All Properties are Sold “As-Is” Unless You’re Paying Attention – Part II

As I said last week, when you buy a property in California, you’re buying it “as-is” unless you negotiate an agreement pertaining to a specific item. Without that special agreement, you’re accepting the property in its current condition.

This is why it’s worth investing in several inspections. Once you’ve had the inspections pertaining to structures, land, and features (reviewed in last week’s column), it’s time to get the inspections pertaining to ownership, property definition, and natural hazards.

Title insurance takes care of ownership and property definition issues. Without title insurance, you cannot be sure that your claim on the property has priority over someone else’s. With title insurance you’re really paying for the research—which is why I’m including it with other inspections. With most insurance, your premium is based problems happening in the future. With title insurance, you’re paying to see if a problem has already occurred.

In addition, title insurance provides a legal definition of the property, including its shape and location. I know this sounds crazy, but people have actually purchased the wrong property before. I know a contractor who built a house to sell on the lot he thought was his. Sadly, it wasn’t. (Surveys aren’t included with the title insurance, so if you want precise location measurements, talk to your Realtor about hiring a surveyor.)

Long story short, you definitely want title insurance so you can be sure of what you’re buying, and so you don’t buy a property only to discover there are back taxes or recorded liens which weren’t paid; or worse yet, that the deed you were given was not signed by the true owner of the property and therefore worthless to you.

Moving on to natural hazard disclosures (NHDs), the inspection for NHDs includes a review of public records to see whether your property is in a flood zone, on an earthquake fault line, near an old dump site, or any number of other hazards. Depending on the findings and your intended use of the property, you may decide to do an environmental inspection.

A Phase I environmental inspection is a public records search for suspected contamination: did there used to be a gas station at this location? A Phase II environmental inspection is an on-site inspection to see whether any concerns from Phase I appear grounded in fact. A Phase III environmental inspection basically requires the world to come to a screeching halt. You dig big holes to remove toxic material. It’s called “remediation.” It’s not fun, it’s not cheap, and it’s not quick, but hopefully it will make the property usable.

As important as inspections are, they are no replacement for walking the property yourself. And, regardless of what the inspections uncover, the seller and Realtors involved in the transaction must disclose anything they know (or should reasonably be expected to know) about the property.

Any inspection is limited to what can be seen without destructive testing. In other words, if an inspector has to cut a hole in the wall to see a problem, that problem won’t be included in the findings.

Remember, it’s always better to check things before you close escrow, when fixing the problem may be a joint effort of the buyer and seller, rather than afterwards when the responsibility is yours alone.

As an aside, property boundaries are based on surveyors’ monument points. In Mendocino County, we use the Mt. Diablo base meridian to the south and a landmark in Humboldt County to the north. Surveyors have put “pins” in the ground between those two landmarks to precisely identify distances from those landmarks so people can more easily determine boundary lines. This works well unless someone makes a mistake, which they did years ago. A surveyor’s point near Boonville Road has caused many of those properties to be misidentified by about three feet.

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.

 

Rent vs. Own

Would-be to Should-be or Rent vs. Own

Some would-be buyers have emotional reasons to own a home like having a place of their own where they can raise a family, feel safe and secure and enjoy their friends’ company. Other buyers’ dominant reasons might be financial in nature such as building equity or lowering their cost of housing.52407681-250.jpg

Regardless of what might be motivating people to want their own home, it is easy to justify that now is a good time to purchase. Let’s look at a $250,000 example using a FHA loan.

The total payment will be about $1,835 dollars a month. If the payment is lower than the rent a person is paying, that should encourage a person to continue investigating.

In this example, when you consider the monthly principal reduction, the monthly appreciation and the tax savings, even with money added for monthly maintenance, the net cost of housing is less than half the total house payment.

Considering all those advantages, the would-be buyer is spending over $1,100 per month more to rent than it would be to own. In a year’s time, they would lose close to $14,000 which is more than the down payment of $8,750 required on this price home.

Most would-be buyers understand that a home is a big investment but they may not understand the advantage of the leverage caused by the low down payment mortgage. The benefits extend beyond a return on the down payment but to the value of the home.

In this example, the $8,750 down payment grows to an equity of $73,546 in seven years based on 2% annual appreciation and normal amortization on a 30-year loan. If you calculated that as a rate of return, you’d be challenged to find anything that could compare with it.

rent vs own 2017.png

To see what your numbers might look like, check out this Rent vs. Own. If you need any help or have any questions, contact us. Part of our greatest satisfaction is helping would-be buyers understand why they should-be.

