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 Your Realtor will write counteroffers on your behalf that can be withdrawn at any time, and will assure you only confirm the counter offer you want to accept.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 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.

What’s the Difference Between a Comparative Market Analysis and an Appraisal?

Before you buy or sell a house, it’s important to know its market value. As a buyer, you want to pay as little as possible, while still putting in a winning offer. As a seller, you want to maximize the sales price. So how do these two parties ever come to an agreement? Through the use of comparative market analyses (CMAs) and appraisals.

If you’re a seller, you will invariably ask the question, “What’s my house worth?” To which your Realtor should reply, “Let’s look at the CMA I’ve done for your property.” Realtors depend on a database of properties for their market research. The database includes properties of all descriptions that have recently been put up for sale and either sold, remained on the market, or been removed from the market without selling. Your Realtor uses that database to search for properties similar to yours in terms of age, condition, size, style, and location.

In preparing a CMA, your Realtor will review properties that sold, and see how long they were on the market; properties that still haven’t sold, but have remained on the market and may have had price reductions; and properties that never sold and eventually were pulled off the market. Each of these situations provides valuable information about how your property fits into the housing market. The houses that remain on the market are the most interesting to your Realtor, since those are the properties with which your house will compete for the ready, willing, and able buyers. Realtors create CMAs as one of the many services they provide to clients, or even as a way to demonstrate their value to prospective clients. There’s no specific fee for a CMA.

An appraisal, on the other hand, includes similar data but is usually done by a certified or licensed appraiser with hundreds of hours of training and expertise, and most importantly, with no financial stake in the transaction at hand. Lenders depend on this expertise and objectivity to determine the fair market value of a property upon which they make lending decisions. An appraisal is the highest price at which a property is likely to be sold from a willing seller to a willing buyer who both have all the material facts. The cost of an appraisal varies widely from a few hundred dollars to a few thousand dollars (or even tens of thousands of dollars).

Depending on the type of loan and type of property, a lender usually chooses to loan between 50 percent and 100 percent of the appraised value. If you are buying raw land, you can expect closer to 50 percent. If you are buying a commercial property with the first deed of trust, you can expect about 60 percent. If you are buying an owner-occupied, single-family house, you can expect between 75 and 100 percent.

Lenders are not the only ones to use the appraised value. Buyers can use it to negotiate the sales price. In fact, I have a Realtor in my office right now involved in a transaction where the property value is highly subject to opinion. We have sent the seller a letter of intent noting that the buyer is willing to enter into a purchase agreement for whatever the appraised value turns out to be. This particular property will be extremely difficult to appraise and the appraisal will therefore probably cost tens of thousands of dollars. However, with a buyer ready to commit to purchasing the property, the seller may decide the cost of the appraisal is worthwhile.

Neither CMAs nor appraisals are based on exact science. They are both opinions of value, albeit from well-educated sources. Usually, the final sales price falls within 3-5 percent of the appraised value. Now and then a unique property breaks that rule.

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.

 

Appraisals: What You Need to Know

An appraisal is a professional assessment of a property’s value, and it is a critical part of the home-buying (and refinancing) process. Before lenders will agree to finance a home loan, they want to be sure they can recoup their money, should the need arise. If you find a cute little house on the Westside of Ukiah worth $250,000, a lender will not finance a loan for $400,000 because if you default on that loan, they need to be able to sell the house and get their money back.

Since most people don’t make a habit of buying and selling houses, here are a few details you should know.

Who Pays For the Appraisal?

Usually the buyer pays for the appraisal; however, in some sales contracts a buyer may ask the seller to reimburse them for the cost of the appraisal at closing. When refinancing your home, you pay for the appraisal upfront, or sometimes it can be part of the closing costs that can be financed back into your loan.

How Do Appraisers Determine the Value?

Appraisers thoroughly inspect your house to review the square footage, how many bedrooms and bathrooms, the kitchen style, and the overall condition of the house. They also review the property’s location and other factors, including the recent sales price of similar homes in the area. Finally, appraisers must provide a “Condition Code” rating that reflects the integrity and condition of the house, based on a formula provided by the appraisal institute.

Who Gets to See the Appraisal?

On a purchase transaction, buyers should receive a copy of the appraisal at least three days before closing; however, it’s usually given to them a few days after the lender receives it. Neither the seller of the property nor the real estate agent typically receives a copy—unless the buyer provides written authorization that it’s okay to share it. If you are a buyer and you do not receive a copy of the appraisal, ask for it! If you paid for the appraisal you are entitled to a copy.

What If the Value is Lower than Expected?

If you are the seller, and the appraised value is lower than the sale price, you can either back out of the contract (depending upon the wording in the contract), or you can renegotiate the price. The buyer also has the right to renegotiate the sale price. If the appraised value is higher than the sale price, then the buyer gets a good deal and the seller must live with the agreement.

If you are refinancing and you think the value is too low, you have the right to appeal the value, provided you have additional information to help increase the appraisal value (i.e., other comparable properties that have sold or mistakes that the appraiser has made such as the wrong square footage or number of rooms). Appraisers are human; they make mistakes. Review the appraisal carefully, especially if the value is significantly higher or lower than you expected.

