Archive for the 'Negotiating' Category

Request for Repair Guide for Sellers

said on September 29th, 2015 filed under: Localism, Negotiating, Real Estate Nuts and Bolts, Request for Repair

This is a compilation of brief articles about the Request for Repair process in California Real Estate.   Though the California Residential Purchase Agreement (RPA) is the governing document for this discussion, the overall principles and strategies will apply to most states and situations.  Note that this article is not applicable to commercial real estate transactions, in California or elsewhere.

 

stock-photo-5538759-pocket-kings-in-poker

1.  INTRODUCTION

At some point in the life of a residential real estate transaction, the buyer will need to continue reading…

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Request for Repair Guide for Buyers

said on September 29th, 2015 filed under: Localism, Negotiating, Real Estate Nuts and Bolts, Request for Repair

This is a compilation of fourteen brief articles about the Request for Repair process in California Real Estate.   The California Residential Purchase Agreement (RPA) is the governing document for this discussion, but the overall principles and strategies will apply to most states and situations.  Note that this article is not applicable to commercial real estate transactions in California or elsewhere.

stock-photo-5538759-pocket-kings-in-poker

1.  INTRODUCTION

At some point in the life of a residential real estate transaction, you will need to continue reading…

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The Real Estate AVID

said on June 15th, 2015 filed under: Localism, Negotiating, Real Estate Nuts and Bolts, Request for Repair

The Real Estate AVID

AVID
The California AVID is not an insect–though many real estate agents consider it worthy of extermination. The Agent Visual Inspection Disclosure is, for a fact, an odd and awkward creature. Can the findings from the AVID be used by the buyer in negotiating a Request for Repairs? Answer at the end of the article. continue reading…

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Bidding for a Home at On-Line Auction: Part 2

said on February 20th, 2013 filed under: Market Trends, Negotiating, Real Estate Nuts and Bolts

Here are some aspects, and some risks, of the auction for you to consider.

You cannot place the bid yourself. We have to do it for you. That’s because we have the required “ticket” to the auction–a real estate license. Our license promises the auction house that we have vetted you properly, and that you are financially qualified to make the purchase if you are the successful bidder.

There are extra costs involved in winning a bid.   Sometimes the costs are modest, a few hundred dollars, called a “technology fee” or something like that. These fees are tacked on to the price.  Sometimes the fee is not modest at all, a one percent surcharge. If the property is $250,000 then the surcharge is $2,500. I have seen the surcharge as high as five percent!  You read that right. So whatever is the final bid, add five percent. On a $250,000 purchase it would be $12,500. Yikes.

As in any California real estate transaction, you will make an earnest money deposit (EMD) when you open escrow. The difference here is that the amount is set by the auction house, $5,000 is typical, and it is non-refundable. No matter what. It will apply to the purchase price as long as you complete the purchase. But if the purchase fails, kiss your earnest money goodbye.

The auction house will dictate the escrow company, title insurance company, the “closing” company, the time frames, and even the type of contract used. It will all be stacked in their favor. You, and your agents, will have very little to say about this, and very little recourse if things go wrong.

Auction properties are sold strictly “as-is,” and the sellers are not fooling around. There is no, repeat no investigation period once your bid is accepted, to be more exact, once they have your non-refundable earnest money deposit. You should do all of your investigations before you give them your money. Sure, you can keep investigating once you are in escrow, but if you find something horrible, something that makes you want to cancel, well that’s tough, because they are not going to give you back your money. Not. going. to. give. you. back. your. money.

All of that sounds pretty scary, but there are upsides.

The bidding process is exciting and fun.

Sometimes you can score a great deal for yourself.

It will often go much smoother than I have described. Last year we bid and won a lovely home for a young couple, first-time buyers. They were able to purchase a home below market value, a home they could not have afforded otherwise. The closing agents we worked with were competent and pleasant. Our “kids” are very comfortable, and very happy, in their new home, the wonderful home they won at auction.

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Bidding for a Home at On-Line Auction: Part 1

said on February 17th, 2013 filed under: Localism, Negotiating, Real Estate Nuts and Bolts, Success Stories

When a bank-owned home comes up for auction there will be a minimum opening bid. Nobody knows what that minimum bid is until the property is placed “on the block.”  There will be a period of time, usually a couple of weeks, for bidding. Often, the bidding is transparent. That means you know what the other bids are.

We’ve been to this rodeo before, and here’s what we like to do:

(1) We place one bid very early in the process at the minimum increment allowed. This lets us continue reading…

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How Much Do Banks Negotiate on Foreclosure Sales?

said on October 7th, 2012 filed under: Localism, Market Trends, Negotiating

One of my clients (let’s call him “Mike” because . . . uh . . . that’s his name) wrote to ask:

Hi Bob,  Question……How much lower than asking price have you seen REO’s <foreclosures> go for? I know there are a lot of determining factors. Say everything is in our favor, time on market , maybe bank has cashed in on insurance policy, etc. What is the lowest you have seen a property listed for 239k,or 229k go for?…….Mike”

I responded:

You have to remember a few things.

