Factors affecting an investment property’s value

Investment Property Value Considerations

Property values will be determined taking the following variables in mind:

  1. Vacant Buildings.
  2. One unit currently owner occupied or vacant
  3. One or more units to be recovered for owner occupancy and/or extended family occupancy.
  4. Completely tenant occupied to remain that way (leased, month to month,  or protected rentals).
  5. Evictions already performed on the building creating a ‘tainted unit’.
  6. Ellis Act evictions on the premises.

In establishing marketing strategy, there are several options:

  1. Approach the tenant/tenants as buyers.
  2. If the tenant plans to move at any point in the future, be flexible with them on expected time lines, offer to help them with moving expenses, or wait until the unit becomes vacant.
  3. Wait to market the building until the tenant, or tenants vacate.
  4. Sell the building now at a value consistent with its income.
  5. Consult an attorney to explore your options.

Consider talking to an attorney who specialized in real estate law; particularly landlord-tenant law.  The City and County of San Francisco has implemented varied legislation over the years; sometimes in contradiction to each other.  Have a firm understanding of the impact of your tenancy on how you may market your building and in how you can use it after you own it.  If you need any resources for local attorneys, please don’t hesitate to reach out to me.

How are closing costs split between buyer and seller

Closing costs are the moneys necessary to pay off all expenses incurred by buyer and seller on a property.  This will include an accounting of all funds spent and received in the transaction for both the buyer and seller.  Following is a partial list for items generally paid for by either buyer or seller in San Francisco.

Buyers:

  • Escrow fees
  • Title insurance
  • Loan fees, including points
  • Appraisal fee
  • One year’s hazard insurance premium (if not a condominium)
  • Deed recording fees
  • Notary fees
  • Prorated property taxes split between buyer and seller
  • Pre-paid interest to your lender
  • Prorated homeowners dues is you are purchasing a condominium.

Sellers:

  • Transfer tax
  • Real Estate agent commissions
  • Loans and loan fees (to close out existing loans)
  • Prorated property taxes split between buyer and seller
  • A portion of the taxable gain if above allowed limits
  • Prorated rents and security deposits if an income property
  • Deed and recording fees

The estimate of closing costs is generated when both the agents in the transaction, provided to the escrow officer that reflect the terms and conditions of the purchase contract.  The escrow officer will then compare the two sets of instructions and, if they match, the escrow holder will execute these instructions, disbursing funds and recording the deed which marks your ownership of the property.

What do you mean when you hold title to a property?

The way you own a property is called vesting, or holding title

 

The form of ownership chosen in your purchase, known as the vesting (holding title), will determine who may sign various documents and future rights of the individuals in the transaction; it can have an effect on one person buying as well as multiple people. You may have already heard some of the terms, joint tenancy, community property, tenants in common, sole ownership, or held in trust.

These rights associated with each type of vesting involve such matters as: real property taxes, income taxes, inheritance and gift taxes, transferability of title, exposure to creditor’s claims and significant probate implications in the event of death.

Before you can close escrow (or get loan documents), you must have selected a method of ownership.  Please get started on that process as soon as you begin the search for property.  Living trusts for instance, can take months to set up, so your preparation is important.

I urge you to speak with your attorney and/or tax advisor as soon as possible for vesting questions.  Your advisor may make recommendations which require partnership agreements, trust documents, wills, or other such documents.  Since these decisions and the accompanying documents may take time to be generated, I urge you to start this process immediately so that they may be accomplished prior to close of escrow.

How to get started with financing

Getting started with financing

Property purchases usually include some kind of institutional (bank or savings and loan) financing.  There are many types of financing to consider depending on your long-term financial goals.

Mortgage brokers are popular because they have relationships with multiple lenders.  Mortgage brokers will search for the best loan programs with several lenders, and provide options for you, saving you time and energy.

Direct lenders (such as Wells Fargo or Bank of America) may be the right fit for you if you already have a relationship with a lending institution or credit union, or if the specifics of your situation call for it.  Direct lenders will usually have fewer programs available to them than a mortgage broker, so you’ll be doing your own due diligence to make sure you have the program right for you.

On-line mortgage brokers are available, but I have found that often times these brokerages are not local, nor familiar with our real estate market.

My recommendation will always be to work with a local broker or direct lender that you can meet in person.  If you need a few referrals, let me know.

