-
-
-
-
- Buyers' steps
- Sellers’ steps
- Combined buyer/seller checklist
- Eight reasons to buy a home
- How to buy wisely and make money
- Financing and FHA requirements
- Revised RPA (contract) and explanation
- Present an offer with no money
- How to make a competitive offer
- Evaluating a home’s condition
- Termite damage repairs
- Costs when buying a home
- Seller and buyer tips
- Buyer’s agent’s questions to sellers
- Buyers taking title
- Buyer’s condo questions
- Moving into a new home
- How sellers attract buyers
- Nine ways to sell at highest price
- Sellers must have strong marketing
- Condo info to buyers & sellers
- Condo insurance
- Fsbo tips
- Selling-buying tips
- Seller mandated disclosures
- Condo mandated disclosures
- Multi-family investor
- Capital gains tax
- Prop 19
- Investors’ lowball offers -- beware
- Flipping companies’ lowball offers -- beware
- Good investors
- 1031 Exchange -- explained
End of chapters list.
Chapter 1
Detailed buyer’s steps when preparing for and presenting an offer
Preparing to present an offer to purchase a property:
Analyze your finances to be sure you can afford to buy a home. Include the cost of property taxes, homeowners insurance, house maintenance, down payment, closing costs, monthly mortgage payments, and long-term debt payments like car payments and student loans. For condo and townhouse buyers, include monthly HOA fees and probable future special assessments. Don't buy a home at the maximum price for which you qualify because you don't want to be financially chained to your home. Budget for other house expenses like maintenance, furniture, and appliances. Ideally, prospective homebuyers will have little or no long-term debt and will have a three to six months emergency fund.
Generally, not more than one-third of your monthly household gross income should go toward mortgage payments and other house expenses. This will vary some, depending on a buyer’s debt-to-income ratio. To calculate your DTI add up all your monthly debt payments and divide by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are subtracted. As a general guideline, 43% is the highest DTI ratio a borrower can have and still qualify for a mortgage. Ideally, lenders prefer a DTI ratio lower than 36%, with no more than 28% of that debt going toward servicing a mortgage or rent payment. The maximum DTI ratio varies from lender to lender. However, the lower the debt-to-income ratio the better the chances that the borrower will be approved for a loan.
Get a lender’s pre-approval letter for a loan before searching for a home (for buyers who plan to finance). However, the home search can begin before pre-approval for buyers who are confident that they can get qualified and who know their approximate price range. The mortgage broker will precisely calculate how much house you qualify to buy, and most realtors can calculate your approximate affordability.
Documents your lender will ask for:
- Tax returns for the last two years.
- Pay stubs or other documentation of income for the last two months.
- All bank statements, plus brokerage and investment account statements, for the last two years.
- Proof of funds for down payment and closing costs (or a gift letter if someone is giving you the money).
- Get a letter of recommendation from your previous landlord if you have been renting.
- ID -- preferably a driver’s license or passport.
Your lender may have more documentation requests as they process your loan, but these are the basics that will get you started.
Search the internet or ask a realtor to search for the type of property you want to buy, or both can search at the same time. Realtors will narrow down the search to meet a buyer’s preferred criteria, which will include the city or specific neighborhood, type of property (SFR, condo, townhouse, duplex, etc.), the physical condition of the property (move-in condition or needed cosmetic or major repairs), price range, anything you must have (formal dining room, large back yard, upscale area, etc.), and anything you must not have (on a busy street or near a freeway, house with lots of deferred maintenance, etc.). Focus on the most upscale neighborhood you can afford, but don’t buy a house at the maximum allowed by your lender. You will want painless monthly mortgage payments and funds for maintenance.
Hire a seasoned and knowledgeable realtor
He/she will look out for your best interests 100% and will have a goal to help you make money. The realtor should know the inventory, local real estate trends, where the best deals are, have experience on both sides of the table, be a skilled negotiator, know how to coordinate a smooth transaction. and knows how to accurately analyze the comps (similar nearby active listings and recently sold properties) to suggest an accurate fair market value list price.
Prepare to make an offer.
Have the following items ready: earnest money deposit (EMD), pre-approval letter, and proof of funds (POF) sufficient to cover your down payment and closing costs. (See Chapter 5 regarding no upfront money required). Next, discuss the most important paragraphs and terms in the purchase agreement with your realtor. Your realtor should provide a written brief explanation of every paragraph in the California Association of Realtors (C.A.R.) Residential Purchase Agreement (form RPA). Some other purchase agreements are acceptable, but the RPA is used in approximately 95% of all real estate transactions because it protects the buyer and seller more than others, but mostly it protects the buyer. No more "buyer beware” (caveat emptor). Note on the EMD: It can be any amount up to 3% of the offered price (the maximum amount allowed by the State of California) per the liquidated damages clause in the RPA. However, the more the EMD (up to 3%) the stronger the offer will be. The EMD becomes part of your down payment, which will be due one or two days before close of escrow (COE).
Become familiar with the purchase agreement and transaction steps. Your realtor will: 1) explain every paragraph (or at least the most important ones) in the purchase agreement; 2) give you a filled-in sample copy of the agreement with brief written explanations of each paragraph; and 3) give you a copy of the transaction steps for buyers and sellers.
Items to enter on the purchase agreement:
+ Names of all buyers.
+ Purchase price you want to offer.
+ Amount of earnest money deposit (EMD). The EMD becomes part of your down payment, which isn’t due until a day or two before COE.
+ Amount of down payment. It can be any amount, depending on the lender's requirements. Usually, it is 3% to 20% of the offered price, then later changed to the same percentage of the purchase price if the offer is accepted. High credit score buyers can get a 0% down payment.
+ Proof of funds (POF) – sufficient to cover down payment and closing costs if financing, or sufficient to cover an all-cash purchase and closing costs.
+ Escrow period: 30-45 days is most common. Much quicker for all-cash transactions.
+ Who pays for inspections and needed repairs, transfer taxes, and other fees.
Make an offer. Establish an accurate offering price by producing an accurate Comparative Market Analysis (CMA) (comps) and studying and analyzing them by yourself or with your agent. Your realtor will draft the offer (purchase agreement) and email a rough copy to you, and you will make any corrections or changes. Upon your approval of the offer your realtor will finalize the offer and email it to you and all recipients for electronic signing and initialing (via DocuSign or Digital Ink). Note: This is huge: You can present an offer with no upfront money or proof of funds. That is, no earnest money deposit (EMD), lender’s pre-approval letter or proof of funds will be required until after your offer is accepted and ratified. After your offer is accepted you will have 17 calendar days to investigate the property and remove all buyer contingencies, or negotiate with the seller regarding who will be responsible for the needed repairs.
