I met with my friend Allen last week and he was telling me that he had a tenant (Robert) that wanted to be the buyer for his $300,000 rental property, but he could not figure out how to get the tenant qualified for the loan.  Allen had bought this property ten years earlier and there was only a $65,000 mortgage.  It turned out that the tenant had two car payments totaling $1,000 per month on a $20,000 total balance, and it seemed that without this extra income, Robert could not buy the property. 

Allen also told me that his tenant had made some improvements to the property totaling about $50,000 over the past 10 years.  Allen was going to credit Robert for his improvements by lowering the sale price to $250,000 from the appraised value of $300,000.  I thought that the Bank would think that sure sounded like a strong down payment for the buyer.   

I suggested that Allen and Robert go to a small community bank for financing.  They have more flexibility to make loans such as this.  I also suggested that part of the loan proceeds be used to pay down the remaining $ 20,000 of debt on Robert’s vehicles so there is more income to put towards the mortgage payments.  In particular, Robert could then afford a first trust from the Bank of $190,000 at 6 % and he was willing to use $20,000 from the $190,000 to pay off his car loans.  This meant that Allen was only going to get $170,000 from the Bank  After giving the $50,000 credit, Allen needed to hold a second trust of $80,000 ($300,000 - $50,000 - $170,000 = $80,000).  As long as Robert qualified to make the payments on the debt of $270,000 ($190,000 + $80,000), this deal could go through.  The ratio for the Bank loan was 190/300 = .633 loan to value – a very comfortable margin for the Bank. 

Finally, I realized that if my friend, Allen, was going to get his price for the property, he was going to have to hold the financing at 4% (a below market interest rate) on his portion of Robert’s debt..  However, if Allen put money into secure investments, he felt that his yield was going to be no more than 5% anyway.  Since the tenant and Allen were well known to each other, there did not seem to be a problem here.  This deal worked because of the creative removal of debt for the tenant having to do with his auto loans, and the creative use of a seller take back mortgage at an interest rate that helped the borrower qualify. 

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One of our employees bought a small condo 5 years ago.  Diane was fortunate to buy in before the upturn in the economy began to level out.  Her $49,000 condo grew in value to $212,000 and she sold it.  Because of the new capital gains treatment on the sale of a personal residence, as a single person, Diane had no income tax to pay on the sale of her home.  Her proceeds were less than $250,000.  With a $150,000 check in her possession, Diane realized that she could relocate herself to a less expensive and warmer climate.  She seized the opportunity to use her home proceeds to start her retirement. 

So Diane gave her notice, and moved to the West coast of Florida where she bought a bungalow for herself and a few pets.  She paid $155,000 all cash.  She was no longer going to have to make a mortgage payment.  This drastically reduced Diane’s monthly expenses.  Diane’s new home was free and clear.  This enabled Diane to live on her social security, retirement savings and her new part time employment.  She was now ‘working just for food’ and entertainment.  Retirement takes planning and knowledge of your needs and potential expenses.  It also requires that you know how well you can live on less income.  If I can help you get a home or sell your home so you can live your retirement dream, give me a call.

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I got a call from my old friend Sharon.  Her home had been listed for sale for several months in a neighbor city and the traffic coming to see it was zero.  She was very frustrated.  She wanted to know what was wrong.  So I drove 40 miles to the west and went for a visit to Sharon’s home.    As I got out of my car I could not help but remember that residential sales are emotional.  Buyers fall in love with properties at first sight.  They picture themselves and their loved ones on the property.  But as I walked up to Sharon’s front door, I felt blah.  There was no excitement to her yard at all.  She needed a little white picket fence, some colorful plants and green bushes and the lawn needed seeding.  Her house had been neglected and there was nothing inviting in the front to welcome buyers onto the property.  If I wasn’t there for a reason, I might have left myself. 

So I helped Sharon do a design for her front yard, cost out the supplies and the plants, and

Linda sold her house and was very happy with the buyer’s offer.  It was higher than her neighbor received two months ago.  As the custom, the buyer’s lender ordered an appraisal.  Linda really did not know why she needed an appraisal since the buyer wanted to buy and she wanted to sell the property. 