What Can You Do Before the Home is Appraised?

While you may not think small cosmetic changes should affect the appraisal, they can. The first impression of a home with good curb appeal can positively influence an appraiser’s (and buyer’s) opinion. Cut overgrown bushes, rake the leaves, pull weeds, and mow the grass. Inside the house, de-clutter the counter tops, cabinets and closets. Vacuum floors, wash tile floors and polish wood floors. If you have made improvements (e.g., new roof, deck, furnace, water heater, etc.), give copies of paid invoices to the appraiser before they make an inspection, especially if the improvements are readily visible.

If you’re wondering whether it’s in your best interest to refinance your home, contact your Realtor. They can help you.

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.

 

 

Illegal Parcels Masquerading As Legal Parcels

When homeowners receive a property tax bill, some see more than one assessor’s parcel number listed for a single property. Ever wonder why? Well, let me explain.

An assessor’s parcel number, or APN, is simply a number assigned by the tax assessor to assure the property is taxed appropriately. A unique APN does not equate to a legal parcel. A legal parcel is a segment of real estate that a city or county has determined is a separate, salable parcel with no use restrictions except those required by zoning and code compliance—and it may include multiple APNs.

An illegal parcel is a parcel that local governments do not recognize and therefore the owner cannot obtain building permits or conduct other activities on the property. It’s easy to think that all parcels are legal because they have a unique description recorded with the county; however, the county recorder’s office limits its review to the validity of document itself (not the legality). Weird, I know.

This means that if you and your brother inherit a legal 40-acre parcel, and you two decide to split the property in half, you could accurately describe each of the parcels and record a grant deed for each; however, that does not make them legal parcels. The resulting parcels have significant restrictions on future use, and therefore, on their market value. Remember, two APNs doesn’t mean two legal parcels exist.

To create legal parcels, an owner must either subdivide or go through the certificate of compliance process. The certificate of compliance process is far easier, drawing less scrutiny, taking less time, and costing less money. Government regulation is less restrictive and less expensive, which also reduces or eliminates the price of professional services like surveyors. So given the choice between subdividing and completing the certificate of compliance process, always choose the latter.

Sadly, not all properties qualify for the certificate of compliance process. The certificate of compliance process can only be used if the property in question was ever in its history more than one legal parcel. If more than one parcel existed, you can go back to however many legal parcels existed. If you don’t like the original configuration, a boundary line adjustment can reconfigure the parcels to your liking. For example, if a half-acre parcel was added to an 80-acre parcel, a certificate of compliance process can break the property back into two legal parcels. The owner can then request a boundary line adjustment to divide the property into two 40.25-acre parcels (or a 20.5-acre parcel and a 60-acre parcel). Parcels do not have to be the same size, but they must generally comply with the current zoning.

This recently happened at the old Masonite property. The owner used the certificate of compliance process to create 14 parcels where only three existed, making the property more valuable and easier to sell.

If a property has never been more than one parcel, your only means of creating more than one legal parcel is to subdivide. Unless you have a cast iron stomach and a fearless heart, do not go down this road.

There are two types of subdivisions: a four-way subdivision and a major subdivision. A four-way subdivision cuts a parcel into four pieces with one left over (so yes, five legal parcels). Four-way subdivisions are handled at the county level (unless they’re within the city limits) and they are infinitely easier to manage than a major subdivision, which requires state-level scrutiny and compliance.

So to review: do not to be tricked into thinking an APN indicates anything other than a record-keeping number, and if you want to legally split your property, cross your fingers and toes that it was more than one legal parcel at some point in the past.

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 35 years.

 

Real Estate Investing – What Are My Options?

When it comes to real estate, you can invest in several types of properties. The question is, why would you? Well, because it can pay handsomely.

A reader asked, “If I were interested in investing in real estate, where should I start?” Well, there are several different types of real estate investments: single family homes, duplexes to four-plexes, residential buildings with five or more units, commercial real estate, raw land, limited partnerships, or notes secured by deeds of trust.

Today, I’ll talk about single-family homes. While many of the investment issues are common among all types, most folks start with single-family homes. Bear in mind, all consideration of buying a new residence applies to buying an investment property. Do your due diligence: complete all recommended inspections and listen to your realtor’s advice. Remember, lower priced properties will have a much better rent-to-price ratio. A $200,000 home will probably rent for $1,200/month, while a $750,000 home will likely rent for $3000/month. In addition to a better rent (income)-to-price ratio, you’ll probably have shorter vacancies with a less expensive property. More people are in the market for a $1200/month property than for a $3,000/month property.

For the purpose of this column, I’ll assume we’re talking about a $200,000 house in good condition. You should anticipate expenses in the neighborhood of 3-4 percent of the purchase price per year, or $6,000 – $8,000 per year. This includes taxes, insurance, and maintenance costs. Taxes alone are about $2,400. Now, you won’t spend the additional  $3,500 – $4,500 every year, but the year you need a new roof, paint inside and out, and new carpet, you’ll make up for any money you didn’t spend in previous years.

