Tuesday, March 24, 2009

The Poop, the Poop, and Nothing but the Poop

Questions and Answers About Septic Systems

As a realtor in rural Nevada County, California I have long pondered the deep mysteries of my client’s septic tanks. For both buyers and sellers, I have attended every one of their septic system pump-outs and inspections. I’m not an expert, but over the years I have become familiar with many of the oft-asked client questions, the familiar septic system problems, and the normal cures for those problems.

Why does the pump-out and inspection cost so much? Yeah, it does seem like a lot for an hour’s work from one guy. Our local companies charge between $500 and $900 for the basic service—and a lot more if they have to locate and dig up a deeply buried tank. The most costly element is the disposal of the stuff once it gets into the truck. In our area it has to be transported an hour away, then off-loaded at a surprisingly steep fee: $.20 per gallon X

1500 gallons = $300.

Follow this. At 8:00 am the service tech fires up the rig, drives as much as an hour to the residence, spends an hour (or more) pumping, hosing out the tank, inspecting the entire system including the leach field, and cleaning up. Then he drives an hour to the only legal dumping site in the area, off loads, and pays the $300 fee. He drives an hour back to company headquarters, writes and files his report. It is now noon or later. The client only sees the one hour on site, but four hours of technician time, gas for three hours on the road for that heavy truck, and steep disposal fees most accurately describe what really happens.

How can you save money? Locate your tank and dig up the two lid covers that give access to the wonders below. If you don’t know where your tank and leach field are, go to your county office. Except for very old systems, the building department will have a map (often just a sketch) that will give the location (more or less). If the tank is buried just below the surface, you can probe for it with a sharp metal spike. Hire the strapping lad who lives next door to dig up the lids before the septic tech arrives. If you leave it to the septic company, they will probably send two men and charge you $150-$200 an hour for their labor. If they can’t locate the tank by map or probe, they will drop an electronic bug in one of the toilets and trace it to the tank. Cost for the bug and trace? $125 smackeroos in addition to the hourly charge.

What awful and expensive problems can be revealed during the inspection? Problems can occur in the tank itself, the solid pipes and fittings that enter and exit the tank, and the leach field.

Most tanks are concrete and last a long, long time. They will, however, eventually deteriorate and you will begin to see rocks and broken concrete on the bottom of the chambers. The ground moves, expands, contracts, freezes and thaws. Heavy tanks filled with hundreds of gallons of wastes begin to settle and shift. Cracks develop. You need a new tank. Crap. It will cost several thousand dollars to dig up and dispose of the old tank, install and connect the new tank. Oh yes, and the good folks down at county building department will want to wet their beak in the operation. Permit fees, inspection fees and the like.

Most tanks are located near the house, so the solid drain pipe from the house to the tank is not usually a problem unless it has been damaged by construction, landscaping, or some other activity subsequent to the initial installation. Obstructions can usually be routed out by a plumber.

Invasive roots can be a serious problem anywhere in the system, but particularly vulnerable are the inlet and outlet openings in the (usually) concrete tank where the solid pipes enter and exit. There is a precise, but more difficult method for installing these pipes and fittings. This method tightly seals the openings and discourages roots. On the other hand, there is a fast and easy method of installing the pipes into the tank that eagerly invites roots to the poop party going on inside and, yippee, out in the leach field itself. If a sleazy method of installation around the openings is the problem, it can be corrected by digging up and retro-fitting the pipe and fittings. It ain’t cheap.

What can you do about the roots invading your septic system? You can re-locate part or all of your septic system at a cost too horrible to contemplate. You can eliminate the source of the roots by cutting down the trees. Ugh. You can hold the roots at bay through eliminating the existing root invaders, putting your system into top-flight condition, and then keeping tabs on the situation through regular maintenance.

How do you eliminate the existing roots? You can start by retro-fitting the pipes and fittings at the tank inlets and outlets. For short distances of solid pipe, mechanical roto-rooting the invaders will probably work. If the roots are out in the leach field, you can try chemical cleaning with hydrogen peroxide.

Hydrogen peroxide? Like in your medicine cabinet? No. The ridiculous stuff used by the septic companies is 35% pure distilled terrifying madness. It will literally scare the shit out of your leach field. Drop some on the ground and the ground will sizzle. I am NOT making this up. This hydrogen peroxide solution is so potent that only licensed technicians can buy it, transport it, and use it. And it ain’t cheap, either. Cost to treat a standard leach field with hydrogen peroxide. Start at $1200 for 25 gallons and labor and go up.

Does the hydrogen peroxide treatment work? The local companies claim a 98% success rate. It cleans out roots, sludge, everything organic, and then . . . presto . . . it dissolves away without harming your environment. Cool. But the questions remain: what caused the problem to begin with, and will the problem recur? If the problem is invasive roots, yes, they will recover and slide right back in. If the problem is an inadequate, damaged, poorly designed, or poorly installed leach field, yes, it is still a problem. If the problem is septic abuse by the human residents, they can mend their evil ways. Septic abuse is a topic for another blog. I know you just can’t wait for that one.

What do you do if your leach field has completely failed? Sludge is flowing back from the leach field into the septic tank. Hydrogen peroxide and roto-rooting will not clear the lines. Raw sewage is bubbling up to the surface. Eeuuw. Gross. You are hosed. What can you do? Septic permits in our area now require that the septic system engineer designate an alternate leach field called a “repair field.” If the primary field fails, put a new set of leach lines in the repair field, pay the man thousands of dollars for the installation, and get on with your life. If you do not have an acceptable repair area? Oh my. That is a big (and expensive) topic for another article. You don’t want to read it. It will break your heart.

