Tuesday, August 31, 2004

Show me the money! And soon!

I called the escrow office at 4 PM. The buyer's loan had funded but they were waiting for the wired funds to hit their account. It was supposed to happen today. As of 5:50 PM, nothing has been put into my account. Bah. Frustrating. I can't believe how hard it is to get someone to wire you thousands of dollars! :-)

Issues resolved - waiting for funds

The air conditioner repair guy was out yesterday. It turns out, it was the condensation line that was clogged. However, it was not the one that drains to the outside. Apparently, there is another one that drains to the bathroom (which is a standard practice these days, I am told). The guy blew out the line and he said stuff just flew all over the bathroom :-) He cleaned it up though. So the good news is that it was indeed the AC that was causing the problem in the ceiling and not something more serious. The better news is this only cost me $132 to fix instead of the $300 I offered the new buyer.

I also went out to the house early this morning to fix the paint. I pulled off the paint that had bubbled up, and painted over the spot using some of the extra paint that was left in the garage from when I had the whole house repainted. It took me about 20 minutes to finish everything. I did check out the bathroom and it looked clean, so the AC guy cleaned up nicely. And, in a moment of goodwill, I also threw out some of the trash that was still in the garage. All that's left now is an old bookcase, some plywood, and a car battery.

So that should be it! Funding should happen today and this will be a done deal!

Monday, August 30, 2004

Last minute issue update

Heard from my agent. She said the buyer doesn't want to hold up escrow either and is willing to go ahead and close and take me on my word that I will get an AC guy out to fix the problem today or tomorrow. That's pretty cool of him. But he's also complaining that the condensation line issue that was raised by the home inspector (that it needed to be extended so it didn't drain into the wall) was not fixed. They claim it still looks like the picture. Well, I only have a fax copy of the picture and it's just a big black blob, so I can't judge, but this was definitely fixed. I had an elbow joint put on so now rather than the line exiting flush with the wall, it extends out a bit and turns 90 degrees down towards the ground. This guy is pretty strange.

Anyway, the good news is my agent has an AC guy that she can probably get out there today to fix it. She going to contact him for me. She's fantastic and worth much more than the 1% I'm paying her. When this is all done, she's getting some kind of gift. And the funny thing is, this is the second house I've sold through her in a year and I still have never met her in person!

Sunday, August 29, 2004

Last minute issue crops up

So it's Sunday at 1:30 PM. Both myself and the buyer have signed our paperwork and we're just waiting for tomorrow to roll around for escrow to close. Then I get a phone call....

It's my agent and she tells me the buyer had his final walkthrough on Friday and found three problems. The most serious is a big paint bubble in the ceiling of one of the bedrooms. It looks like a water leak and he is concerned about a roof leak. The other two issues are a shower head that sprays water funny and some trash that is in the garage.

I'm ignoring the last two. He's not buying a new house. If he wants the shower heads to function with a perfect spray pattern, he can go to Home Depot and buy a new one for $10. The trash in the garage consists of an old bookshelf, some plywood, some old mini blinds and two bags of trash. The garage is actually cleaner than it was when he had his first walkthrough (and none of these issues were mentioned after his first walkthrough). I honestly did try to clean up the garage. I filled both trash cans full of garbage and put them out for trash collection. I never did it a second time with the remainder of the trash because I didn't want to have to make the return trip out there to bring the empty cans back in. So I figure he can put the trash out for himself. It's not a big deal.

But the ceiling is not good. I was out there on Thursday after signing and did not see this, so it's something that is fairly recent. We have not had any rains lately, so I can't believe it's a leaky roof.

So I got in my car today and made the 45 minute drive out there to check it out. Sure enough, there is a big bubble in the paint in the ceiling, near the ceiling fan. I crawled up into the attic with a flashlight to check it out. I couldn't see any signs of water damage or spots or leakage on any of the attic walls, ceilings, or beams, so I'm really confident this isn't a leaky roof. But the air conditioner unit is directly above the bedroom where the paint bubble is. What I believe is happening is the condensation from the AC unit is either overflowing the drip pan or leaking out through a crack in the drainage line. I suspect the former because I think one of the drip pan supports has slipped, leaving one side of the drip pan lower than the other. The drip pan has very shallow walls, sort of like a big cookie sheet and the drainage outlet is at the higher end. So I believe condensation is collecting and overflowing the shallow wall at the lower end before it can exit the drain hole at the higher end.