However, the Bank wanted an appraiser to tell it the value of the property.  From an appraiser’s perspective, value expresses an economic concept.  Appraisals are never a fact, but always an opinion of the worth of a property at a given time in accordance with a specific value.  In appraisals there are always a number of different types of values such as market value, investment value, estate tax value, and so on.  The Bank was interested in market value since this was a residential purchase. 

The market value is the most probable price which a property should bring in a competitive and open market under conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably and assuming the price is not affected by undue stimulus. 

Some of the factors that would affect Linda’s appraisal would include location, condition,  demand and availability of financing, utilities, environmental regulations, state and local regulations, road frontage, and water frontage.  Linda’s property was unique as most properties are.  There is no other property exactly like it.  Linda’s property and one next to it may be affected by different outside stimuli making the values different for each of them. 

The buyer may be willing to pay extra cash for Linda’s property if it does not appraise.  But the lender is weighing the risk of making the loan to Linda’s buyer based on the appraisal, and the amount of cash the buyer is putting as a down payment.  The Bank wants to be sure that its shareholders are not at risk if the loan is granted in the current “down market” upon terms decided by the Bank’s loan committee and underwriters. 

If you have questions about this process, send me an e-mail.

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One of our investment partners called me over the weekend with a curious but common question. He was surprised to get a note in the mail from the manager of a limited liability company where he is a member.  The note detailed for George the fact that the rental property he and the 3 other members owned was not performing and the members each had to pay $3,700 for expenses for the year to date that were not met by the income stream.  How could this happen?, George wondered. 

I told George that it was quite straight forward actually.  His group of 4 people own a property.  A manager was put in charge of making sure that all the bills for the property were paid in a timely manner.  For example, the mortgage needs to be paid, taxes, insurance, homeowner fees, and on-going maintenance (lawn care, painting, etc). 

George said everyone contributed $10,000 when they bought the property two years ago.  I advised George that these funds were already spent, per the manager’s letter, and the manager was building the reserve back up for the coming months.  The manager was making a “cash call” to the members for the necessary funds to continue to run the rental property (business) in a proper manner. 

It is always important to realize that when unusual or difficult events take place (fire, hurricane, vacancies, etc.) that affect your property that is held in a partnership, you are likely to get a “cash call” to stabilize the economics of the property.  On the other hand, when all goes well and there are profits to be distributed as cash flow exceeds income, or when the property is sold, then the manager will send George and the other member partner’s money according to their ownership interests.

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I just got off the phone with Pat, a longtime client who called with a renovation story- one I feel I must share… She is just about finished renovating her kitchen.  She has a lovely stone floor and beautiful cabinets and granite counter tops with top appliances.  She planned her project down to the last screw to make sure she did not over purchase on supplies for the job.  After all, she plans to sell the property within 3 years and she would like to get all of her invested capital back. 

But today she was in a complete panic.  Pat had measured her floor precisely and she had bought just the right amount of stone floor tile from the vendor / supplier.  The floor was finished without a scrap of waste.  She had certainly saved some money on this part of the job.  What she had not counted on was that her husband would drop a heavy pot of water on the floor and one of the stone tiles would spit into pieces.  She had no leftover tiles and the floor looked terrible. 

Pat got right on the telephone to her supplier, and she turned white as a ghost when she heard the dreadful news – I am so sorry, but the manufacturer has discontinued that tile, and we sold out the last batch last month.  We have no replacement tiles left for you to purchase. 

Suddenly her accountant’s mentality to quantity control is a real problem.  The purchase of 3 or 4 extra tiles would not have harmed her overall spending plan for the project, and it would have given her a margin of safety for cracked or broken tiles long into the future.   

I remember Pat every time that I talk to someone about their home projects.  I pass on a word to the wise – do not skimp on your supplies.  You just never know when an extra piece of material will be needed for an emergency repair. 

Let me know if you have had a similar experience to Pat’s and how you solved the dilemma.

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Every year on the Fourth of July we purchase and deliver thousands of

I was recently asking a friend at a commercial real estate brokerage company about trends in his industry.  He launched into a heavy discussion about ‘going green’. 

In just a few years, he indicated that building green has gone from a concept shared by a few developers to a much more mainstream concept in the commercial real estate business.  Tenants have been demanding energy efficient space, and sustainable facilities, while owner/landlords have focused on improving building standards to keep pace with environmental innovations. 

