Thursday, November 6, 2008

BENEFITS OF RESIDENTIAL LEASE OPTIONS

Motivations to enter into lease option agreements (also called lease-to-own) are a reaction to today's declining real estate market. These motivations are not typical of a "normal" real estate market in which properties are appreciating at a reasonable rate.

SELLERS

Current sellers are motivated to enter into options because they can't sell their house any other way. Why?
  • Too much inventory
  • Too few buyers
  • Lingering stubbornness by sellers who have yet to "re-calibrate" their notions of value and drop their prices far enough to meet willing and able buyers.
  • Difficulty in obtaining financing.

Sellers should also consider that, in a market predicted to decline for the foreseeable future, granting an option right now allows them to lock the price in today’s market value.
Here’s a rough example: Seller is asking $500,000 which is reasonable for the area, but the damn house still hasn’t sold. Seller grants a one year option at that price. Home prices continue to decline 16% (last year’s decline for Nevada County, California). After the one year period, the property is worth $420,000, but the seller still gets $500,000. Capiche? Yeah, yeah, the figures are rough and don’t account for this and that, but you get the idea.

BUYERS

Current buyers are motivated to enter into options because it is the only way they can manage to own a home.

  • Their credit is crappy, but fixable during the option period.
  • They don’t have enough cash for down payment and closing costs, but will be able to get it or save it during the option period.
  • They have assets that are temporarily tied up somewhere else.

Buyers also need to know that the value of the property will (or may) decline during the option period. This depreciation can have serious implications with financing the buyers’ purchase loan when it comes time to execute the option.


BACK IN THE DAY


In an appreciating real estate market, the whole scenario is flipped on its head. Now it is the buyers who are most eager for options because they can lock in today’s price, sit back and watch the value go up up up during the option period.

What would motivate sellers to enter into options in this kind of market?

  • A sales price above current market value
  • A handsome option fee
  • Both

In the next blog, I’ll discuss the kinds of contracts and documents you need to set up lease-options.

Wednesday, October 29, 2008

REAL ESTATE OPTION-TO-OWN

Over the next few weeks I am going to blog on the topic of Real Estate Options, also called “lease to own” and “lease options.” The blogs will address several questions:

  • Why option? Motivations and benefits for buyers and sellers.
  • How do you do it? The documents required to establish an option.
  • Negotiations? The interrelated aspects of price, term, option fee, rent, portion of fee and rent applied to down payment, all of which are subject to negotiation.
  • Closing costs? Title, escrow, MOU, junk fees, inspections, and real estate agent commissions are among the costs paid by both buyer and seller.
  • Lender? How and when the lender gets into the picture.
  • What are the risks? For both buyer and seller, there are plenty of ways for things to go wrong.

The context for these discussions will be California residential properties and the documents used will be selected from the libraries of the California Association of Realtors (CAR).

Please feel free to contribute with your own insights and stories.

Wednesday, October 22, 2008

I Hate PG&E

A couple of weeks ago I wrote a blog titled "Hooking Up Electrical Service in Rural Counties." In the blog I was quite complimentary to the folks at the PG&E application desk. Two respondents quickly fired off dissenting opinions. Both said words to the effect: "I hate PG&E." Here is my summary of their points:
  • PG&E is a profit-oriented business, and a monopoly, and its goal is to squeeze every last cent it can from its customers.
  • PG&E tells you one thing in the office and another thing out in the field.
  • PG&E manipulates customers toward the most costly solutions for hooking up service.
  • PG&E withholds information about available discounts, shared service options, and other cost saving strategies.
  • PG&E's attittude is "if the customers are too stupid to know about a cheaper way to do things, then they deserve to get a higher bill."


You can see that there are at least two very unhappy PG&E customers.

Tuesday, October 7, 2008

SEPTIC SYSTEM TEST AND DESIGN IN NEVADA COUNTY, CALIFORNIA

How much will it cost to put in a septic system on a parcel of raw land?


