The Goldilocks Approach to Pricing: Not Too High, Not Too Low—Just Right

As a rule, people who sell their real estate holdings want to receive top dollar, whether it’s a family residence or a commercial building. The challenge is how to price a property to sell relatively quickly without undervaluing it.

Ultimately, the market will determine the value of a property, and the market is fluid. Value is based on what buyers will pay the day they look at a house, and unfortunately for you, the seller, buyers do not take into consideration what you think the property is worth or the amount of money you need to get out of it.

A common misconception when determining a property’s listing price is the belief that it is okay to start too high, figuring you can always come down. Overpricing a home is risky and can ultimately result in it selling for lower than fair market value.

Most people fail to realize that there are a limited number of buyers looking for houses in a given price range at any one time. Serious buyers often have a sense of urgency, so when a new property goes up for sale, all those looking for a home in that price range will probably see the property within a week or two.

If your home is overpriced and no one makes an offer during the first few months, what can you do? One option is to wait for more buyers to enter the market. This can be a slow process and your home will become less appealing as its days on the market pile up. Your property will be viewed as a stale listing and people will begin to wonder what’s wrong with it.

Another option is to lower the price in hopes of recapturing the attention of the buyers who have already seen your home and think it is overpriced. The problem with this approach is that most buyers pay more attention to new homes coming on the market than to the homes with price reductions. Even real estate professionals can miss price reductions that make a property a great deal. Once a listing gets a reputation as overpriced, even after months of lowering the price, it can simply be overlooked.

Prior to 2007 (before the real estate crash) most buyers got pre-qualified for the biggest loan they could and set that as their target price for purchasing a home. In today’s market, many buyers take a more conservative approach. They base their price range on their own comfort zone, not necessarily what they are pre-qualified for. If they are getting a loan (as almost everyone does), their lender will order an independent appraisal to confirm the home’s fair market value. Before a lender is ever involved, buyers often research home prices on the Internet to make sure they are not overpaying. Regardless of how much you paid for your home and regardless of how much you’d like to receive for it, buyers will not pay more than fair market value.

What you can control is how attractive your house is the moment it hits the market and makes its first impression on buyers ready to make offers. Pricing will determine the number of buyers who look at the house and ultimately whether or not they choose to make an offer.

On the bright side, the market will rarely allow you to under price your home. If buyers feel your price is too low, you will receive multiple offers. The market will push your price to the highest price the market will bear. So let go of the idea that overpricing is a good strategy—that it will allow you to see if anyone will bite. It isn’t and it won’t.

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’re 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.

 

Environmental Assessments – Part 2

Last week, I introduced Environmental Site Assessments and the cost to address any issues found (called remediation): Phase 1, Phase 2, and Phase 3. I reviewed the first phase, so this time I’ll review the last two phases.

As a brief refresher, the whole reason for the assessments is to determine whether a property is contaminated and what it will take to fix it. If you’re an investor or lender interested in commercial property, you don’t want to get stuck purchasing (or foreclosing on and owning) a property that will require expensive remediation to address the ills of a bygone era.

We’re talking about anything from a little fuel from a leaky tank or asbestos in ceiling tiles to toxic chemicals disposed of in a way that puts people, animals, or the environment (or your bank account) at risk.

Remember, during a Phase 1 assessment, an investigator will review county records, make a few phone calls, check out the neighboring properties, and try to determine whether contamination is likely. Phase 1 is, for the most part, a paperwork investigation. Many investigations never need to go beyond Phase 1.

A Phase 2 assessment means something from Phase 1 raised an eyebrow. Determining the validity of any potential exposure gets expensive. We’re talking about contractors and engineers taking building material samples, as well as soil samples and water samples at various depths. If all goes well, Phase 2 tests will indicate no contamination and you can kiss then contractors and engineers on the cheek, pay them with hefty checks, and wave goodbye. If contaminants are found, you begin the next phase of your adventure.

Depending on the Phase 2 findings, recommendations will vary. At the very least, you’ll probably be required to install monitoring wells to determine the amount and disbursement of the contamination and whether it’s moving. If it’s moving under your property from one of your neighbors, you may have recourse against the neighbor, but you’re probably not off the hook.

The opposite extreme of monitoring wells in terms of expense (and environmental concern) is complete remediation: welcome to Phase 3. If you thought the wells were expensive (and I’m sure they were), wait until you have a backhoe digging a hole in the middle of your property 50 feet across and 30 feet down (2,750 yards of contaminated dirt-_- that over 250 dump truck loads). And all this dirt goes to a special landfill rated to accept the type of contaminates found in your soil. These landfills charge by the yard of material. This situation is rare, but it does happen.

