VA Benefits Helping High Dollar Purchasers

I recently opened escrow on a $2.2M listing (see here for my recent sales) . The buyers were a super power couple with clearly income to spare. The husband was a veteran and as well qualified as they come. What made the file unusual was that the buyer chose to use their VA eligibility to finance the purchase. In other words, this was a very high balance VA loan.
Many Realtors frown on VA financing as do their sellers. There are certain costs  a seller must absorb like both Section 1 and 2 of a wood destroying pest inspection and a VA buyer can’t pay escrow, although there are ways around this. A typical VA loan requires as little as zero down but has a high balance loan cap, which while varying from county to county, can reach as high as $679,650. For most of greater Los Angeles area this is the cap. But VA doesn’t actually have a loan limit and a VA borrower who has sufficient eligibility, can seek a virtually unlimited loan amount. The catch is that borrower must put down 25% of the loan exceeding the county cap. ie: A vet buying a home for $1,679,650. The amount borrowed exceeding the county cap is $1,000,000 ($1M + $679,650 = $1,679,650). The vet then has to put 25% down on the excess $1M which is $250,000, while putting zero down on the first $679,650. This is great for a vet because a normal borrower would have to put 20% down on the purchase amount of $1,679,650 which would be $335,930 (20% of $1,679,650) while the VA borrower only has to put down $250,000 (25% of the amount above the cap). That’s a difference of $85,930 that the vet doesn’t have to put down. Other VA benefits include a typically lower interest rate and up to 60% back end debt to income ratios. Back end ratios are the mortgage plus any other debt divided by gross income vs. front end which is only the mortgage divided by income. The benefits of doing a VA loan therefore, are substantial (contact me for more info). 
I handled another purchase at $1.2 in January also a vet buyer, using their VA benefits to finance the purchase. In this case, instead of putting 20% down on $1,200,000 ($240,000), the buyer only had to put 25% on the borrowed money exceeding his cap of $679,650 or $130,088. This represented a reduced down payment to the tune of $109,912! That’s huge.
Finally, what I’d like to leave you with is this: There are lots of vets who are well established in their post-military careers.  A vet who at 20 served in Afghanistan in 2002, is now 36 and a vet who served in the 1991 Gulf War, is already in their late 50’s and making the best money of their life, so we aren’t talking only about young first time buyers just getting started after their service. As a seller, selecting a veteran buyer means you are not only on the moral high ground but you can feel confident that from a financing perspective, regardless of purchase price, VA financing can work just fine and in many ways, even better than conventional financing.

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Thoughts On Online Brokerages

I was on a listing appointment the day before yesterday and the issue of Purple Bricks, an online discount brokerage out of Australia came up. They had taken a listing up the street which had been marketed by several Realtors prior to the latest incantation with Purple Bricks and it had finally gone into escrow. The seller mentioned this home and that the commission was just $3,500. Another Realtor might have been taken aback by this revelation, I however, just smiled. I love the opportunity to talk about the value a Realtor like me brings to a transaction. I explained that his information was incorrect, that the MLS states the seller’s broker was paying a 2.5% commission to the agent who brought a buyer. Since the home as listed at $1.2M, that meant a $3,500 listing office commission plus an additional $30,000 selling office commission. The client then said it was still

2026 Warble Court in Rancho Conejo

only $3,500 for the for the listing side, a savings of $26,500. “Was it really?” I said. I pointed out the obvious first: The new listing was priced at $1.2M when it had previously been listed for $1,399,000, $1,299,000 and $1,239,000 over the past Christmas holidays. I suggested that not only did Purple Bricks list the home for $200K below where the seller started, but that by listing it for what they did, when they did, they’d not priced it correctly for the season. Had they hired me instead (check out my new listings here) , I would have listed their home higher because the lack of success over the holidays is irrelevant when compared to listing in spring when it’s the best time to sell and prices are always higher. Without reservation I said, I would have listed and sold far above where the discount broker with their discounted service had. I then pointed out that we still don’t know what they actually sold for but that while I researching the property prior to our appointment I had to actually look at the previous listing agent’s photos to remind me (I’d shown it back when it was $1.4M) because the Purple Bricks photos were thumbnails, making them impossible to see. Proper photos and marketing would have helped it sell more quickly, which usually means more money. And while thumbnail pictures are admittedly an easy fix, the listing still showed the amateur photos 51 days after hitting the market. No one bothered to even notice. The seller then said he would have never considered them himself for his most important asset. He just wanted to see if I knew about it. He said he wanted someone he knew was local, established and was someone he could trust. Smart guy.
The trend of using the internet for commerce is nothing new and discount

