Mr Monk Buys a House

Mr Monk

Mr. Monk returns to TV with a premiere episode this Friday, July 18th. This one will be near a dear to our hearts. He’s going to buy a house! That’s right. Here is your most OCD client in a life-imitates-art drama.

When his new neighbor plays his music too loud, Monk decides it’s time to move. He makes the big leap and buys a house that turns into a money pit, reminiscent of the 1986 movie that we agents like to give to first-time buyers who think they are ready for a fixer-upper. Things continue to challenge Adrian when he hires the handyman from hell who is determined to rip up the entire house. Brad Garrett form Everybody Loves Raymond guest stars.

Mr Monk Buys a House - trailer
Episode Trailer

Most of us agents have had clients like this to some degree and I’m sure there will be a number of been-there-experienced-that moments. I just wanted to make sure those who didn’t know have a chance to TiVo or whatever to see it.

Can you price your house at land plus structure?

Larry asks: ” Isn’t it too simple a model to look at the sale price of a property by looking at the square feet of the structure? A property around Seattle, correct me if I’m wrong, has about half of its value in the land, and half in the structure. If real estate appreciates or depreciates. it’s the land that goes up and down, not the structure, right? I understand that $/sqf is an index that varies with property value, but this doesn’t seem to reflect the reality that it’s the land value that’s going up and down, which has only a loose relationship to house square footage.  Or is it just not workable to try to do a more complex calculation? My concern is that when you have an unusual situation with a large lot, and 2/3 of the value is in the land, this method will give erroneous results.”

Let’s deal with this sentence first and get it out of the way “A property around Seattle, correct me if I’m wrong, has about half of its value in the land, and half in the structure.”  No, not true.  One can not even begin to generalize, but a good rule of thumb for builders is that the new house will sell for 3X the lot value.  But that is ONLY if the lot was worth buying in the first place.

If your land has value separately from the structure, then your structure often doesn’t have any value. When your structure has value with the land on a combined basis, then the (extra) land can usually only add 10% more to that value unless the lot can be split into two or more lots.

If a builder might want the land, then yes, the value of the land is part of the valuation process.  If a builder wouldn’t want the land, then no, the land does not “value out” except as “an extra”.

Let’s take a regular neighborhood where the only buyers are those who are buying homes, and not builders who want the lot.  How can you tell?  Every house on the street is the same age, is a good clue.  No builder has ever bought a house torn it down and put a new home on that street, usually means no builder wants to do that. If a house burned down, well then of course the lot would have a value.  But if no one is interested in tearing the house down and putting a different house on it, then you don’t value the property by valuing the land first and then the structure. Most homes on the Eastside (housing developments) fall into that category, and any street in Seattle or Kirkland or Bellevue, considered to be a bad investment for new construction, falls into that category as well.

When no one would build a new house on the lot, you value a property based on comps alone, and the value of the land becomes irrelevant.  Most times the homes are on lots of about the same size.  A bigger lot vs. a smaller lot becomes “an extra”.  Sometimes extras add value and sometimes they don’t.  Too large of a lot often is viewed by potential buyers as “too much maintenance” and can actually detract from the value.  Often corner lots fall into the “more maintenance” category.  In these neighborhoods the large lot only values out IF it is SUBDIVIDABLE.  If the person buying it can turn the lot into two lots and put another house on that second lot and sell it, then yes, the extra land would be a factor in determining the asking price or offer price.

Before we leave this category of “no” you don’t separate the land when determining an asking or offer price, let’s talk about land as “an extra”.  The best rule of thumb for “extras” is they can’t in total equal more than 10% of the value of the property without the extras.  Say you have a house that comps out at $650,000.  You can’t get more than $65,000 more for that house because of extras, or $715,000.  Beyond that it just has too many extras.  Extras include, tennis courts, pools, extra land beyond the norm for the neighborhood, and to some extent new kitchens, new baths and any “added value” unless many in the neighborhood homes have also added these things and the comps have grown as a result.  If no one in the neighborhood has done ANY improvements since 1968, you can’t get double the price of everyone else’s house because you remodeled your house and have a pool and a bigger lot, etc.  That ONLY applies in areas where land is not separated from the structure in order to do a valuation.