After an offer is presented the seller will accept, counter, or reject the offer. If your offer is accepted, the listing agent will order the escrow company to open escrow. If the seller counters your offer the listing agent will prepare and email a counteroffer to your realtor. The buyer will either accept the seller’s counteroffer or counter it. This could go back and forth several times. Each counter is numbered, beginning with number one. If your offer is rejected and you still want the property, you can wait a day or two and present another offer a little higher. This can be done three or four times until the offer is accepted. Your EMD will be due within three business days* after your offer is accepted. Therefore, you won't be required to have any upfront money when making an offer. However, including the EMD will make for a stronger offer. No upfront money may not be applicable or acceptable in some areas or states, or in a hot seller's market (low inventory, greater demand than supply, rising prices, etc.). *Side note: All deadlines in the contract pertain to calendar days, except the EMD deadline pertains to business days (Monday through Friday and no holidays).
After an offer is accepted and ratified, escrow is opened. The buyer will instruct his/her bank to wire the EMD to the escrow company. The escrow company will email wiring instructions to the buyer, for you to forward the instructions to your bank. Next, you or your realtor will order a professional property inspection. It is an intensive and thorough 2-3 hours (average) inspection, depending on the home’s size. Here are the commonly inspected items:
· All systems: electrical, plumbing, heating, air conditioning.
· Yard water drainage.
· Windows & doors.
· Walls & ceilings.
· Water heater – connections, condition, bracing up to code.
· Smoke alarms.
· Carbon monoxide detectors.
· Floors, including under carpeting.
· Foundation.
· Connections to appliances.
· Sewer line from the house to the street.
· Chimney and fireplace. The inspector will recommend further inspection by a mason if a problem is found.
· Furnace – minimal inspection. The heat exchanger requires further inspection by a furnace expert. In many cities the gas company will inspect a furnace for free, including the exchanger, and the stove, water heater, and water heater connections.
· Roof – minimal inspection. The property inspector will recommend further inspection by a licensed roofer if a problem is detected.
Note: The property inspector will recommend further inspections by appropriate experts if any problems are detected with the land, foundation, chimney, fireplace, furnace, roof, and any evidence of mold or termites, rats, or other pests).
Details of a good inspection are on these two links. Click here:
https://www.totalhomeinspection.com/totalhomeinspectionchecklist.pdf
and
https://www.fortunebuilders.com/the-ultimate-home-inspection-checklist-for-first-time-homebuyers/
The most common inspections are the property and termite/pest control. The termite inspection is required by the buyer’s lender unless the inspection is waived in the Contract. The other inspections are the buyer’s options. The needed termite repairs used to be separate from the property repairs. Now they are part of the property repairs per the revised purchase agreement.
Other possible inspections: roof, chimney and fireplace, foundation and basement, geological/soil, pool and equipment, and mold. Some inspection companies do a drain and sewer line inspection (from house to the street) with a fiber optic camera attached to a flexible long cable. They usually charge extra for this service.
Buyers shall have 17 calendar days (the contract's default which can be changed) to investigate the property, which includes inspections, reviewing the seller’s mandated and other disclosures, and studying any city reports. For condos and townhouses, the HOA documents will be reviewed by the buyer and realtor. Within the 17 days you and the seller (through the two realtors and executing the buyer’s Request for Repairs form) will negotiate over any needed repairs and cost, including termite Section 1 damage, or you will remove all contingencies and agree to move toward close of escrow, or cancel the contract and get your deposit back. Typically, the three contingencies to remove are loan, appraisal, and property condition. Note: The seller has 7 days to provide the buyer with all required documents, and the buyer has 10 more days to respond (17 days after acceptance of the offer). All purchase agreements state that buyers are purchasing the property “as-is” in its present physical condition subject to buyer’s investigation rights. Therefore, if a seller advertises that the property is being sold “as-is” it means only that the seller doesn’t want to make any repairs. The seller is still legally and contractually required to disclose everything he/she knows that affects or might affect the value and desirability of the property, and the buyer still has the right to investigate the property and negotiate with the seller over needed repairs and costs. The seller can also give a credit to the buyer for repairs. Therefore, "as-is" doesn't carry much weight. Two things buyers should do the day after Acceptance is order the property inspection and a homeowners insurance policy (also called fire or hazard insurance). Important: During the 17-day investigation period and right up to close of escrow (COE) the buyer’s and seller’s realtors should contact the buyer’s lender every few days to see how the loan process is going and if there are any financing problems. Many transactions fall through because buyers don’t follow certain lender rules, such as don’t buy big-ticket items on credit, like furniture or a car until after escrow closes.
Get a list of buyer dos and don’ts from your lender or realtor. For example, don’t buy big-ticket items on credit until after COE. Best is to not buy anything on credit. Don’t change jobs during the escrow period. Don’t transfer money.
Arrange for homeowners insurance to begin on the recording date (the date you get the keys and take possession). Condo and townhouse buyers should have their insurance agents review the HOA’s insurance master policy to be sure there won’t be any duplication of coverage and there will be adequate coverage.
Contact utility companies and give them the estimated COE date.
Decide how to take title by consulting with your financial advisor, accountant, attorney, or title company. Realtors aren’t allowed to give this kind of advice, since it involves tax and/or legal consequences, and they aren’t allowed to give tax or legal advice, although they can provide general information.
A few days before COE the buyer and buyer’s realtor will do a final walkthrough of the property. This formality is to see that the property is in the same physical condition as it was when last seen by the buyer. It isn’t a contingency, but any issues could delay closing escrow until the issue is resolved. An example of unexpected damage is a cracked door jamb caused by moving furniture out of the house. Also, there will often be termite fumigation/tenting for a house (but rarely for a condo or an attached townhouse). Fumigation is usually done before close of escrow, but sometimes after closing if proper written arrangements are made.
Two days before COE the buyer's bank wires the balance of the buyer’s down payment to the escrow company. The EMD that was wired soon after the offer was accepted became part of the down payment. Therefore, the balance of the down payment is due. Next, the buyer signs many documents, including loan documents. The escrow company will make the signing arrangements and meet with the buyer. The escrow company will often send a notary to the buyer for signing.
Close of escrow day. After escrow officially closes the transaction is recorded with the county clerk, which will be on the same day as COE or the next day. All parties to the transaction will be notified via email or phone that the recording has been completed, and the buyer (new owner) gets the house keys. A few days later the deed of trust is mailed to the buyer.
After close of escrow the buyer’s realtor will contact the new owner to be sure everything is in good order. The realtor will coordinate any remaining issues.
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Chapter 2
Detailed seller’s steps and timelines for a real estate transaction
Two parts for the seller’s steps: Pre-transaction and transaction.
Pre-transaction
1. Be sure your plans for a replacement home, a temporary rental, or a rentback are in order.
2. Prepare your home for sale. Do minor repairs such as repair or replace torn screens, repair those small rectangular screens near the bottom of a house (those screen holes are a favorite place for rats to get into a house and live in the attic), fix patio door screens that are difficult to open and close, and state-mandated safety hazards like a raised cement crack in the patio where visitors can trip and fall. Have your home clean and orderly, and free of pet and other odors. Baking cookies will help mask foul odors. Be sure the front door, sidewalk, and yard are presentable for good curb appeal. Buyers who see a lot of deferred maintenance will think there will be more physical condition issues. Have your home in as move-in condition as possible. Most buyers want a turnkey home. Many couples work and don’t have time to renovate or repair. Declutter your home and garage. Clean windows will allow in more natural light. Be sure exterior lights work. Clean mailbox. Make a flyer and list your home’s best features, including the location. Expound on your location if it is desirable because many potential buyers are from other parts of California, other states, and other countries. Examples: close to upscale stores, two miles to the beach, panoramic ocean views, majestic mountain views, DTLA, ten minutes to LAX, and views of city lights.
