Many buyers think that making an offer means you’ve bought a property. In fact, buyers are heavily protected through many steps of the process before you’ve actually exchanged money for title. For nervous buyers, this can help. Let me explain the steps:
- Negotiations: You likely won’t get your offer accepted in a seller’s market. When you’re reaching for a good deal, it’s likely that the seller, in a seller’s market, will come back with new terms. When the seller makes a counter offer, your offer is immediately void until you accept or offer new terms.
- Earnest Money Deposit (Days 1-3): Once your offer is accepted, you have three days to send in your earnest money deposit (EMD – usually 3% of the purchase price). Before the EMD is sent, it’s very easy to cancel if you have to. At this point, the seller likely hasn’t changed the property status on the MLS, so they will still solicit other offers. Once you send in the EMD, you settle into the escrow/investigation process.
- Physical Contingency (Days 1-17): Depending on negotiations, you have up to 17 days (in some cases) to investigate the physical state of the property. During this time, you can cancel if you don’t like anything about the property, and receive your EMD back. (Out of the 50 or so escrows I’ve brokered, only one company charged a $200 cancelation fee. That is not normal.) During this period, the seller delivers disclosures about the property and we receive the preliminary title report.
- Loan Contingency (Days 1-21): Depending on negotiations, you have up to 21 days (in some cases) to get approval on your loan. Given the massive amount of loans being processed in Southern California, this process usually takes 21 days or longer unless you have worked with a direct lender to get approved already. Often, the best we do is get a confident nod from the loan officer to go ahead and remove the loan contingency.
- Appraisal Contingency (Days 1-21): Depending on negotiations, you have up to 21 days (in some cases) to get an appraisal on the property for the price that you offered. If the appraisal comes up short, you can invoke the appraisal to cancel the deal.
- Removing Contingencies (Day 21): Once you’ve removed all of your contingencies, your EMD is promised to the seller. That said, if you can prove negligence on the seller’s part, an arbitrator may not grant the seller your EMD. During this time, you work with your loan officer for final approval. You still have not paid your down payment, and that is still protected, in most cases.
- Funding (Day 30): Once your loan is approved, you sign loan docs, and you transfer your down payment, you can still shout STOP and the escrow company cannot move forward with the deal. If the other party doesn’t agree to cancel and refund your money, you will likely go to arbitration to settle claims.
In conclusion, it is preferred to be confident in your offer. But if you’re nervous as a buyer, rest assured that signing your first offer doesn’t necessarily mean you’ve made your most important real estate decision. Usually, that comes when you remove contingencies.Read More
Los Angeles Magazine wrote a piece on drones which features Yours Truly. The funny thing is, you’d be surprised how many listing agents won’t shell out for drone footage. Of course, all of my listings get drone videos for free, if requested. Here is the paragraph in the article about real estate:
Comparatively inexpensive aerial footage is also changing the way real estate agents market properties, whether palatial estates in Beverly Hills, starter homes in Echo Park, or condos in downtown L.A. “It’s not like every buyer needs a drone video, but you don’t want to alienate anybody because they feel you weren’t selling them hard enough,” says Coldwell Banker realtor David Brundige. He’s so bullish on drones that he formed a company last year, DroneMyListing.com, with a former airline pilot.
Of course he didn’t quote the part of my interview where I describe the value of videos in marketing a property. The truth is, certain properties are served better from drone footage than others, depending on what that drone footage reveals. I’ve even used a drone to scout the roof of a property for a buyer. That could reveal good things or bad things. When you market a property, it’s always about what you want to highlight. Drones provide a special angle, and one that can pay off if used correctly.
Here’s the article. Here’s a video for my listing that sold for $130,000 over what top agents at my brokerage considered an ambitious listing price:
While my record as a listing agent is second to none with a 107% average sale above listing price, I spend 80% of my time as a buyer’s agent. Why? Because a) we’re in a seller’s market, b) buyers tend to be younger than sellers so that c) buyers search the Internet for good information and find my blog. Therefore, you can bet I’ve talked to enough first- and second-time investors to understand the weight that this decision has on their livelihoods, futures, and all the work they’ve put into getting where they are now: at the cusp of climbing America’s class structure.