So for all of the above, simple methods of price per square foot and adding and subtracting for some things here and there is the only method that works.

Let’s move on to where Larry is correct.

Larry, when the land does matter…then often it is ALL that matters, and the structure does not.

When it’s not all about square footage or value of structure, it often shifts to all about the land.

Example:  I had a buyer client who bought a 4-plex at 7th and Market in Ballard.  When he sold it two and a half years later (a year ago) the value of the 4-plex was roughly $720,000.  I listed the property at $850,000 because IF the buyer wanted to tear down the 4-plex and build townhomes, the value of the land was worth more than the value of the 4-Plex with the land under it.  It sold for $855,000 and five townhomes are being built on it as we speak.  People called who wanted to buy a 4-plex and it didn’t “pencil out” and a lot of agents thought I was nuts 🙂

When the value of the land exceeds the value of the home plus land, then the structure is “free”. This is true where builders are building and only WHEN builders are building.  If builders stop building for five years because the market is soft, then the value will go down to whatever an owner occupant will pay for it, and whomever buys it can live in it and sell it when the builders come back out looking for lots to build on.  We are entering a market like that and to some extent have been in that market for 10 months or so in some areas and in some locations.

So to answer your question, the reason it is or is not done the way you suggest is not because the “calculation is too complex”, it’s because it’s unnecessary.  A buyer isn’t going to pay you 3X the value of the neighbor’s lot plus the value of your structure, because the lot is 2/3rds bigger, unless it is subdividable into THREE lots. If it can only be subdivided into two lots, then they may pay you the value of your house based on comps and price per square foot, plus a portion of the value of the extra lot, not triple, even though it is 3X bigger. And if it can only be one lot, they may not want it at all, because it is too much maintenance and that can reduce the value overall.

The highest value of a lot is usually where the value of the structure is about nil AND a new house built on that lot will sell.  If you live on a street with no newer houses, if no one has ever wanted to build a new house on your street, the houses could end up at no value if no one wants to buy it as is and no builder wants to build on the lot.  Then it becomes your home for life…or a perpetual rental property 🙂

A woman approached me this Sunday.  She asked me what her property was worth.  The house was tiny and worth about $300,000 with a huge yard.  The lot was worth $300,000 without the house.  When I told her the lot was worth $300,000 she started talking about the house.  No!  You can’t add the value of the house to the value of the land.  No one is paying $300,000 for a big yard. They will only pay $300,000 if they are going to tear the house down.  Someone may buy it and live in it, but they will get the house for free if they do.  Maybe you can get $350,000 for it.  A $50,000 house is dirt cheap and someone may pay an extra $50,000 over lot value and live in the house.  But you can’t value the house at price per square foot and add it to the value of the lot.

You can sell it to a builder for lot value, or you can try to find an owner occupant who is willing to pay a little more than the builder will pay for the lot.  Those are your options.

Larry, my guess is your land is treated as “an extra” and adds 10% to the value IF a buyer views it as an extra vs. a shortcoming.  Today most people don’t want to spend all of their free time mowing the yard.  And you can only get 10% more for ALL extras on a combined basis. So if your house is already worth 10% more than your neighbor’s homes because you added a new kitchen…then the extra land is not of value as your exceeded you cap for “extras”.

Should You Buy a Short Sale Property?

The current market is making me feel older than dirt.  Mostly because there are fewer and fewer agents around who have sold real estate in a previous bad market.  I find myself explaining what is going to happen next, to many who have never been through a short sale from beginning to end.  Even if you take classes about what may happen, it doesn’t replace the experience of living through what actually does happen.

