Meathead Movers

Do What You Can, Then Hope for the Best When Moving

You’ve sold your house and you need to be out by 5:00 pm today, but the movers don’t show up as promised. You call to inquire why and they let you know they’re running a couple days behind. You call your Realtor to see if the buyers can wait a couple days, but find out their movers are on the way with two big trucks full of everything the buyers own, and they’re on schedule to arrive promptly at 5:00 pm, when you no longer own the house, according to your sales contract.

To avoid this and similarly dreadful moving scenarios, it’s best to plan ahead as much as you can. Then, all you can do is take a deep breath and hope for the best.

Carefully manage the packing process.

Whether you pack your own belongings or have professional packers do it for you, head to the hardware store and purchase about eight different colors of duct tape. Use yellow on boxes for the master bedroom, blue for the kitchen, and so on. When you arrive at your new home, put a little duct tape of the corresponding color on the doorway to each room so movers can put boxes in the right rooms.

If you pack your own things, use small and medium-sized boxes (ones you can lift when they’re full). If you hire movers to pack your things, I recommend keeping a close eye on the process by letting them know you’ll label boxes as they pack.

Choose a reputable moving company.

Many people try to save money by moving themselves. If you can afford professional movers, I recommend you do so. While your brother-in-law and your Great Uncle Ned might be fun at family barbecues, their knowledge about how to transport Grandma’s heirloom china might not be too impressive.

To find a good moving company, ask your friends, family, or Realtor for a referral and then check out the reviews online. Make sure whoever you hire has liability insurance, workers’ compensation insurance, and content coverage. And for specifics about what is included in their fees and what is extra.

Review Your Homeowner’s Insurance.

According to Rob McAsey at Mark Davis Insurance, you should review your homeowner’s insurance before you move so you know what’s covered. Let’s say you own a home worth $500,000. Contents coverage is usually set at 70 percent of that value, or $350,000. The coverage for contents that leave the home is often 10 percent of that, so $35,000. If all your belongings in that truck would cost more than $35,000 to replace, you might consider purchasing more insurance.

I recently heard a horror story about a family moving to Ukiah whose mover stopped en route to visit someone. During the stopover, the moving truck was stolen. Unfortunately, although the client had confirmed that the moving company had insurance, he had not checked how much. The moving company’s insurance carrier paid $50,000 for $130,000 worth of losses, leaving our new Ukiah resident $80,000 in the hole.

Schedule Utilities Activation Early.

It’s Friday at 6:00 pm. Your belongings have been transported to your new home and almost all the boxes have miraculously been placed in the right rooms. The sun is setting. It’s time to order pizza and celebrate.  You reach for the light switch to turn on the lights when you realize no one has alerted the utility companies that you’ve arrived. You have no electricity, no water, and no gas.

Avoid this situation by contacting utility companies early.

Be Clear About What’s Included and What’s Extra.

Next week, I’ll write about all the services that are typically included when you hire movers, and those for which you must pay extra.

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.

 

Appealing Your Property Tax Bill

 

When you purchase a property, the Mendocino County Assessor’s Office determines the property’s assessed (or market) value for the purpose of establishing future property taxes. The initial assessment is critical because it establishes the basis for all future payments. Property taxes are calculated on the base year (first year) and cannot increase by more than two percent compounded per year.

Once this base value is established, if the property value falls below the original base year value, the assessor can lower the assessed value to reflect the current market value. But if prices take a big jump the following year, the original base value comes back into play, and the value can be increased by two percent per year from the original acquisition date and amount.

Usually, the assessor establishes the base year value at the purchase price, a reasonable approach. However, there are occasions when this approach isn’t appropriate. The assessor’s job is to equate the assessed value with the fair market value as of the closing date of the purchase. If you got a screaming hot deal, the assessor is obligated to assess the property at a value higher than the purchase price. In this case, the responsibility to justify a base value higher than the purchase price is squarely on the assessor’s shoulders.

Revenue and Tax Code 110 says, “For purposes of determining the ‘full cash value’ or ‘fair market value’ of real property, other than possessory interests, being appraised upon a purchase, ‘full cash value’ or ‘fair market value’ is the purchase price paid in the transaction unless it is established by a preponderance of the evidence that the real property would not have transferred for that purchase price in an open market transaction. It goes on to say, “This presumption may be overcome if the assessor establishes by a preponderance of the evidence that all or a portion of the value of those improvements is not reflected in that consideration.”

Clearly, the assessor has to do two things: use evidence to show that the sales price wasn’t fair market value, and then demonstrate what fair market value is. The method to determine fair market value is well established by appraisers, using comparable properties that have sold recently and making adjustments for the condition of the property in question.

Now, this can work in the opposite direction, too. Let’s say you overpaid for a property, perhaps this property was your childhood home, or maybe you want to be sure no one builds on the empty lot next door. In these cases, if you want to have the property assessed so you can pay taxes on a lower base value than the purchase price, the burden of proof is on your shoulders.

The most critical thing to remember is that the first year of assessed value will impact your taxes for as long as you own the property. Once the base year is established, doing home repairs should not impact the assessed value; however, improvements will. If you replace your roof with the same type of roof, that’s considered a repair. If you replace a flat, 1955 tar-and-gravel roof with a peaked composition shingle roof, that’s an improvement and can cause an increase in the assessed value. To the extent that the new roof is superior to the old, the assessed value can reflect that improvement.

The bottom line is this: if you honestly feel your assessed value is higher than fair market value, call the assessor’s office and explain your position; then ask them to lower the assessed value.  If they don’t agree, don’t be afraid to appeal the decision. If you convince the appeals board you’re right, it could save you a lot of money.

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.