The rough estimates below for Percolation and Mantle Testing (aka Perc and Mantle) were compiled in consultation with three different engineers with offices in Nevada County. The figures represent average costs for testing and designing septic systems. There are three initial expenses:

$500 Nevada County Testing Fee
$900 Test and Report from the engineer
$400 Backhoe rental fee

$1800 Total

Then there is the design fee that will depend upon the test results:

$600 Standard leach field design
$1500 Complex design (and costs in between for other systems)

So adding initial costs and design costs, for your design you are looking at:

$2400 - $3300

Now you will have to take the design to the County building department for approval and to pay your installation permit and inspection fees. This cost will depend upon the size and complexity of the system, but you should figure on:

$500 - $1100

Finally, you will need to hire a licensed contractor to install the system. How much will that cost?

$7000 to $10000 for the simplest standard system
up to $40,000 for an elaborate, engineered, computer monitored system for 4-6 bedrooms

So, the least expensive system you can test for and install on your raw land is about . . .

$10,000

If you have a disastrous Perc and Mantle test that requires a pre-treatment pod system, and you are planning on 4-6 bedrooms, your test, design, permit, and installation costs could very well exceed:

$45,000 (gulp!)

And here comes the really cool part . . . you will be paying additional annual fees for maintenance and monitoring of your space-age poop disposal system!

Monday, September 22, 2008

DEVELOPING RAW LAND IN CALIFORNIA

There are two types of raw land: usable and un-usable. Un-usable land is worthless except for defensive purposes; to provide a buffer between usable land and the rest of the world. By the way, in most states you still pay taxes on un-usable land, so owning unusable land is worse than worthless.

What makes a piece of raw land usable? You will need:

  • access to proven, reliable, potable water in adequate amounts
  • septic or sewer systems that do not cost a bloody fortune
  • a location within your driving comfort zone
  • easy road and driveway access approved by the county and the fire department
  • affordable electric hookup (bringing power just a quarter mile can cost you more than $25,000!)
  • a good building site that will not drive you insane or into bankruptcy because of adverse topography or geology.

Bringing a parcel of raw land up to the point of usability can easily set you back

  • $12,000 for a 300 foot well
  • $12,000 for a modest pressure dose septic system
  • $15,000 for a driveway
  • $25,000 for electric service
  • $10,000 for grading and site prep
  • and don’t forget to set aside several thousand dollars for county fees just to install these features.

Add that up: with mid-priced necessities like those just itemized, developing the parcel will cost you about $75,000 . . . maybe a bit less, but possibly a lot more. What if the 300 foot well comes up dry as a bone? What if the fire department decides that the approach to your preferred home site unacceptable unless you add two switchbacks, a turn around at the top and, oh yes, pave the whole thing!

We haven’t even touched on the aesthetic aspects of the property. Does it have a view, good trees, acceptable sun exposure, a bubbling little creek, quietude, the chirping of birds, rock outcroppings, whatever it is that floats your boat? How much are those subjective and emotional elements worth?

I’m going to give you three examples of developing raw land.

1. The first scenario (I hear this notion all the time) is based on buying a cheap (this is a relative term, ha ha) piece of land, trucking in a $100,000 manufactured or modular home, and voila, little cabin in the woods! You already know that the development of the raw land may cost as much as the manufactured house itself. Add this up:

  • five acres with a happy little view for $150,000
  • $100,000 for nice manufactured home
  • at least $75,000 for site development
  • a two car attached to your home for about $20,000

Wait a cotton picking minute! That’s $345,000 minimum for a manufactured home not counting landscaping, irrigation, and, of course, the horse.

