Looking Out From the Garage: August 2007

Welcome to part four of my A-Z journey through real estate.  Of course, this isn't a definitive glossary of real estate terminology, techniques, strategies or idea, but rather just a few answers to questions.  Of course, for every question that gets answered, at least one new question is raised.  I guess that makes it like most everything else.  

Which brings me right back to Due Diligence.  Simply put, Due Diligence is the process of gathering needed information about a property.  Some of the information is volunteered, for instance the Seller's Disclosure.  Here in GA, the sellers are required to disclose any defects of which they are aware, as well as past defects which may have been corrected.  The beginning of the Due Diligence process would include reading the Seller's Disclosure to see if there is anything striking and/or disturbing.  Keep in mind that if the seller properly discloses a property defect, the buyer is buying the property with knowledge that defect exists.  If the seller were to not include a defect that is known to them to have existed on the property, they could still be liable to correct that defect, even after the sale of the property is executed.  

The usual next step in the process of performing Due Diligence would be to have the property inspected by a certified. professional, competent home inspector.  There may be issues which the sellers are not aware, or there may be issue which the sellers are knowingly hiding.  The inspector's job is to locate these, and inform the buyer of their existence.  In some cases, further inspection by a specialist might also be called for.  A HVAC technician, electrician, or engineer might need to look at situations beyond the scope of a standard inspection.  These specialists might employ techniques and technology not available to a regualr home inspector.  Also, the vast majority of the time,  an additional inspection needs to be performed to search out wood destroying organisms.  These "termite inspections" (which look for a lot more than just termites) are usually required by banks if there is financing, and always a good idea. 

Depending on the expected future use of the property, proper Due Diligence might also include checking county records to determine if a proposed use will be allowable.  If one wants to convert the property to another type of zoning, or wishes to expand the living space, or add an addition, there might be restrictions from the city, county or subdivision.  It is the responsibility of the buyer to determine this during their Due Diligence Period in the contract, if not before entering the contract.  If there is a HOA (Home Owner's Association) or other governing board for the community, it is also the buyer's responsibility to get a copy of their Covenants, Conditions and Restrictions (CC&Rs) to review during this same period.  

There may be many other questions which would need to be answered during the Due Diligence Period of the contract.  Generally, finding these answers are the responsibility of the buyer and/or their agent. 

There is one item which ISN'T done by the buyer or their agent, but is done on their behalf.  That is the title search.  It is performed by (or for) the closing attorney, on behalf of the seller and their mortgage company.  The buyer generally pays for the mortgage company's premium for the resulting title insurance.  I would add, that the buyer should almost always also pay for additional title insurance to cover themselves if a title problem arises.  Problems are rare, but could be devastating.  

Stay tuned for E... 

A contingency is simply a condition that must be satisfied in order for the contract to execute. 

In real estate, there are several common contingencies, as well as a gazillion uncommon ones.  In this post, we are only going to go over a few common contingencies.  As I said previously, a contingency is a condition that must be satisfied for the contract to execute.  In math, it would be an "If/Then."  If the contingency is satisfied, then the contract moves forward. 

The most common contingency we see is an inspection contingency, or a variation.  Here in Georgia, there are three different options that fall under the umbrella term of inspection contingency.  The first option would be an As-is sale.  In an as-is sale, the property is purchased as-is, effectively without an inspection contingency.  The next level would be the traditional sold with right to request repairs.  In this case, there is an inspection period, at the end of which, a list of requested repairs are submitted to the seller by the buyer, and the negotiations start anew.  The most far reaching version is sold with right to terminate.  With a right to terminate, the buyer can terminate the sale during the predetermined period, for any reason, or no reason.  The buyer may also submit an Amendment to Address Concerns.  This would function largely the same as the Amendment to Remove Inspection Contingency does for the sold with right to request repairs contingency.  It allows the buyer to negotiate for issues that are found during the inspection or during due diligence.  