Morrison Estates Sutton Valley

Morrison Estates Sutton Valley Home

real estate services are nothing new. The combination of the two is nothing new either. Redfin, an online discount broker with a great website, has been around for at least 10 years. They use salaried agents which allows them to offer the discount, but who by definition have no incentive to fight for a better sales price. Redfin tries to limit the risks of being a Realtor (a commissioned sales person spends time and money but makes nothing if they can’t close your transaction) by limiting their marketing to the MLS and their website’s traffic and placement on Google. They offset the demands of being a Realtor by using a “division of labor” approach. The agent that shows a property, isn’t the agent who handles the inspection, the appraisal or the paperwork or the interface with the other agent, escrow, title etc. My one experience with a Redfin listing was that the other agent was missing in action. The seller handled everything as if it were a “For sale by owner.” Showing, open houses, all on the owner. Like the Purple Bricks example earlier, that seller left money on the table, which was fine by me as it benefitted my buyer.
While there are other examples of online brokers espousing cheap fees, some of whom aren’t even Realtors or members of the MLS. A company called REX comes to mind who advertises 2% total commissions. They are licensed but they aren’t Realtors. They don’t follow a nationally implemented Code of Ethics like Realtors do (more info here) They do however, keep all of that 2% commission to themselves, doing nothing but put your home on a hard to find-if-you-don’t-know-where-to-look website, and hope someone sees it. Pretty hard to imagine them selling for the true market value when no one knows you’re even on the market and the Realtors with buyers aren’t compensated to show their clients your home.
Real estate is a tricky business. It’s stressful and is filled with many emotional ups and downs. There are lots of moving parts and while it may look easy from afar, it is nothing of the sort. How could it be, with so much riding on it? Dividing the labor demands into multiple people may save money and even be more efficient in a production line kind of way, but this is no way to handle any transaction with such far reaching implications and financial importance. With me, the buck stops here. Online, there is no “here” for the buck to stop. And this doesn’t begin to address the significance of the emotional support and counsel a quality Realtor can provide to a buyer or seller. I can tell you that at times I am a therapist, an accountant, an attorney (not really but I feels that way) and a marriage counselor. I am a financial advisor, retirement planner, crystal ball reader and by the end of an escrow, a virtual member of the family, because there is nothing more important when buying and selling real estate, than trust (so call me if you want advice ).
Ultimately there will always be changes to the real estate industry as a result of many factors including online brokerages, but again, change is nothing new to our industry. Real estate has come a long way from the days when the only way to learn about available properties was to hire an agent who could pull out their “Listings Book” and drive you around. But for all the changes, real estate remains a local, personal, one on one business. And while the internet will empower people with knowledge, knowledge alone is not experience, nor is transacting a home purchase an everyday event. Liability is greater than ever, regulations and requirements change, time passes and inevitably you forget most of what you learned the last time around. Thankfully however, there are ethical local professionals, who carry the label Realtor; neighborhood experts who will bring value and insight to the most important transaction of your lifetime: The buying or selling of your home.

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Talking About Insurance

I recently put a home in Sherman Oaks into escrow.  It’s a gorgeous San Fernando Valley canyon, 4 level home that had been completely remodeled.  While in escrow it was disclosed to my buyer that there had been a small kitchen fire.  “No big deal but good to know,” we thought, and our process of investigation continued.  The California Residential Purchase Agreement or RPA, contains several default contingency periods.  There’s the 17 day contingency for appraisal, 21 days for loan approval and up to 17 for investigation.  Investigation includes the physical inspection, title search, HOA document review and insurability.  The physical inspection can include, geological, Radon testing, mold test, structural, roof, sewer line, property line survey etc.  Often times in this competitive marketplace, the investigation contingency time period gets shortened to as few as 7 days.  In fact, in San Francisco and much of the Bay Area, the seller will pay for an inspection, then complete any repairs they intend on doing and then offer the home “As-is.”  If the buyer wants to do an inspection of their own, they do so before the home ever enters escrow, before their offer is even accepted and some cases even before they write the offer.  Once in escrow, the buyer’s money is pretty much on the table from the get go.  When it’s a seller’s market like it is there, a buyer has to be happy to just find a home they can put into escrow.

Back in Sherman Oaks, my client had their physical inspection and also had civil engineer out to do a structural investigation.  A Geo had been ordered already by a previous buyer.  This hillside home had a 20 foot tall retaining wall holding back a mountain.  We had a sewer main inspection and a roofer out to examine the roof.  As you can guess, this is a very thorough buyer.  At last everything was a go and all they had left do was get insurance.