3. Hire a savvy and competent realtor or prepare to sell by yourself. Establish an asking price by calculating an accurate Comparative Market Analysis (CMA) and studying and analyzing the comps by yourself or with your agent. Beware of realtors who “buy the listing,” meaning they will promise to get your home sold for x dollars more than what the comps show you can get (aka fair or true market value). This ploy is legal but unethical. Mostly, it is an injustice to the owner because most often the price will have to be reduced one or more times to get the home sold, and usually the home will sell at a lower price than fair market value. Your realtor should have a strong and effective marketing program that will attract thousands of buyers and buyers' agents. In today’s market it is truly a “numbers game.” Thousands of prospective buyers and agents must be reached.
4. Have an extra house key for your realtor to put it in the lockbox. Realtors use an electronic Supra lockbox controlled by a smartphone that records the entry info: time, date, and name of the person unlocking the key box.
5. Complete the state-mandated seller disclosures and give them to your realtor, who will forward a copy to the buyer’s realtor for the buyer to read.
6. Be sure your realtor has a strong and effective marketing program ready to go, which includes a compelling and convincing description of your home in the MLS property profile sheet because that (and the internet) is where buyers’ agents and most buyers begin searching for a home. Expound on the desirable location because many potential buyers will be from other cities, states, and countries. Be sure the listing is entered on the hundreds of real estate portals and websites, and social media sites, and promoted to thousands of L. A. County real estate agents and brokers.
7. Schedule one or more open houses and vigorously promote them. Strategically place at least 15 directional signs and distribute invitation flyers to 100-200 neighbors. Neighbors may have relatives or friends who want to move into the neighborhood or want to invest in an income property. Hide all valuables when hosting an open house or showing your house.
8. Selles shouldn't allow anyone to preview their home who doesn’t have a lender’s pre-approval letter. Otherwise, the visitor will waste the owner's valuable time. The exception is open house visitors because they are almost impossible to screen.
9. Your realtor should: 1) explain every paragraph (or at least the most important ones) in the purchase agreement; 2) give you a sample copy of the agreement with a written brief explanation of each paragraph for easy reading; and 3) give you a copy of the transaction steps for sellers and buyers. (Both should know each other's steps).
10. When an offer is presented to the seller the choices are to accept, counter, or reject. Counteroffers are the most common. Sellers can refuse any offer, even offers higher than the asking price, and they don’t even have to give a reason for rejecting.
11. After an offer is accepted and ratified and escrow has opened, the transaction begins (duration is usually 30-45 days).
The transaction
1. Your realtor will give you a contract timeline sheet to check off completed items with deadlines. He/she will follow up to be sure all deadlines are met because missing even one deadline can void the contract. Deadlines can be extended by completing a form and both sides agreeing to the change.
2. Right after the offer is accepted your realtor will contact the escrow company to be sure the buyer’s bank wired the earnest money deposit (EMD) to the escrow company.
3. Your realtor should contact the buyer’s lender every few days to see how the financing is progressing. This will help prevent a TFT (transaction fell through).
4. Make your home accessible for the buyer’s 17-day investigation rights, which includes a professional property inspection and possibly other inspections (termite, other pests, roof, chimney, mold, pool and equipment, geological, etc.).
5. Be ready to negotiate with the buyer as to who will be responsible for any needed repairs, including termite and dry rot damage (usually in bathroom sub-flooring). Most often there will be fumigating (tenting). The buyer will submit a Request for Repairs (form RR) to the seller. The seller can accept, counter, or refuse the request for repairs. Within the buyer’s 17-day investigation period the buyer will either remove all contingencies (loan, appraisal, and property condition) or negotiate with you (through the agents) regarding any needed repairs. Note: The loan contingency shouldn’t be removed until the lender gives the green light. It is usually removed with the appraisal contingency.
6. If the buyer is satisfied with the contract terms and removes all buyer contingencies, he/she will be contractually required to move toward close of escrow (COE).
7. If the seller lives in a condo or townhouse HOA complex, the seller shall order HOA documents (escrow company often orders).
8. Seller shall deliver a copy of the contract to the buyer’s lender and escrow company.
9. Seller and buyer shall return escrow holder’s general provisions.
10. Seller shall provide buyer with the Market Conditions Advisory.
11. Seller shall provide buyer with all mandated and other disclosures.
12. Approximately five days before COE the buyer will do a final inspection walkthrough to determine if your home is in the same condition as when the buyer last saw it. It isn't a contract contingency. Any issues could delay COE or could be settled after COE.
13. One or two days before COE the buyer will submit the down payment balance and closing costs funds. The balance is the down payment minus the EMD.
14. One or two days before COE the buyer shall sign many documents, including loan documents.
15. Escrow closes. The escrow company (escrow holder) disburses funds, including the seller’s proceeds, and the transaction is recorded with the county clerk. The new owner receives the keys to the property, and a few days later the owner will receive the grant deed. Usually, the entire transaction takes 30-45 days.
More to-dos:
+ Follow the terms and deadlines in the Contract.
+ Order the HOA packet (includes CC&Rs, bylaws, financials, reserves, and more).
+ Prepare for buyer’s inspection by allowing easy access to all areas.
+ Provide change of address to the post office, bank, credit card companies, insurance companies, doctors, schools, relatives, and friends.
+ Gather house keys, garage door remotes, remote security devices, transferrable warranties for appliances, solar panels, etc.
+ Prepare for termite repairs and fumigation (tenting) if required by the Contract. Note: Tenting can be done after COE if proper written arrangements are made.
+ Have the seller's disclosures ready and give them to the buyer’s agent.
+ Before showings: Put dog in garage or chained in the back yard, empty garbage and trash containers, open shades and curtains to allow in natural light, and turn on lights.
+ Cancel utility companies, trash, water, internet, cable TV, and satellite services, effective on COE date.
+ Cancel homeowners insurance or transfer it to your replacement home.
+ Advise your lender that your home is for sale.
+ For condo and townhouse owners, advise HOA president and HOA mgmt. company that your home is for sale.
+ Advise everyone of the estimated COE date, and later advise your sold date.
+ Get quotes from moving companies.
+ Write down alarm codes and instructions for the buyer.
+ The following fixes are mandatory before selling a home:
- Mold or water damage.
- Pest infestation.
- Wildfire infestation.
- Fire or electrical hazards.
- Toxic or chemical hazards.
- Smoke and carbon monoxide alarms in operable condition*.
- Major structural hazards or building code violations.
- Trip hazards.
*Note: In California smoke alarms older than age ten must be replaced before escrow can close.