The next most common contingency that we deal with is the financing contingency.  The buyer is required to state what type of financing they are seeking, or if they are seeking a cash sale.   In a cash sale, there is no contingency for financing.  More common, the buyer needs to get some sort of financing in order for them to purchase the home.  In this case, the buyer will include the percentage of financing (Loan to Value, or LTV), the maximum interest rate, and the term, as well as whether it is fixed are adjustable.  Other details may also be required.  Finally, there will be limits placed on the timeframe for application for loan, pre-approval letter, and underwriting approval.  These can be negotiated in the contract.  

A less common contingency, but one that is very important in this market is a Sale or Lease of Buyer's Property.  With a sale contingency, the buyer only is required to complete the sale if their current home sells within the period set about by the contract.  In some cases, this may also include a Kick-out Provision.  The kick-out provision allows the seller to continue to market the property, and if they receive another acceptable contract, the first buyer has a specified period of time to drop their sale contingency, or the seller can terminate the contract.  

Finally, there is the Back-up Agreement.  If the property is already under contract, this allows a buyer to be next in line shouls the current contract fail.  In a hot market, this is a great tool to use.  

This is by no means an in-depth discussion of the various contingencies, but rather an overview with a quick description of each.  This will allow a new buyer or seller to know what types of contingencies they might face in buying or selling real estate.  

Simply put, a buyer's agent is the agent that work for the buyer in a real estate transaction. 

More importantly (for now anyway) let's talk about what a buyer's agent is not:

• The nice agent a buyer works with from the new home community.
• The helpful agent that has listed the property (unless there is a dual agency agreement).

In both of the above instances, the agent may be a great person, but they are working specifically for the seller.  Their job is to protect the best interests of the seller.  They are required to be deal honestly with the customer (that would be the buyer), but they aren't looking out for the buyer's best interests.

In order for an agent to be "The Buyer's Agent," they need to be working under a Buyer's Agency Agreement.  The BAA outlines the specifics of the relationship between the buyer and the agent.  It will include a few different things.

• Scope of the agreement.  Locales.  I have one investor client in particular that uses different agents for different areas and specialties.  The agreement can include to where it shall be limited.
  
• Payment.  Most agreement state how much the agent will be compensated.  Mine say that I will receive 3%.  I have yet to have a problem, since almost every listing pays 3% or more in this area.  I have had one buyer interested in a property that paid less.  We talked about it, and we figured out an arrangement, but the sellers couldn't come to an agreement with the buyer on price. 
  
• Time frame.  I generally work with buyers on a six month contract, but there is always...
• A way out of the contract.  I usually include one for both the buyer and for me.  Either of us can fire the other with some sort of cause.  I might fire the buyer because they aren't pursuing financing pre-qualification, or actively trying to buy the properties they are seeing.  They can fire me if I am not able to find them... or pretty much anything else.  They just need some sort of reason that doesn't start with "I found this great house for sale by owner..."
• An explanation of duties.  What should the agent do, and what should the client do?

I always give folks a "free look" period where we will go out and see some properties.  They can get to know me, and I can get to know them.  We can each see if there is a fit.  When working with buyers, the fit is very important.  I might spend a lot of time with them looking for properties, as well as negotiating the property, and other tasks required to get from looking to contract to closing... and sometimes after closing.  

The bottom line is that in order to make sure that you are protected as a buyer, you need to have someone working specifically for you.  The listing agent or the community agent isn't that person.  And, since there is seldom a cost to the buyer to have representation, there is no reason to not retain a buyer's agent.  

An appraisal is simply an estimate of value made by a certified appraiser.  That is all...

However, there are a few other terms that are often used (wrongly) as interchangeable with appraisal.  Other value estimates, such as a BPO or CMA are often confused with appraisals.  While all three aim to accomplish the same thing, there are a few key differences. 

The most common real estate valuation tool is a CMA.  They may also be referred to as CMSs, but are essentially the same thing.  While we generally agree on the initials, what they stand for varies from region to region, and even agent to agent.  Almost everyone seems to agree on Market Analysis for the MA part, but the C might be either a Competitive or Comparative Market Analysis.  So, we can say that a CMA is a Competitive Market Analysis or Comparative Market Analysis.  Please note that the A should never stand for appraisal unless the agent is also a licensed appraiser.  Regardless of the initials, a CMA is performed by a licensed real estate agent.  The value is arrived by looking at comparative properties (comps).  Features and amenities are taken into account to adjust for square footage, style of property, lot size and description, as well as general property condition.  As with all comp based measures, the similarity and proximity of the comps, as well as the accuracy of any adjustments may have a huge impact on the quality of the result.  