(1) At what price did the REO first come on the marke,t and how long has it been at this current price?

(2) The bank is basing the asking price on Broker Price Opinions (BPOs).  If BPOs come in at a certain price, the bank has rules about how much discount below that price it can accept.

(3) How severe is the pain?  How much is the bank losing?

(4) How much house are we talking about?  An 87% accepted price on a lower-end house might equal $18,000 discount (acceptable) but an 87% loss on a mid-range house might be $60,000 (not acceptable).

Here’s a recent scenario at Lake of the Pines:

A lower-end property goes on the market at $160,000, sits there getting stumpy little offers for a while.  Bank reduces the asking price to $150,000.  More low offers.  Sits there, and sits there.  Bank reduces the price to $140,000.  This time an offer comes in at $120,000 with a request for $8000 in seller credits to buyer for “health and safety” repairs.  Bank counters at $130,000 but gives the $8000 credit for an adjusted price of $122,000.  Buyer accepts.

There’s your 87% discount off the asking price, a price that has already been reduced twice.  It is actually a 76% offer on the original price, but it took months of sitting, a bunch of lowball offers, and two price reductions to get there.

Right out of the gate, first week on the market, the bank is probably not going to take less than 90-95% of the asking price.

 

 

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Buy a Rental: Cash-on-Cash Comparison

said on August 25th, 2012 filed under: Localism, Negotiating, Real Estate Nuts and Bolts

This is the third of three formulas for buying rental property.  In this article I will compare the cash-on-cash returns for the rental purchases described in the previous two articles.

Buying a Rental:  Loan Formula

Buying a Rental:  Cash Formula

The cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage.

 

CASH-ON-CASH RETURN =    ANNUAL BEFORE-TAX CASH FLOW / TOTAL CASH INVESTMENT

 

Example 1:  BUY A RENTAL WITH LOAN FORMULA

Suppose you purchase a $150,000 rental with a $30,000 down payment and $20,000 in closing, finance, holding, and fix-up costs for a total cash investment of $50,000.  You finance the balance of $120,000 for 4% APR on a 30 year fixed rate loan.  Each month, the cash flow from your rental, less expenses, is $427.  Over the course of a year, the before-tax income would be $427 × 12 = $5,124 so the cash-on-cash return would be

$5124

_______   =  .10248  = 10.25%

$50,000

Example 2:  BUY A RENTAL WITH CASH FORMULA

Suppose you purchase a $150,000 rental with a $150,000 cash and $16,000 in closing, holding, and fix-up costs for a total cash investment of $166,000.  Each month, the cash flow from your rental, less expenses, is $1,000. Over the course of a year, the before-tax income would be $1,000 × 12 = $12,000 so the cash-on-cash return would be

$12,000

_______   =  .072289156  = 7.23%

$166,000

 

CONCLUSIONS:

You will get a higher rate of cash-on-cash return (10.25%) by financing 80% of the purchase at 4% APR.

You will get a lower rate of cash-on-cash return (7.23%) by paying cash for the property.

You will get a higher monthly income if you pay cash.

 

*LIMITATIONS TO CASH-ON-CASH CALCULATIONS:

  • Because the calculation is based  on before-tax cash flow relative to the amount of cash invested, it cannot take into account an individual investor’s tax situation, the particulars of which may influence the desirability of the investment.
  • The formula does not take into account any appreciation or depreciation.
  • It does not account for other risks associated with the underlying property.
  • It is essentially a simple interest calculation, and ignores the effect of compounding interest. The implication for investors is that an investment with a lower nominal rate of compound interest may be superior, in the long run, to an investment with a higher cash-on-cash return.

It is possible to perform an after-tax Cash on Cash calculation, but accurate depictions of your adjusted taxable income are needed to correctly address how much tax payment is being saved through depreciation and other losses.  It is always advisable to consult with your CPA or tax preparer before buying real property for investments purposes.

*Most of the text for this “Limitations” section and certain phrases used earlier were adapted from the Wikipedia article titled Cash on Cash Return.

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Buy a Rental: Loan Formula

said on August 24th, 2012 filed under: Market Trends, Negotiating, Real Estate Nuts and Bolts

This is the second of three formulas for buying a rental property.  In this version the rental is purchased with a down payment of 20% and a fixed rate loan of 80%.

