I got a call from Al last night.  He was very agitated about a notice he received stating that the County was about to sell his $500,000 home for $110.  Al thought this was some kind of a joke.  I assured him that this was no joke and it happens all the time. 

Whenever a homeowner fails to pay his property takes, or a portion of the property taxes, the County can auction off the property through a tax sale process.  Even though Al’s taxes were $14,389 per year, the $110 remaining balance on his bill was the start of a process by the County to collect a debt.  If Al was not careful, traveling abroad, living in another jurisdiction, or simply not paying attention, he was at risk of losing his property because of a County tax lien, and a subsequent tax sale. 

This is why I recommend that owners check their tax status every six months to be sure that there are no delinquent taxes on their property.  When you find that your property is in arrears, you may need to pay the local jurisdiction, or settle up with the County’ debt collection agency – usually a local law firm.  In Al’s case, it was going to cost him $110 for the taxes and $1,500 in legal fees and court costs to remove the lien.  This was a very expensive oversight by Al.  Al can check periodically with the County about his taxes, go online to their web site and check the status himself, ask his local realtor to pull the County tax records, or have his favorite settlement company attorney do the research.  It is very important to stay on top of this matter.

If I can help you check the status of your tax payments, give me a call.

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This is becoming more of a regular question, considering the current market:  I met with a client recently to talk about his real estate holdings.  Jack was having a hard time with his cash flow.  He had borrowed money on his appreciated properties and the rental increases had not kept pace.  He was now asset rich and cash poor.  He had what the industry calls “ a liquidity problem”.  He was not sure what to do next.

I told Jack that there are a couple of solutions that can be pursued:

-  First, he could sell one or more of the properties and put the net equity into a reserve account to help off set the costs of the remaining properties until the rents can be increased to cover more of the expenses. 

-Next, Jack can take on a partner in one or more of his properties.  For a fixed amount of cash, Jack could sell a percentage interest in his properties to a fellow investor. 

- It is also possible that Jack could apply for a ‘blanket loan’ that use several properties as collateral so the combined equity was sufficient for a commercial bank to provide a line of credit to Jack to be used for reserves. 

-Jack might also establish an escrow account with the commercial bank that made periodic automatic payments on his various property mortgages.  This is more of a directed source of funds that cannot be used for other purposes (the line of credit can be used for any purpose).

A good source for partners and lenders is your local real estate brokers and community bankers.  If I can help you with a liquidity problem, please e-mail me at jane@janefairweather.com

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When I have a question about investing, my go-to person is always my husband David- his years of experience and success are the first indicator I’m talking to the right guy. This is part of a discussion we had recently about rental residential real estate vs. publicly traded securities:

David: “There are several reasons I prefer rental residential real estate, but the primary reason is leverage.  Another way of saying this is that as a real estate investor, I get to use my lender’s money (the loan) as well as my down payment to make money on the appreciation of the property I buy.

For example, I can buy a $250,000 property with $200,000 of Bank financing and $50,000 of my funds.  This is a standard deal for an investor.  If the property appreciates just 2% ($5,000), I earned $4,000 on the Bank’s money and $1,000 on my personal funds.  However, I get the benefit of the entire $5,000 when I sell the property.  Leverage is quite powerful boosting my return from 2% to 10%.

Now, I can also buy $250,000 worth of stocks, but I will probably need to use $125,000 of my own funds.  A 50% margin is allowed.  Furthermore, if the market declines and the stock value decreases, I have the added burden of a margin (cash) call.  This does not happen with my real estate purchase.  If the property declines in value, my leverage decreases, and the bank becomes more at risk, but I am not required to offset this decrease in value with more of my own funds.

If I have excellent credit and lots of income, I can leverage even more.  Take my $250,000 property (A).  I again put $50,000 of my funds into the purchase, but I borrow $45,000 of these funds from a different property (B) with substantial equity.  In other words, I use the funds from property B to help finance property A.  Now I have $5,000 of my own cash in property A – and I am 98% leveraged.  Here again, if property A increases 2% in value, I have a gain of $5,000 when I sell the property which is a 100% gain on my own cash.

Also keep in mind that leverage can hurt you badly if you are not careful using this approach.  In general, leverage increases the monthly cost of the property and a downward valuation removes your equity very fast.  Many of today’s current mortgage problems reflect an over-leveraged buyer situation.”

If you have any questions about using leverage in a transaction, or would like David to answer any other questions about real estate investment- Let me know! Post your comment here or send an email to jane@janefairweather.com .

Have a wonderful day!

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One of the last minute decisions my buyers usually make concerns the level of insurance they obtain for their new purchase.  This decision can be complex because of market conditions and other factors related to your business and personal situation.

For example, if you buy a $300,000 home it may not make a lot of sense to insure the property for $300,000 because part of the purchase price includes the value of the land on which the home sits.  So assuming the land is assessed at $100,000, you might feel that you would need only $200,000 worth of coverage on the home, right?  Not necessarily, because you might have bought a foreclosure at a discounted value and the cost to rebuild the property may be $150 per square foot and your home is 1,800 square feet.  So you might actually need $270,000 worth of insurance coverage ($150 x 1,800).