PNL Insurance Services

Since I knew this was a “brush area,” I referred them to my insurance agent of choice, David Lebental of PNL Insurance Services out of Torrance.  As an independent broker, David works with the “non captive” companies like National General (formerly GE), Nationwide, Travelers, Lexington and the Rolls Royce of property-casualty insurance companies, Chubb and AIG.  These are all “Admitted Carriers” for California.  He also offers others including Lloyds of London which is a non admitted carrier.  Admitted means they are under the supervision of the California Insurance Commissioner, an elected official and this adds a layer of protection for the consumer.  In insurance there are basically 3 tiers of offerings. The consumer direct companies like Progressive, Geico, AAA, General, Liberty Mutual etc., tend be less expensive and very square peg in a square hole type companies.  Square holes and round pegs need not apply.  I was once dropped by AAA after my wife Tama introduced our car’s bumper to that of a fire fighter’s at the local soccer field parking lot.  My client had their cars with Geico.  The captive companies would be your Allstate, State Farm, and Farmers.  Lastly there are the non captive, relying on independent brokers like David.  Because we were in a fire area, I was pretty confident that the captive and consumer direct companies would not be interested in “insuring the risk” posed by this canyon home.

There are a couple reasons I suspected insuring this home might be difficult.  First is the high fire zip code factor.  Few companies want this niche market.  In fact, following the huge San Diego Witch Creek Fire of 2007 which saw 1200 homes burn down, many of the captive companies began reevaluating their exposure to “catastrophic loss.”  As a result they stopped renewing policies that came due or when a home resold, refusing to insure that property for the new owner.  I had this happen in Calabasas a few years back where State Farm said they had “too much exposure” in Calabasas and refused to re-insure the home for my buyer.  The second reason I expected trouble, is the fact that we just had two devastatingly tragic fires in California in 2018; Santa Rosa where 5000 homes were lost and the Thomas Fire in nearby Ventura and Montecito where another 1500 homes burned to the ground.  Thirdly, California is once again in a drought so insurance companies are taking a hard look at the risk of insuring in California.  And if that wasn’t bad enough, the “small kitchen fire” we had been told about, had actually resulted in a $483,000 claim!  Talk about a game changer!

Fortunately, I thought, since the home I was told, had been insured by Travelers and the policy had just been renewed last month, Travelers would want to make back some of that big payout and would welcome the opportunity to reinsure for the new owner.  Wrong!  Travelers said, “Ah, yeah… thanks but no thanks.”  Uh-oh.  Sure enough, the recent near half a million dollar claim, put off practically everyone.  So that meant my client was going to have to step up their game and get insured through luxury carriers Chubb or AIG, except that Chubb declined too.  That left us one carrier, AIG, the best insurance on the planet.  But with the best comes, cost.  You see, AIG won’t just insure the home as a stand alone policy, they require 3 lines of insurance: Home, auto and an umbrella for liability.  Fortunately, the umbrella policy was only $700 so no big deal, but remember my client currently had their cars insured with Geico.  Suddenly they went from your budget, cut rate, least expensive auto insurance to most expensive in the market.  And lest you think that was all there was too it, there was the issue of how much insurance was required for this home.

The thing about insurance that is so difficult to comprehend is, how much insurance is enough?  In the case of the Seller’s Travelers policy, he had insured the home for replacement rebuilding in the amount of $875,000.  However, this is a 3,500 square foot home in a very expensive neighborhood.  If you do the math, the seller had insured a total rebuild at a cost of just $250 per foot.  For some of you out there, that is plenty of money to rebuild your home.  But in Los Angeles?  No way.  Especially if it’s a catastrophic loss like Santa Rosa had.  In her LA Times article, “Santa Rosa’s rebuild is anything but easy,” Robin Abcarian writes, “Many of the fire victim’s policies will not nearly cover replacement costs.”

One interviewee credits her insurance agent for “bugging her” every year to update her policy.  As a result, she had adequate coverage when many of her neighbors did not.  Abcarian goes on to write that “Even the concrete foundations had to be replaced as they were too damaged by the high heat” to be built on top of.  Complicating things further is the availability of labor and contractors to do the work even if your claim was paid adequately and quickly. The cost to build when you are one person seeking help, is totally different than when everyone around you is seeking the same limited pool of talent.  That’s right, the price shot up.