Here is a helpful article for sellers and buyers. Click here:
https://www.ownerly.com/home-buying/what-if-seller-refuses-to-make-repairs/
Here is a good article: For additional information; refer to paragraphs 4-10 in the following link to know how the buyer proceeds. Click here:
https://homesbyflavia.com/blog/real-estate/buyers-guide-to-a-real-estate-transaction
Important note: When showing your home to visitors or holding an open house, and you want visitors to wear booties or remove their shoes, place a chair or bench near the front door. Many people have fallen when putting on booties or removing shoes while standing.
NOTE: See Chapter 3 for a buyer and seller checklist after an offer is accepted.
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Chapter 3
Combined buyer and seller checklist in a real estate transaction
+ Buyer shall deposit earnest money into escrow. It is usually wired by the buyer’s bank.
+ Buyer shall order a property inspection. Order right after the offer is accepted. Buyer will have 17 days to investigate the property (includes inspections).
+ Buyer shall arrange for homeowners insurance (aka fire/hazard insurance). The policy must be in place by close of escrow. Make it effective on the date of possession which could be days or weeks after COE, depending on the contract’s terms. The seller could occupy the property for a week or a month if there is a rentback agreement.
+ Seller shall order termite/pest control inspection unless other arrangements are made.
+ Buyer shall deliver Purchase Agreement to lender.
+ Buyer shall deliver Purchase Agreement to escrow company.
+ Buyer shall provide funds for down payment and closing costs.
+ Buyer shall provide Seller with a pre-approval letter from lender
+ Buyer shall receive Buyer’s Inspection Elections.
+ Buyer shall receive Market Conditions Advisory.
+ Buyer’s lender shall order appraisal.
+ Seller shall order HOA package (CC&Rs, Bylaws, Rules & Regulations, 12 months of most recent meetings minutes and bulletins, Articles of Incorporation, financials, and reserves).
+ Seller shall provide the following disclosures to the buyer within 7 days after acceptance of the offer (called Acceptance):
Lead-based paint and pamphlet.
Transfer Disclosure Statement (TDS).
Any known insurance claims.
Seller property questionnaire (SPQ).
Natural Hazard Disclosure (NHD). Includes mold and special tax assessments.
Mello-Roos Community Facilities notice—if applicable.
Homeowners Assoc. documents—if applicable.
Preliminary Title Report.
Water heater bracing (must be strapped and on a pedestal).
Smoke alarm and carbon monoxide detector compliances.
Earthquake/Environmental Hazard Booklet and receipt.
+ Buyer shall deliver copies of the buyer-signed disclosures and reports to the seller.
+ Buyer shall remove property condition contingency or submit Request for Repairs form to seller, or negotiate with seller to determine who pays for the repairs, or buyer may cancel the contract.
+ Buyer shall remove the loan and appraisal contingencies, but only after the lender gives the green light.
+ Seller shall order work to repair Section 1 termite damage, based on termite inspection report unless other arrangements are made. Work to be completed before Close of Escrow.
+ Buyer shall do a final walk-thru inspection a few days before COE.
+ Both realtors shall complete agent visual inspection disclosure (form AVID).
+ Buyer will receive escrow instructions from the escrow company.
+ Buyer will receive escrow closing statement.
+ Buyer will receive a One-year Home Warranty policy confirmation.
+ Buyer shall sign escrow papers, provide balance of down payment, and funds for closing escrow.
+ Close of Escrow.
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Chapter 4
Eight reasons to buy a home
Pride of ownership – Gives you and your family a sense of stability, security, and solid members of the neighborhood. A feeling of stability is especially important for children. No more worrying about your landlord’s control and demands. You will also have a greater voice in community affairs. According to many surveys, this is the most important reason to buy a home.
Freedom to personalize your home – Paint your desired colors, decorate the way you like, play music louder than you can in a rental, landscape and grow vegetables and flowers if you have a yard.
Property values are declining. Buyers can try “timing the market” by buying at the bottom of the real estate cycle and just when prices begin to increase again, but that is not easy to pinpoint because the only way to know when the bottom of the cycle is reached is when prices begin to increase again. The following statement is true when prices are increasing: “The best time to buy is yesterday; the second best time is today.
Build equity – In addition to property value appreciation, part of your monthly mortgage payments reduces your loan obligation. The least amount applied to the mortgage reduction is during the first three years, and each month and year after, the percentage applied to the principle is higher.
Mortgage interest tax deduction – The paid interest part of monthly mortgage payments is a Federal and State income tax deduction. This amounts to a lot of money during the first several years when the payments toward interest is much more than the payments toward the principle.
Property tax deduction – Another Federal and State income tax deduction.
Capital Gains exclusion – Married couples can exclude up to $500,000 of profit, and single homeowners can exclude up to $250,000, providing the owner has lived in the home for two of the past five years. It is no longer necessary to purchase another home, and there is no longer an “over age 55” rule.
Home equity loans – Depending on the amount of equity built up, many homeowners take out low-interest equity loans (HELOCS) to pay off more costly credit card balances, pay for home improvements, or finance other needs.
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Chapter 5
How to buy a home wisely
These steps will prevent making any mistakes when selecting a home. When you are ready to search for a home (being ready means having ready your lender’s pre-approval letter if financing, and proof of funds), the following steps will help you make a wise choice, and you may (or will) eventually make a ton of money. However, if you already know your approximate price range, and you have reason to be confident that you will get funding, you can begin searching for a home or investment property before receiving your pre-approval letter. Here are the steps:
1. Make a list of priorities:
+ Move-in condition, some deferred maintenance, or a major fixer?
+ Type of home – one or two-story, size of house, size of yard, size of garage, number of bedrooms and bathrooms, inground pool or no pool.
+ What must you have? Examples: large kitchen, open floor plan, desirable neighborhood, three-car garage, large yard, move-in condition, close to public transportation.
+ What must you not have? Examples: on a busy street or close to a freeway, next to an apartment building, close to a dumpster, many stairs, noisy neighbors, barking dogs, tiny garage, and lots of deferred maintenance.
2. Drive down the asking price when presenting an offer. (Most list prices are inflated). First, study and analyze the comps to determine if the list price is accurate and at or close to fair or true market value. Second, present an offer in a manner that the seller will accept. Third, be prepared to respond to the seller’s counteroffer. If your offer isn’t too low the seller will probably counter because people like to negotiate.
3. Make location a priority and find a home that is an example of the Principle of Progression. This is important if you want your new home to appreciate in value the most. A high property appreciation rate will do more than make money after selling. After a few years of ownership and building equity many owners become serious investors by using the equity from their primary residence to buy an investment property, such as another house or a multi-unit. Since the Principle of Progression is so important, I need to elaborate further in the next paragraph.