This leaves the issue of what to do. Escrow closes tomorrow. No one I hired ever worked in the attic, so it's not like a handyman broke this. By the same token, the professional home inspector hired by the buyer did not catch this either. I could say, since it wasn't mentioned before, I'm not going to fix it, but then the buyer could back out.

What I've instructed my agent to do is to explain to the buyer what I believe the problem is and offer him $300 back to get it repaired on his own. If he doesn't want to do that, what we are going to suggest is for escrow to go ahead and close, but the escrow company will withhold some of the funds due to me. I will get the problem fixed, present the escrow company with the receipt showing it was fixed, and then they will release the remaining funds. I really prefer the former, since I'd like to be done with this house and move on to the next investment.

So my agent will contact their's today and we'll go from there. And this is the reason why I never count my money until it's sitting in my bank account.

Thursday, August 26, 2004

My signing is done!

Signed the paperwork at 8 AM this morning. The escrow company did finally get hold of the buyers and they are scheduled to sign tomorrow at 2 PM. After that, the money will be wired into my account. Again, I'm going to wait until I have actually received the money before posting any numbers. I guess I just won't believe it until I have the cash!

But I did save $307.50 by getting investor rates from the escrow company. The price reductions were:

  • Settlement fee to the title company went from $215 to $150.50.
  • Owner's coverage of title insurance went from $810 to $567.

One thing I just can't figure out is title insurance for the seller. When I bought the place, I obtained title insurance. The title obviously transferred to me without any problems. There have been no liens, judgments, etc. since I have owned the place. Therefore, I know the title is clear. Why should I be forced to buy title insurance when selling then? I completely understand why the buyer needs it, but I can't see how a situation would arise where the seller needs it if he purchased it when he bought the place (and, of course, there has been no title-related activity since).

After signing, I stopped by the property and left the keys, mailbox keys, and garage door opener inside the house for the new tenant. I got out by running under the garage door as it closed. I must admit, it was a bit sad leaving the house for the last time. It's been pretty good to me. Guess it's time to get another one!

Wednesday, August 25, 2004

Mistakes in escrow - quite common

I received a preliminary copy of the HUD settlement statement for the sale this evening. There are two mistakes in it. The first is rather minor; my fee for title insurance was $810. This is too high and my Realtor called and told them to give me investor's rates. We'll see tomorrow what that drops it to.

But the second mistake is, in my experience, very common. The contract states that I was to pay for the appraisal and the buyer would pay me back at escrow. The settlement statement does not show that. This is the second time in a year that I have sold a house and had this happen. Luckily, I kept a copy of my check and the letter to the appraiser. That could have been a $400 mistake. I called the company and they verified they received the check and deposited it, so it should be a simple matter to correct.

My overall estimate of the amount of money I would receive was off by only $500. And I was off on the low side! This is pretty good, considering all the various charges that get added on. Actually, I'll be getting even a little more back once the above two problems are corrected. When escrow has closed and the money is in my bank account, I'll post the final figures of this investment.

Anyway, let this be a lesson - always go over the HUD settlement statement with a fine tooth comb, preferably before you go in to sign it. Although details may be clearly spelled out in the contract, they might have been missed when transferring that data to the final statement.

Closing on track - I think

I just called the title company and verified everything is on track. I go in tomorrow morning to sign the paperwork. They hadn't called me yet because they are having difficulty contacting the buyers. They've left several messages and have gotten no response. They've also called the buyer's agent and he is trying to get hold of them as well. Hmm..

Tuesday, August 24, 2004

Home warranty question

The only times I have ever seen a home warranty purchased is when a property is bought or sold. Does anyone know if these can be purchased at other times? I'm asking because it might be possible to get another stream of income going. If you asked your lease-option tenants if they wanted to purchase a home warranty, perhaps the home warranty company would pay you a commission. It would probably be legally questionable if you forced them to buy one or forced them to buy one from a specific company, but if you gave them the option, it might be ok.

Friday, August 20, 2004

Two Must-Have Items for RE Investing

Nothing much happening on the escrow front. Just cruising along - only 10 days until escrow closes.

If you want to get involved in real estate investing, there are two items you must have in order to make your life easier: a cell phone and a lockbox.