Here are the assumptions:

  • You have $50,000 sitting in a non-productive instrument, perhaps a savings account, mutual fund, low-yield bond, or your funds are in a CD that is getting ready to mature, or the cash is buried in a coffee can in the back yard.
  • The tax benefits or liabilities are not computed (see your CPA or tax lawyer).
  • The purchase price and  rent are hypothetical and will vary by location.
  • The property will need some fixing prior to renting.
  • Property taxes are based on the California ad valorum 1% rate plus a bit of miscellaneous supplements.
  • Closing costs are customary for northern California for a loan-financed  purchase and include inspections.

 

Here are the Assumptions

Purchase a Rental with a Loan Formula
Purchase Price 150,000
Loan @80% 120,000
Down payment   @20% 30,000
Loan costs (1 point + $1500) 2,700
Closing costs   (escrow and title) 3,500
Fixup and holding costs 13,800
Total Cost to Purchase 50,000
Rent earned on the property 1,430
Monthly principal and interest @4% 30 year fixed 573
Monthly property taxes 150
Monthly property management 95
Monthly insurance 85
Monthly maintenance 100
Total monthly expenses 1,003
Monthly net 427
Annual Gross 17,160
Annual Net 5,124

 

Summary: If you can buy the property for $50,000, fix it up for $13,800, and get $1430 rent, you will net $427.00 per month.  (Remember, income taxes on the net are not computed in this formula, nor are the mortgage tax deduction and business expense deductions calculated).

 

 

 

 

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Buy a Rental: Cash Formula

said on August 23rd, 2012 filed under: Negotiating, Real Estate Nuts and Bolts

This is the first of three formulas for buying a rental property.  In this version the rental is purchased with cash.

Here are the assumptions:

  • You have $166,000 sitting in a non-productive instrument, perhaps a savings account, mutual fund, low-yield bond, or your funds are in a CD that is getting ready to mature, or the cash is buried in a coffeee can in the back yard.
  • The tax benefits or liabilities are not computed (see your CPA or tax lawyer).
  • The purchase price and  rent are hypothetical and will vary by location.
  • The property will need some fixing prior to renting.
  • Property taxes are based on the California ad valorum 1% rate plus a bit of miscellaneous supplements.
  • Closing costs are customary for northern California for a cash purchase and include inspections.
Cash Purchase Rental Formula
Purchase Price 150,000
Closing costs 3,000
Fixup and holding costs 13,000
Total Cost 166,000
Rent earned on the property 1,430
Monthly property taxes 150
Monthly property management 95
Monthly insurance 85
Monthly maintenance 100
Total monthly expenses 430
Monthly net (rent minus expenses) 1,000
Annual Gross 17,160
Annual Net 12,000

Summary:  If you can buy the property for $155,000, fix it up for $13,000, and get $1430 rent, you will net $1000.00 per month.  (Remember, income taxes on the net are not computed in this formula).

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The Net, The Net, and Nothing But The Net

said on May 14th, 2012 filed under: Negotiating, Real Estate Nuts and Bolts

Once you put your home on the market for sale, it becomes a product.  It can be difficult for you to change your preception about the place you live from “home” into its new identity as a commodity.  But that’s what it is now, and more so, it’s now business.  For many homeowners, selling your home may be  big business, the biggest you may ever conduct.  Your  financial future may be determined by the success or failure of the sale.  We’re not fooling around here.

You need smart, objective business decisions followed by energetic action and a sharp eye toward the bottom line, the net, the size of your check when all is said and done.

Your agent should (must!) provide you with a net sheet, or multiple net sheets at different selling prices, so that you can get your mind on the net where it belongs.

Smaller decisions about costs, who pays what, during marketing and escrow should be examined only in regards to how they affect the net.

I frequently hear things like this from the homeowner:

  • “I’m not paying for a home warranty for the buyer!”
  • “When I bought this house I had to pay the escrow fee, and now that I’m selling it, they want me to pay it again.  It’s the buyers’  turn to pay.  I won’t do it!”
  • “The buyers want me to give them 3% back to help them with closing costs?  Nobody gave me help.  No way!”

I keep reminding you over and over, “just look at the net.”

If the buyers want you to absorb $3,000 in closing costs (the nerve!), but they are offering $5,000 more for the sale, you are netting an additional $2,000.  It seems like a no-brainer to me, but real estate transactions can become emotional, especially if you are still wrapped up in the perception that it is your “home” that you are selling.

  • Keep your eye on the goal.
  • Don’t lose sight of the forest among all the trees.
  • Don’t lose a fortune bending over to pick up a dime.
  • The net, the net, and nothing but the net.

In an ideal world, you would give me the keys to your house, and then you would fly off to Maui and sit on the beach until I called you to come back and pick up your check.

(Or maybe I’ll bring the check to you.  Maui, you said?)

 

 

 

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