That’s why I take it so personally when a listing agent or her seller messes around in order to earn an extra $5,000 or 0.5% on their purchase price. For the seller, it’s an extra $5k. For my buyer, an entire life’s savings or inheritance is at risk. My job as an agent both on the listing and buyer’s side always involves considering my client’s larger financial picture and advising according to life plans. You can’t discuss a real estate decision without thinking about a client’s daily life and goals. It’s not a stock or bond; it’s a living, physical, very expensive investment that takes care and attention, and affects tenants’ lives directly.
So why the rant? I’ve been an agent for multifamily and single family residential real estate for four years now. Speaking honestly, there aren’t many Princeton graduates who become realtors – if I skipped college altogether I could make as much money as I do now. Real estate came into my life because of the larger picture: retiring early from my real estate investments. Most residential realtors aren’t business-minded in that way and understand that a lot of pounding pavement and making neighborhood connections and self-marketing could earn them a six-figure salary. I’m not that kind of realtor, and I never intended to be. So when a long-time realtor invokes her 20 years of experience and justifies her backhanded and illegal move by claiming “her client’s interests,” I bite my tongue while in the background I call the guild lawyer and prepare for every chess move. (I can beat you at chess. Especially if that chess game involves nuances of Southern California’s standard purchase contract.) You may have been in practice for the past twenty years but the contract has changed 10 times in the last four.
The thing is, while I never worry when it comes to my client’s legal and leveraged position since I set them up right, for a buyer, any sign of less than reputable action by the seller’s side can set nerves aflame. Buyers have enough to worry about from the property condition to title to their loan. It’s an emotional time for most buyers, and it’s easy to forget that real estate is one of the oldest businesses whose barrier to entry involves no morals nor reputation nor license. While an agent requires a license, if she is acting on her “client’s interest” she could attempt anything and justify it as such.
When I’m selling a property, the reputation of the agent is one of the biggest qualifiers for an offer. When I’m buying, the due diligence period and the property must speak for itself. Though an agent’s checkers tactics don’t work in a game of chess, I’d rather not play games at all and work together in order to give our clients the best possible transaction experience.
On that note, I’d like to name several agents and colleagues with whom I’ve worked who have been stellar partners in this endeavor, while truly representing their clients’ best interests (in chronological order): Carlos Skubacz, Donna Rue, Francesca Zummo, Yolanda Gomez, Gavin Fleminger, Bill Rojas, Diane Herlofsky, Venus Martinez, and others.
In multifamily real estate, a good deal for a buyer usually comes in differences of $100,000 and a secure investment. For sellers, they celebrate if they get $5,000 more than the market suggested. I contest that, in my experience, you can have it all: a wonderful transaction where both sides win.Read More
Despite one’s personal political beliefs, a sharp turn in government is going to mean changes in the economy. You’ve already seen markets fall based on anxiety, so what does this mean in terms of real estate?
So far, since the election, more fair-priced apartment buildings have come on the market than I’ve seen since the beginning of the year. Could this be coincidence? On one hand, it would be hard for a reactionary seller to get a realtor to throw a property on the market in less than a week. However, that’s not to say they didn’t have a plan going into the election. Why would a seller want to sell now? Perhaps it’s the instability, fear, or they decide this its an apt time to move?
With a real estate mogul as president, one can assume that he might take care of his assets, tax-code-wise. Additionally, in a time of market volatility, having multifamily rental units is the most secure way to own real estate. House prices often surge and fall with the markets, but multifamily less so. When people foreclose their houses, they rent. This is the reality, for what it’s worth, from where I can see it.
Today I refinanced my triplex in Boyle Heights. I bought it with an FHA-backed loan, which is meant only for primary residences between 1-4 units. It’s quite difficult to use an FHA loan in most good areas of L.A. nowadays, as FHA loans have stricter closing requirements than traditional loans. However, I bought this Boyle Heights triplex in December, 2014 when it was a different world out there.
One interesting point about this refinance is that I actually refinanced out of primary residency and still saved money. When I bought the apartment building, mortgage insurance was higher and so were interest rates. So now I’m saving $264/month and I can legally move wherever I want. I recommend it to you investors who still have your FHA loans.