Brokers and lenders will look at various financial information to get the best snap shot they can of your financial picture.  This will help them establish you as a credit risk and how much of a risk (the amount they will loan you) they will take.  They will look at such things as:

  • income, including documentation about additional income such as alimony, child support, or pension
  • assets
  • debt
  • late payments
  • bankruptcies or foreclosures
  • your work situation, length of employment, and job changes
  • two years tax returns
  • bank statements
  • source of your down payment (will this be your own money, proceeds from a stock or retirement account sale, or a gift from family)
  • reserves and retirement plans
  • credit report and FICO score

Types of Financing

Adjustable Rate Mortgage (ARM)-have a mortgage interest rate that changes over the life of the loan, usually tied to an index and can adjust as often as once a month or as little as once a year.  The type of loan carries more risk to the borrower, as the interest can go up frequently over the life of the loan.

3, 5, 7, or 10-year fixed rate loans-have a fixed interest rate for a period of time usually three, five, seven or ten years, then turn into an ARM which adjusts once a year.  Once the loan changes to an ARM the payments fluctuate and the loan is amortized-meaning set to pay off for the remaining duration of the loan.  This type of mortgage gives borrowers a steady payment for a period of time, usually with an interest rate lower than a 30 year fixed rate mortgage.  This is a good option for borrowers who plan to sell or refinance their home within 5-8 years who want some stability in their payments.  Some of these loans also offer an interest only option, meaning that no principal is paid on the loan for a period of time.

Fixed Rate Mortgage-has a fixed mortgage payment for the loan’s entire duration-usually 30 years.  A portion of the mortgage payment goes to interest and the other to principal (the amount borrowed).  Payment to principal is smaller in the earlier years, and increases over time.

Loan Limits

You’ll hear the term ‘loan limits’ as you talk more and more about financing. There are three types of loan limits: conforming, super-conforming and jumbo.  This is important, because the government buys loans in the secondary market, which puts more money back into lenders’ pockets to lend out even more money.  The government has limits on the size loans they will buy, so they will only buy conforming and super-conforming loans.  The loans that fall outside these categories are jumbo loans.

The conforming loan limit is a permanent limit (subject to change by the government) and the super-conforming limit is temporary, based on median income in a region.  Interest rate pricing for the conforming loan limit is generally the lowest of the three.

Jumbo loans are financed through private investors, and not eligible to be purchased in the secondary market.  When financing tightens, it’s generally in this category, as there may be fewer investors willing to risk their money to people borrowing money at this level.  Pricing for this financing is generally higher than it is with conforming.

http://www.fanniemae.com/aboutfm/loanlimits.jhtml

Questions to Ask Your Lender or Mortgage Broker

  1. What loan programs and options are available to me?
  2. Will my loan be Conforming, Super-conforming, or Jumbo?
  3. What type of loan is available to me?  Adjustable, Fixed, or a hybrid?
  4. What loan program would be best for my situation?
  5. So I qualify for any special programs such as Below Market Rate Units, Mortgage Credit Certificate Programs, Mayor’s Office of Housing Programs, or FHA programs?
  6. Will private mortgage insurance be required in my loan?  How much will it cost?
  7. How long is the approval process?
  8. What information is necessary to get my approval?
  9. What documents are necessary from me to approve my loan?
  10. How much will be closing costs be?  What will they include?
  11. How much are your fees, and who pays them?
  12. How much is a loan lock, and how long is it good for?
  13. If rates go down during the escrow period, will I be able lower my rate?
  14. How long will it take to close my loan?
  15. Is there are prepayment penalty on my loan?
    1. Why?
    2. How long?
    3. How much will the penalty cost if I pay my loan off early?
  16. Who will service my loan?

Finding the right financing for you does not have one answer; there are many different options which may work for your situation.  The above is broad in scope, and may not cover your specific situation; please consult a mortgage broker and/or accountant to help you in your financing goals.

What to expect at the title company

Prior to meeting your escrow officer at the title company, both you and your real estate professional should have received a copy of the estimated closing costs for your transaction.  This will be an accounting of all fees and what you have left to pay (if you are buying, receiving if you are selling) prior to closing your transaction.  You will be bringing a cashiers check or arranging for a wire transfer to deliver the balance of funds to escrow.  If you are selling, you can have remaining funds wired to you, or a check cut and delivered to you.

You should also have worked out:

  • all the conditions of your loan with the mortgage broker or lender.
  • obtained hazard insurance on the property
  • bring a valid driver’s license or passport so that the notary can verify your identity
  • decide how you would like to hold title-this may require conversations with estate attorneys or accountants far in advance of closing escrow, as estate and tax planning require time to implement.