 

Don’t Accidentally Sell Your House Twice

With interest rates remaining low and nice weather making it easy for people to get out and see new properties, the housing market is likely to remain hot. This is often when we see multiple offers on a single property.

A seller’s first reaction to multiple offers is usually, “Yay! Lots of offers.” The reaction immediately afterwards is, “Dang, I priced the house too low.” The first feeling is justified; the second may not be.

Multiple offers give the seller options. More offers increases the likelihood of a higher sale price, but price is not the only consideration in determining the best offer.

With multiple offers, sellers have the luxury of choosing a buyer who is prequalified or even preapproved for a loan. The seller may also get to choose a buyer who can make an all-cash offer, one who can provide copies of bank statements to prove it.

In addition to finding a highly qualified buyer, sellers with multiple offers can compare contingencies and lengths of escrow. One offer may include no contingencies but require a 90-day escrow (that’s a long time). Another offer could require a seller to perform repairs based on a pest and fungus report, but also close with an all-cash offer in three weeks. Like I said, more offers means more choices.

Things can get a little complicated when multiple offers lead to multiple counteroffers. This is where you have to be careful not to inadvertently sell your house twice. A good Realtor will help you manage the multiple offer/counteroffer process by assuring contracts are written with clear boundaries. Your Realtor will write counteroffers on your behalf that can be withdrawn at any time, and will assure you only confirm the counter offer you want to accept.

Just so you know, you are not obligated to counter all offers or to offer the same terms in counteroffers to multiple prospective buyers. You may be willing to settle for a lower price from a buyer who doesn’t require you to pay closing costs or do repairs.

It is illegal for you or your Realtor to take into consideration anything considered a protected class at any stage in the real estate transaction. This obviously refers to race, ethnicity, and religion. It also refers to age, marital status and whether the buyers have children.

To be clear, it is NOT legal to consider the needs of a family with four kids looking at your four-bedroom house with a jungle gym in the backyard over the needs of a single elderly gentleman. However, if you fall in love with a young couple, you could give them preference over a grumpy old man, because personality is not a protected class.

After you’ve selected your favorite offer, your Realtor will be sure to cancel all other counter offers and open escrow for you. However, do not forget about other prospective buyers. One or more of whom may still see your house as their dream home. They can be encouraged to write a back-up offer, which would become the primary offer if the first offer falls through for any reason.

A certain percentage of offers do not go through for a whole host of reasons. Sometimes the highest price offer—the one that looked so good at first blush—comes with problems. Many of us tend to ignore problems when the money looks good, but we’re sorry later when the transaction falls apart. That’s when the back-up offer swoops in to save the day.

However, as your Realtor will remind you, if the first escrow fails, not only will you need formally cancel the contract, you will also need to disclose any material facts brought to light by the first buyer’s inspections.

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.

 

The Multiple Listing Service – Then and Now

In 1975 (just like today), real estate brokers in the Ukiah Valley belonged to a local association called the Multiple Listing Service (MLS) to share information about properties they were trying to sell. This is back when houses in Oak Manor sold for about $30,000 and today’s Ukiah High School on Low Gap Road wasn’t built yet.

When a Realtor secured a new listing, he or she would type up the pertinent information about the property (location, number of bedrooms and bathrooms, square footage, etc.) and then share that information with the MLS office. There, the information was reduced to a half-sheet of paper using what would now be considered an antique device—a mimeograph. Those of you who have been around awhile may remember mimeographs from your elementary school days.

Information was carefully typed onto a master copy, of which there was only one. To create the master copy, you punched letter-shaped holes into the paper. Once completed, it was put on a drum saturated with ink. When the drum turned, the ink came through the holes and created copies of the original form. Mimeograph copies of each listing were created for every Realtor. The mimeograph required a whole room of its own in the MLS office. The room was about 15-feet square and everything in it was coated with varying amounts of ink dust.

Each week every Realtor received a packet of all the new listings—typos and all. To keep track of the properties for sale, Realtors filed each mimeograph copy in their 18-ring binders. Then, as now, the housing market changed constantly. Listing agents would have price changes. Sellers would decide to take their properties off the market. Houses would go into escrow and fall out of escrow. All that information was reported to MLS to be distributed the following week. Then Realtors (or their assistants) updated their MLS binders, pulling out sold properties and keeping them in a shoebox to use when determining pricing for future listings. They manually crossed out the old price and wrote the new one on the MLS listing form for that property. They noted any status changes by painstakingly going through the binder, finding the listing form, and handwriting the change.

Believe it or not, as I’m working on this column, I’m looking at my MLS binder from 1975. There was a property for sale on Pomo Drive in Oak Manor—a four-bedroom, two-bath house with a two-car garage—for a whopping $36,000. It would probably go for $375,000-$400,000 today.

In 1976, I was able to convince the MLS finance committee and board of directors to discard the mimeograph in favor of a photocopier. It was incredibly expensive, costing $5,000 at a time when houses were selling for $30,000. In today’s dollars, that photocopier would be about $25,000. Ultimately it paid for itself by requiring far less office space and fewer hours of staff time. It took ten minutes instead of all day to prepare the MLS listing information for all the agents. The binder was replaced by a bound book shortly thereafter.

Fast-forward to the mid-1980s and computers arrived, revolutionizing real estate. We could take “dumb terminals” to a client’s house and upload information about the new listing directly to the MLS database and a printer using a landline telephone hooked up to a coupler as a modem for the lowest-speed connection you can imagine.

In today’s world, we upload detailed information with pictures and sometimes video for listings, and within moments, other Realtors have instant access to it. If I want details about a listing I happen to drive by, I can park my car and pull out my phone—and say “Hey, Google.”

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 – 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.