Dear readers – most of you know I’m quite the practical real estate agent. But corporate marketing compels me to let you know that I’m now a top 2% Coldwell Banker nationwide agent. I’d be much prouder, however, if I could properly calculate the total net worth I’ve helped increase for my clients by selling and buying. Being a top 2% agent doesn’t quite reflect that – most of us in the top 2% sell giant mansions. I wonder how many of us work primarily in income property, and within that number, how many have repeat clients, etc. I think you get my point.Read More
I couldn’t really ask for a better testimonial from a client. Thanks, Paul.
“What is increasing net worth, worth?”
Total Assets: $2.26M – Net Worth $1.122M – Total Liabilities $1.138M. (see image above)
Why was this meaningful? Three years ago I had a net worth that was negative – essentially my $45,000 of student loan debt.
In that same year, 2013, I decided to buy income properties to build wealth and have a good long-term plan for developing passive income. My realtor, David Brundige, helped me find an undervalued fourplex in Koreatown. I bought it and, through some strategy and work, rented all the units at 50% higher rents than the seller estimated was possible. Now I had a cash-flowing fourplex in Ktown, minutes from Silverlake, Echo Park and Downtown LA.
One keeps a solid, cash-flowing property for 30+ years, right? That was the plan according to the standard “buy and hold” strategy. But as I considered how much I’d already increased the value of the property in year one with higher than expected rents, and how long it would take me to save up enough for my next property, I began to seriously question whether to hold or to sell the property. I discussed my impatience with David and he told me if I sold the property through a 1031 exchange I could buy something bigger, or maybe two properties, to replace my original fourplex investment. Then I’d have increased my equity and assets considerably while shielding profit and cap gains from taxes.
Against the advice of the fairly vocal “buy and hold” crowd, and after owning it for only one year, I put my first fourplex up for sale in 2014. David helped me sell well-above list price and just as planned the significant profit and 1031 tax deferment allowed me to buy two more properties with the proceeds. And a year later, in 2015, using the same formula that we used to sell my first fourplex, I sold my second fourplex and bought two more properties, bringing me to a total of three properties.
This brings me to my post’s title: What is increasing net worth, worth? Is it worth selling a property that will likely appreciate over time? Is it worth the energy it takes to reposition your property and increase its value? Is it worth the risk that when selling and buying in a 1031 exchange you may not hit your targets? For me, the answer to all of these questions is an emphatic yes. David helped me go from a negative net worth in 2013 to a $1.122M net worth in three years through two 1031 exchanges. If you feel handcuffed by your current property’s income stream and you have the potential to become a successful income property investor, David can help you to develop that potential—and you’ll find yourself making much smarter real estate decisions than you imagined you could.Read More
According to this recent article that’s been going around my office, Zillow CEO Spencer Rascoff sold his Seattle home for 40% less than its Zestimate this year.
Why are real estate agents happy? Because one of the most common obstacles we face in pricing a house is the owner saying “but my Zestimate says [40% higher than the actual price].” Now there’s ironic proof that Zillow plays games with us.
Why does Zillow inflate prices? If you think your house is worth more, you’re more likely to sell with them. This is the fallacy: “If the Zillow agent thinks my house is worth X => he is more likely to get me X.” I know agents at other firms who are famous for this, as well. To them, if they win the listing, they don’t mind having their name outside your house for eight months while you reduce the listing price down to its actual price, eventually. It’s free marketing for them, and in the end, they still get the commission.
Why don’t I do that? My clients are smart, and finding actual comparable sales is part of my job. When the evidence is there in front of you, I don’t have to do any convincing. I don’t stress about Zillow or Redfin or any of that. I’m not a flashy agent so I know my clients come to me for knowhow and honest feedback.
Once in a while, I like to touch on the basics. But if this is obvious stuff, skip to the next post. Here are the questions I’ll be answering:
- What is a real estate loan?
- What loan programs are available today?
- How do I qualify?
- What are the hidden costs and benefits of a loan?
1. What is a real estate loan?
A real estate loan allows you to buy a property whose purchase price (or, value) is a lot more than you have in cash. Banks and mortgage companies will lend you large sums of money so that they earn loan origination fees, plus fees for selling your mortgage to a third party, who then collects interest on your loan.