A house of lower value than the nearby houses will appreciate faster and more than the higher value nearby houses because those houses bring up the value of the lower value properties. That is what savvy investors look for. That is the Principle of Progression (The opposite is the Principle of Regression). You may not get your dream home this way, but you will make more money. You could also compromise by buying a mid-range priced home that will appreciate in value, but avoid buying the most expensive home and avoid buying at the top of your qualified price range because home ownership costs amount to more than monthly mortgage, property tax, and homeowners insurance payments (P.I.T.I.). You should budget for maintenance and repairs and increased taxes, and for condos and townhouses be aware of special assessments and an increase in HOA fees. But one good thing about home ownership is the huge state and federal income tax deductions that apply to the mortgage interest, property taxes, and homeowners insurance payments. That will offset a lot of maintenance costs.
4. This is huge. You can make an offer on a house with no upfront money or any documentation. That is, no earnest money deposit (EMD), no pre-approval letter, and no proof of funds (POF) will be required until three days after the offer is accepted. One good thing about this is you won’t have to splash your proof of funds all over cyberspace. However, you will need those items ready if your offer is accepted and ratified. After an offer is accepted you will have 17 calendar days to investigate the property (inspections, seller’s disclosures, city reports, etc.) and decide whether or not to buy the house. If you decide to not buy you will get your EMD returned, usually within 48 hours.
5. When previewing a property before making an offer, be diligent when analyzing the location and the physical condition. Regarding the location, talk to neighbors and study the area at different times of the day. You may find heavy traffic during the early morning and late afternoon. Be sure the house or condo isn’t close to a garbage dumpster where a million flies hang out. Regarding all the home’s physical condition items and details, they could take up many pages. Even small items shouldn’t be overlooked. For example, if there are pedestal sinks in the bathrooms there won’t be a counter to provide space for a can of shaving cream or face cream. Are there enough electrical outlets? You won’t want to stretch electrical cords across rooms. Enough cabinets and storage space? Remember when choosing a property, four things can’t be changed: location, natural light, square foot size, and the HOA (if applicable). For general physical condition due diligence, following is a list of more concerns:
+ Foundation and wall cracks, and sloping floors. (indicates soil and settling problem). If the house sits on a hill there could be liquefaction and landslide issues. A geological inspection would be appropriate.
+ Moldy or musty smell. (could be mold, but not always).
+ Sagging ceilings and water stains in ceilings and walls. (could be a leaky roof).
+ Fresh paint. (seller could be covering up old water damage).
+ Owner-built addition. (building permits and code issues).
+ Strong air fresheners. (could be masking pet urine and other odors).
+ Standing water in the yard.(drainage problem). The yard should slope down from the building toward the street. Gutter downspouts should drain away from the house. The biggest enemy of a house is water and moisture infiltration.
+ Old single-pane aluminum framed windows. (produces moisture inside the house). Vinyl-framed dual pane insulating glass windows eliminate moisture infiltration, and do a lot more: reduces outside noise by 28%, allows people to comfortably sit close to the window during hot and cold weather, keeps cold and heat outside, keeps heat inside during cold days, reduces utility bills.
+ Inadequate attic ventilation. (heating ducts will deteriorate faster).
+ Aging HVAC system. (expensive to replace).
+ Broken and missing roof shingles. (causes roof leaks). Leaky roofs cause water to settle in walls and ceilings.
+ Age of roof. (expensive to replace).
+ Termite damage. (depending on the contract’s terms, termite Section 1 repairs could be the responsibility of the buyer or seller). Section 1 repairs include fumigation (tenting) and dry rot (usually found in bathroom sub-flooring).
+ As-is and long-time-on-market properties.(possible repair and deferred maintenance issues).
+ For sale by owner (fsbo) homes. (many legal, seller disclosures, pricing, negotiating roadblocks, and other problems).
That was just a short list. Do a Google search and you will be overwhelmed with property physical condition advice. During your investigation and after perusing the property inspection report, consider hiring and bringing a contractor to the property. Have him investigate the inspection report items, especially the systems (electrical, plumbing, furnace, a/c) and the water heater, chimney, and fireplace. Keep in mind that the seller and both realtors are required to disclose all known defects and issues that affect the value and desirability of the property. Most or all of the needed repairs will be included in the buyer’s Request for Repairs form that will be presented to the seller during the 17-day investigation period (also called the contingency period).
Note to investors: Having homes that are rented out all year or the majority of the year can provide a stream of steady income and tax benefits, as well as building equity. Landlords can get a tax deduction on the rental income by depreciating the property, which means deducting the cost of buying or improving a rental property. You can also use any expenses (including your mortgage, utilities, repairs, etc.) to help offset rental property income by deducting the expenses from personal tax obligations. This means that a portion of the income is tax-free.
Avoid appraisal gap
The current strong seller’s market has caused a few problems for buyers. One costly problem for buyers with a mortgage loan is having to present offers higher than the list price, which causes an “appraisal gap.” For example, a house is listed at $1,350,000 and Joe Buyer knows there are nine other offers on the table. But since Joe has been looking for the right home for five months he is determined to be the successful bidder for this house. So he tells his realtor to present an offer for $1,450,000, which made Joe the winning bidder. Joe’s lender hires an appraiser and the house appraised at $1,340,000, close to the asking price. Either the buyer or seller (or both) will have to pay the difference between the appraised value and the selling price, which is the “appraisal gap.” The appraisal can be challenged, but more often than not the appraiser won’t budge. Also, another appraiser could be hired if the lender gives the okay. If the matter isn’t resolved, the lender won’t finance the purchase. In a strong seller’s market the buyer will most likely have to pay.
One of the purchase agreement’s default paragraphs explains that “this offer is contingent upon the property appraising at no less than the purchase price.” The problem is most sellers won’t accept an offer with that contingency, so they will counter. Therefore, in a hot seller’s market buyers may want to offer a compromise (like split the differential with the seller) or waive the appraisal contingency.
Important: One judicious step to buying a home is to hire a competent realtor with goals that include helping the buyer and seller make a lot of money. Note to first-time buyers: Hiring a realtor won’t cost you a dime because the seller pays the buyer’s broker fee (commission). Here are a few ways good agents provide exemplary service to buyers and sellers:
To buyers, they:
… find or create money-making deals on desirable homes in Los Angeles County’s desirable neighborhoods and in areas where distressed homes are located that are ripe for low offers. Note: The Platinum Triangle (Beverly Hills-Bel Air-Holmby Hills) has plenty of homes waiting for low offers. Price range: $600K to $195M.
… drive down asking prices. Depending on certain conditions, they get asking prices reduced to where the buyer will make a ton of money by the time escrow closes (immediate equity). This usually works best with homes that have been on the market for several months.
… watch out for their clients’ best interests, including being sure there won’t be any mistakes in the selection of a property. Their goals should always include helping their clients make a lot of money.
… present offers with no upfront money or documentation if there are no competing offers. That is, no earnest money deposit (EMD), no pre-approval, and no proof of funds will be required until after the offer is accepted and ratified. After acceptance, the buyer will have 17 calendar days to investigate the property (inspections, seller’s disclosures, and reports) and decide whether to proceed toward close of escrow or cancel and get the deposit back. This is good for buyers because they won’t need to present money and documentation every time they make an offer, but only after their offer is accepted. Property values (prices) in Los Angeles County are predicted to increase 6.5% in 2024 and as high as 10% in affluent areas. So it would be advantageous and a good idea to begin previewing homes before prices increase further.