Everyone wants a bargain, especially in this market.  But the truth is that many bargains go to investors and people inside the industry, because they can handle all the hiccups better than owners who plan to occupy the property.  Whether it’s a short sale, a foreclosure, an estate sale or other “discounted” property, often it’s like buying yesterday’s donut.  You can expect something to go sideways in a short sale, and often you can’t get it to go perfectly straight.

short sale1) The closing date may be delayed. In fact you can pretty much count on it.  For someone who is trying to coordinate a move, this can wreak havoc on their life.  If you are trying to link together the sale of your house with the purchase of a short sale, well good luck with that one.  If you are trying to give notice to your landlord and be able to move into the short sale property on a firm given date, not always a reasonable expectation.  Most often short sales involve a series of extentions strung together until it closes. If someone is not planning to live in the house, such as an investor, not a huge big deal.  But for someone trying to move into it, it can be a nightmare of uncertainties.

2) The bank does not approve the sale price. One of the hardest things to understand about a short sale is that the buyer and seller agree to a price, but the bank is the one calling the shots.  Even when you get the HOORAY OK from the bank, the road can be very bumpy to the end.

Say you are buying a house for $820,000 and the payoffs on the seller side are $860,000 including a first and second mortgage and seller’s closing costs including exise taxes.  The 1st mortgage is going to be paid in full, so it is the second mortgage lender who is agreeing to whatever is left after other costs are paid. You send them an estimate that they are going to get $60,000 of the $120,000 owed to them.  They say OK.  Now during the time you waited for them to say OK, guess what happened.  Yup.  ALL THE COSTS INCREASED!  The first mortgage payoff got a lot higher than expected.  The utility bills went into arrears and the utilities may even have been shut off.  The arrearages grew and grew and now the 2nd lender who agreed to take $60,000 is only getting $50,000.

You can see how this can turn into a big yo-yo affect with the buyer feeling like someone is not telling the truth.  Yes the 2nd approved the short sale.  No the 2nd isn’t letting it close now.  You must remember that the 2nd mortgage never approves the sale price of $820,000 in the example above. They approve the amount that they are going to be “short” on their payoff.

The buyer thinks the bank approved the sale price of $820,000 when we got the first Hooray OK, when in fact what they approved was receiving $60,000.  Now when you do the final closing statement and the payoff is $50,000…you are back to square 3.  You are not back to square 1.  You have made progress.  But not as much as you thought and the closing date is again delayed and the sale, again, may not happen at all.

3) Now you get to the final stage.  The bank approves the $50,000 or the buyer agrees to come up with an additional $10,000.  Somehow the gap between the $60,000 approved and the $50,000 left to pay the 2nd mortgage has to be bridged.  Possibly with a little give and take on everyone’s part, including the agents.  The buyer who is now being asked to give a bit more than agreed to at a sale price of $820,000 doesn’t understand why.  “I thought the bank agreed to the price of $820,000?”  Remember, the “shorted” lien holder never approves a sale price.  They approve the “short payoff” which is a moving target! It can get very frustrating and difficult to comprehend and follow.

4) Now the buyer wants to walk through the property the day of signing.  Uh-oh…the utilities are shut off.  Anyone who can’t make their mortgage payment and who is not living in the house, is not likely to keep the utility bills current during this long approval process. Yes it is reasonable for a buyer…normally…to want the utilities on for the final walk through or for the inspection.  But getting them turned on is easier said than done.  Whose name do they get turned on in?  If it is closing in the buyer’s name in 3 days, they likely don’t want the utilities in their name yet.  In fact the utility companies may not even let a non owner/non-tenant put the utilities in their name.  It clearly is not something a lawyer would advise a buyer to do prior to closing.

The seller isn’t forking out any money to get the utilities turned on, they have no proceeds and are not putting any money into the house.  Same goes for repairs.  You walk through and see something wrong with the house and want the seller to get it fixed.  No way Jose.  Seller is walking off with his tail between his legs licking his wounds.  He’s often depressed and disgusted and beat up by life.  He’s not coming over with a licensed contractor to make repairs.