Cell phone: When I started, I did not have a cell phone, but I did have a pager. I thought that would be good enough. Well, not really. With all the people that have to visit the house during the repair process, you will be getting a lot of phone calls. And most of them will have cell phones and if they have to wait for you to return their page, they might take off. To make matters worse, I work at my "real job" from 6 AM to 3 PM, so if someone wanted to call me, I would have to give one number for before 3 PM and one for after. Once my property was rented, I got rid of the pager and used the cashflow to pay the cell phone bill. My life is much easier now.

Lockbox: These are lockable devices you hang on a door that contain a key to the property. They come in two flavors - combination dial models and push button models (which have buttons for the digits 0 through 9). Both types are available at Home Depot for about $25 and with each kind, you can set the combination to whatever you want. On the dial model, you can select three letters. On the pushbutton model, you can select as few or as many of the numbers as you want. You need these because you don't want to have to run out to the property everytime someone needs to get in for some reason. It makes things much easier for you and for them, since they can schedule their visit whenever it is convenient for them.

Here's a little tip: don't get the combination style lockbox. This was the type I originally purchased and probably 75% of the people who tried could not open it. After talking several people through the process, I discovered the problem - people do not know which direction is clockwise and which is counter-clockwise! I reached this breakthrough while on the phone with a carpet guy trying to get in. I talked him through the process twice - "turn the dial clockwise until you reach letter R, now turn counter-clockwise past the R to G, then clockwise to S." I asked if he was starting by turning clockwise first and he swore he was. Just for the hell of it, I told him to try starting in the opposite direction this time. What do you know! It opened! He made some comment about how I made a mistake in remembering how the combination worked and I let it pass. The truth was he didn't know clockwise from counter-clockwise.

This left me with a dilema. I didn't want to insult people's intelligence, but the only way I could think of to make sure people were turning the knob the right way was to say something like "grab the knob between the thumb and index finger of your right hand. Spin the dial by moving your thumb up and your index finger down. That is clockwise..." In the end, I decided to buy another lockbox, this time with the push buttons for the combination. I haven't had a single problem with that one yet.

Wednesday, August 18, 2004

Happy Birthday!!

Today is my birthday! Yay! I'm now mumblemumble years old.

I had to stay home yesterday morning to meet some contractors doing some repair work at my home, so I took the opportunity to call the escrow agent and make sure everything was progressing smoothly. I remember when one time I was buying a house, at about 2 PM on the day before we were supposed to close, I got a phone call from the escrow company saying I had a bunch of stuff I still needed to do, including a payment that I needed to make for something. Needless to say, I ended up doing a heck of a lot of running around and was more than a little stressed out. I don't want to repeat that. This escrow agent said everything looked good and we were on track for an August 30th closing. Just to be sure, I'll probably call again 4-5 days before we close.

I also had to follow up with the company that repaired the sprinkler system. They still haven't mailed me my receipt.

Oh.. I got a nice surprise yesterday. I received a letter from a title agency saying they had issued me a check back in April of 2003 that had not cleared yet. I guess when I refinanced the rental property, there was some sort of refund I had coming that I missed. Anyway, they are going to send me a new check. It's only $70, but it's still a happy little bonus.

Tuesday, August 17, 2004

Increasing my cashflow

After about a year of renting and getting around $150 a month, I decided I wanted to try to increase that. (I got a cell phone and the bill was $90 a month, so that ate up most of the cashflow.)

Interest rates had continued to fall since my original mortgage was opened and I had finally overcome my fear of adjustable rate mortgages. I think I overcame this just from being more and more immersed in real estate, as well as having a clearer understanding of my goals. When I first bought the property, I had envisioned holding on to it forever, renting it out again and again. Considering I rented it on a lease option, this was an interesting view, since any tenant could buy it. (With lease options though, the vast majority don't buy.) Anyway, I had come to the realization that I would probably sell the house in 5 to 10 years and then buy another property or two. Given that, it really made no sense for me to have a 30 year mortgage.

Remember what I said earlier - 30 year fixed mortgages are the most expensive mortgages you can get. So when I called a mortgage broker to refinance, I looked at all options. I wanted to go with an interest only mortgage, but I wasn't quite at 80% loan-to-value yet, so those were out. I decided to go with a 5/1 adjustable 25 year loan. The interest rate was fixed for the first 5 years, then could adjust once each year after that. Since I planned on selling the property in a couple of years, I'd be done with the loan before it ever adjusted.