Another tool, although less common, is the BPO.  BPO stands for Broker Price Opinion, and despite the name, can be performed by agents as well as brokers.   The primary market for BPOs are banks or other corporate entities that are trying to get prices in order to dispose of property.  A BPO is a bit more in-depth than most CMAs.  It will include comps, as well as repair estimates.  It allows the reviewer to determine if they are financially better off selling the property as-is, or if they should improve the property prior to sale.  Again, the similarity and proximity of the comps will have a major impact on the quality of the results.  

Appraisals come in several types, depending on the property being appraised, as well as the purpose of the appraisal.  In some cases, especially true when replacement value is being calculated, or if the property is very unique, cost of current reconstruction is used for the basis.  This may then be adjusted, again, depending on the usage of the appraisal.  For a market value, there may be a mark-down from cost, but for an insurance value, there may not be.  Market appraisals are another type of appraisal.  These are quite similar to CMAs and BPOs, but may be more in-depth.  Usually more emphasis gets placed on square footage and lot size, and less on buyer preferences.  When a buyer is getting a loan, this is the type of appraisal the bank will order prior to approving the loan.  Also note, that in most instances, the bank will only be concerned that the appraisal comes in higher than the loan amount.  The main thing to remember about market appraisals is that they are also comp based, like CMAs and BPOs.  The final appraisal type we'll cover is a tax appraisal.  The way this is done will vary from market to market, but these are generally the least accurate valuation for a property.  Here in GA, the last sale price is the value of the property and is adjusted by a blanket percentage whenever the county commission deems it appropriate.  While it is quite accurate right at closing, within a few years, it might be very high or very low, depending on how your specific location has changed in value compared to the more general location you are in.  I've seen just as many properties sell for half of the tax appraisal as I have that sold for twice the tax appraisal.  For determining the value of a property that hasn't been sold for a few years, it is severely lacking in accuracy. 

Every once in a while, we fall into an opportunity.  Here is one if you qualify, and are selected.

There is a new program that is looking to film first time home-buyers as they visit homes, make a selection, and then offer for a house.  Everyone gets a shot at their fifteen minutes of fame.  Filming will be in Atlanta beginning next month and continuing in October.

Obviously, I can't guarantee that any particular person will be selected.  But, if you are interested, and not currently working with a real estate agent, email me for details.  The production company won't pay for your house, but they say that they will provide a "nice closing gift" for those selected.

I think it would be a lot of fun.   

Meet Pat Johnson of the blue CJ.  This poor guy is often my road trip companion.  This particular picture was on one of our Moab trips.  If you look at the Moab, My Happy Place post, you'll see the tow rig dragging our toys out there.  Here is Pat playing in the "Wedgie" on the Poison Spider Mesa trail.  It started as a great day, and ended as a great story. 

Poison Spider Mesa leads to a trail called the Golden Spike.  That connects to a trail called Gold Bar Rim.  That combo is generally an all day affair.  It took us a little longer.  

As I mentioned, everything started out great, but then we started having a few problems.  We had five Jeeps in the morning.  The first Jeep exploded a lock-out.  He had a spare and was soon on his way again.  The second Jeep had a serious case of angle issues with the carb.  It kept getting worse, and he decided to turn back.  The driver of the Jeep with the previously blown hub agreed to accompany him out.  I wish I had a transcript of the CB conversation between those two on the way out.  We could hear them all of the way into town.  

Next up is Patrick Bennett of the olive CJ.  He has built a VERY cool Jeep, but this day was not to be great for the Jeep.  A short while after this picture, the power steering pump gave up its long fight.  And then, an over-extended driveshaft caused further delay.  In both cases, we were able to get everything back together and moving along.