Til next time… May all your deals be easy ones!
Follow me on Twitter @yourmendorealty

Clint Hanks                                   707-391-6000

The post Rent vs. Own appeared first on Clint Hanks, 707-467-3693.

All Properties are Sold “As-Is” Unless You’re Paying Attention

When you buy a property in California, you’re buying it “as-is” unless you negotiate a different agreement pertaining to a specific item with the seller. Without that special agreement, you’re accepting the property in its current condition.

This is not to suggest that sellers can announce they are selling their property as-is, and then skip required disclosures. Regardless of whether they intend to address problems with the property, sellers are legally obligated to share known material facts and defects with buyers.

However, to protect yourself as a buyer, it is imperative to get as many inspections as you can. First and foremost, you’ll want to inspect the structure. The first inspection is often the pest and fungus inspection, which discloses any problems related to dry rot, termites, powder post beetles, earth-to-wood contact, or other issues related to pests and fungus. It is an inspection of all that’s visible, so any problems that exist inside the walls or under the tile in the subfloor will not be identified.

The next inspection is often the home inspection, which reveals structural issues resulting from substandard workmanship or deferred maintenance, as well as any safety hazards, including faulty electrical connections caused by an inexperienced electrician or old technology/building standards. A roof inspection is sometimes included as part of the home inspection, but not usually—and it’s really important, as is the heating and air conditioning inspection. The inspection that evaluates the condition of heating and air conditioning equipment can save your life. If a heater has a cracked heat exchanger, for example, it can pump deadly carbon monoxide into your house.

The last thing to consider with respect to the structure is whether it is standing on solid ground. When a house is located near a cliff, most people can see it’s worth an inspection to make sure the land won’t slide out from under the house. However, when a structure is sitting on a flat lot, problems can still arise.

In years past, building requirements for testing soil were quite different. Depending on the type of soil (and what’s buried in it), the weight of a house can cause the earth to compress, leading to cracks in a house’s foundation. If you’re considering a property on a hillside, hire an engineer to inspect the integrity of the land. If you’re interested in buying a house on a flat lot, you probably don’t need to hire an engineer unless you see red flags like damage to a foundation, floors, or walls—specifically, cracks that seem to indicate the house is settling more than it should. As with all inspections, it’s better to be safe than sorry. Sure, inspections can be expensive, but not nearly as expensive as purchasing a property that slides down a hill or becomes an unstable mess.

In addition to structural inspections, you’ll want to evaluate specific functions like a pool, well, or septic system. Some problems are obvious; others are not. A pool inspection will not only note the crack in the bottom of the pool, but also the condition of the pumps, filters, heater, and piping. Well and septic system inspections are important because they can identify problems that the current use may not have triggered. A well or septic system may work beautifully for a retired couple, but when you and your spouse and your four kids and your in-laws move in, the well and/or septic system may not be equipped to handle the volume. Be sure to test the well for both quantity and quality of water.

Next week, I’ll review inspections done for natural hazard disclosures and title insurance, so you’re sure you are, in fact, buying the property you intend to buy—and no one else can lay claim to that property.

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.

 

Tax Deferred Exchange An Alternative to Paying Tax Today

An Alternative to Paying Tax Today

The cartoon character Wimpy would say that he’d gladly repay you Tuesday for a hamburger today. Some real estate investors say a similar thing to Uncle Sam to be able to hold on to their proceeds from the sale of an investment and agree to pay the tax later.exchange.png

The benefit of a 1031 exchange is that it allows the investor to defer the tax due from the sale into the replacement property. This allows more money to be reinvested. In the example shown, the investor has 27% more to invest now by deferring the tax into the future.

The property to be exchanged must be like-kind which means real estate for real estate.   Rental property can be exchanged for other rental or investment property.  Personal-use properties like a first or second home are not eligible for exchanges.

There are some critical dates that restrict the validity of the exchange. The investor must identify the replacement property within 45 days of the sale of the relinquished property. The replacement property must be closed within 180 days of the sale of the relinquished property.

  • The replacement property must be equal to or greater in value, equity and debt than the one being relinquished.
  • All net proceeds must be used in acquiring the replacement property.

There are specific rules involved in constructing a valid tax deferred exchange. There are three professionals that should be involved: a tax advisor, a real estate professional and a qualified intermediary who will assist in the acquisition and transfer of both the relinquished property and the replacement property. Additional information can be found in IRS Publication 544.

Til next time… May all your deals be easy ones!
Follow me on Twitter @yourmendorealty

Clint Hanks                                   707-391-6000

The post Tax Deferred Exchange An Alternative to Paying Tax Today appeared first on Clint Hanks, 707-467-3693.

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.