that there are no liens that might encumber the note. Your broker can also provide a financial analysis to let you know what the rate of return will yield if all the payments are made in a timely manner (including any balloon payments).

When the dust settles, the sale of an existing loan can be a reasonable source of cash for the seller and an attractive investment option for the note’s buyer.

If you have questions about real estate investment, sales or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com.

Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

 

Buying Existing Loans, called “Real-Estate-Backed Notes”

Last week, I shared information about hard-money loans, which are loans that often work when conventional loans won’t. This week, I’ll talk about buying and selling notes secured by real estate, a close cousin to real estate-backed, hard-money loans.

If you sold a property and carried the financing, you are now the proud owner of a note secured by a deed of trust. The note outlines the terms of the obligation, including length, monthly payments, interest rate, and when any associated balloon payment(s) will come due, among other things. (A balloon payment is a payment that amounts to more than double the value of a regular payment, and is usually planned as the final payoff at the end of the loan.)

The main job of the deed of trust is to tie the specific loan to the real estate that secures it. In a seller carry-back situation, the real estate is normally the property you sold. When you sold the property and carried the financing, there may have been good reasons to do so: a higher sales price, a faster sale, a better return on investment than was available from other investment sources; or maybe the sale could not have happened at all without seller financing. Now, however, things have changed. Your princess may be about to graduate from high school and hoping to go to college, or perhaps you want to remodel your home or take advantage of an exciting investment opportunity.

Whatever the reason, you’re currently in a position of needing cash. Happily for you, that note secured by a deed of trust is a negotiable instrument. That means you can sell it.

Depending on a number of factors, you will usually get something less than the outstanding balance owed. If the financing you provided was at a low rate or had an especially long term, the note’s sales price will almost certainly be less than the outstanding balance. If the loan-to-value (LTV) ratio is high–calculated by dividing the total loan amount by the value of the property–you can also expect to sell the note for less than the outstanding balance. Still, cash in your hands may be worth more than the value of the note.

If you choose to sell the note, these transactions are typically handled by a licensed broker who charges a commission for arranging the sale. Like a real estate transaction, it should be handled in a professional manner, making sure all escrow instructions are carefully drafted and followed, and title insurance is secured.

As a buyer of this note, you should have your broker verify that the value of the property supports the loan, and that fire insurance and property taxes are accounted for. And most importantly, confirm that the seller does, in fact, own the notes–and that there are no liens that might encumber the note. Your broker can also provide a financial analysis to let you know what the rate of return will yield if all the payments are made in a timely manner (including any balloon payments).

When the dust settles, the sale of an existing loan can be a reasonable source of cash for the seller and an attractive investment option for the note’s buyer.

If you have questions about real estate investment, sales or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com.

Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

 

The TRUE Cost of Building

I’m frequently asked why we don’t have more houses available in Ukiah for sale or rent. Although the Realty World Selzer Realty property management division manages about 800 properties, we typically have almost no vacancies—and that’s been true for at least a couple years. The reason, of course, follows the laws of supply and demand. Although the demand for more housing is high, the cost of building it is higher.

Part of the reason for the high building costs is that City of Ukiah is still paying off a $72 million sewer upgrade debt from five years ago. Although I like the changes in attitude I see in our current councilmembers as they support policies to encourage affordable housing, we are all saddled with debt incurred by poor decision-making in years past.

When people try to build on a vacant lot rather than buy an existing residence, they are often surprised by how many fees and expenses they incur. Recently, the sale of an empty lot fell through because the costs of developing the property ran tens of thousands of dollars more than expected. I’m not talking about the cost of the lot itself. I’m talking about the regulatory costs associated with preparing the lot.

Here are some of the costs the buyers would have incurred for the simplest of building projects: putting a mobile home on a vacant lot.

  1. Sewer, water and electrical fees: $19,000.
  2. Sewer lateral and water line from mains to the property line: $10,000
  3. Installation of four street trees installed within five feet of the sidewalk with garden stacking blocks for watering: $3,600
  4. Storm water drainage mitigation (an infiltration ditch with gravel and berm at low end of lot to stop runoff – two feet wide by three feet deep with one-inch berm): $4,600
  5. Demolition of existing sidewalk and ADA-compliant replacement sidewalk around driveway: $6,000
  6. Excavation for utilities from house to sidewalk for underground utilities: $2,200
  7. Building permits: $4,500

This amounts to about $50,000, much of it includes things the owner would not have elected to do given a choice. While every new home needs sewer, water and electrical services, the hook-up fees and the cost of connecting to those services to the structure adds up to more $30,000. That is a lot of money.