Because of the delays, we hit on if the more famous obstacles on the Golden Spike at the most beautiful time of day, that golden light just before sunset.  The problem is that it takes about five hours to drive back out to paved roads.  That means that four hours is done after dark... and it was REALLY dark.  Even with extra lighting, finding the trail markers became a challenge on the slickrock.  In fact, it was enough of a challenge that our only passenger, Pat Johnson's wife Helen, had to walk in front of out little three Jeep caravan with a flashlight, searching for the trail markers.  These faded markers were painted every few hundred feet, but were difficult to see with headlights.  A wrong turn could lead to a disaster.  At one point, we were on the end of a point.  One way lead down a series of steps along the trail.  The other lead over a 300 foot cliff.  They looked the same from the driver's seat by headlight.  Add an extra hour to only drive at walking speed. 

We seriously considered camping for the night.  Despite the daytime temperatures in the 90s and higher, nighttime temperatures were in the 50s.  We took an inventory of our stores... several bottles of water, tarps, and a single "Lunchable" left over from lunch.   We also had a few small bags of chips, and a couple of granola bars. 

We decided to keep going. 

After a little hiking at an intersection, we were soon on our way down the Gold Bar Rim trail.  We were almost home free.  The one problem we still faced was that Gold Bar Rim empties out into a valley that is criss-crossed with sand wash roads.  It is also still 15 miles or so from pavement.  It was dark.  there were no signs, and none of us had run this particular trail before. 

Referencing a map and a GPS, we determined the general direction to the exit of the canyon.  I had run another trail in the area three years before on a previous trip. 

We managed to find our way back to the pavement, and eventually to the condo.  We had started on the trail around 10am, and finished the day at 2am.  It was rough.  But, all in all, it has been a great story to re-live every so often around a campfire.  I've been back since then, and plan on going again before too long.

I have been asked several times how I can think of so many different topics for blog posts...

It's easy.  Seriously.  Here are a few tips I would pass on:

Read several things every day.  I read the daily and weekly REALTOR(R) Magazine Online emails, and go to the full story whenever something strikes me.  I also read 20 or more blog posts here daily.  I find that I need to read at least two posts to find one that I really want to comment on (not a quality issue, but a relevance issue.  I don't want to post a "me too" or anything like that).   I also surf posts in other venues.  Some of these are real estate related, others aren't about real estate, but might spark a related idea.

Start a list.   I might have 23 ideas one day, and none for the next week.  So, I have a list of things that I'd like to write about.  I keep it on my PDA, and jot down new ideas as the occur.  Some of the ideas die a quiet death, others are resurrected to be written about. 

Have a fallback.  Think of a series of posts.  I was talking to Angel Walker today at Showcase, and suggested that she might start a Staging A-Z series.  The A-Z concept can be used by ANYONE to brainstorm for ideas.  Just think, "A is for Appraisal","B is for Buyer's Market", etc.  I have my real estate investing series.  I find that the more I write about something, the more there is to write. 

Just write about something.   Do this for two reasons.  The first is that it will get your mind into the creative mode.  Secondly, it will give you the discipline to continue to write.  The internet, and Active Rain are littered with blogs that started with great promise... and then slowly faded away.  The work that was done to find an audience, and bring in new prospects is now just wasted.  Blogs thrive on new material.  I started blogging a couple of times before I got here and really made it take off.

Blog for points.  If all else fails, remember the points.  Set a goal to make the first page for your town, county or state... and then meet the goal.  The points are my last line of defense against getting lazy and not writing a post.  I want to be #1 in Gwinnett County, as well as Georgia.  Right now, I am 35,000 points from one, and 75,000 points from the other.  And those are moving targets. 

Finally, blog for ratings and comments.  You might learn some great things.  Give comments, and rate blogs.   

Back in Real Estate Investing 101, Part II, I briefly mentioned "Shifting Classes" after the Buy & Hold strategy.  There are a few different ways to shift classes and uses that can build value for investors. 

Residential to Commercial

One of the most common ways to increase value while shifting classes or use is to have a property re-zoned from residential to commercial usage.  A property that is located on a busy street would be a prime example.  The busy street lowers the value for a residential property because of the noise and associated traffic.  It is even more true of a corner lot.    So, this busy location is a detriment.