2. Here’s a second scenario. Buy a hilltop parcel with a view of the snow-capped Sierras for $250,000 and build a 3000 square foot dream house. Sell it. For all your hard work and risk, make a modest profit of $200,000. Let’s add this up:

  • the house will cost about $450,000 to build (cheap at $150 per square foot)
  • land and development at $245,000

Your project comes in at $695,000. For simplicity, let’s estimate miscellaneous annoyances such as taxes, real estate commissions, closing, loan, and holding costs at $100,000. To make your $200,000 profit you will need to sell for at least $1,000,000. Now look around at all the other houses that have sold in a two mile radius. How many of those have sold for more a million dollars. If you find a significant number of million dollar sales? Go for it. No million dollar sales? You are upside down, house poor, up the you-know-what creek without a paddle.

3. Third development idea. Build a 4000 square foot dream house on a $300,000 completely finished parcel surrounded by new homes already selling for $1,500,000 and more. Sell it. Make money.

Now add up your base costs:

  • construction at $600,000
  • land at $300,000
  • miscellaneous at $100,000

You are into the project for $1,000,000 (gulp!), but the projected profit is as much as $500,000! Oh baby, that is a lot of profit! Do you think Uncle Sam is going to want some? See your tax guy before you even get started.

I give you these development scenari to make two important points. First, do not buy undeveloped land unless you have a feasible business plan for development. Even in historically reliable California real estate, you can get hurt buying land without:

  • clear goals
  • a logical time frame
  • a workable plan
  • enough capital to accomplish that plan

My second point may sound self-serving, but I mean it sincerely: do not buy land without the services of a knowledgeable real estate professional with experience and expertise in land purchase. Give me a call if you want to chat about buying land or if I can help you with any of your real estate needs.

Call Bob Jenkins
530-906-1023

Sunday, September 21, 2008

BAD NEWS, GOOD NEWS FOR OCTOBER REAL ESTATE


Bad News

Home prices will continue to decline through the end of the year and far into 2009.

Home sales will continue to decline because of buyer anxiety over the economy.

Home sales decline even more during the fall and winter.

Bank owned homes (foreclosures, short sales, REO’s) account for almost half of the current sales in California and are dragging prices down.

Mortgages are much harder to get as credit tightens among worried lenders.

Appraisals are coming in very low.

Lots of competition. Many homes for sale.


Good News

Interest rates (when you can get them) are extremely favorable for buyers.

Smart buyers, especially investors, know this is a great time to buy. It is a buyer’s market.

First time buyers, young buyers are able to get into the lower priced homes through special assistance programs.

The lowest priced homes are selling pretty well.

Real estate agents far prefer to show seller-owned homes (rather than bank-owned).

Saturday, September 20, 2008

WELL DRILLING IN RURAL CALIFORNIA

Professional well drillers in Nevada County, California charge $18 to $21 per foot to drill with a minimum drill of 100 feet. The drilling fee includes 20 feet of casing into bedrock and a seal and cap.



100 foot well = $1800 to $2100
200 foot well = $3600 to $4200
300 foot well = $5400 to $6300
400 foot well = $7200 to $8400
500 foot well = $9000 to $10,500

fees & setup = $750 (approximate)


pump and system = $2200 (approximate and includes boom truck)
100 feet trenching = $ 550 (100 feet of trenching for power
source and pipe at $5.50 per foot)

300 foot well with a 100 foot trench = $8,900-$9,200

Variables that can increase price:


  • steel casing or additional liners if geology is unstable


  • difficult access to the drilling site that requires heavy equipment to cut a road or level a drill pad
Can deepening an existing well increase the yield? Possibly. The best rule of thumb: if your well is 200 feet and producing 2gpm and the other wells near you are (1) deeper and (2) producing more than yours, chances are good that deepening your well will increase your yield.












If you need advice in developing land or your dream home in rural California, call Bob at 530-906-1023.









HOOKING UP ELECTRICITY IN RURAL NEVADA COUNTY, CALIFORNIA

When estimating development costs for raw land in Nevada County, California, one of the most difficult numbers to generate is the cost of bringing PG&E electric power to the home site. These notes may prove helpful in helping you create your own cost estimate in the least amount of time and with the least hassle.