My client found out that the AIG policy on the Sherman Oaks home, wasn’t for $875,000 rather, $1.5M.  AIG would rather over insure than under.  So not only did they have to get the most expensive insurance company and have to add their vehicles and an umbrella policy, they had to increase the amount of insurance they had to buy.  David explained it this way to me, “The thing about insurance is that you only need it when you need it.  It’s about mitigating risk and evaluating risk-reward.  You spend $8,000 a year for maybe 20 years, but should you need the insurance, that $160,000 paid out is going to return you $1.5M when you need it most.”  When I looked at it that way, it didn’t sound that expensive after all.  So the take away here is this: don’t look at insurance as a cost, rather see it as a hedge against total financial ruin.  Don’t believe me?  Take a trip to Santa Rosa.   You can buy a burned out lot for $285,000 from any one of a thousand for sale by people who paid for insurance that was insufficient to let them rebuild.  And I ask, “What is the good in that?”

For more information on what to expect during the buying process, check out my  other articles on the home buying process. Or contact me for more information.

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HOW DO I SELL MY HOUSE? BECOMING A SMARTER SELLER

Selling a house is a lot more complicated than buying.  First of all, you not only have to ready your home but you have to keep it that way while living there.  Not so easy.  Getting started is a multi-step process, but in a nut shell, you’ll need to begin by prepping your home, a service I, like many top producers, provide.  Putting a home on the market without decluttering and maybe painting or carpeting, is a recipe for a lowball offer. clutter I like to tell my clients that it’s all about the three P’s (Preparation, Presentation and Price) and if they follow my recommendations and invest in their sale, which sometimes can run upwards of $10,000, I will double and maybe even quadruple their return on investment.  To be fair, I have no real way to measure this, but just as pricing strategy is a matter of opinion, I feel I’m pretty right on with this assessment.

Naturally you’ll want to hire a great Realtor.  What makes a great Realtor?  A lot of things: experience, ethics, trustworthiness.  Do they like your home, do they communicate well and in the way you like, ie: in person, by email or text?  Do they explain things clearly and respond to your concerns quickly?  I could go on and on, but rather than focus on the Realtor hiring process, I’m going to give you some practical tips that you can do on your own to become a smarter seller.  The first step starts with getting your home ready for selling.

So what is prepping all about?  I’m going to focus on the inside as the outside is a whole other discussion.  Start by looking at all your horizontal surfaces and then take everything off and box it up since you’re moving anyway.  You’ll want to set aside large pieces like statuettes, candlesticks and picture frames to use later on.  preppingIf the object is smaller than your fist, get rid of it.  Harsh I know, but small items by definition are cluttering and the goal is to make your home as sleek and clean looking as it can be.  I know you want to keep pictures of the kids and grandkids; the little snap shot of gramma holding you as a baby, but trust me on this, your buyer doesn’t want to see it.  This holds true for your Elvis ashtray collection, tea cups, Victorian era spoons… you get the picture.

Next, look at your furniture.  An average family room for example, should have a coffee table, a chair and a couch, an end table with a lamp, but after that you have to ask yourself, is it a family room or a furniture store?  Once I helped a client fill her entire garage with furniture that was in her home (she had lots of antiques) and she still had a house full of furniture.  I can tell you, she was not happy about it.  She said she liked a home that looked “lived in.”  I tell all my clients this: the way we live in our home is not the way we present it for sale.  And while there are some buyers out there that like a home with lots of stuff in them, most folks just want to see the space.  The more stuff, the less space; the less space, the lower the price.  If your couch is the same one you had in your bachelorette apartment, if nothing else, find an afghan to toss over the corner, maybe add an accent pillow.  Trust me on this, corduroy couches are not making a comeback.  Offices are tough because if you’re like me, you’re using it all the time.  Sometimes you’ll need to have bookcases or file cabinets removed so it’s not so crowded.  Speaking of books, if you have a book case plan on packingorganize up 2/3 of the inventory and FYI, there’s no reason to ever display paperbacks.  If you’ve got those, you’re going to want to pack them.  By the way, the library is happy to take your hard backs and give you a tax deductible receipt for them.  Speaking of donating, you’re likely to want to organize a part of your garage for charitable donations.  Most will pick up for you.  Salvation Army even takes furniture.  Word to the wise: don’t just open the garage and expect them to go in if you’re not at home, they will just drive off and you’ll have to reschedule.

Pictures, paintings, etc.  I sold a home for a woman who was a painter, very much in the Thomas Kincaid style of thatched roof cottages and bridges etc.  Most of the paintings were of the 18” x 24” canvas size… she had to take down 50% of them.  Even though she was a very good artist, her home was too much like a gallery than we wanted to present to the public and because the canvases were all the same size, the walls looked symmetrical and boxy, so down they came.  As for the family wall of fame, you know, it’s usually a stairwell or hallway that you’ve hung pictures of every generation or every school picture your kids ever took.  There may even be several of Old Yeller, yeah I know, he was a sweet old dog, but your buyer isn’t interested in that.  Aside from the obvious number of holes they’ll be thinking they have to patch and paint, it makes the space look small and we don’t want small, we want big, bright, clean and open.  Though I’m making light of this process here, I want to point out there are bound to be a whole lot of emotions when moving.  And the longer you’ve been there, the more emotions there are.  If you are older or have lost a spouse or child, this is especially hard so you’ll want to leave plenty of time to go through the closets and cupboards.  This process is often slowed by the memories of the items you are packing.  So take your time.  You don’t want to rush through this just to get on the market.  That said, we’re always rushing to get on the market, so doing a little advance work before you call me is a good idea.