Another proposal fell through when a developer wanted to build an apartment complex on the lot behind Rite-Aid in Ukiah. The sewer hook-up fees alone exceeded the contract purchase price for the land.

The bottom line is this: before we see new construction of single-family homes, prices for those properties will have to increase. We are still waiting for the current market value of a typical home in Ukiah to reach the value it held in 2007, before the housing bubble burst.

Once that happens, we still won’t see a huge construction craze because since 2007, inflation and regulations governing construction have consistently driven up building costs.

To support the cost of building a new 800-square-foot, two-bedroom, one-bath apartment, rents will probably need to rise to about $1,200 per month. While this is not a welcome idea for people looking to rent an apartment, it is just the simple facts of life when it comes to the cost of building a multi-family complex in the Ukiah Valley. There are a few apartment projects in the planning stages, but they are unlikely to go through until the developers are confident they will have the income to support their project. Based on the shortage of housing, particularly rentals, and the fact that there will be new construction in desirable locations, I think they’ll be able to achieve these numbers.

If you have questions about real estate investment, sales or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com.

Dick Selzer is a real estate broker who has been in the business for more than 40 years.

Reverse Deferred Exchanges – Not for the Faint of Heart

Once in a while, it’s fun to discuss a topic that’s a little esoteric. While 90 percent of real estate investors will probably never have reason to be involved in a reverse deferred exchange, for those who do, here’s a little introduction. Before I continue, I must give my regular disclaimer. As I’ve said many times, I’m not an accountant, so before you decide to leap into any complicated financial decisions, please be sure to discuss them with people trained to provide expert accounting advice.

Here we go. When you buy an investment property, your tax basis is established based on the acquisition cost, and this will impact the taxes you pay when you eventually sell the property. The tax basis is loosely defined as the acquisition price plus the acquisition costs plus improvements during the time you own the property minus depreciation.

Let’s imagine you purchased a residential property 23 years ago, and you’ve rented it for the past 20 years while making improvements and repairs, as well as taking depreciation on it. Now it has a basis of $25,000 and a current market value of $250,000. Because you were an aggressive investor, you refinanced three times and now owe $200,000. If you sell this property for $250,000, your gain will be $225,000. Between state and federal taxes, you could have a tax liability of as much as $70,000. If you do some quick math, you’ll discover that to sell the property, you need to come up with $20,000 out of pocket.

You have just entered the investment world of exchanges. In a typical exchange, you would dispose of (sell) Property A and acquire Property B. As long as you follow the legal rules and use an accommodator—and Property B requires the same or more debt and the same or more equity as Property A—you can postpone paying taxes until sometime in the future.

What happens when you find Property B before you’re able to dispose of Property A? This is when you consider a reverse deferred exchange. It’s expensive and time consuming, but when faced with a $70,000 tax bill and $20,000 deficit, it could work well for you.

With a reverse deferred exchange, you purchase Property B before you sell Property A; actually, technically, your exchange accommodator buys Property B and holds it for you until you find a buyer for Property A, at which time the exchange is completed.

There are some incredibly strict rules with regard to the exchange: timelines and dates matter a lot. For example, you only have 45 days to identify the property to sell and 180 days to close escrow. The rules are so strict that 45 days and one hour is too long. And when I say 180 days, I do not mean 6 months. Just to add a little more complexity, there are additional limitations on those time frames if they cross calendar or fiscal year ends.

If you choose to undertake a reverse deferred exchange, all the complexity should be managed by your accountant, Realtor, accommodator, and title company. Your job is to pay the bill.

An accommodator’s standard fee for a standard transaction is about $500, but for a reverse deferred exchange, it’s closer to $5,000. Expensive? Yes. Far less than the $70,000 you’d pay otherwise? Also yes.

Financial challenges are one of the many pieces to this puzzle. You’ll need to come up with the down payment for Property B before you sell Property A. You’ll need to find a lender comfortable making a loan while the property is in the name of the accommodator. You’ll have to find an accommodator (ask your title company for a referral). These things take time, so don’t plan on a quick turnaround.