After the signing you will be waiting for the lenders final review of your loan documents, funding the loan and the title company recording your deed, making you the owner (or not if you are selling) of your new property.  Once all these things have occurred, usually within a few  business days, you will be notified of closing and get (or give) your keys
Expect to receive your policy of title insurance and the deed to your new property sometime within the next month after closing.  They should be put into a safe deposit or other firesafe box.

All cash offers are destroying the real estate market

461-2nd-St-01-682x1024We roared out the real estate slump in a matter of a few months at the beginning of 2012 and it has been an up trajectory ever since. We went from properties taking longer to sell, to a flood of buyers and not enough properties in a very short time frame. Since that time, the lack of available homes to buy has maintained a situation of multiple bids and over asking offers. We have seen this in the Bay Area before, but not nearly so aggressive and without any sense of the ultimate value of a home.

In an effort to do their best at winning, buyers have showed up with trunks full of money; hence the all cash offer. No loan, no appraisal, no problem. All cash offers are sexy and everyone loves it when they can say that a buyer wanted their home so much, ‘they paid all cash!’ This is happening at all price levels; even those homes over $1 million.

So now the logical question you ask, is ‘why is that a problem?’ A buyer with cash legitimately wanted my house. I didn’t want to worry about an appraisal or financing contingency.

My experience has been that there is usually one cash offer in a sea of offers on a property; everyone else needing financing. To give an example, a house is on the market and receives four offers; one all cash, the other three need financing. The lack of inventory and the fact that several of those offers have probably lost in competition before, prices continue to go up in each successive offer in an effort to be more competitive. The all cash offer swoops in, may get a bit of a break in price and gets the home. You can see how a buyer would get tired of losing out, bidding higher and higher every time they find a home that they like well enough to live in and never be successful.

The choice for these three unsuccessful buyers is to; 1) leave the marketplace; 2) lower their price range and expectations (and push buyers out of that lower price range); or 3) leave the area, going into another more forgiving market. The long term affect will be fewer bidders (we are already seeing this happening, as well as offer dates coming and going with no offers), prices will adjust downward and then, I think, the all cash buyers will get something else, lower prices. The competition has been reduced, so prices have to come down.

All this being said, there are legitimate reasons to accept an all cash offer. If they were the highest, or if the condition of the property warrants all cash, then by all means, go for it.

In the spirit of full disclosure, I have counselled sellers to take the all-cash offer when it was a little under the highest offer with financing. We all want the deals to go through with fewer problems, but it is time to challenge that thinking.

It is time for sellers and agents alike to throw a buyer a bone. If they have a strong offer, give them a chance to buy your home with financing and put the all cash buyer in a back up position. The winning buyer will be so thrilled at the chance to get out of the grind, they will likely jump through whatever hoops they have to.

The long term effect will be maintaining a healthy, strong market place in which everyone can participate. By taking this approach, I anticipate that we will maintain the seller’s market for a lot longer and you will still get top dollar for your home.

Will an insurance claim affect my sale?

Obtaining hazard insurance on property can sometimes be a challenge.  This is because of the extraordinary losses that insurance companies have paid out from disasters and mold claims.

Since lenders require hazard insurance to be in place prior to close of escrow, unknown claims discovered prior to close could be frustrating and/or expensive through a delayed close date, or renegotiating the purchase price should the buyer in contract on your property not be able to close escrow.

Its prudent to order a CLUE (Comprehensive Loss Underwriting Exchange)  report from your insurance carrier to disclose any claims that may have been made on the property over the last five years.  Your insurance agent, for a small fee, can order this document for you, or you can order it yourself online from www.choicetrust.com-you can obtain one free report a year by signing up on the site, which does require a social security number to order the report.

What is escrow?

Once you have successfully ratified (get into contract), escrow begins, which comprises of two things:

the length of time necessary to complete the purchase or sale of your property and,

the inclusion of a neutral third party in the transaction (an escrow officer at a title company) who acts as an intermediary to create a secure environment in which to collect and disburse all the funds and documents related to the purchase of your property, including recordation and delivery of the deed to the buyer and any proceeds to the seller at closing.

During the escrow period, there are many activities going on simultaneously of which you will be a part. You will be very busy during this time. You should plan to ease your normal routine to make time for meeting your contractual responsibilities.