5) The Buyer Agent often agrees to a short commission.  So if you have arranged with your Buyer Agent to recieve a portion of the commission, don’t be surprised if that amount changes at the end.

Lots of headaches.  Lots of uncertainties.  The truth is that investors foresee most of this.  They don’t care as much about the mundane things like what date it will close or making repairs.  They are going to gut it anyway.

So the next time you wonder why investors and insiders always seem to get the best deals, ask yourself this.  Who else would put up with all of this nonsense?  Looking for a bargain?  Great.  Just remember this.  It’s often like buying yesterday’s donut instead of a warm Krispy Kreme straight from the oven.  The taste left in your mouth after all’s said and done…may be a little stale.

Beginning the Home Buying Process – Part 2

[photopress:MacCommercial.jpg,full,alignright] The next step in the Home Buying Process is determining how much home you can afford and how much you actually want to spend. When buying your very first property, it is important to note that while a lender may tell you that you can afford a property priced at $350,000, lenders do not actually qualify you based on sale price. It has become common practice for the ease of agents and buyers to quote a sale price. But the actual process qualifies you for a monthly payment that includes Principal + Interest + Taxes + Insurance/HOA Dues.

This is VERY important because a Townhome with very high monthly dues can be more expensive, even though it has a lower price, than a Single Family attached townhome.

There are four townhomes on my desk. Let’s look at these as a real life, current example. Let’s calculate the monthly payment based on 20% down and an interest rate of 6.25%. 20% down is clearly not the norm for a first time homebuyer, but the way to finance the amount of loan on the 20% top portion, varies greatly from one individual to the next. So we are eliminating that factor to make the point that taxes and homeowner dues, can impact the price at which you can purchase, even though your “lender letter” says you qualify at $350,000.

1. Price $315,000 – Taxes $1,559 a year – Dues $310 a month (Condo Townhome)

2. Price $359,000 – Taxes $2,986 a year – Dues $282 a month (Condo Townhome)

3. Price $365,000 – Taxes $2,064 a year – Dues $239 a month (Condo Townhome)

4. Price $375,000 – Taxes $2,460 a year – Dues $75 a month (SFR Townhome)

1. Payment $1,550 + $130 taxes + $310 dues = Total Payment of $1,990

2. Payment of $,1765 + $250 taxes + 280 dues = Total Payment of $2,295

3. Payment of $1,800 + $170 taxes + $240 dues = Total Payment of $2,210

4. Payment of $1,850 + $205 taxes + $75 dues = Total Payment of $2,130

The homes in price order do not follow suit with regard to monthly payment order. The second lowest price has the highest monthly payment.

If the lender qualified you at a purchase price of $350,000 with 20% down at 6.25% using $200 as estimated dues and $200 as estimated taxes, that would translate into qualifying you at a payment of $2,125. Using the real life examples above, you would actually qualify better for the townhome priced at $375,000 than the one priced at $359,000, even though the lender said your max affordability was $350,000.

When you and your agent walk off with a lender letter at $350,000 and buy a townhome or condo at $350,000, but the lender used $200 a month for taxes and the real taxes are $300 a month, and the lender used $200 for monthly dues, but the real dues are $325…the sale can fail on financing issues. Many owners and agents get very angry when the financing fails, but it really falls upon the agent to know the estimate of taxes and dues used by the lender, so they can adjust on a case by case basis before submitting an offer.

Moral of the story is, when a lender hands you a letter saying “you qualify at a purchase price of $350,000”, make sure you know the interest rate, downpayment, taxes and ins./hoa dues the lender used to come up with that number. Then you can adjust, if you are liking a townhome with dues of $425 a month!

We all know that one complex in Bellevue that has high dues and more “Sale Fail Releases” than any other complex in the Seattle area. Now you know why that is happening.

