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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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