As with my last refinance (from a hard money lender loan to a bank loan), I rolled the costs of the refinance into the loan. This increased my loan balanced by about another $3,000, but my monthly payments still dropped. I would be getting about $260 a month cashflow with this new loan and my tenant would be paying down the higher principle, not me.

As part of the refinance, I discovered some interesting things about my tenant and my real estate agent. A new appraisal was needed by the bank, and the appraisers access to the property had to be coordinated with the tenant. Apparently, the tenant thought I was selling the house to someone else and it took several phones calls from both his agent and mine to assure him that wasn't happening. This gave me an idea of the lack of experience in real estate my tenant had.

My agent, on the other hand, was putting up what in retrospect, I can see were little warnings signs. (See my post Identifying People's Mindsets for more on this.) The appraiser had a bit of a problem because my property was still listed in the MLS. Since the sale had not actually taken place yet, my agent had left it in there. The appraiser couldn't, in good faith, not tell the bank that it looked like I was going to sell the house right away, which of course, would cause the bank to turn down the loan. So what we ended up doing was taking the house out of the MLS for about 2 weeks. Technically, I think it was put on a "not available" status. In order to do this, my agent had me sign some paperwork stating that she was still my Realtor and that I would "re-list" with her, blah blah blah. Why should I have seen this as a warning sign? Because it showed she was more focused on ensuring she got her commission than working to help me. Now we still had all our signed paperwork for the sale - the property was in escrow, don't forget, and those documents showed she would get a commission, but she still had me sign all this other stuff. As I said, it's interesting to see where people's minds are at.

Anyway, after the refinance, I had to contact the escrow company and give them the new mortgage payment info and then it was done! I had increased my cashflow about $100 a month to around $260. Piece of cake.

Sunday, August 15, 2004

Another step done... and more about getting started

Another step in the process is completed. My Realtor called today and she has received the sign-off on my response to the buyer's inspection checklist. All the issues on the list that I will fix are fixed, so now, I just sit back and wait until the 30th. The termite inspection and appraisal are the last outstanding issues. I'm not paying for the termite inspection and for all I know, it might have happened already. I don't expect any problems with the appraisal - the selling price might be a bit high, but it's not out of the ballpark with the comps, so it should be ok.

I realized that in my last post, I neglicted to mention the specifics of the lease-purchase deal I had when I rented the property. (Most of the info was there, just scattered over various places.) Here's what my deal was:

Rent was $1,100 a month for two years. The buyer paid a $3,000 non-refundable option fee for the right (but not the obligation) to purchase the house anytime within those two years for a price of $125,000. The $3,000 would count towards his down payment. None of the monthly rent would be credited towards the down payment. The buyer also contributed a $1,000 earnest money deposit for the purchase of the house. This was also non-refundable. A late rent fee of $25 was due if the rent was not received by the 5th of the month. (In retrospect, this should have been done differently. Now, I would charge a $5 per day late fee for each day after the 1st that the rent is late and if rent is received by the 5th, the late fee is waived. Thus, if the rent was 5 days late, I'd still get a $25 late fee plus it would increase each day after that, but the tenant would still not have any late fees if he paid by the 5th.)

At the time, the fair market value of the house was $120,000. The selling price in the deal was $5,000 higher to account for future appreciation. As I know now, the appreciation was quite a bit more, but at the time, I was scared of going too much higher than the current FMV in case it might scare buyers away.

The $1,000 earnest money was a surprise to me. I didn't ask for it, so it was probably something either my agent or the buyer's agent recommended. If neither one had much experience with lease-options (and I don't think they did), I can see why they asked for this - it's how "normal" purchases are done. I didn't say anything. If the buyer wanted to put up more non-refundable money, that was fine with me.

I also asked my agent about crediting a portion of the rent towards the down payment. She said she hadn't seen that done before, so I went ahead and left it out. I figured if the buyer wanted it, he'd ask and I could always use that as a negotiation point. He never asked.

Everything was handled through an escrow company. The lease was recorded, as was the option to purchase the property. The escrow company's account servicing department handled the monthly details of collecting the rent from the tenant, paying my mortgage, and sending me the remaining rent. They charged $15 a month for this service, paid for by the buyer. I should note that they were not that great at servicing the account. My tenant was late a couple of times and each time, it was I who had to call the escrow company and have them notify my tenant. They sent out a letter, which was copied to me, informing him he was late and of the late charges. The also charged him $25 for sending this letter.