Clean.  Again, another one of those obvious things, but clean means what exactly?  Mop the floor, wipe the counters and clean the carpets?  Sure; but how about windows or grout?  I sold another home recently where the tile was 20 years old, but in near perfect condition.  The grout however was dark grey.  It had been mopped so many times that there was years of soap embedded deep in the grout.  To address this, we brought out a crew who does grout cleaning.  They used a machine much like a carpet cleaner with a rotating brush.  It steam-injected a solution and then sucked it out.  The grout looked like new when we finished.  A clean home is one of the most important elements of a successful sale.  In that transaction we painted and put in new carpet.  We also had some professional cleaning that  included windows and screens.  It cost the seller about $9000 but we sold in three weeks and for near top dollar.  Had we not taken those steps, I have no doubt the seller would have had to accept $30,000 less.  That’s about 350% return on investment, not to mention the quick sale.

Smell.  Whether you have diaper pails, pets or kimchee, all of our homes have odors, some are just nastier than others.  To combat this, open your windows regularly.  A closed up home smells stale.  Picking out a nice potpourri or fresh fragrant flowers is always helpful.  Whatever you do however, do not use Glade plug-ins or any other of these overly perfumed products. cleaning  Not only does it overwhelm a potential customer and make them not want to stay in your home, it makes them suspicious that you are trying to cover something up like pet urine or dirty dog.  Try some lemon on your cutting board or in your garbage can, it kills bacteria. Woodsy smells are good too and Cinnamon is especially good around the holidays.

Of course I have many other tricks; tricks of the trade as it were, that help my clients get good, fast offers.  These are just a few basic ones.  How successful is this approach to listing a home?  As a rule, using these techniques sell my listings for more than a competitor’s every time.  Other Realtors know they can show my properties cold without previewing because of my reputation for helping my sellers prepare.  Knowing the tricks; having the trades that do the work quickly and affordably and knowing how to analyze the market for pricing strategy and marketing are what separate the great Realtor from the average Realtor.  It’s also why it’s so hard to sell your home on your own without a Realtor.  I tell all my prospective clients that if you hire me I will sell your home for the highest possible price, in the shortest amount of time and with the lease amount of hassle.  It’s like that old saying goes, “Hiring a professional doesn’t cost, it saves” and when it comes to selling real estate, these words were never truer.

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YOU JUST WROTE AN OFFER, WHAT HAPPENS NEXT?

You just wrote and an offer, the seller accepted and you’re telling your friends you just bought your dream house. dreamhouzz (Search for homes here.)  You are super excited, but what happens now?  The first thing that happens is your agent is going to make sure all the papers are correctly signed by all parties, then they or the other agent will send the contract to escrow who in turn assigns an escrow number.  This is called opening escrow.  Escrow is the neutral third party assigned the task of being the hub, through which all buyer and seller, lender and agent documents pass.  The escrow officer is the person in charge of your escrow.  Escrow is going to order a preliminary title report or “prelim,” along with all the other necessary reports as required by local ordinance or other government statute, including Home Owner Association (HOA) docs and any particular items requested by the lender.  Once open, escrow will send you a package that will also include the escrow instructions.  Escrow instructions will reiterate the terms of the agreement including address and names of the parties.