… often give their buyers a generous legal tax-free rebate, although the amount depends on the price of the home and the commission rate. (Real estate buyer rebates do not violate California Business & Professional Code §10137).
… find mortgage loans with much lower rates than the average 30-year fixed rate, and with downpayment and closing costs assistance.
… often get the seller to pay part or all of their buyer’s closing costs. (Buyer’s closing costs average around .8% of the purchase price).
… explain every paragraph in the 16-page contract (purchase agreement). Also, they give a sample copy of a filled-in purchase agreement and a written brief explanation of every paragraph for easy reading. They make sure their clients know what's going on and there won't be any surprises.
... explain in detail every step in a real estate transaction for buyers and sellers. (Both should know each other’s steps). They also provide the steps in writing for reference and to avoid any surprises.
… have a spotless Dept. of Real Estate (DRE) record and no complaints.
… have a balanced record of closed buyer and seller escrows so they will know how to effectively negotiate on both sides of the table.
… run smooth and problem-free transactions. The realtor should have a knowledgeable transaction coordinator.
... If the seller prefers, the agent will conduct a simultaneous close of escrow (closing on the sold and replacement homes at the same time).
To sellers, They:
… are skilled at selling at the highest price the market will bear.
… have a strong and effective marketing campaign that attracts thousands of prospective buyers, and more than 35,000 L.A. County real estate agents and brokers. The campaign should include entering listings on more than 750 real estate portals and websites, including all major social media sites. Their marketing program includes much more: drone photography, open houses, professional flyers, blast emails, and other ways to attract buyers. Their fiduciary duties include getting the highest sold price possible in a legal and ethical manner.
… write a compelling and convincing MLS property description with 75 professional photos and a video tour. This is very important because the MLS is where most agents and buyers begin searching for a home. Buyers also search on the internet, but the info is borrowed from the MLS. They emphasize in the MLS description section the desirable location as well as the home. Actually, good marketing agents will write two paragraphs – one for the home’s description and one for the desirable location. Many buyers are from other cities, states, or countries, so they may not know that the house is in a prime location with attractive features.
… know how to conduct a smooth and problem-free transaction.
… know how to analyze offers and counteroffers in the best interest of their sellers.
… don’t wait for other agents to bring a buyer. Instead, they do their own buyer searching. They subscribe to the Los Angeles Business Journal database of CEOs and businesses, AtoZ database, contactanycelebrity.com, and RocketReach to contact qualified potential buyers.
… explain every paragraph in the 16-page contract (purchase agreement). Also, they give a sample copy of a filled-in purchase agreement and a written brief explanation of every paragraph for easy reading. They make sure their clients continually know what's going on and there won't be any surprises.
... explain every step in a real estate transaction for buyers and sellers (both should know each other's steps). They also provide the steps in writing for reference and to avoid any surprises.
… have a spotless Dept. of Real Estate (DRE) record and no complaints.
… have a balanced record of closed buyer and seller escrows so they will know how to effectively negotiate on both sides of the table.
… run smooth and problem-free transactions.
... If the seller prefers, the agent will conduct a simultaneous close of escrow (closing on the sold and replacement homes at the same time). Usually, the first choice is a seller rentback, next is a hard money loan.
... If the seller prefers, the agent will help find a desirable replacement home.
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Chapter 6
Financing a real estate purchase and FHA requirements.
Since advice is plentiful and all over the place for getting a mortgage loan, homebuyers should take advantage of the choices and shop around. Shopping is the best first step for getting the most attractive financing. For example, there are mortgage interest rates with three percentage points lower than the average 30-year fixed rate. Example: since the current rate is 6.5%, a borrower can get a loan in the 3.5% range. Furthermore, depending on credit scores, loans are available with downpayment and closing costs assistance.
FHA loans are a blessing for first-time buyers and other buyers, partly because of their 3.5% down payment feature. However, FHA has strict rules regarding the properties they insure. First, FHA has its own appraisers. Generally, the appraiser will look for things that may have these effects: adversely affect the physical condition of the property, endanger the health and safety of occupants, and affect the livability and marketability of the home.
The following items make up the minimum eligibility requirements for an FHA-insured loan (this is a good checklist for any buyer or seller):
- The property must be a single real estate entity
- The property must be free of hazards and conditions that pose a risk to the health and safety of the occupants or adversely affect the structural soundness and use of the home
- The septic system (if present) must be functional
- Property must be free of soil contaminants
- No underground storage tanks
- The site must adequately drain water away from the perimeter of the walls
- Must have an acceptable and sufficient water supply
- Must have safe and sanitary sewage disposal
- No evidence of termite infestation
- Property must have safe and adequate access to cars and pedestrians from a public or private street
- Presence of any defective conditions, including but not limited to, poor construction, leaks, and decay (A property with any defective conditions is considered unacceptable until the defects are corrected.)
- Natural and adequate ventilation of attics and crawl spaces
- Foundations must be in good condition
- Property must have sufficient access to the crawl space
- Roof must be in good condition and prevent moisture from entering the home. (If re-roofing is needed, FHA requires specific guidelines.)
- Mechanical systems must be safe, protected from destructive elements, functional, durable and of decent quality
- Heating sources must be safe, functional and meet any local requirements
- Electricity must be available for lighting and any equipment used
- Additional health and safety hazards, including but not limited to, broken windows, blocked doors or steps without a handrail
- No presence of lead-based paint
The appraiser will note the condition and defects of each item, if applicable. The lender will use the results of the appraisal and inspection to determine the eligibility of the property.
In addition, the lender has other eligibility criteria:
- Adequate space must exist between buildings to allow the maintenance of the exterior walls
- If property has multiple units, each living unit must be able to be maintained separately
- If property has multiple units, each living unit must have separate water, sewer, gas, electricity and shut-off meters
- Access to the property must be provided without having to go to another site
An appraisal is a written assessment of a property performed during the mortgage approval process. To determine if the property is eligible for financing, the appraisal accomplishes the following:
- Estimates the market value of the property. FHA uses the estimate to confirm the home is worth the amount it is guaranteeing.
- Evaluates the physical condition of the property. The appraiser will complete a Valuation Conditions (VC) form, documenting any necessary repairs.
- Assesses whether the property is free of hazards, odors, physical defects noise.
- Assesses the longevity of the property. The expected life of the property must warrant having a long-term mortgage,
- Analyzes the site of the property. The appraiser will provide an analysis of the site, which includes the topography of the location, suitability of soil, easements, encroachments and the areas adjacent to the property.
- Assesses the livability of the home. The appraiser will analyze the above-ground and basement living areas, and the overall structure and functionality of the property.
The following are common issues that an FHA appraiser could flag when the buyer is using FHA financing. But sellers and buyers of all properties should use this as a checklist for items that need to be corrected:
- Peeling paint in homes that were built before 1978.
- Safety issues like a missing handrail on a deck or stairway.