A lease-option (and, by the way, I use that term interchangably with lease-purchase, although purists probably wouldn't agree with me) is generally used by people with poor credit, hard to document income, or some other problems that make getting a loan difficult. This type of deal allows them to lock in a price for a home, make a small down payment, possibly earn credits towards the price via rent, and gives them 1-2 years to work on fixing their credit scores to obtain a loan in the future. I was told my tenant worked as a welder and had been at his current job for about 1 year. That was the extent of my research on him. I didn't bother with a credit check - given the reasons people typically use a lease-option, I did not expect his report to be sparkling clean and it was ok with me. $4,000 of non-refundable money was, in effect, a very large security deposit.

And that was it. It's interesting to note that I never once met the tenant. Even when he moved out, it was his girlfriend who met me at the house and gave me the keys. And using an escrow company allowed me to let them be the bad guy and be the ones to contact him when his rent was late (which only happened twice - and the second time I started the eviction process and he paid promptly).

So there you have it.. Things went super smoothly for about a year. No late payments, no maintenance calls. Just a check coming in each month for a hundred and some-odd dollars.

Coming up next - how I refinanced to increase my cashflow.

Saturday, August 14, 2004

The long story of how I got started

It all started with a layoff... Not mine, but a co-worker. After being gone for a couple of months, this co-worker stopped by the office to visit. I heard him talking to the person sitting in the cube across the aisle from mine one morning. He said he was on his way to a foreclosure auction. My ears perked up! I had been reading the website for about a year at this point and had read all the Rich Dad books. I quickly asked my friend out to lunch to find out more.

Turns out, he was buying properties, fixing them, and renting some, selling others. At the time I had lunch, he had 12 properties rented and had started a business flipping houses. I told him I was interested in getting a rental as soon as I had some financing set up. As he explained to me, the way he went about this was to buy a house below market value using a hard money lender and then do a cash-out refinance with a bank at market value. This should allow the return of most of your investment. The hard money lender he used required 20% down and 1 month's interest up front. The loan was at 18% and payments were interest only. I could use the same guy he did.

I knew I wanted to get a rental property, but the problem, even using this method, was getting the 20% down. What I decided to do was open a home equity line of credit (HELOC) on my residence. I had owned my house for a couple years and it had appreciated a good amount. So I called my bank and got a HELOC for $20K. (I asked for $25K, but they wouldn’t go that high.)

The next step, in my mind, was to form an LLC. This was the entity I was going to use to collect rents. I contacted my CPA, told her what I was planning on doing, and she got all the paperwork going to create the LLC. It cost me $800. Once that was done, I opened a business checking account under the LLC’s name and I was read to go.

All of these steps took a couple of months and when they were completed, I called my friend again. It just so happened that he had a property he just bought and was starting to fix up. This was a 3 bedroom, 2 bath house built in 1993. I went out to look at it.

Wow.. What a mess. I was a bit shocked to see the condition of the house – there were huge holes in doors, trash was everywhere, walls were filthy, light fixtures were missing, the backyard was overgrown with weeds, broken furniture was everywhere... Right then, I had some doubts about what I was getting into. However, the handyman my friend had hired was already working on the place and that was encouraging. The house had a huge backyard, but it backed up to a major street. It wasn’t too noisy though.

I decided to go through with the purchase. It would cost me $98K for the house, which had a market value of about $120K, plus a $1,346 finder’s fee to my friend. (I can’t remember why such an odd amount.) The 20% down payment, plus loan origination fee, plus first month’s interest that I had to pay to the hard money lender came to just under $23K. Since my HELOC was only for $20K, I used some cash I had saved plus a cash advance on my credit card to cover the rest. (I knew I still had fix up costs, so I didn’t want to put all my cash towards this.)

So I made a couple trips to the bank – first to the bank that had my HELOC and I drew against that. Got a cashier’s check and went to my LLC’s bank and deposited it. They wanted to put a hold on it for 14 days, which I could have, since I had to pay really quickly. I explained that the reason I got a cashier’s check was so that there would not be a hold on it. After the teller consulted with the branch manager, they agreed to not put a hold on the check.