Assuming you are financing a portion of the purchase, you will be speaking with a lender and providing them an executed contract.  They will need your financials including W-2, tax returns, asset statements etc. and they will run your credit.  Truthfully, you have probably already done this since no offer is taken seriously today without 3 things: The proof of funds (evidence of down payment), preapproval from a reputable lender (preferably local) and the purchase contract.  As a result of changes in the lending world specifically as it relates to the Dodd- Frank legislation, there will be a 3-day period after you apply for the loan to look over the lender disclosures. Anytime the loan terms change substantially, the lender is required to re-disclose and another 3 day wait ensues.   This delays everything which is why you really need to sew up your loan decisions quickly.   Often times a buyer wants to shop for the best interest rate and they do this in the days immediately following their offer’s acceptance.  Please note that while you should absolutely look for a lender who has competitive rates, finding a mortgage lender you trust is really the most important thing to seek in my opinion.  By all means, explore different companies, but remember time is of the essence and it will take the better part of 3 weeks to get a loan approval.  The longer you wait to begin the process, the longer it takes to get an approval.  Since the California Association of Realtors (C.A.R.) Residential Purchase agreement (R.P.A.) defaults to 21 days for due diligence, loan approval and appraisal (your investigation and loan contingency periods), you really don’t have the luxury to play the loan rate game.  Given this reality, I recommend you ask your agent for their favorite lender or lenders and see if you “click” with them.  More important than the interest rate on a given day from one lender to another, is whether you connect and develop trust the person you are dealing with.  Customer service and watching out for your best interest will always eclipse an 1/8 percentage point one way or another in my opinion.  Don’t get me wrong, we all want the very best rate but since rates are changing every day and sometimes several times a day, having someone you trust to have your back, is essential.  Give me customer service every time over a slightly better rate.  Getting a loan is hard enough already, hire a mortgage person who is going to help you; someone who you can meet face to face.  Seriously, you’ll thank me later.

While the escrow and lender are working behind the scenes for you, you the buyer are also on the clock to do your due diligence.  Remember, the C.A.R. R.P.A.   provides for 17 days during which time you have to investigate all aspects of the home you are purchasing.  This is your contingency period, but it doesn’t go on indefinitely.  What’s that mean anyway?  Due diligence is your responsibility to investigate all aspects of the home you are purchasing.  This means, insurability, title, schools, taxes, neighborhood characteristics.  I showed a home to a couple once and they loved it, but when we went outside, two monster dogs ran up to the fence and were snarling and barking so loud that we all took a step back.  We went back a second time a couple days later and the same thing happened.  My clients decided to pass on that home.  It’s impossible to know everything about a neighborhood or house when you buy it, but the 17 days afforded for investigation are there for a reason.  creiaDo your research !  Included in all of this investigation, is the physical inspection .  I describe the physical inspection as our “first line of defense.”  What I mean is that there are many inspections you might want to have.   Mold, radon gas, roof, geological, sewer line, structural… but all that costs money and it adds up, so the first thing you do is hire a home inspector (Visit creia.org for more info) to give you a solid overview of the home you are buying.  If there is no sign of water intrusion, perhaps a mold test or roof inspection isn’t necessary.  Your home inspector is going to be able to give you an idea of the condition of the home you are buying and make suggestions if he or she senses further investigation is necessary.  Another practical note: many times, an inspector will make a “further investigation” recommendation because they have to cover their tail.  So it’s important that you ask the inspector, “Is this a big deal?”  More often than not, the inspector will say something like, “This is a terrific home and if it were me, I probably wouldn’t worry about it, but I always recommend that if you’re concerned, you should have a detailed inspection by… a plumber, or engineer etc.”  In other words, he’s saying he wouldn’t worry about it so unless you’re worried, don’t worry.

After the inspector issues their report, there are undoubtedly going to be things that need correction.  However, some may be upgrades to new standards that weren’t in effect when the homes were built, while others may be cosmetic.  I always tell my clients that we start with “Health and safety” issues first.  It’s not reasonable to ask a seller of a 40-year-old home, to bring it up to the latest codes if not required by law.  Examples of code changes that are required would be, garage door sensors for child safety, CO detectors, smoke detectors and water heater strapping.  As a buyer you can ask for anything you want but you shouldn’t get your hopes up that the seller is going to make your home like a new one.  Measure your expectations and put yourself in the seller’s shoes.  As a new homeowner there are going to be things you are going to want to update and upgrade.  This is part of the joy of owning a home.

One thing I tell my clients is that there are two negotiations: the first is price and terms: what’s the price, how much down payment, when do we close, what’s included?  The second negotiation is the “Request for Repairs,” and this is often the most contentious.  Typically, sellers are resistant to fix things after they’ve agreed to a price especially if they’ve had to come off their asking price to make the deal.  One of the comments I hear a lot from sellers is, “I lived with it for all these years, so can they, it’s not a new house.”  Can’t really blame them for that attitude, but this is why I recommend health and safety first.  It’s equally hard to blame a buyer for asking for an unsafe situation to be rectified.  After health and safety comes things that should be working.   I once was on an inspection where the gas oven didn’t ignite.  It’s a pretty safe bet that the seller is going to agree to fix the oven.  The same would be true had it been the A/C, heat, windows, garage door etc., etc.  Problems often arise when the inspector notes something like this: “The roof is 25 years old and with a life expectancy of 25-30 years you should expect you’re going to have to re-paper or re-roof in a few years.”  However, when there’s no evidence it’s ever leaked, this can be a tough sell to get the seller to agree to pay for new roof.  Same comes up on water heaters and A/C compressors.  They don’t go forever and eventually they’ll need replacement, but when there’s nothing wrong now, how can the seller be responsible or a future problem or repair?