However, for a commercial property, the traffic is an asset.  If it is a corner lot with heavy traffic on multiple sides, that is even more of a bonus.  A savvy investor might see the commercial potential of a property, possibly even years before having it re-zoned.  In fact, it is preferable to buy the property well before it can be converted to commercial zoning and rent it out for residential purposes.  The reason that one may choose to do it this way is that the property can be purchased for the best price, and then carried with the costs offset by a renter while the investor seeks to have the property re-zoned.  Depending on local rules and nearby zoning, as well as future plans the city may have, it might take a year or more to get the property properly re-zoned.  Meanwhile, because the property is located on a busy thoroughfare, advertising for renters is as easy as putting a sign on the property. 

Keep in mind that frontage may be just as important for commercial property as acreage.  That is another reason that corner lots are such a premium.  They have as much as twice the frontage/acre as a lot on just one street.  Obviously, lot dimensions will play into this, but in almost all cases the corner lot is the premium.

Low Density to High Density Residential

Another popular way to increase land value is to change it from a lower density residential to a higher density residential usage.  Finding a single property or an assemblage of properties to re-zone to higher density can increase the attractiveness of the property to a developer. 

Of course, as with most real estate, location is everything.  A townhouse or condo development might not be in demand in a less densely populated area, but might support very high valuations in a sought after area.  It might also be a great way to capitalize on a smaller parcel adjacent to a popular subdivision.  For those familiar with the St. Marlo subdivision at the extreme southern end of Forsyth County out side of Atlanta, The Weston, which is next door is a great example. 

Apartment to Condo Conversions

This is an often overlooked strategy that is similar to flipping, but on a huge scale.  It is out of the realm of most investors, but purchasing an apartment complex and converting them to condo can be extremely profitable.  This is especially true of a slightly older community.  As the community ages, the demand for it may decrease.  As demand drops, the rent may not keep up with fresher complexes.  At the same time, the mechanical systems will be getting ready for an overhaul.  If one can purchase the entire operation at a reasonable price, one might be able to flip it to individual ownership. 

There are a few different strategies that can be employed depending on the needs of the investor as well as the needs of the community and subject property. 

Starting at the lowest end of the economic scale, if the property is converted to condo, there might be reluctance from current residents.  One way to overcome this is to build a pricing model that allows the majority to remain in place, increase the value of the community and more quickly sell the remaining units.  Finding a financing solution that allows the tenant to be converted to a buyer means that one doesn’t need to market as many units.  Offer to pay closing costs, finding sources of down payment assistance or 100% loans would also help to ease the transition.  If there is a way to allow the current residents to buy in below the prices that the property will be marketed at, this is even better.  This gives the current residents instant equity, and they will be more likely to be better neighbors since they now have a stake in the community.  Occasionally, converting to low income housing may also carry tax benefits for the investors.  Having single unit or multi-unit investors in line should there be residents that don’t wish to purchase is also an option, but not as attractive since there will be a lot of residents without a financial stake in the community.

The same strategies can be used with higher priced properties as well.  But, financing is often easier to set up.  Many of the residents may already to considering purchasing their next residence, and allowing them to buy in below market will be very attractive.  Set up several programs that allow different pricing based on renovations to existing units.  Offer a low price for un-renovated units (only to residents in those units), a mechanical only upgrade, and a full upgrade including fixtures, etc.  For a full upgrade, one might offer a nearby similar unit to allow a faster transition. 

This can also be done with vacated apartment complexes, but there will generally be much higher renovation costs.  However, the profit margin may be significantly higher.  While driving through New Orleans earlier this year, I couldn’t help but think that there were huge opportunities in renovating apartments.

Commercial to Condo

Loft conversions are hugely popular.  Most of the conversions that are currently being done are very high end.  However, this can be done at various price points.  The primary difference will be in the level and quantity of finish for the units.  Finding a building worth saving, that is convertible to residential space is the first challenge.  It needs to be unique and have plenty of character. 

If one is shooting for the lower end of the market, all that needs to be done is to provide the stubs for plumbing, and require the buyer build out kitchens and baths on their own.  Set some sort of minimum standards, and be sure all work is permitted and done to local code.  

Moving up, one may choose to put in baths and a kitchen, either fully finished or in some other state agreed by the buyer.  One could also go as far as to have several private rooms, and fully outfit the space with high end finishes and fixtures.  Additional amenities could be included ranging from pool and parking to high-speed, wireless internet access.