This helps explain why prospective buyers of suspect properties do extensive testing before taking title, since liability can run to the current owner. It also helps explain why lenders want environmental assessments before lending on suspect property, since their ultimate recourse on a loan is foreclosure and potential ownership of the problem.

By the way, environmental studies don’t happen overnight, nor are they cheap, but they are far less expensive than the possible ramifications of acquiring the property without one.

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re 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 35 years.

Who Pays for What: Renters v. Landlords?

Before I jump into the topic of who pays for what on a rental property, let me say that contracts trump all. If you sign a contract that gives away your rights or requires you to pay for uncommon expenses, it doesn’t matter what’s “typical.” You have to comply with the contract.

When you own a rental property, you are expected to pay for upkeep resulting from general wear and tear. For example, you are expected to repaint every few years and replace carpet every several years. You are expected to take care of safety hazards and problems that make the house uninhabitable such as faulty electrical wiring, a malfunctioning sewer system, broken appliances, and inadequate heating. You are expected to patch the roof if it leaks and call the gas company if there’s a funny smell coming from the propane tank.

Renters, on the other hand, are expected to fix things they break (or that break as a result of actions by people they invite to the house). They are also expected to maintain cleanliness inside and out, which may include yard work.

While this sounds wonderfully black and white, it isn’t. Property management companies try to clarify the relationship between landlord and renter as best they can, while providing services for both. Property managers charge landlords a service fee that includes a wide range of offerings, often including the following:

  • Marketing (to get the property rented)
  • Thorough application processing
  • Rent collection
  • Preparation and posting of notices
  • Property inspections
  • Management of inquiries, service calls, and complaints
  • 24-hour emergency service
  • Itemized monthly statements
  • Expense management (ensuring taxes, mortgage payments, and insurance are paid on time)
  • Property maintenance

Property managers often charge for coordinating repairs because that coordination takes time. Landlords who choose not to employ property managers and do not care to deal with maintenance issues will sometimes allow the renter to coordinate a repair and deduct the cost of the repair from the monthly rent. While this may seem like an equitable arrangement, you have to ask yourself: is it fair that the renter was not compensated for the time it took to coordinate the repair? And the murkiness begins.

Property managers inspect rental properties periodically for safety and habitability. However, they (or the landlord) can’t just stop by and ask to tour the place because they were in the neighborhood. If, during a scheduled inspection, the property manager believes the renter could easily be featured on the television program, “Hoarders,” the renters can be evicted.

Another not-so-black-and-white area is the definition of “emergency.” On behalf of landlords, property managers must address emergencies immediately, but property managers and renters sometimes define “emergency” quite differently.

True emergencies affect the safety or habitability of a property, like a burst water pipe, a plugged sewer main, or no electricity or heat in winter. Inconvenient non-emergencies include a dripping faucet that’s driving you crazy, one burner on the stovetop that isn’t working, or an air conditioner that will only cool the house down to 90 degrees on a 110-degree day.

Some common questions from renters include:

  1. Q: I locked myself out. Can you come and let me in?
    A: Yes, the property manager will let you in. If you require assistance on the weekend, there’s often a bigger service charge than there would be during the week when the office is open. If someone has to be paid overtime to let you in, you’ll probably be on the hook for that expense, rather than simply paying for the cost of a key replacement.
  2. Q: My smoke alarm is chirping; is it broken?
    A: No, your smoke alarm’s not broken, but it does need attention. The battery is likely low and letting you know it’s time for a replacement.
  3. Q: My electrical outlets aren’t working. Can you come right now?
    A: Yes. It’s likely a tripped breaker, but if you don’t want to mess with the circuit breaker, the property management’s maintenance team can.

If there’s something you would like me to write about or if you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re 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 35 years.

The Pros and Cons of Using a Property Management Company

Hey, I had the opportunity to give away another one of my Schat’s Bakery gift cards with this column, since it was in response to a question from a reader. The reader asked, “What are the costs and benefits of hiring a property management company to deal with my rental property, and what’s typically required of the owner?”

In the spirit of full disclosure, I own a property management business, so while the information below is absolutely true and accurate, it may also be a wee bit biased. Without further ado, let’s get right to the question at hand, starting with the pros.