First, please consider this important disclaimer. As a Realtor I am not authorized or qualified to quote development costs for electric power. You must seek out actual price quotes from PG&E estimators or from licensed electrical contractors. What I am describing in these notes is my personal experience in estimating these costs.

Now, allow me to begin by dispelling a couple of myths:

  • Myth #1—PG&E is unpleasant and difficult to deal with. In my effort to address this mythic misconception, I went to the PG&E New Construction office in Grass Valley, California posing as a naive Nevada County land owner. I asked some good questions, and I asked some really stupid questions. Two PG&E representatives worked with me, answering all of my questions, giving me the information I needed, even offering to help me fill out the application for new service. Both representatives were friendly, patient, and generous with their time. No complaints whatsoever. Clients I have sent to the New Construction office report the same pleasant interaction.
  • Myth #2—You can’t get PG&E to give you any dollar amounts or specific details unless you pay fees. This myth is untrue for two reasons. First, there is no initial application fee. None. Zero. Zip. Second, they will give you free handouts providing details, specifications, drawings, and generic costs for service.

Here’s what you need to know to get started:


Only owners can apply for service, not real estate agents, not prospective buyers.

Your most important initial decision is whether to bring in the service through overhead wires or underground trench. (By the way, you can change your mind.) Several elements will influence your decision:

  • Aesthetics

  • Local regulations (Homeowners Association rules for instance)

  • The distance from the distribution point (usually a power pole) to the home site

  • The geology and topography of the parcel

  • Costs (trench service is more expensive than overhead service)


Before applying for electric service you must obtain two copies of the following documents and make two decisions about rates and size of electric service:

  • Parcel map or survey map (your real estate agent can provide this) with all easements, property lines, rights-of-way.
  • Building permit from the County or Title 24 Utility Report.
  • Detailed site plan with existing and proposed locations of electric meters, roads, driveways, sidewalks, fire hydrants, building elevations, proposed future improvements.
  • County approved plot plan with assigned address


Decide which rate options you want. You can investigate this on PGE.com.


Decide on the size of main switch panel you need. This size is expressed in amps. Talk with your electrical contractor about sizing the electric service for the kind of home, size of home, equipment you will be operating (air conditioning, well pumps, pools and spas, as well as your usual electric needs for washing, cooking, lighting.)

After you submit your application and all the supporting documents and decisions, you need to schedule an appointment at the site with a PG&E estimator/engineer. If you need it soon, be firm with the New Construction staff about getting a timely and specific appointment. Meet the engineer at the site and work toward an agreement on how to best get service. Some items, costs, and solutions may be flexible or negotiable. There may be more than one way to skin a cat. What if you could trench 200 feet across the back corner of your neighbor’s parcel instead of extending a new 12,000 volt service a half mile down the county road? That sort of thing.

Most rural parcels will need their own transformer. (That’s the gray beer keg up on the top of the electric pole.) Cost? Last year, a transformer costs $2000. Put it in your budget.

After you get your bid from the PG&E estimator/engineer, you can choose PG&E or a qualified contractor to design and construct the service trench (if appropriate) and service facilities.

The cost of power poles is included in the generic price per foot for overhead service.

Not included in the generic price per foot are easements, right-of-ways, tree removal/trimming, inspection fees, trenching, and substructures (splice boxes or drain boxes, for instance)

“Out in the county” most contractors get the temporary electric service to build the home by borrowing it from a neighbor or using a generator. In town or suburban neighborhoods, projects may get electric service from an existing pole through a wire dropped directly to a panel on the back of a portable toilet. The portable must be pretty close to the pole and also pretty close to the building site for this solution to be feasible. You don’t see this often out in the “sticks.”

If you are fortunate enough to be able to hook up to natural gas, the gas line can go in the same trench as the electric power wire. What else can go in the same trench? Phone and cable TV. What can not go in the electric power trench? Water, sewer, propane, storm drain, private utilities (alarms, sprinklers, gate controllers, etc.)