The next day, I met my friend at my office. He had a bunch of paperwork for me to sign. The way this worked was the hard money lender was my “bank” and I was buying the house using him as the mortgage holder. After signing some papers, we went into escrow. I took several trips to the bank to get stuff notarized, but finally everything was done and I owned the house.

Which meant I had an 18% loan I had to pay, plus I still had to pay the guy fixing the place up. Plus I had to find a renter. Plus I had to refinance the loan to get rid of that high interest rate.

I got the cash out refinancing going immediately by calling a mortgage broker. I ended up getting a 30 year fixed rate. In retrospect, this was not the way to go, but at the time, it was what I was most comfortable with. Adjustable rate mortgages scared me. I already knew I wanted to rent the place out on a lease with an option to purchase (a “lease option” or “lease purchase”) for a number of reasons: I would get another chunk of cash (the option fee) when the tenant moved in and I could also have the tenant be responsible for most of the maintenance, since theoretically, he would be buying the place. I rolled all the loan costs into the loan, so I ended up with a $103K mortgage. My payments were around $950. I figured I could rent the place for $1100. Only $150 a month cashflow, but it was a start and I didn’t think that was too bad for my first try. After all the loan and escrow costs, I ended up getting about $18K back from the refinance, which I used to pay down my HELOC. At this point, I had the property for about $6,000 ($23K less $18K plus about $1K for a bunch of miscellaneous expenses). Nice!

I had been running an ad in the paper for two weeks looking for a tenant. I got a couple of phone calls, but nothing ever came of them. I tried several of the things mentioned on the boards – I left flyers and applications at the house, I posted For Rent notices on the community bulletin boards at the local grocery stores, and put up signs. (Unfortunately, I discovered the city had an anti-sign ordinance, so the signs got taken down within a day or two of my putting them up.) So I was starting to get worried. My first mortgage payment was coming due and I had no tenant yet.

As anyone who has ever bought a house knows, as soon as your mortgage is recorded, you start getting all kinds of advertisements from real estate agents you obtained your name and address from the publicly recorded mortgage docs. I grabbed one of the postcards and called the agent. We met at the house and I told her what I wanted to do. She listed the property and within 1 week, I had a tenant!

The details were all handled through an escrow company – they collected the rent, paid my mortgage, and sent me what was left. They also collected the $3000 option fee plus $1000 in earnest money for the purchase, and sent that on to me. I had my first real passive income!

Coming up next – I refinance to get a higher cashflow.

Thursday, August 12, 2004

Another interested party

My Realtor called me this morning to tell me she had another agent who has someone who wants to buy the place. She told them we were already in escrow, but we have not received a response to our list of fixes yet, so a backup offer might be appropriate. She then called the agent of the current buyer, who said he didn't think there would be any problem with our fixes. She told him we need the signed document back since we have another interested party, so hopefully, we'll get it today.

On Tuesday, I mailed a check to the buyer's loan officer to pay for the appraisal and was told this was already scheduled, although I didn't ask when. I will be reimbursed for this in escrow.

So, as far as I can tell, the outstanding items are: fixing the water heater (which should be done today), the signed buyer's inspection report detailing what I will and won't fix, and the appraisal. Once all those things are done, it should be smooth sailing.

Wednesday, August 11, 2004

If it's not one thing, it's another

Well, the handyman got the work done and he told me the gas guy was out to turn the gas on. Turns out the water heater has a bad gas valve. So that needs to be fixed. The gas guy estimated $80 but the two people I've talked to said about $175. That will be fixed tomorrow. Does this mean my old tenants didn't have any hot water? I find that hard to believe. Maybe the valve was broken but still functional, but the gas company won't re-light it in that state.

Have not heard back from the buyer yet regarding the items I will fix.

Monday, August 09, 2004

The Fixes

Today I met with the handyman and went over what we will fix. Here is what I am replying with back to the buyer:

  1. Cracks in stucco – no
  2. Extend condesate drain line for the heat pump – yes
  3. Sprinkler control valves - yes
  4. Front sprinkler valve leak - yes
  5. Trim tree in the front yard - no
  6. Fuel system was not on for inspection – yes. Gas company will turn on tomorrow and light appliances.
  7. GFCI electrical outlets - yes
  8. Missing window screens – no. Three screens are in shed in back.
  9. Smoke detectors did not respond to the test button. – When I pressed the test button, they worked. Nevertheless, we will re-check.
  10. Missing smoke detector - yes
  11. The drain line for the dishwasher is improperly installed. – yes. Just was not connected to overflow valve that drains to sink.
  12. Stuck water shut off valves in bathrooms – yes