How does a buyer protect themselves then, from a problem in the future?  Sometimes a seller will acknowledge a certain likelihood and offer a credit or reduce the price a little.  But this is why the second negotiation can be so difficult, sellers really aren’t that interested in what happens after they sell.  One possible solution is asking for a Home Protection Policy (HPP) in your offer.  There are various degrees or features of these policies which you should research, but in general the HPP will help offset many unexpected expenses in the future.  Another note is that they are renewable, so you can actually keep your plan in place many years after you originally purchased.  It’s a type of insurance and it’s worth exploring especially if you purchased an older home.

Once the request for repair is done, you’ve verified insurability (can it be insured and for how much?), HOA docs, title, neighborhood noise and whatever else you can think of, it’s time to lift your contingencies.  This is a big deal but it an inevitability if a transaction is going to go through to fruition.  Lifting contingencies is a big deal because until you “lift,” you can always withdraw cancel, quit and still get most if not all of your deposit back.  You are always supposed to have a reason when you cancel but the point I’m making is that you can cancel and usually not lose your deposit.  Once you lift your contingencies however, your money is on the table.  Cancel after you lift, and you will likely lose most or all of your deposit.  On a $700,000 home that can be up to $21,000.  3% is the maximum “Liquidated Damages” allowable in California, so your earnest money deposit (EMD) is typically 3% of the purchase price because the seller wants you to have the maximum amount of “skin in the game” when you buy their home.  You can’t get hit with owing the total purchase if you quit, but 3% is still serious business.

Once you’ve made your offer, had it accepted, opened escrow, reviewed all the documents, done your inspection and due diligence, negotiated your request for repairs, obtained your loan approval and lifted your contingencies, all you have to do now is plan your move and await your loan documents.  Once in escrow, your loan documents are the last step between you and your new home.  Sign them, wire in your down payment and wait for the lender to “fund” your loan.  After your loan funds, the title company will record the deed in your name.  That’s when you get the call from your agent: “Congratulations, you just bought a home.”  And that really is music to the ears, isn’t it? Call me if you would like to more information or are ready to buy your dream home (Contact Tim here).

 

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Stuff: To Stage And Declutter Or Not, That Is The Question

This past weekend I did a listing presentation of an older client I sold a home to some 17 years ago.  It was pristine.  It had been painted within the past couple years and the carpet had been replaced then too.  Clean as you could want.  The issue facing us however was do we approach this home like we do most listings where we get it cleared out of excess stuff, take the pictures off the walls, remove a bunch of furniture etc. and make it look staged and sparse or do we do some light decluttering and put it on the market right away?

One of the things to keep in mind when selling real estate is that every seller is different and therefore the approach to each home requires flexibility.  This may seem obvious enough, but in my experience the approach of declutter and stage to get the highest and best price is still the best.  The question becomes even if true, is that always the right approach?

Let’s take this example and break it down starting with, what do we know?  We know if we make it look like a model home it will sell faster and for more money.  We also know however, that our seller has a lot of stuff.  That stuff would need to be removed and disposed of as part of the staging and decluttering process. The thing is, whether done as staging or moving, that stuff needs to be dealt with and disposed of  at some point.   As you may or may not know, stuff doesn’t have much value.  Unless it’s rare or museum quality, its value is not generally significant.  Stuff is just stuff.  We all have too much of it and selling it is difficult at best.  If you are in a restrictive HOA and you can’t have a garage or estate sale, the challenge is magnified.  This is really where the individual seller’s needs need to be assessed.  In our example the question is, is it better to hold off selling while the family tends to the stuff or get the stuff stored and deal with it at a later time?  It has to be dealt with eventually so deciding when is the question, rather than if.  Either approach postpones selling some, but storing and dealing with later at least accelerates the listing date.  Most people don’t opt for this though because moving and storing feels like twice the work.

In our example we also have the option of selling with all the stuff still in the house.  The price likely wouldn’t be as high but it would put off the need to address the stuff issue prior to selling.  Once the home is sold the clock is ticking and now the stuff must be dealt with.

Not every seller is after every dime.  Some would rather take a little less and address the issue over the time of marketing and escrow.  Market conditions also enter the decision process.  One advantage our area has, is that the market is very strong and inventory is low.   Standing pat and doing a few little things so we can sell right away might not have a big impact on sales price.  It certainly wouldn’t be so huge as to make the decision obvious.