These are just some of the issues that are involved in insuring your property.  It is best to consult an expert in the insurance business to be sure that you and your property are protected. 

Also, if you plan to rent out your property, be sure and get rental income coverage.  If your tenant cannot live in the property while it is rebuilt after a fire, you do not want to suffer from a loss of rental income during construction.

I suggest that you also analyze your liability coverage on your properties and discuss with your insurance agent the potential value to you and your business of an umbrella policy for additional liability coverage. 

Insurance is one of those purchases we make with little forethought, until an event occurs and we scramble to determine if we are covered for the calamity.  I recommend to my clients that they have an annual insurance ‘check up’ to figure out if all their various policies (life, health, property, business) fit together properly.

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I wish I had a dollar for every time a seller told me that they set their current (unrealistic) home price at some level because they ‘need the money’. 

Need has nothing to do with the value of your home, or my home.  Very simply, value is a moment in time based on what a specific buyer is willing to pay you for your property at that moment.  What I want or what I need is totally irrelevant to what is going to happen.

Everyone today, is wishing that they placed their property on the market two years ago.  Why?  Simply because market conditions were different two years ago and buyers were willing to pay more for property at that time.  In fact, with low inventory levels, buyers competed for contract acceptance and often paid over the asking price for property at that time.  The real estate market was better for sellers then.

Today’s economic conditions have changed all of those types of situations.  We have a declining stock market, higher unemployment, a high cost for oil, higher foreclosure rates, and bank short sales, higher down payment requirements for mortgages, increased lender verification requirements, lower consumer confidence, and on and on.  These factors dramatically affect what a buyer is willing to pay for real estate on a day to day basis.

As the tune in the Rolling Stones song says, ‘you can’t always get what you want’, and I can tell you that you certainly may not get what you feel ‘you need’ for your property under these conditions. 

However, homes are still selling, people are still moving up to larger homes, or moving down to smaller retirement properties, or buying rental properties as investments, or transferring to new jobs, and so on.  Individuals and families are just doing more analysis, fact finding, and setting more realistic expectations.  If I can help you with these critical decisions, feel free to contact me.

This month, I also discuss short sales on my podcast. Listen by going to www.janefairweather.com and clicking on “Bethesda, MD Podcast” .

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My daughter called me and was very upset about a letter she received from WSSC – the local water utility company.  She told me the water company was charging her $17,000 for her new investment property.  I met with her and realized that this was the utility company’s standard letter describing a ‘front foot benefit’ charge. 

This is the charge that the water company made against my daughter’s property for bringing water to her new home.  But the fine print said she could write a check to WSSC for the entire $17,000 (not likely) or pay for this installation service over the next 23 years as part of the property tax bill. 

Most developers and property owners opt to pay over the 23 year period.  The reason to select this option is simple.  You may own the property less than 23 years and if you paid the fee all at once, you would be paying the charge for future owners you do not even know.  Since the average time an owner stays in their property is around 7 or 8 years, you can avoid 15 or 16 years worth of fees by just paying your share while you own the property.

Typically, if the utility company does not receive your check for the entire amount of the connection fee, they will assume that you have opted for the annual amount to be added to your tax bill.  If you are buying an older home, and you review the tax bill components, you will see this charge or there will be no amount in this category if the time has been sufficient to amortize the fee completely.  This is one benefit of buying an older home.

If you have a question about your front foot benefit charges, or other tax bill items, feel free to e-mail me.

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This is a situation that comes up more often than you think, just last week this was going on with one of my sellers. She was concerned because the buyers wanted to go to settlement earlier than expected and they wanted to have her rent back the house at a cost equal to the buyers principal, interest, taxes and insurance (PITI) for 30 days before vacating.  Mary just wanted to wait the 30 days and then settle without having to pay the buyers to “rent her own home”. 

I explained to Mary that I always felt it was a good idea for a seller to get their money from the sale as soon as possible.  You just never know what might happen.  When you have been in the real estate business for 25 + years you tend to have seen thousands of cases and they do not all go well.  Sometimes a buyer loses their job, or gets injured or dies.  All of these events tend to delay or terminate real estate deals.  However, none of these events affect Mary and her money if they occur after settlement.  Sometimes weather is a factor.  It is better to be the renter if a storm knocks over a tree onto the roof.  The new owner then deals with the insurance company, the contractor bids, the repairs and the deductible cost.  It is also possible that the loving couple who has the contract on Mary’s home is having family problems and they start divorce proceedings prior to settlement.  Now the couple will not be buying together and they no longer qualify for that large mortgage needed to buy Mary out of her property.

If Mary gets her sale proceeds early, she can always invest the funds to make up for some of the rental payments to her buyers.  Whether Mary earns a little money on her proceeds or a lot of money, she at least has the proceeds and all of the various problems that can occur to her buyers need not worry her further.

If I can help you analyze a rent back opportunity, please e-mail me.