By the way, you are not going to find a lot of natural gas service out here in the boonies, except, maybe over at Ira’s pig farm. Pigs? Natural gas? Never mind.

There is a big difference between an extension and a drop. Typically, extensions are much more expensive than drops. If the nearest boundary of your property is, for example, a half mile from the nearest power pole, you are going to pay to have the electric power extended to your property, a distance of about 2640 feet! How much will this cost you? Well, the generic cost for 12,000 volt extensions is $20 per foot for overhead service (2640 feet X $20/foot) which gets your estimate off to a roaring base cost of $52,800! Add to that, transformers, fees, and PG&E only knows what else. Yikes!

So, you have extended the electric power to the edge of the property. Now, you need an electric drop from the pole to your actual building site. How much will it cost for a drop from the pole at the edge of your parcel to bring 120/240 volt electric power to your building site 250 feet away?

For overhead drop service at a generic cost of $10 per foot plus a transformer, about $5000. For underground service through a trench at a generic cost of $12.50 per foot plus a transformer, about $5600 plus the additional costs of digging the trench, “no-rock” backfill, conduit, pull tape, fittings, and substructures (if necessary). Neither estimate includes the price of the service panel. Neither estimate includes any tree trimming, easement, or right-away costs.

If you need advice about developing your dream house in the country, please call Bob at 530-906-1023.

STAGING YOUR HOME FOR A QUICK SALE

The benefits of home staging are statistically clear. Staged homes sell faster and for more money than their un-staged competition. Home Staging results in quicker sales and fewer price reductions than homes that languish on the market.

First impressions are very important. Buyers often make their decision in the first 60 seconds. Take a good look at your front door. Does it need painting? Does the hardware need replacing? Is the door mat new and clean? Have you put away all the gee-gaws? Does your entryway welcome a buyer to their new home.

Buyers will drive by without stopping if the home does not “invite” them to come in. Seasonal flowers, well-pruned permanent shrubs and trees, a perfectly mowed lawn are very attractive to drive-by customers. What can we do to improve the curb appeal of your home? Is this the time to hire a short-term gardener?

Buyers relax in a house that is neat and clean.

The home you live in and love is not the home you want to sell. You want to sell a home for the buyers to live in. Too many of your own personal decorations interfere with the buyers’ attempt to mentally decorate the home with their own belongings. Buyers need to see themselves, not you, in the home.

A home that is uncluttered and spare is easier to sell. Kitchen counter tops, especially, should be as bare as possible. Remove those magnets, photos and other stuff from the refrigerator.

The fewer the objects, the bigger the room. Less is more. When in doubt, pack it away. You’re going to be packing it anyway for your upcoming move, aren’t you? So, do it now, before you start showing your house.

Windows! Be sure they are sparkling clean, drapes are drawn, and blinds are open to let in the light and show off your views.

Light! When you know there is a showing, turn on every light in the house.

Smells! Many people are very sensitive to smells; really turned on by good smells, really turned off by bad smells. The absolutely worst smell? Pet odor! Many buyers won’t even come in the door if they smell cat urine or “fragrance de old dog.”

Towels! Bring out the good set, the matching set that compliments the rest of the bathroom and kitchen d├ęcor.

Closets! Pack away the off-season clothing. Make the closets as empty and organized as possible. Get stuff off the floor. You don’t need all that stuff anyway, do you? Crowded, messy closets mean one thing to buyers: not enough storage!

We will be happy to advise you on staging your home for a quick sale.

Call Bob at 530-906-1023 or CJ at 530-906-4715

Thursday, September 18, 2008

CREDIT DAMAGE WITH SHORT SALES AND FORECLOSURES

Foreclosures and short sales are forms of “settled debt” as opposed to “paid debt.” Both are are highly damaging to your credit profile.

From Vitek, one of the country’s biggest lenders:

A foreclosure will result in a credit report deduction of 200 to 300 points.
A short sale will result in a credit report deduction of 200 to 300 points.