A few of the buyers’ activities will comprise of:

  • Schedule and attend physical inspections.
  • Work through the financing specifics with your mortgage broker or direct lender to secure financing
  • Review all disclosure materials
  • remove contingencies.
  • Increase your deposits for down payment and closing costs
  • Choose how you want to hold title if more than one person is buying the property
  • Sign loan documents
  • Review the accounting of moneys owed (or received from) escrow
  • Arrange for hazard insurance
  • Give 30-day notice to your landlord if you are renting.  I recommend waiting until your loan has been approved or giving a provisional notice.
  • Select a moving company and begin packing.
  • Arrange for all utilities to start when you close escrow.
  • Notify the post office, doctors, banks, and others of your new address.

A few of the seller’s activities will comprise of:

  • Making the property available for inspections
  • Answering questions
  • Making negotiated repairs
  • Preparing to move
  • Compiling information requested from the buyer

Scared to buy your first home

Avoid paralysis in deciding whether buying real estate is for you

Eric Castongia  It’s normal to be nervous about buying your first home.  Buying real estate will likely be the biggest purchase you will make in your lifetime, so making a good decision is important.  Here are a few questions to help you determine if buying real estate is right for you:

Why do I want to buy a home?

Security?

No rent in retirement?

A home you can personalize?

 

 

 

What are my long term goals? 

Stay in the area?

Move out of the area?

Build a nest egg for retirement?

Am I prepared to buy a home?

Do I have the necessary down payment?  If not, what is my plan to?

Good credit?

What can I afford?

Is my job steady?

What do I want to buy?

Can I afford what I want to buy?

Where do I want to buy?

Will I compromise if necessary?

What is the real estate market like?

I have always felt that owning my own home was the right thing; I knew that long before I started selling real estate.  The bottom line is that owning real estate is not for everyone.  Don’t feel guilty if you don’t want to own property because of societal or peer pressure.  Be happy you made the decision that is right for you.   If you are not going to buy, make sure that you still have a financial plan in place to get ready for retirement.

On the other hand, if it is the right thing, get a good real estate professional to assist you, be knowledgeable about the market and make the best decision you can.  And enjoy the process!  It will probably be a heck of a story.

What are the elements of a purchase offer?

The real estate purchase contract, also known as a purchase offer, or offer, is meant to be binding and spells out in detail your obligations and responsibilities. Some key points are:

Purchase Price

  • The purchase price should be looked at as part of the strategy for negotiation.
  • Are there multiple offers?
  • Is it priced low?
  • Is it priced high?
  • How long has it been on the market?
  • What have other similar homes sold for?
  • What is the condition of the property?
  • Is it unusual in the marketplace (i.e. is this a one-of-a-kind property)?

Ratification / in contract / in escrow
These are the terms used to convey that you are in the process of purchasing a property.  It means that buyer and seller have agreed to price and terms and are moving toward transferring ownership of the property.

Deposit / Good faith deposit / Earnest Money Deposit
A good faith deposit is most often a personal check made payable to a title/escrow company, which accompanies your offer; an offer must have ‘consideration’ to be valid.  The check is deposited after you get into contract and is applied toward your down payment and closing costs.  You will generally make three deposits to escrow prior to closing.

Inspections
Your offer should be made contingent upon your obtaining, reviewing and approving thorough and professional inspection reports so as to be satisfied with the properties condition.  These may include reports by inspectors such as licensed pest control and general contractors, underground storage tank specialists, and additional reports by structural engineers, roofers, sewer inspectors, and chimney sweeps if applicable.

Disclosures
Most sellers of residential properties and involved agents are required by law to disclose any information, which may materially affect the value of your property.  A few exceptions to this requirement are probates and foreclosures.

Loan Contingency
If you are obtaining a loan to finance the purchase of your property, you will most likely need time to obtain a loan from a lender at terms acceptable to you.

Close of Escrow and Physical Possession
Close of Escrow (COE) and physical possession of the property are negotiable and may not occur on the same day.  A typical COE is scheduled for 30 to 60 days after the contract is accepted.  If the property is tenant occupied, or if the sellers request to rent back the property after the COE, your possession of the property would occur after your ownership begins.

Liquidated Damages, Mediation, and Arbitration of Disputes
These three sections of the purchase contract address what happens if the buyer and seller get into a dispute and have difficulty coming to agreement.  You should review these paragraphs prior to writing a purchase offer.  If you are unclear as to what they mean, or how they may impact you, please consult with a real estate attorney to better understand these clauses.