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Mary just had her home inspected by a first time buyer and she received the home inspection report with a contract addendum asking for all kinds of repairs and replacements.  A few of these requests, to her, were absurd.  So Mary called me for my opinion.

After I calmed her down, I pointed out that these were first time homebuyers.  Mary had already given them a seller credit so they had the funds necessary to complete settlement and to get into the property.  This told me that they were short on money for repairs.  So anything that came up in the inspection was likely to end up on Mary’s lap as a repair request.  Mary’s home also suffered a little from owner neglect. 

So Mary had a couple of options.  She could say no to a lot of the repairs and risk losing the deal.  This was a horrible idea, I thought, since she had already lost a buyer at settlement.  She could also provide a credit except I thought she would be over the lender limit for the size of credits on the buyer’s loan amount.  So a credit was not viable.  Therefore, we needed to look at the inspection list and separate it into repairs that met the contract terms (broken, damaged home items), and repairs that were really home improvement requests.  The latter would be something nice to have, but really not called for under the contract.  For example, the dishwasher did not work.  It needs to be repaired or replaced under the contract terms.  However, it would be nice to have new windows, but the home did not have new windows when it was placed on the market and seen by the buyer.  This is an improvement not required by the contract.  Mary could say no to new windows and still not breach her contract.

The trick to sorting all this out is getting the buyer to understand the difference and not have these be items so important to the buyer that they decide to continue looking for another home.  In a buyers market, it is best to do all or nearly all of these requests – even if they are improvements.  If the seller is going to make $225,000 on the sale in net profit, it is not as important to debate the replacement of a light fixture, or whatever.  Everything the buyer wants has to be put in the context of the seller’s desire to sell and the net result of the sale to the seller’s capital.  On the other hand, if the seller is going to net $2,000 from the sale of the property, it is unlikely Mary will be amenable to much in the way of home improvements.  So Mary took another look at the list and went along with most of the items.

If you need help figuring out the tradeoffs in your home inspection list, contact me.

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I wanted to share a recent call from my friend Victor in Florida.  He was there after a recent move from Washington DC and he wanted my opinion about how to evaluate property there.  This is not so easy.  First, I was a long distance from the property of interest – never a good idea.  Second, there is a huge glut of property on the market in Florida.  Finally, Victor was an emotional buyer.  He was likely to assign a higher value to a property simply because it had an appealing water view, or his decorating taste.

This clarified for me the difference between value based on what an investor might pay for the property and what an emotional buyer might pay.  The difference is important because when it comes time to sell the property again, you increase the pool of buyers if investors see value too.  What I explained to Victor was that he might fall in love with a property and pay full asking price just to assure himself that the sale would be completed.  However, as an investor, he would really need to know the amount of rent and net income from the property in order to properly value it.  Investors buy future income streams.  I reminded Victor that money was very portable.  People take their money all over the world to buy real estate based on their perception of the deal, and the value.  Therefore, I told Victor to study his local rental market to learn what he might expect to be paid if he had to move back to DC and lease his property.  He would not want to have a $2,000 per month payment and only be able to rent the property for $1,000 per month.  In this case, his emotions had him pay close to double what the intrinsic value of the property would be worth.

I told Victor that this was OK and that most homeownership fits this scenario.  However, it is really important in difficult economic times to recognize what decision you are actually making – the decision to pay more for the property than anyone else would give me as a tenant.  If you are going to stay in the property for the rest of your life, like Victor, it probably does not matter much.  It is also hard to separate the emotional value of the property from the brick and mortar value.

If you want to discuss the value of your potential real estate purchase, send me an e-mail.

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A client named Paul called me from his home in Rehoboth Beach, Delaware and asked why I thought his quarterly water bill had skyrocketed above $1,400.   Before I began to answer Paul’s question, I checked with him to see if there had been any unusual usage situations – broken pipes, yard soaking, filling the pool, and so on.  Paul had been gardening a lot and planted lots of flowers and small trees that he soaked for hours at a time.  Finally, I asked Paul to read me the information off his water bill.   

As I suspected, he was being charged for each gallon of water being used anywhere on his property as if it had gone through the sewer system.  Most people are unaware that utility companies do not measure sewer usage except by the number of gallons used by the property.  The typical bill will give the owner one rate for the water and a separate and higher rate for the sewer for the same amount of water.  Paul was hot.  He screamed that he was not flushing his toilet every minute and he should not be charged that way. 

 I told Paul that he could remedy the situation by placing two telephone calls.  First, he needed to ask the local utility to install an “outside” water meter in addition to the existing meter.  Next, Paul need to call a plumber to connect his outside water system to the new “outside” water meter.  The new meter will differentiate the water type being used (inside versus outside) and Paul will get a more appropriate invoice. I warned Paul that this was not going to be a cheap fix.  It will likely cost him $2,000 for the meter and another $2,000 for the plumbing work.  However, it looks like he could save $600 - $800 per quarter on his bill so the payback period for Paul’s investment is under 7 heavy usage quarters.

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