So the answer of stage or not to stage is not as clear cut as it was in the down market.  Much will depend on the individual seller.  In most cases, staging is still the best choice (Check out  my website here for homes that have been staged to sell, can you tell which ones have, let me know).

Staging almost always yields a higher sales price and in a shorter amount of time.  My role as agent and advisor is to help my client make the best decision for them, in the current market, for their current situation.  As for this seller, I’m leaning towards sell “as is” and take advantage of the lack of competition in the market place.  A month from now, I might not recommend the same approach.

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Tax Reform: The probable Effect On California Real Estate

The 2017 Republican tax bill that just passed includes several provisions that will have a direct impact on California real estate.  Most are not good, but there’s often some silver lining if you look hard enough.

Preface to say, I am not an accountant, so take this for what it is, it’s just what Tim thinks.  The most obvious, most painful and most significant tax change affecting California, is the cap of $10,000 on state and local tax deductibility or SALT for short.  If you are unfamiliar with this component, it’s a provision that caps how much local tax you can deduct.  Because we in California are an income tax heavy state and pay as much as 10.5%, state income taxes, most coastal California home owners will exceed the cap of $10,000.  To keep this real basic and simple, if you have a fire fighter and school teacher couple earning $150,000 per year, the 10.5% state income tax exceeds $10,000.  If you are a scientist or engineer and your spouse an attorney and you make $350,000 a year, your state tax is over double the cap.  This means that you will have to pay federal income tax on the tax you pay California.  This is called double taxation, paying tax on tax paid.  So if you had to pay Federal income tax on $25,000 California state tax you would have to pay an additional $8,000.  ($25,000 x 32% tax rate).  Why the 32% highest tax rate you ask?  Because the addition of taxable income at this income level is added to the top line which is taxed at your highest rate.  $315,000-400,000 income is now being taxed at 32%.  This all by itself knocks nearly $700 a month off your monthly take home and therefore drops your ability to borrow/pay for a mortgage by over $100,000.  In other words, you’ll be paying a lot more in taxes and therefore have less money to pay for that higher monthly mortgage.  Do you think the nearly $1,000 a month take home might influence how much house you buy?  Probably.

The second thing that hits Californians is that state income tax isn’t the only tax we pay.  We also pay property tax.  So, if I bought a median priced home in Los Angeles for $750,000, I’d be paying $9,375 in property tax.  If you add $9,375 to your top line, you’ll have to pay the IRS and additional $3,469 or $289 a month.  Added to the additional Federal tax you’ll pay on your state income tax, you now have $1,100 less a month.  You will however save some money with the lowered tax rates.  I mean that was the whole point of the legislation, right?  But using our $350,000 income example, I calculate you’ll save about $7,500 a year or $625/mo. But you’ll pay $1,100 more.  As you can see, the cost of losing the full deductibility of your SALT by capping it at $10,000 and the subsequent double tax you will be required to pay on the difference, marks a reduction in monthly income of about $500.

The third thing that affects many, albeit not all Californians, is the reduction of the mortgage interest deduction for loans above $750,000.  Currently you can deduct $1.1M ($1M first trust deed and $100K 2nd.)  This deduction cap drops to $750,000.  This equates to an additional $5,180 in Federal income tax or another $431 a month less in the pocket ($350,000 x 4% divided by 12 months).  Admittedly, many will not feel sorry for someone with a million dollar mortgage not getting the extra write off, but it is going to have an effect on high balance borrowers and that is going to trickle down.  In other words, am I willing to pay $1.3M for that home now that I have $800 less income every month?  The answer to that question gives us an indication on what is going to happen with values.  By the way, that’s equal to a $200K loan payment.  Yeah, the math is not good.  There’s also the issue that second home interest is no longer deductible and that could lead some people to sell and/or not buy a second home.

About that silver lining I alluded to at the outset is my expectation of declining property values.  Because I believe this tax revision will inevitably lead to some decline in California property values, theoretically more people will be able to afford them and we desperately need that.  Of course, affordability is not just the price of a home, it also reflects the money we have to spend on a home.  But more homes at a more affordable price isn’t a bad thing for many Califorinians.

Finally to the question of, “With this knowledge should I still consider buying and/or selling?”  The answer is yes.  You should buy but you should also crunch the numbers.  It may not be the time to stretch to the breaking point.  Be a little conservative.  If you’re a seller, heck yeah, sell now (and call me).  If you are considering moving in the next few years, now is probably the time because the effects on our net income won’t manifest until 2019 when we realize we will owe more than we did in 2018 (2017 tax year.)

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