- Falling or unattached gutters.
- Exterior doors that don’t open and close correctly.
- Exposed wiring and uncovered junction boxes.
- Non-functional heating systems.
- Significant plumbing issues.
- No active pest issues. This may require an inspection.
- Leaky or defective roofs, roofs with a life expectancy of fewer than three years.
- Rotted window sills and wood trim.
- When missing appliances are always sold with a home such as a stove.
- Kitchen appliances that do not function.
- Having bedrooms without windows for proper egress by a human.
- Foundation or structural defects.
- Having an actively leaking basement.
- Evidence of standing water in a crawl space.
- Empty swimming pools or pools that don’t have a working pump.
- Ripped or badly damaged screens.
- A fence in disrepair.
FHA-insured loans for condo and townhouse complexes:
This link explains FHA requirements and more: https://www.maxrealestateexposure.com/house-fha-mortgage-eligible/
This link contains a good checklist: https://www.cardinalfinancial.com/blog/fha-home-inspection-checklist/
Pros and cons of FHA-approved condo complexes: https://www.bankrate.com/real-estate/fha-approved-condos/#pros-v-cons
Spot approval loans are for individual condos/townhouses within a complex that hasn’t been FHA-approved: https://www.maxrealestateexposure.com/fha-spot-approval/
Want to know if a condo complex is FHA-approved? Click or copy/paste this link. (not necessary to fill in each box. The fewer filled-in boxes the wider will be the search): https://entp.hud.gov/idapp/html/condlook.cfm
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Chapter 7
C.A.R. Residential Purchase Agreement – latest edition
The revised 16-page C.A.R. Residential Purchase Agreement (form RPA) was recently released. Approximately 95% of all CA residential real estate transactions are on the RPA). Sellers can be certain that offers will be on the new RPA if the buyer is represented by a realtor. For California residents, a free filled-in RPA sample and my brief explanation of every paragraph for easy and clear reading are available. Click here:
https://homesbyflavia.com/blog/real-estate/sample-new-rpa
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Chapter 8
Present an offer with no upfront money or documents
Can you really make an offer on a home with no upfront money and no qualifying documents? Absolutely! You can make an offer any way you like, even if the listing agent writes in the MLS property profile sheet that you must include various documents with your offer. However, buyers (offerors) competing with other buyers would probably not want to follow this procedure.
But assuming that a buyer wants to take advantage of the no upfront procedure, the offer should be presented properly by a skilled buyer’s agent. The upfront money is the earnest money deposit (EMD) which is any amount up to the maximum allowed 3% of the offered amount (adjusted to the same percentage of the purchase price if the offer is accepted). The qualifying documents are the lender’s pre-approval letter (unless the offer is all cash) and the proof of funds (POF) which all buyers must provide. The POF supports the down payment and closing costs, or for cash buyers, the POF includes the purchase amount, down payment, and closing costs. The down payment is due one or two days before close of escrow, and the EMD becomes part of the down payment.
In a strong seller’s market (more demand than supply, low inventory, prices increasing, etc.) the items mentioned should accompany offers, especially if there are multiple offers. But in a buyer's market or an equilibrium market buyers can now make offers with no upfront money or proof of funds. Why do some buyers want to delay presenting their proof of funds when they make an offer? Most often, they don’t want to display their bank statement when their offer hasn’t yet been accepted. However, buyers should have the items ready in case their offer is accepted. If the offer is accepted the buyer’s agent will forward the two qualifying items to the listing agent a day or two after the offer is accepted and ratified, and the EMD will be wired by the buyer’s bank to the escrow company (the escrow company provides wiring instructions to the bank).
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Chapter 9
How to make a strong competitive offer
In addition to making an offer at or higher than the list price, include three items: the EMD (preferably the maximum allowed 3%), lender’s pre-approval letter, and proof of funds. Two reasons for including these items: 1) The seller will see you as a serious buyer; and 2) you might be competing with one or more other buyers, and they will probably include these items with their offers.
When and how to make a low offer:
A strong buyer’s market (more sellers than buyers, greater supply than demand, high inventory, prices stable or declining) is the best time to make a low offer. Even in an equilibrium market or often in a seller’s market, a low offer can still be made. Here is how to do it: 1) Present a low offer. 2) If the seller flat-out rejects the offer, wait for a day or two and make another offer a bit higher. You can do this multiple times until your offer is accepted. That way no money is left on the table, and you will get a good deal. However, this may or may not work if you are competing with another buyer. But since that buyer will probably also make a low offer, it may be best to stay on the low side.
In a strong seller’s market (more buyers than sellers, greater demand than supply, low inventory, prices increasing) it could be a good time to buy, although there will be fewer choices, and probably or possibly there will be multiple offers. In a multiple offer arena it might be best to include in the offer an escalation clause. It is quite uncommon, but it works if executed correctly. Here’s is an example: The list price is $860,000 and the buyer makes an offer of $870,000 with an escalation clause. The buyer’s escalation clause states that she/he offers $2,000 more than the highest offer, with a cap of $900,000.The highest offer was $890,000. So the successful buyer purchases the property at $892,000. The buyer would receive a copy of the highest offer for verification (with the offeror’s name blocked out). However, there are often two potential problems: 1) some listing agents and sellers don’t like escalation clauses, and 2) the appraisal could be lower, which could adversely affect the buyer’s loan.
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Chapter 10
Evaluating a home’s condition
Carefully evaluating a home’s physical condition and desirability will help avoid mistakes. It is also part of your realtor’s fiduciary duties to help evaluate the physical condition of a property. Here are a few things to do and observe:
1. Bring a digital camera, notebook, tape ruler, and a marble — You can’t remember everything, especially if you are previewing several homes, so photos and notes will help. Measure rooms and areas to see if your furniture will fit. Roll a marble to see if all floors are level. If they are sloping there could be a foundation, soil, or settling problem, and those are expensive fixes.
2. Determine if there will be enough sunlight coming into the home.
3. Check wall and ceilings for water damage and old water stains, and stains that were painted over. Check floors for dry rot and mold — especially in bathroom subfloors.
4. Look for wavy or discolored wood siding on the exterior — Walls facing north are the dampest, and walls facing south get the most sun.
5. Be sure downspouts drain water away from the house — Water settling at the base of the house will damage the foundation and encourage mold growth, termites, and rats. Water infiltration is the biggest enemy of a house.
6. Be sure there is sufficient storage space — Check closets, cabinets, garage, attics, and other storage areas.
7. Listen for outside noise — Turn off music so you can hear any street or airplane traffic. Check to see if the windows are dual-pane (insulated). They reduce outside noise 28% more than single-pane windows.
8. Check for the type of flooring under the carpeting by lifting up one corner of the carpeting or by the heating vent.
9. Check the attic for insulation, heating ducts for damage, and for rats.
10. Don't be overly concerned about appliances and carpeting — they can be replaced. Focus on location first, then on the building.
11. Check the roof to estimate its condition and the number of years it will still be leak-free.
There is much more to check, but three things will reveal most of the home’s condition: 1) A professional property inspection report, 2) A termite inspection report (usually ordered by the seller), and 3) The seller's disclosures.