The sprinkler valves I had fixed Friday. The cost of that was $530. Yikes. More than I expected, but they said there was a fair bit of metal work that needed to be done. The other items above my handyman quoted me $200 to fix, including parts. He will start tomorrow morning and I don’t think it will take more than a day. So these fixes will cost me $730 total. Now I’m glad I counter-offered 1.25% cash back to their 1.75%. That got me an extra 0.5%, or $710. Enough to mostly pay for these items.

We fax the inspection checklist with my response back today. The buyer has 5 calendar days to respond.

Friday, August 06, 2004

Buyer's Inspection

OK, here's the list of items the buyer is requesting that I fix:

  1. Cracks in the east side of the stucco that need to be repaired
  2. The condesate drain line for the heat pump is inside the east exterior wall. It needs to be extended to keep condensation from getting behind the wall.
  3. The sprinklers did not come on when the sprinkler control valve was turned on.
  4. There is a leak at the front sprinkler valve.
  5. The tree in the west front yard has to be trimmed away from the roof.
  6. Fuel system was not on for inspection - suggest utilities company light and test all fuel appliances.
  7. The electrical outlets on either side of the kitchen sink are hooked to a GFCI that did not work.
  8. All the window screens are missing.
  9. The smoke detectors did not respond to the test button. They were painted over.
  10. The west hall smoke detector is missing from the wall.
  11. The drain line for the dishwasher is improperly installed.
  12. The water shut off valves are stuck open under the sinks in the master bath and the hot water valve is stuck open under the hall bath sink.

Now, keep in mind, I can fix all, some, or none of these and if the buyer doesn't like what I choose, he can back out of the sale. What would you fix?

Thursday, August 05, 2004

Not quite gone yet

Of course, the second I post that nothing much is happening, something happens..

My agent called me today and faxed me a bunch of paperwork. I got copies of the earnest money check and the signed, final counter offer. I also got an info sheet to fill out for the escrow company to help them do their job - who my mortgage was with and the account number, etc. And finally, the standard residential Seller's Property Disclosure Statement.

The SPDS is a 6 page document that asks you all sorts of questions about the property. It's looking to uncover any knowledge you have about problems with the house, land, liens, etc. It also tells the buyer who provides what utilities, etc. No big deal here either. But a little birdie did give me one tip that is useful for investors - the last page of this document has a section where you can write in additional information. If the property used to be a rental, it's a good move to cover your butt by writing "Owner never occupied property. Knowledge is limited."

Also, since my contract states I will pay for the appraisal and will be reimbursed for it in escrow, I need to send a check to the appraisal company. My agent tells me she now understands why this was done. It turns out the buyer is another investor who is buying this property as part of a 1031 exchange.

This just in! While typing this, I got another call from my agent. She just received the buyer’s inspection notice. This is a document that is filled out by the buyer after the buyer or something the buyer has hired, has inspected the property. It contains a list of items the buyer wants fixed. As the seller, I can agree to fix all, some, or none of these items. If the buyer does not like my response, he can back out and still get his earnest money back. Haven’t had a chance to go over the list yet.. More later..

Gone for the weekend

Well, I'm heading out of town for the weekend, so nothing will be posted here for a couple of days. Not much is happening actually. Haven't heard from the escrow company or the real estate agents, so I'm just killing time until escrow closes..

Monday, August 02, 2004

Identifying People’s Mindsets

Well, now that I’m in escrow, things will probably be quiet for a bit. I expect nothing much will happen for 3 weeks and then, during the last week of escrow, there will be a flurry of activity as the escrow agents realize the deadline is approaching. This gives me some time to talk about various things.

If you’ve read The Cashflow Quadrant by Robert Kiyosaki, you know of the four different quadrants people operate in – E for employees, S for self-employed, B for business owners, and I for investors. Most people are in the E quadrant – they work for someone else and are dependent on that person or company for their paycheck. They are focused on paychecks. Investors, on the other hand, are focused on rates of return and how hard their money can work for them so that they don’t have to work. In the book, Kiyosaki mentions he can tell what quadrant a person is in just by talking with them for a few minutes. I had an experience recently where this difference jumped out at me.