Sunday, March 15, 2009

Costs of Lease Options

How Much Does It Cost Buyers to Obtain a Lease/Option (Option to Purchase)?
How Much Will Sellers Make If They Grant a Lease/Option?

Earlier blog posts have addressed the issues of buyer and seller motivations for entering into options. Please refer to those discussions when necessary, but let’s make these assumptions:

  • The property has been on the market for over a year. The sellers are highly motivated.
  • The prospective buyers have poor (but repairable) credit and little cash. These buyers are also highly motivated.

I’m going to set up a scenario which presumes these transaction elements:

  • The property is in California.
  • Asking price is $379,000.
  • Home Owners Association dues of $2000 annually.
  • Comparable rentals are $1500 per month.
  • Both sides are represented by licensed real estate agents.

Fundamental to any option calculation is the variable of time. Generally, longer option periods are more expensive and incur more risks, especially for sellers. So, what is a “normal” option period? I don’t have that answer. Most of the options I see are one year or two year options, but the period is negotiable. For this exercise:

  • The option period proposed by the buyer is one year.

Central to the negotiation is the percentage of the option fee and the percentage of monthly rent that the sellers will credit to the purchase price, usually as a credit toward the down payment. These percentages can range from all (100%) to none (0%), and are not necessarily keyed to each other. For instance, the sellers may credit 50% of the monthly rent to the purchase price, but none of the option fee. Or vice versa. This is a key negotiation point in the transaction. One final caution:

  • The proposed lender must allow seller credits to apply to the down payment. Some lenders will; some won’t.

The option proposal must include a statement from a lender. This usually comes in the form of a feasibility letter in which the key strategy is to cover the lender’s ass, and the key terminology is the word “if.” Such and such a loan is possible in one year if the buyers repair their credit, if the house appraises at the purchase price, if the loan interests rates are still in such and such range, if we’re still in business, if an asteroid doesn’t destroy the earth. This letter will never be a commitment or a pre-qualification. (If the buyers were pre-qualified, why didn’t they just buy the property?)

  • The proposal includes a one-year feasibility letter from a lender.

OK, with all that said, the buyers propose this structure:

  • Full price ($379,000)

  • 20% down payment at close of escrow ($75,800)

  • Option fee of $10,000 of which $6200 will be applied to down payment

  • Monthly rent of $1800 of which $800 will be applied to down payment ($9,600).

  • Closing costs to be divided as customary.

If the sellers (and lender) accept these terms, the sellers will eventually credit $15,800 to the buyers' down payment ($6200 + $9600). This will require that the buyers come up with $60,000 additional down payment, plus some closing costs, in one year. Can they really do that? Really? In my opinion this question is where the rubber meets the road.

Now we get down to it. How much cash-in-hand do the buyers need to enter this option as set up in the above scenario?

$10,000 Option fee
$ 1,800 First month rent
$ 1,800 Security deposit (remember, this is a lease for one year)
$ 2,000 Pre-pay one year of Home Owner’s Association dues (hmmm?)
$ 900 50% title and escrow costs (customary in Nevada County)
$ 500 Property inspections (pest and whole house)

Buyers costs to enter this option($15,600 goes to the sellers)


What are the seller costs to grant the option?

$ 7,580 Real estate commissions figured at 1% to each side. These fees will be recovered at close of escrow, if the option is executed, because they are pre-payments against the total commission owed. If the total commission is 6% (3% to each side), at close of escrow the sellers will now owe 4%. Did you get that?

$ 900 50% title and escrow costs

$ 2,000 Estimated pest and other repairs. There is no way to really estimate these repairs (if any). I include them so the sellers are not surprised when the expenses arrive like unwelcome guests.

$ 2,000 Home Owner’s Association dues during the option period

Sellers’ cost to grant this option:


The buyers pay the sellers $15,600, the sellers incur expenses of $12,480 and the sellers keep $3,120 as the net option fee.

During the year, the sellers pay the property taxes and insurance.

The sellers keep $1000 per month of the $1800 per month rent.

At close of escrow the sellers’ gross profit will be $366,320 ($379,000 purchase price minus $15,800 credits to buyer plus $3120 already recieved as initial option net). Out of this profit, the sellers will pay the remaining 4% commission of $15,160 plus remaining closing costs of about $1,000 plus return of buyers’ security deposit of $1800.

Assuming the sellers own the house free and clear, the estimated net profit to sellers will be about:


Adjust this, of course, to pay off any existing liens.

What about the $1000 per month rent kept by the sellers? If the property is owned free and clear, add that to the net profit. If there is an existing mortgage, apply it to the monthly mortgage payments.

Taxes. Sellers, don’t forget to obtain professional tax help to calculate capital gains taxes, re-capture of depreciation, and other ugly items of this nature.

What can go wrong? Lots of things. There are numerous risks, and those will be the topic of a future post.

Tuesday, March 10, 2009


Follow Up Your Sales!

These ten ideas are not original with me. I heard them in a Century 21 online sales class and thought they were worth passing along. Most of them are common sense; the rest are just good manners.

1. Thank your clients.

2. Thank any and all parties involved in the sale (title, escrow, lenders, the agent on the other side).

3. Provide a closing gift to your buyers.

4. Stop by on moving day with little items like light bulbs, toilet paper, windex etc.

5. Stop by the day after move in to see that all is well.

6. Call in a couple of weeks—ask for a visit.

7. Call every 2-3 months to say hello.

8. Send cards at holidays and the anniversary of the sale.

9. Ask for referrals.

10. Ask for letters of recommendations.

Pretty good plan, ne?