On a $200,000 house with 20 percent down, your monthly payment will be about $800. I recommend that you treat the expenses mentioned above as a monthly bill. Take $550/month and put it in a separate “reserve” account, so you’ve got the money you need when that paint job or property taxes come due.

On the upside, you’ll have depreciation (a non-cash expense) as a tax benefit. Depreciation is a bookkeeping expense that allows you to deduct the value of improvements over time. As long as you take good care of the property, it will last many years past the “depreciable” life. Consequently, depreciation is only a taxable expense, not a cash expense. This means, you have the ability to save on your income tax expense to the tune of $150-200/month. This savings pretty much offsets your negative cash flow, and income tax savings IS a cash savings. You can reduce your withholding or your quarterly tax payments to provide cash to deposit to your reserve savings account for future property expenses.

So now, you own a $200,000 rental property that takes no significant time to manage or maintain, and that has about a break-even cash flow. You invested $45,000 (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, that equates to $6,000 per year on a $200,000 house—that means you made $6,000 on a $45,000 investment or a 15 percent return. This is called leverage. Compared to other investment options, real estate looks pretty darn good!

In addition to the increased property value, over time rents will also increase. And while expenses go up with inflation, mortgage payment (your biggest expense) won’t go up over time. The bottom line is, if you can afford to buy a $200,000 rental today, by the time junior heads to college in 10-15 years, you should have an asset capable of paying for much of his education.

If you have questions about real estate or property management, 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 35 years.

Appraisals 101

It’s a seller’s market, but whether you’re talking about a sales transaction or a lease situation, it’s important to know the value of your property, and which home improvements will pay off. Here are some of the factors that affect a property’s value the most.

  1. Size. Square footage is the single biggest factor in determining a property’s value. Be sure you know the square footage of the home. Measuring it is not always easy and even professionals make mistakes, so estimate it yourself to check the numbers.
  2. Land. How much property does the structure sit on? A big back yard can add a lot of value. However, sometimes the difference between 10 acres and 20 acres isn’t as big when it comes to overall impact.
  3. Condition. The condition of the property (both visible and invisible) is a major factor. Obvious signs of wear and tear are unappealing, but sometimes it’s the structural issues that have a bigger impact on a property’s value.
  4. Location.  Location used to be more important than it is now. While it’s still a major component of value, our telecommuting world allows people more freedom in where to live.
  5. Décor. The style should not only be attractive, but appropriate to the home and the era. It helps to be internally consistent as well as consistent with the neighborhood.
  6. Room Count. In addition to how many bedrooms and bathrooms, the total room count matters. These days, “outdoor kitchens” almost count as another room.
  7. Other Amenities. Pools, hot tubs, and other amenities, while nice, do not increase the value by the amount it costs to install them. And, they can detract if they are poorly placed or in disrepair.
  8. View. To let you know the value of a view, I once knew an apartment building owner who said, rent was $1000 and the view was an extra $200. Yep, people paid it.
  9. Community Amenities. If a property is close to good schools, parks, shopping, and other amenities, the value increases. Now, of course, these are subjective. For a retired couple without children, clearly the schools won’t be much of a draw.
  10. Financing. If the seller is willing to carry the loan, the value of a property may go up. No fuss, no muss (simpler loan application, no fees, etc.).

When it comes to things you can change about your house, the absolute best return on your time and money is to clean and de-clutter. Haul stuff away and deep clean your house—top to bottom. Once that’s done, you can decide  on additional improvements.

People often ask, should I update the kitchen or the bathroom(s)? Well, as with most things, that depends. If you have a four-bedroom/one-bath home, add a bathroom (preferably a master bath). If your kitchen fixtures were done in a nice shade of 1970s avocado, consider renovating your kitchen.

When updating, go neutral. If you want a snazzy color, paint a wall. Paint is inexpensive to replace. Appliances and flooring are not. And, think long and hard before you convert a garage into a family room, because what you gain with one, you lose with the other. It’s almost a fair trade in overall value, so you’re getting little or no return on the money you spent to make the change.

Once your property is in tiptop shape, it’s time for an appraisal. While there are three methods appraisers use to estimate the value of the property; theoretically, they should all come up with comparable values. It costs about $400 to get a single family residence appraised, and this is another one of those times when it’s really important to have a reputable, local professional do the job. Call your local REALTOR for a referral.

In case you’re interested, the three methods of appraisal are as follows.

  1. The Market Approach – compare physical data, get data on several comparable properties, and make adjustments for size, condition, etc.
  2. The Income Approach – figure out the fair market value for renting the property, get income/rental information for comparable properties, and multiply by a ratio to get the appraised value.
  3. The Replacement Cost Approach – figure out the top value (what it would cost to replace it), assess the cost of doing so (including permits, hookup fees, insurance, taxes, etc.) and adjust for the aging of the property (physical, functional, and economic).

Lenders require appraisals, and they can be handy if you’re a For Sale By Owner type of person. If you work with a REALTOR, they can provide a market evaluation as part of their service which will help you estimate the value of your home.

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