The good news is: you shouldn’t have to part with that $70,000.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

Save Yourself a Little Time and Hassle: Fill Out the Right Forms

 

Each time a property’s ownership changes hands, a small avalanche of documentation must accompany the transaction. Your Realtor will walk you through the process, but it’s still nice to know what’s coming. Here’s some information on a couple forms, forms that will save you time and money if you complete them in a timely and thorough manner.

The first form is the Preliminary Change of Ownership Report (PCOR), a short document that informs the county about the change of ownership. Each time a property is transferred to a new owner, the county reassesses the property’s fair market value in compliance with Proposition 13: the PCOR aids them in this process.

In 1978, Proposition 13 declared that the maximum amount of any ad valorem tax on real property shall not exceed one percent of the full cash value of such property, and that annual increases of the tax would be limited to an inflation factor not to exceed two percent. A reassessment of the property tax can only be made when the property ownership changes or when construction occurs. (California Constitution Article XIII)

Given this information, you can understand why the county is eager to know about ownership changes: it’s one of the few times a big jump in the taxable value of a property happens. There are exceptions to the reassessment rule. For example, if one family member transfers ownership to another family member, the property’s tax base remains unchanged; but typically (if not a family member) a new tax base is established when the property changes hands.

Be aware that fair market value does not necessarily mean purchase price—a common misconception. The county assessor’s office independently researches the value of the property based on other properties in the area and current market conditions. So if you got an incredibly good deal when you purchased the property (or if you overpaid), your purchase price may have little to do with the fair market value assessed by the county.

When you sign the Preliminary Change of Ownership Report, you are certifying the information is correct under penalty of perjury. This is not a time to stretch the truth to try to get out of paying more taxes. Just dutifully complete the information that identifies the property, the seller, the buyer, and the terms of the sale. As with many regulations, if you don’t, the penalties get expensive.

The next form is the Statement of Information (SI), frequently required by your title company. It establishes that you are who you say you are, and prevents you from being confused with someone else. Sounds basic, I know, but you don’t want to be confused with someone of a similar name who has a problematic financial or legal history. This confidential form helps prevent a mistaken identity issue. It asks for information including your full name, social security number, date of birth, driver’s license number, and marital status. It also asks for ten years’ worth of residences and work history.

You may recall that title insurance is different from traditional insurance in that it attempts to protect you and your lender from problems in the past, rather than the future. The SI helps assure that problems that could impede the sale of the property are, in fact, related to the buyer and/or seller involved in this transaction. Clearly, if you have a common name like Smith or Jones, you’re more likely to have issues, but by collecting a detailed history, the SI is often able to prove you were not, for example, the John and Nancy Jones involved in a lawsuit in Los Angles when you’ve been living in Ukiah your whole lives.

So although these forms are mundane, take the time to complete them properly. You’ll be glad you did.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 Preliminary Title Reports Are Really Helpful, Especially If You Read Them

I know I’ve said this before, but it bears repeating: when it comes to real estate documents, the large print giveth and the small print taketh away. When you decide to purchase a home, your preliminary title report will include many paragraphs full of boring (but important) information, and potentially a few paragraphs with information that could change your mind about buying the property. Be sure to read the whole thing.

Vesting

Much of the information in a preliminary title report is information your Realtor and the seller’s Realtor will take care of; it won’t require any action on your part. For example, if the title of the property is in the name of a corporation, the seller’s Realtor will have to obtain documents from a vested owner authorizing someone to sign on the dotted line. While it’s not something you, as a buyer, have to deal with, it’s important; because if the corporation is not in good standing with the state, the seller may have trouble transferring the title.

Taxes and Assessments

While you will not be responsible for paying outstanding balances of taxes and assessments, it’s good to see what they are to get a sense of what your future liabilities will be. A local example of an assessment you may start to see are those from Property Assessed Clean Energy (PACE) loans. Mendocino County recently approved these loans that help people finance energy efficiency upgrades or renewable energy installations. PACE assessments totaling many thousands of dollars will need to be paid by the seller or taken into consideration when determining the purchase price.