Two years ago, when I purchased my rental property, I tried to rent it out myself for two weeks. I had no luck. I ended up calling a real estate agent. She listed it for me and within 1 week, the place was rented on a lease-option deal. My contract with the agent said I’d pay the standard 6% commission – 3% to my agent and 3% to the buyer’s agent - when the sale was complete. I asked her what would happen if the sale did not go through. She said she wouldn’t get paid. Well, as long as she knew that, I was ok with it.

As an investor utilizing a lease-option, I WANT the sale to fall through. Because when it does, I get to keep the tenant’s option fee, which is a couple of thousand dollars, plus I still have the house. I can then repeat the process, collecting another option fee, increasing the selling price of the house, and possibly increasing the rent. However, this puts me at odds with a real estate agent, who only gets paid if the house sells.

When it became clear to me that my tenant was not going to purchase the house, I spoke with my agent about putting the property up for a lease-option again. I explained the above to her and told her we needed to get our goals aligned. I offered to pay her $1,000 of her commission on signing and the rest when the house was sold. If the tenant did not buy the house, she could keep the $1,000 and we’d do it all over again. It was a win-win for both of us. Initially, she agreed. About 3 weeks later, I got an email from her, out of the blue, saying she was resigning as my agent. She said it was hard to find tenants who would pay a non-refundable option fee equal to what her commission would be if she sold the place and she couldn’t take the time to work on leases. In other words, she didn’t just want $1,000 now and the rest OR MORE later – she wanted to be paid her full commission for selling the house up front, even if the house didn’t sell! I said thanks for your time and found another agent.

Just to recap – she had an opportunity to get a good cashflow stream going. Yes, she wouldn’t immediately get a full commission (about $4,000 in my case) if the tenant didn’t buy. But she would get $1,000 and, when the next tenant moved in, she’d get another $1,000 plus commission on a higher sales price. And if THAT tenant didn’t buy, another $1,000, etc...

She was firmly in the E quadrant and so focused on her next paycheck, she couldn’t see the benefits of the deal I was offering her. And then, of course, my plans changed and I ended up selling the house anyway, so she lost out there too.

I can understand her fears. Just last week, our local newspaper had a story about real estate agents’ fees and how the once iron-clad rule of paying 6% commission is being eroded. A seller’s market not only affects housing prices, but agent prices as well. You can use a bare-bones service and get your house in the MLS for about $500. If the only way you know to earn money is from a paycheck, these are scary times to be a real estate agent.

Sunday, August 01, 2004

The 2 kinds of lease options

8/1/04 9:40 AM

While I’ve got some down time this weekend, I thought I might explain the two kinds of lease options you might hear about. Unless you know there are two types, it can be confusing.

If you go buy a book on real estate and it talks about lease options or lease purchases, what they are generally referring to is this: you find a person selling a house. You work out a deal with them whereby you agree to buy the house in X years and in the meantime you rent it from them. The seller continues to own the house and but you make the mortgage payments. In turn, you lease the house out to someone else, charging them more in rent than the mortgage and you pocket the difference. You may or may not have a contract with the tenant to buy the house. If you do, they pay you a non-refundable option fee that gives them the right to buy the house for a specified price in the future. So the seller doesn’t sell the house right away, but he does get to stop making the mortgage payments and yet still receives the tax write-off for mortgage interest. This is not what I did.

The lease option method I used was to actually buy the house, then lease it to someone and they pay to have the option to buy the house for a specific price in the future. In my case, the lease was for 2 years at $1,100 a month and an option to buy the house anytime within those two years for $125,000. That option cost a non-refundable $3,000. I chose not to credit any portion of their rent towards the down payment for purchase. Some people may credit $50 - $100 of each month’s rent, but I didn’t offer that and the tenant didn’t ask. A benefit of this approach is that, since the tenant is theoretically going to buy the house, you can put it in the contract that he is responsible for all repairs – expect for major things, such as a roof caving in or something. And it works. For two years, I never had a single call to fix anything in the house. (Of course, after seeing the dishwasher when they moved out, I wish they would have called me, but oh well.) A drawback is that the house may appreciate more in value than you thought and you’ll have to sell for less than the fair market value. Had my tenant opted to buy the house, he would have had an instant $17,000 in equity – his contract was to buy the house for $125K, yet I ended up selling it to someone else for $142K.

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