As various green projects come on line, a new generation of industrial buildings is being constructed.  The standard landscaping features such as grass berms are being replaced by bioswales, which are drainage systems that retain water onsite.  French drains, which reduce water discharge into public sewer systems, are also a new sustainable feature for these buildings. 

On the inside of these structures, you find clerestory glass which provides ambient lighting and requires less energy.  The design also tries to use daylight through the strategic placement of windows and skylights to capture natural light.  Recycled carpet is also becoming commonplace.  Developers are also using non-volatile organic chemical-emitting paints and finishes, and energy efficient mechanical systems. 

On the other hand, my friend made it clear that all of these green approaches and components cost the developer and owners extra money.  It is yet to be proven that these innovations can be recovered from an increase in tenant rents.  It remains to be seen if tenants will place a premium on such facilities for their work environment and their co-workers.  Perhaps going green will lead to less tenant turnover, and reduced workforce health costs as well as other long term benefits. 

On the residential side, I’ve included a great article in this summer’s Fairweather Report about the effects of “going green” in your own home.

Have you made any changes in your home to make it “greener”? Let us know, you could be featured in our fall edition of The Fairweather Report! 

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I had a buyer come into my office the other day and we talked about finding her a detached single family home in the $350,000 range.  The buyer knew that she could not live close to downtown (Bethesda, MD) since current home prices are well above her limit. 

As we talked, I learned that she had been pre-qualified by her lender.  She also told me that she had saved 3% for her down payment and another 4% for her closing costs.  Based on her income she was aware that she could qualify under the FHA program for her loan. She had clearly done her homework. 

I learned that she was a single mom with a small child.  She told me that she planned to use all her savings for the home purchase and that she would have just a few thousand dollars left in her savings.  This situation is not unusual.  Most buyers I meet have just enough funds to qualify for their loan and meet lender guidelines.  However, this is not always a good approach to making your home purchase.  It is important for buyers to think about their reserves.  This is a very important concept.  This is not only money for the next couple of monthly mortgage payments, but money for auto repairs, unexpected dental bills, home repairs, shoes for the kids, an unexpected trip, and other “surprises” that can throw a personal budget for a loop.  Most financial magazines I have read encourage homeowners to keep six months of ordinary expenses in reserve.  This is not very easy for the average American.  We are not particularly good savers.  However, it is a standard that buyers should strive to obtain. 

It is important to remember that our best plans often do not work out exactly as we thought they would.  So, it is usually better to be conservative and prepared for financial problems in the future. If you have any questions about your reserves or home purchase plans contact me at your convenience.

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I was with my cousin Joel yesterday and he asked why anyone would buy a rental property and pay the mortgage off.  There are a number of reasons that I could think of, but the best one involve the concept of a ‘forever income stream’. 

Most of us have income from different sources – our jobs, alimony, child support, retirement payments, and social security and so on.  However, these income streams all end within some finite number of years or upon our death, the maturation of children and so on.  For example, alimony stops if you remarry, child support usually stops when the child reaches the age of 18 years, retirement checks stop when you exhaust your benefits or upon death (yours and or your spouse).  

However, if you owned a $150,000 rental property with a net rental income of $1,000 per month and no mortgage, the income is ‘forever’ so long as the property is maintained, taxes paid, etc., and it remains rented.  Regardless of what is happening in your life (or your death) the income belongs to your estate.  So think about this concept.  You buy a $150,000 property when you are 30 years old and rent it out for 25 years on a mortgage that amortizes over the same 25 year period.  When you are 55 years old the property is completely paid for and the net rental income (after insurance and taxes, and fees) is yours – all $1,500 or whatever you raised the rent to along the way ($20 per month per year rental increases means you are at $1,500 per month).  If you live another 20 years to age 75, you enjoy $18,000 per year or a total of $360,000 net dollars assuming no further rent increases. 

But what if your will gives the property to your son upon your death.  The title and deed transfer to your son and the income stream continues for the remainder of your son’s lifetime.  If you son is just 30 years old when he inherits the property, and he lives to be 80 years old, he will receive the $18,000 per year or more over 50 additional years – another $900,000. 

If your son has a child (your grand child), the income stream can continue for another generation, and another, and another.  With proper planning, it can be a forever income stream for all your heirs.

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