Deeds of Trust

Preliminary title reports also show any deeds of trust that have not been reconveyed (released). Normally, this deals with loans the current owner is obligated to pay. On occasion, an old deed of trust from decades ago appears, and it must be addressed to avoid future problems. Conceivably, a beneficiary of an old deed of trust that was never paid off could make a demand for the outstanding principal plus accrued interest. While compounding interest in your retirement account works in your favor, compounding interest from an old debt does not.

Identity

One of the critical elements of a preliminary title report is to see who exactly owns the property. If an owner’s deceased ex-wife passed her ownership stake to her children when she died, and those children refuse to speak with the owner, it may take some time to clean things up. Start right away. Also, something as simple as an incorrect middle initial can cause problems if not detected and dealt with early.

Pending Actions

Likewise, you’ll want to clean up any legal disputes. If the neighbor’s lawsuit over the encroachment of your shared fence remains unresolved, it can do more than delay the closing of an escrow, it can kill it altogether.

Maintenance Agreements

The most common maintenance agreements are road maintenance agreements. Be sure you understand both the scope of the agreement and your obligation to pay for it. Other maintenance agreements can cover common areas such as greenbelts or shared wells. Read the details.

Legal Description

In the vast majority of cases, the legal description is routine. After all, if you buy a house at 123 Main Street with a fence around the property’s perimeter, the property line is probably obvious. However, a vacant lot in Brooktrails is tougher to determine, and the boundary line on a 350-acre parcel at the end of Spy Rock Road is harder still.

Property in Default

If a notice of foreclosure exists because of the current owner’s default on a loan, your timeline may be affected. The process may be delayed or a pending public sale may rush the escrow.

No matter how boring you may find the details of your preliminary title report, I’m confident you’ll be glad you read it.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

New State Law Governs Granny Units

 

Recently, the State of California passed a law eliminating the ability of local governments to unreasonably restrict homeowners from adding a second unit to their property. One of the first considerations was to change the name of these units. They are no longer mother-in-law units or granny units; they are now Accessory Dwelling Units (ADUs).

The State regulation defines minimum guidelines for ADUs, but the language is still a bit vague, saying local jurisdictions cannot “unreasonably” limit square footage. Clearly, the second unit must be big enough to include a kitchen, bathroom, and living space. As of this writing, the City Planning Commission is considering a 1200 square foot maximum for a detached ADU (one that is not part of the main dwelling), which does, in fact, seems reasonable.

If you’re a homeowner who may want to build a detached ADU, one of the biggest benefits of this new law is the prohibition for local governments to charge any water or sewer hookup fees (the combination of which can run about $20,000 in Ukiah). The law also precludes charging additional service fees, but it does not prevent higher rates based on usage. Since water is metered, your water bill will go up, and increased water usage can impact your sewer bill, too.

When most people think of ADUs, they picture a separate structure, but you can create an ADU inside your house. Consider, for example, creating a separate living space above a garage, one with its own entrance. The ADU would share a roof with the main house, but have plenty of privacy. If you create an ADU within your house, there is no size limitation with regard to square footage; however, you cannot make the ADU larger than 50 percent of your house. Honestly, this rule is a little silly because there’s nothing stopping you from living in your ADU and renting your main house, but such is the nature of bureaucracy. I do think it’s good to enable people to divide their homes. This allows empty nesters or single people who want to downsize to stay in their home rather than having to sell and relocate.

On the bright side, ADUs may help reduce the housing shortage in Ukiah. There are some drawbacks, however. In the older Westside, for example, if a third of homeowners added an ADU, we’d see a significant increase in traffic and decrease in the availability of street parking. I’m also concerned about how our issue-laden sewer system would manage the increased load.

Another potential problem could arise if people do not position their new ADUs appropriately. Imagine if your neighbor built an ADU five feet from their back fence that aligned with your side yard, where your main dwelling is only five feet from the property line. The ADU could be positioned only ten feet from your house, and potentially provide a clear view into your master bedroom. Hopefully, people will be considerate as they contemplate where to build.

All in all, I am in favor of allowing property owners to make decisions affecting the future of their properties. My only concern about the loosening of ADU restrictions is that current homeowners bought their homes knowing the rules at the time of purchase, and now the rules are changing. I don’t really expect to see too many new ADUs with construction costs currently in excess of $200 per square foot, but things can always change.

If you feel strongly about this issue, consider contacting a member of the City of Ukiah Planning Commission or a city councilmember. Better yet, attend upcoming public hearings. They’re very informative.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.