Convenience

Hiring a property manager means you, as a property owner, save the time, hassle, and headaches associated with addressing your tenants’ needs. If you’ve been a landlord for a while, you know that emergencies rarely come at convenient times. Things seem to break at 2:00 a.m. the night before your important meeting, during the afternoon when you’re trying to cook a Thanksgiving turkey, on Christmas morning when your grandkids are opening their presents, or when you’re at church on Easter Sunday. And the obvious reason is, your tenants are having family at their house for the holidays as well. And that puts a strain on everything from the garbage disposal to restroom facilities.

Compliance

Because property managers do this for a living, their livelihood depends on them keeping up-to-date on all the legal issues around tenants’ rights and property owner responsibilities, and there are plenty. So, by hiring a property manager, you’re more likely to stay in compliance.

Higher Rents

When you use a property manager, the rent you charge is likely to be at market value. People who manage their own properties sometimes undervalue their property, either because they are unaware of the market value or because they feel guilty increasing the rent on a tenant with whom they have a relationship.

Time Savings That Equal Money Savings

When the property needs to be rented, several time-consuming activities need to take place. The property needs to be prepared to rent: this usually means repairs, maintenance, and cleaning. Then someone needs to be available to schedule and show the property to potential tenants. Finally, once a suitable tenant appears to be found, someone must run a credit report, verify employment (and income) and contact previous landlords to confirm the suitability of the prospective tenant. All of this takes time, and again, it seems like tenants give notice on the Murphy’s Law calendar, like right before your summer vacation, at the same time your child’s first college tuition payment is due,or other equally convenient times.

Better Pricing on Maintenance

While property managers charge for management and maintenance services, they may accomplish both tasks in fewer hours and perhaps for a lower hourly cost than your own time. Many times, arranging services by an outside professional can take hours if you aren’t sure whom to call. And, as far as costs go, while every property management company has a unique fee schedule, many have agreements with local vendors for discounted rates. Vendors know that property management companies can likely bring a significant volume of business, and so are happy to provide a discount, one they wouldn’t necessarily extend to the owner of a single duplex, for example.

What are the cons to hiring a property manager? Well, as I mentioned, property managers do charge fees for management and maintenance. However, they typically help pay for themselves by charging market value rent, preventing compliance problems, and coordinating high quality, low cost maintenance and repairs. However, if you have plenty of time and just love being a handyman, or are energized by your interactions with your tenants, then maybe hiring a property manager isn’t such a good idea.

Requirements

As a property owner, you will need to prove that you have homeowner’s insurance (yes, homeowners insurance for a rental), and you’ll likely be asked to name the property management company on your policy. You will also be required to adhere to all landlord/tenant laws (I know this sounds obvious, but we’ve had to endure heated conversations with property owners when we tell them that they cannot discriminate against people based on their race or because they have children.)

Property management contracts include the length of time you’d like the property manager to oversee your property, how much management and maintenance services will cost, when you will be paid, and who holds the security deposit. At Realty World Selzer Realty Property Management, we hold onto the security deposit. With the past several years being full of foreclosures, some property owners would spend a tenant’s deposit and then lose the house to foreclosure, so the tenant never got his deposit back. And guess who the tenant comes to, looking for their money? Yes, the property manager. The contract may also include an agreed upon threshold for maintenance and repairs. For example, you may tell the property manager they do not need approval from you unless a repair will cost more than $1,000. That way, you don’t have to be bothered for each issue as it arises.

If there’s something you would like me to write about or if you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re 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 35 years.

 

Real Estate Investing – Part II

Last week I shared information about investing in real estate, specifically purchasing a single-family home for use as a rental. This week, I’ll share why duplexes and four-plexes can be even better investments, if you have the funds.

I’ll use a four-plex as my example. In Ukiah, you can purchase one for about $450,000 and expect rental income of $3,800 – $4,200 per month. That’s a higher rent-to-income ratio than you can typically find with a single-family home. And duplexes and four-plexes are still easy to finance because they qualify for the same preferred financing as single-family homes, so you can get a 30-year fixed rate loan (not true for most other types of real estate investments).

Because of the lower monthly rent, it is often easier to find tenants for duplexes and four-plexes, but the turnover can be higher. Obviously, you’ll want to fill vacancies as soon as possible, but be aware, having a vacancy is sometimes better than having a bad tenant. Screening tenants thoroughly is essential to your emotional and financial happiness, and your neighbor’s niece and her boyfriend should not be exempt from the same scrutiny all prospective tenants should face. I am biased as the owner of a property management company, but I’d say the work required to find and keep good tenants can be reason enough to consider hiring a property manager.