Fair Isaac's proprietary formulae (some would prefer the term "inscrutable" formulae) also indicate roughly equal credit damage.

What’s the difference?

The difference is like being hit by a car going 100 mph or being hit by a truck going 100 mph. Not much. You are hurt either way.

My realtor promises that a short sale will result in less credit damage than a foreclosure.

I have read numerous, and differing, opinions on this debate, and the best that I can say is that there may be a slight advantage to the borrower who stays "at the table" and works with the lender toward a short sale. It depends on several variables, among them are:

  • The Borrower--how many late payments on the mortgage before the settled debt, the nature of other elements in the owner's credit profile, the credit score before the settlement, and the credit history after the settlement may all affect the credit score.
  • The Lender--there are great differences between lenders and how they handle bad loans.
  • The Loss--how big a hit is the lender taking on the loss?
  • The Agreement--sometimes a short sale agreement between Owner and Lender may provide a measure of protection for the Borrower in exchange for cooperation in the short sale.
  • The State in which the property is located. California, for example, provides for "non-judicial" foreclosures in most cases. This has significant ramifications for deficiency "judgements." You can't have a deficiency judgement in a non judicial procedure.

Be wary of any realtor who promises to reduce your credit damage by listing your property as a short sale. In a short sale the realtor will still get a commission. You, however, will get nothing (nada, zilch, zero) except credit damage.

How long after a short sale or foreclosure can I obtain another mortgage?

Not as long as you probably think. Some sources state 3 years, some sources state 4 years, some sources state 18 months! Fannie Mae (remember her?) stated 2 years for a hardship based short sale and 5 or more years for foreclosures. You will not, however, get very good interest rates for a long time.

If I sell "short" can I get the lender to desist from sending a damaging credit report to the credit bureaus?

Highly unlikely. I have heard it through the "Blogvine" of instances where damaging credit reports have been avoided through some "agreement" with certain lenders, but I have never personally seen it happen. The best answer to this question is . . . don't count on it.

When will the credit damage begin?

It will begin as soon as you stop making your mortgage payments on time ("lates") or start missing mortgage payments altogether. This damage could begin months before the lender actually files a Notice of Default (NOD), months before a short sale, months before your home is auctioned off and foreclosed.

Besides getting slammed by a low credit scores, are there other credit consequences resulting from a "settled" mortgage debt?

Yes, unfortunately. You can expect the interest rates and penalties on all of your credit cards to absolutely skyrocket, then skyrocket again. This is utter disaster if you have large balances on your cards. And, by the way, where are you going to live?

What should I do if there is no way to avoid short sale or foreclosure?

If you have exhausted the possibilities of working out a deal with the lender that lets you stay in your home (this is another topic all by itself), then I offer this advice:

  • Pay off your credit card balances as soon as possible and get credit counseling. If you have trouble paying off your credit card bills every month, that in itself may be a major contributor to your financial problems. Consider destroying all or most of your cards. At least try to use them sparingly--and pay them completely off every month!
  • Find a new place to live before your credit scores go into all the way into the toilet.
  • Stop beating yourself up. You are in good company. Whose homes have been foreclosed lately? Doctors, bankers, lawyers, professors, business executives, real estate brokers, M.C. Hammer,Ed McMahon, and the family that lives right down your street.

What are the tax implications of a short sale or foreclosure?

This question is another topic unto itself. I cannot stress strongly enough that your personal situation must be scrutinized by a competent tax CPA, attorney, or other tax expert in regards to your specific situation. Real estate agents are not qualified to give tax advice.

Should I declare bankruptcy?

There is more than one kind of bankruptcy. It is a procedure with numerous complications and profound consequences, and, by the way, bankrupcies are not cheap! The decision to file for bankruptcy must be discussed with an attorney with expertise in this area before you make any moves. It is my understanding that filing for bankruptcy freezes or stalls foreclosure proceedings, but you may be trading that 100 mph collision with a truck for getting struck by lightning.