2. What loan programs are available today (as of 4/21/2016)?
For a single family home as your primary residence, you can put anywhere between 3.5% to 25% cash down, or more. If you put down less than 10% of the purchase price, you will likely have to pay hefty mortgage insurance up to 1.75% of the total loan up front, plus 1% annually. These loans are usually 30-year fixed loan (your interest rate doesn’t change for the life of the loan) and government regulated.
For a duplex the same rules apply, except you’ll pay mortgage insurance if you put down less than 20%.
For 3-4 units as your primary residence, the same rules apply, except you’ll pay mortgage insurance if you put down less than 25%.
If any of the above are investment properties only and not primary residences, you have to put down 25% minimum.
For any residential income properties with 5 or more units, you must likely put down around 50% in order to qualify for a loan, based on today’s market. For five or more units you must get a “commercial loan” which is based on the gross annual rental income, and therefore varies by how much your property currently cash flows. These loans are usually amortized over 30 years, but the interest rate is fixed for a shorter time period (usually around 7 years).
3. For 1-4 units, you qualify partially based on the rent, but mostly based on your average annual income over the past two years (the rent counts toward your income). Banks use a standard formula to determine if your annual income is enough to secure the loan, despite these loans usually being non-recourse.
By contrast, for 5 or more units, your personal income is not a factor because the loan is based on gross annual rent from the subject property. This makes these properties better for investors who can’t show regular income on their tax returns.
4. The hidden cost of your loan is obvious: all the interest and mortgage insurance you pay during the life of your loan adds up.
The hidden benefit of your loan is twofold: if your rental income is covering your mortgage and expenses, that 75% LTV (loan to value) that the bank gave you is turning into money in your pocket over the course of the loan. In other words, if your interest rate is less than the your annual return on your loan, you are making money off the loan.
Make sense? If not, feel free to ask any questions you may have at: firstname.lastname@example.orgRead More
Many clients who read this blog shop for investment properties with the understanding that they will need a loan. The idea of a loan is pretty simple (for a brush up read here), but what you may not know is the actual implications on the real estate transaction, and why on earth there is so much power granted to cash buyers.
The main issues lie in
(2) hassle, and
(3) the value of going through only one escrow.
Off the bat, a cash transaction requires no more than a 21-day escrow, whereas a loan requires between 30-45 days or more. No deal is done until escrow is closed, so those extra weeks cause not only expediency problems, but psychological ones, as well. That’s 2-3 extra weeks that everyone has to worry about closing the deal.
The hassle is real but manageable. Here are the extra steps for closing a loan deal from the Seller’s point of view:
a) pre-approval process to determine the buyer’s ability to close
b) initial appraisal of property by bank
c) loan and appraisal contingency periods
d) fixing physical issues that the bank finds objectionable (this could be anything from exposed studs to unstrapped water heaters to chipped paint — yes, chipped paint)
e) re-inspection by appraiser to confirm those fixes are completed
f) field review by second appraiser to confirm value (this is a new one)
For example, yesterday and today I went to two different properties my clients have in escrow and personally fixed two last-minute physical issues that the Sellers weren’t willing to fix and for which my Buyers couldn’t get a handyman in time. That wouldn’t happen with a cash deal.
There are only two reasons why a loan is more likely to fall out of escrow than a cash deal. The first is that the Buyer may not qualify for the loan. The second is that the property does not qualify for the loan if those physical issues above cannot be fixed. If a deal falls out of escrow, the property may lose value because (a) its market momentum slows, (b) it’s tinged with the question of “what’s wrong with it,” or (c) the backup buyer finds another deal in the meantime.
So what is the real consequence of needing a loan? If there are enough buyers interested in the property, one or two of them are likely to be cash and they have an advantage if your offers come in around $10,000 of each other. That’s why, as a buyer using a loan, you have to be slightly more creative than cash buyers in the types of properties you buy, the terms you elect on your deal, and our approach with the listing agent.
All that said, 83% of my closed deals have used one kind of loan or another. Don’t count yourself out; just know what you’re up against.Read More