Beginning the Home Buying Process – Part 1

[photopress:matt.jpg,thumb,alignright]My friend “Matt” is a first time buyer beginning his home search/buying process. That is not his picture, or his real name, of course. By giving him anonimity, I can take him through the steps here on RCG, so that others can follow along with us. Think of it like a board game. The “Matt” game. This will be a series that will run up until “Matt” closes escrow, and possibly beyond into his first month or two as a homeowner, and the surprises that may come up after he moves in.

Given a “blog” is a web log, it seems appropriate for a real estate blog to offer a log of real people in the home buying process. So lets log and blog the adventures of “Matt” and his home buying process. I’d love for someone to turn it into a board game at the same time. We can give it to potential homebuyers. Maybe Galen or Robbie. It could be like the game of “Life” and people who are thinking about buying a home, can buy the game and “play” before stepping out into unknown territory.

START: “I’m thinking to buy a home this fall. Likely an (x area) townhome just outside the (x) growth zone. Any advice on what I should be reading/doing to get up to speed for home-hunting?”

Now I am going to make this as transparent as I possibly can, without giving away the identity of “Matt” or the location of the home search, for obvious reasons.

STEP 1: The first step is the most extensive one, as it combines many factors. Home Price, which is determined by monthly payment affordability, cash needed to close, and commission to be paid to the Buyer’s Agent. This is all one big first step, as the Commission Negotiation affects the “cash to close” issue. So let’s do that first.

The target purchase price, as already pre-conceived by the word “townhome”, and specified area in the email, is $295,000 to $495,000. For the purpose of this Step, let’s assume that “Matt” has in mind to purchase something for around $375,000, that he is thinking his monthly payment is going to be about $2,200 and that he has saved $20,000 toward the home purchase. This may or may not be the case, but let’s start with that assumption for now.

The ball is in my court. Since I know that “Matt” works in the Technology Industry, and I believe he is a first time buyer, I have already picked up the phone and called Jennifer Chi at First Tech Credit Union. The number one issue is, do they still have that fabulous first time buyer program that I have not used for awhile, and if so, what is the current interest rate, downpayment requirement, and cost for that program. I am waiting for a call back. Left a message. My expectation is that they require little or no money down, have total lender costs of about $600, and the rate is about 5.75 %. Let’s see how close I am, if in fact that program is even still available.

Some people think the first step is for the buyer to go to “the lender”, without consulting the agent. Not so. As the agent I first want to determine who might be the “best” lender for this particular client, as I have already done. Of course the client can do whatever they want over there on the side, and check out all kinds of lenders and loan programs. But that does not relieve me of the responsibility to seek out the best and special programs, especially when I am already aware of their existince, and the likelihood that he probably qualifies for it.

Next on my “To Do” list is to Negotiate the Commission. Since I already know “Matt”, I don’t have to stick him in my car and interview him to determine the fee. Based on a sale price of $375,000, I would not normally negotiate the fee up front, as in that price range, I need to reserve monies for repairs and other issues. But since we will likely be looking at newer townhomes and he gets that “special friend” treatment, let’s establish a flat fee of $6,000, which should give him an extra $5,250.00 to spend, and still leave me enough to fix a few things and get him a nice housewarming gift 🙂

This is an important first step because if any sellers are offering less than 3%, it becomes “Matt’s problem” and not mine. Everyone makes such a huge big deal about Negotiating Buyer Agent Fees. Look. It is that simple. Matt didn’t even have to put in his $.02. LOL. Of course Matt has other options, but that is my offer and he can take it or leave it or negotiate it back at me. We’ll see what he does.

That’s all we can do until we get that call back from First Tech Credit Union, as we cannot determine the price of property to look for, until we know the monthly payment he can afford, which we cannot know until we know the interest rate and cash requirements for that particular loan, which is the best, if they have it and he can qualify for it. More to come…

New Construction Closing Dates

Further to this string of three posts, I think we need to talk about new construction closing dates. I received a call about ten days ago from a former client whose brother was pulling his hair out regarding a new construction purchase. He was TOLD that the home would be ready in July or August, or at least that is what he heard. All of a sudden he got a call telling him that closing was in 2 days.