In all of the condo conversions, whether from apartments or commercial space, it is very important to set up some sort of Owner’s Association.  This will help keep cohesion in the community as it is populated.  This also provides a mechanism to care for common property and maintain amenities.  Another issue that the OA will need to deal with is the level of renters for the community.  The lower the percentage of renters v. owner-occupants, the lower the maintenance needs generally are.  However, if there are no renters allowed, it might adversely affect resale values.  There are a lot of different strategies for dealing with that particular situation.

We have recently set up a Motorsports Calendar for Atlanta area events.  Not only do we have big events like the NASCAR race at Atlanta Motor speedway and the NHRA Nationals at Commerce, but we also have local SCCA events, as well as Legends races and other amateur events at various venues around town. 

Here is a direct link to the calendar.   

If you or your club host an event that you would like included, such as a competition event, show and shine or even a club meeting, please feel free to let us know.  We'll happily post your event on our Atlanta area Motorsports Calendar.  

Mud Bogs, Drags, Solos, etc. are all welcome to be posted.  

We do ask that you send a short blurb about the event, which we will post, along with any relevant contact info, in a link from the calendar entry.

I get the occasional call from people that have a house they wish to sell quickly.  Often, the home is in less than optimal condition (sometimes heinous is a word that creeps into my mind).  They range from estate sales to pre-foreclosures to rentals that the owner doesn't wish to handle any more.  Usually, these people are wanting to market to my investor database.  Sometimes, I don't think people understand what this entails.

Investors are looking for houses that they can use to make money.  In order to make money the house needs to offer one or more possibilities. 

• It needs to be flippable in its current condition.  If you just need out of a house immediately, an investor might be willing to buy at a discount and sit on the house while a proper marketing plan is implemented. 
  
• It needs to be priced so that it can be improved and re-sold.  Perhaps you know that the kitchen looked dated when the Brady Bunch was still on prime time.  Maybe there are deeper problems.  An investor might be willing to put the money and time into the property to increase its value.
• It is in an optimum area to rent, or already has solid renters and can offer positive cash flow.
• The property might be reclassified to a higher use (residential to commercial for example).
• The property is in an area that shows huge potential for appreciation.

The last two are actually more inline with speculation than investment, but I included them anyway since investors and speculators sometimes overlap.  

The thing that potential sellers need to keep in mind is that investors are looking for a profit.  They are taking on risk, and want to be rewarded.  Be prepared to NOT get an offer to buy your house at or above market price.  Whether you are calling me, or HomeVestors, or Ug Buys Ugly Houses, or another agent, don't expect to see an offer much over 70% of the FMV (Fair Market Value).  If the home needs work, look for an offer that is around 70% FMV minus the costs of any improvements.  And, that isn't the cost of buying the stuff at Home Depot and doing it themselves... it would be the cost of having a reputable contractor perform the work properly.  

I am not trying to knock anyone down.  On the contrary, I have found that a lot of sellers are glad to sell the property under these conditions.  Executors of Estate often have heirs SCREAMING to get money from property the decedent left to them, and other times there are bills that need to be paid and the sellers are glad to find a buyer that will close in a week or two.  In these cases, the sellers understand that they are giving away money in order to close quickly. 

In other cases it is a poor fit for the seller.  They would be better off listing the property and selling it through traditional methods.  If they can bring the property up to selling condition (fixer uppers seldom sell for even market minus repairs needed, and in this market can be a VERY tough sell), and carry the property until it sells then selling to an investor is not going to be the first option to consider.  

If you are looking to invest, or have property to sell (to investors or not) I can help you.  

If you are interested in real estate investing, I have a great series for you:

Real Estate Investing 101, Part I

Real Estate Investing 101, Part II

Real Estate Investing 201, More about Flipping

Real Estate Investing 202, Buy and Hold

Real Estate Investing 301, Advanced Strategies

I would also recommend:

One Improvement too many

What Buyers are Looking for

Repairs, Improvements, Upgrades and Resale

Do you have a Unique Selling Proposition?

I could probably find a few more... and then if I started adding other people's posts... well, you wouldn't have time to actually do anything, just read about it.