More living quarters means more people and more maintenance. Four-plexes are ideally suited to small families, adults looking to share expenses, or individuals who want a little extra space. Having all these people living in such close quarters (sharing walls or ceilings/floors) can sometimes lead to disputes, and unless you hire a property manager, it will fall to you, as landlord, to address them.

A four-plex will not require four times as much maintenance as a single-family home, but it will require more. As with a single-family home, you only have one roof to patch, four exterior walls to paint, and one driveway to seal. However, with a four-plex, you have four toilets to unplug, four heating/cooling units to maintain, and four sets of appliances to fix when they break.

As a smart investor you must include these maintenance costs into your planning. Anticipate expenses of about 3-4 percent of the purchase price per year, or $13,500 – $18,000. This includes taxes, insurance, and maintenance costs. While you won’t spend this much every year, you will over time. And when you need the money, you don’t want to dip into junior’s college fund to get it. Create a reserve savings account and pay into it each month.

Happily, you’ll benefit from your property’s depreciation, which helps offset your cash expenses. Depreciation is a bookkeeping expense that allows you to deduct the value of improvements over time. Depreciation is only a taxable expense, not a cash expense. This means, you have the ability to save on your income taxes and this savings should offset the cash expenses noted above.

So, now you own a $450,000 rental property with a break-even cash flow. You invested $95,000 (a 20 percent down payment plus $5,000 in closing costs), and your benefit is the potential appreciation in the value of this property. If values rise at three percent a year, you’d make $13,500 on a $95,000 investment or almost 15 percent. Not too shabby.

In addition, rents will likely increase over time. And while expenses go up with inflation, your mortgage payment won’t. The bottom line is, if you can afford to buy a $450,000 rental today, in 10-15 years, you should have an asset capable of paying for junior’s college tuition (or more rental properties to earn more income).

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re 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 35 years.

Being a Good Renter

The real estate market continues to evolve into a seller’s market. Prices are up, inventory is down, and buyers outnumber sellers. However, if you would rather rent than buy right now, here are some tips on how to be a savvy renter.

  1. Find a property that fits your needs. You can find places for rent listed in your local newspaper, via an online search, or call a professional property management company.
  2. Make sure you’re dealing with a reputable landlord, and that the person you’re dealing with is, in fact, the owner or legitimate property manager. A recent scam involves “landlords” advertising properties for rent. They accept your application and your deposit, but get “called away” and cannot meet with you. They abscond with your money and personal information and never send you the keys. If possible, it’s best to deal with people you can meet with face to face.
  3. Pay attention to the condition of the property. This is the honeymoon phase. If the place doesn’t look nice now when the landlord is trying to rent it, it’s unlikely the landlord will put in more time and money to fix things once you’ve moved in.
  4. Tell the truth. Complete the rental application thoroughly and in good faith. You should assume the landlord will verify the information.
  5. Read your lease agreement, and pay attention to your obligations. You don’t have much negotiating power after you’ve signed your name. If you have questions, ask them.
  6. Use a move-in checklist and take pictures. If the landlord doesn’t offer a move-in checklist, make one for yourself. Take inventory of what’s broken or missing, as well as the condition of appliances and other features. Pictures are a great way to catalog the property.
  7. Confirm that the locks have been re-keyed.
  8. Prepare for an emergency. Find out where the breaker box is, along with the emergency shut off for water and gas. Also inspect the property for a smoke and carbon monoxide alarms. Landlords are legally required to provide them.
  9. Communicate with your landlord. Renters sometimes fear that sharing bad news with landlords about needed repairs will result in a bigger rent payment. However, a good landlord will appreciate being informed about problems when they’re small and easy to take care of. A little leak is usually cheap to fix; massive dry rot is not. Replacing an electrical outlet is relatively easy; losing your property to fire is not.
  10. Move out well. When you leave a property, give appropriate notice (check your lease agreement) and really clean the place. Use your move-in checklist as you move out. Ask the landlord for a pre-move out inspection, so they can tell you what they believe requires attention. This gives you an opportunity to fix things yourself rather than to be charged for them later.

If you’re wondering how much to pay for rent, look at what similar homes in the area are renting for. If the one you’re interested in is really high or really low, pay attention. Be aware that the security deposit cannot legally be more than twice the monthly rent for an unfurnished property. Be informed.

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