It was a very large, well known builder of moderate priced homes in this area whose contract stated they had about 60 days to build it and then the buyer had 2 days after that to close it. The buyer’s first language was not English and relied more on what he was told and did not read the contract specifics. I jumped in and resolved the problem for him. All worked out and I won’t give the details of how I did that, as that is not the point of this post.

The point is that buyers of new construction must know that builders ALMOST ALWAYS have a condition in the contract that the buyer must close within X days after the home is completed. Unless the builder takes a contingency on the sale of your home AND a contingency on the fact that the sale CLOSES, you are required to close within 10 days or less usually of the time the home is completed. Builders often do not put close dates unless it is a spec house already built. They do not want to carry that house after it is completed, they want to close. Read your contract carefully with regard to when you will be required to close and do not rely on “proposed completion dates” or verbal representations by the sales people.

Usually there is NO PENALTY to the builder if the home is built later than expected and there is a per diem charge to the buyer if the buyer does not close within the X days of the completion date. Also the builder does not have to extend the close date, so paying the per diem may not even be a viable option for the buyer. If you cannot buy unless you sell, you need to be sure you understand the complexity of meeting these builder contract requirements. Matching a sale to a new construction purchase is extremely challenging and ridden with potential pitfalls.

Am I better off renting?

The last bubble discussion got me thinking – is it really so bad to rent? Well, here is a cold and calculated answer: The Motley Fool has a great calculator to determine whether you are better off renting or owning (financials only, you supply the emotional). Even the bubble hand-wringers amongst us might find some buy-friendly scenarios. Unfortunately, if owning is better for you, the calculator does not help you save up a downpayment.

They also have a how much house you can afford calculator, although it seems to have low-balled my estimate.


Renters Have Much to Gain by Pursuing Home Ownership

Buying a home vs. renting is a big decision that takes careful consideration, as most mortgage consultants will agree. But the rewards of home ownership are great. For many years, purchasing real estate has been considered an extremely profitable investment. It is an achievement that offers a sense of pride, financial stability and potential tax advantages.

Yes, there are certain responsibilities associated with owning a home. Landlords will often argue the benefits of renting, and for obvious reason. If you are renting, you’re helping them make their mortgage payment.

The numbers are staggering if you look at it this way. If you are paying $1,000 per month for an apartment, and you know your rent will increase 5% every year, then over the next five years you will pay your landlord $66,309. If you are currently renting a house, you may be paying much more than that each month. Either way, you gain no equity by shelling out this monthly housing expense and you certainly won’t benefit when the property value goes up!

However, if you were to purchase your own home or condominium, you would be well on your way toward building equity within that same five-year period. By choosing a fixed-rate loan program, you can have the comfort of knowing that your monthly mortgage payment will never go up. In fact, you would have the option of refinancing to a lower interest rate at some point in the future should interest rates drop, and this would cause your monthly mortgage commitment to go down.

In addition to building equity, there are tax advantages that come into play with home ownership. Depending on your tax bracket, owning a home is often less expensive than renting after taxes. Interest payments on a mortgage below $1 million are tax-deductible, and your mortgage consultant should help you evaluate the tax advantages of various loan scenarios, and share this information with your tax consultant to glean feedback on your behalf.

To find the loan program that is right for you, your mortgage consultant will need to evaluate your monthly household income, current assets and savings, as well as any monthly obligations you may have for credit card payments, car payments, child support, etc. These prequalification factors, along with the report of your credit score, will determine how much house you can afford and what interest rate you will pay for financing. It is also important to let your mortgage consultant know what your future goals are, because this will help narrow down which loan option is the best fit for your long-term needs.

There are many different types of loan programs available, including “low