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Chapter 11
Termite damage repairs cost $billions every year
The last time many homeowners had a termite/pest control inspection and repairs done (called Section 1 repairs) was when they bought their house, detached townhouse, or multi-unit income property. For many it has been ten to twenty years or more, and if that’s the case there will be a lot of termite damage, like $20,000 worth or more. Repairs usually include fumigation (tenting). If the last inspection was more than five years ago owners should consider getting another inspection. Before ordering you might want to save money by doing your own inspection. The easiest way is to search for termites in rotted wood areas with a screwdriver and a flashlight. (See three helpful links below). Also, Amazon and other stores sell a termite-detecting non-invasive instrument made by Termatrac (termatrac.com). Enter in Amazon's search bar: termatrac t3i termite detection device.
Here are two helpful YouTube links:
https://www.youtube.com/watch?v=PYJkRF7r7w0
https://www.youtube.com/watch?v=ED30vjDRC1A
Prepare for fumigation.
If you ever need to have your home fumigated, the following will explain how to prepare. Some items on this list won’t apply to everyone; some will apply only to building owners. Some items are for tenants. The fumigation company will provide their checklist. Following is a compilation of prepare steps from several fumigation companies.
A few days before tenting:
+ Make accommodations to stay in a motel or other places for three days and nights.
+ Contact the gas company for shut-off on the day of tenting.
+ Contact the post office to stop delivery for three days.
+ Notify neighbors to make them aware of your upcoming fumigation treatment.
+ For detached (stand-alone) townhouses, notify the HOA or management company of the scheduled fumigation.
The day before or just before tenting:
+ Unlock and open all interior doors, cabinets, drawers, desks, attic hatches, closets, and safes.
+ Raise all blinds and drapes.
+ Be sure the gas is shut off before the tent is installed.
+ Turn off all pilot lights and flames – fireplaces, water heaters, ovens, furnaces, refrigerators, washers, and dryers.
+ Detach any fences that contact the building.
+ Remove all food from refrigerator, freezer, and pantry. Or double-bag food and put it back in the refrigerator. The fumigation company will provide thick plastic bags.
+ Remove unsealed food and medications. Sealed foods are canned foods and sealed jars.
+ Trim plants and trees that touch the building.
+ Water the soil up to 12 inches from all sides of the building.
+ Drench all plants and trees that can’t be removed.
+ Rake gravel and dirt around the house to be sure the tent is secure around the building. Some termite or fumigation companies will do this kind of prepping.
+ Leave open all air pockets, like waterproof covers on mattresses.
+ Leave one window open in each room (5 inches).
+ Remove all linen and sleeping pads.
+ Remove or double-bag clothes, then wash thoroughly when returning to your home after the tenting.
+ Retract awnings.
+ Remove or lower antennae, weathervanes, chimney stacks.
+ Unplug all appliances, computers, heaters, etc.
+ Mattresses don’t need to be removed, but after re-entering your home (after three days), wipe down your mattresses with a wet cloth with a 50-50 vinegar and water solution.
+ Remove vehicles from the attached garage
+ Remove all valuables
+ Remove all living things (even lizards and Geckos).
+ Turn off all timers, a/c, and sprinklers.
+ Remove all interior plants.
+ Water outside plants.
+ Turn off all electrical heating elements, like heaters and pet habitats.
+ Refrigerators can stay on.
+ Turn off security/burglar alarms.
+ Move out, lock entrance doors, and give house keys to a tenting crew member
After tenting is completed:
+ Re-enter when the fumigation company says okay, and retrieve house keys.
+ Important note 1:The fumigation company shouldn’t say it is safe to re-enter the building until a clearance test is completed. A clearance device measures the toxicity dissipation of the fumigant. Usually, you can't re-enter for eight hours after the tent is removed.
+ Contact the gas company to restore services. Let the gas company remove the clearance notice on the gas meter.
+ Turn back on devices and timers.
+ Wipe the floors, doors, windows, shelves, and countertops to rid the surfaces of any chemical residue. Empty and wash ice cube trays, sealed jars and cans.
+ Important note 2: Some fumigation companies say there is no need to wash dishes, linen, and clothing. Others say you should wash them to rid of the fumigation chemicals – even sealed items. Supposedly, toxic chemicals dissipate within three days after fumigation is completed, but there may be remaining residue. To be sure and if you are concerned, Google search fumigation chemicals.
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Chapter 12
Total costs when buying a home
This chapter will prevent unwanted surprises when buying a home. Buyers need to be aware of costs directly and indirectly related to the property, and budget for more expenses than just the down payment and closing costs. Following are the items that should be on the buyers’ list of total expenditures (14 items):
Down payment — From 0 to 3.5% (FHA) to unlimited -- of the offered price. It is not due until one or two days prior to close of escrow.
Earnest money deposit (EMD) — usually 1% to 3% of the offered price, to be deposited into an escrow account, and it becomes part of the down payment. If you put down 20% and have a deposit of 3%, the balance of the down payment money at close of escrow will be 17% of the purchase price. There may be an adjustment based on the difference between the offered price and the selling price. For example, if the buyer promised to make a 3% deposit and 20% down when presenting al offer, and the offered price is $650,000, and the selling price is $675,000, the 3% deposit and 20% down payment will apply to the selling price.
Appraisal — The cost is usually around $450, and is paid upfront. Appraisals are required by and hired by the buyer’s lender.
Property inspection — After your offer is accepted and ratified, the next step is to order a property inspection. It is risky to waive this inspection. The buyer has a right to cancel the contract if he/she does not like the condition of the home, or cannot come to an agreement with the seller as to who will be responsible for making the needed repairs. The cost of repairs is negotiable between the buyer and seller. The termite inspection is normally paid by the seller in Southern California. Also, the seller usually pays for the Termite Section 1 repairs, including dry rot damage (usually found in bathroom subfloors). The property inspection will cost from $350 to $550, depending on the size of the home. Condo and townhouse inspections cost about $350.
Needed repairs — Depending on several factors, of which one is whether you are in a seller’s or buyer’s market, the buyer may have to pay for some or all of the repairs. The needed repairs will appear in the Property Inspection Report.
Unexpected repairs and maintenance -- When buying a home be sure the seller ordered the common one-year home warranty. It covers many things that might go wrong during the first year of ownership, like problems with appliances, plumbing, electrical, heating, water heater, and air conditioning. After the first year the buyer can renew the coverage. Be sure you know and don’t overlook anything in the inspection reports and disclosures. If it becomes your responsibility to take care of certain needed repairs, get estimates for the work to be done. Be sure you know what your homeowners insurance (hazard/fire insurance) includes and doesn’t include. For example, it may or may not cover a leaky roof.
Deferred maintenance, like minor repairs and fixes, will likely stay minor if they are periodically taken care of. But delaying making repairs will eventually become costly. Cleaning out rain gutters and removing leaves and tree branches from roofs are examples of easy but important maintenance chores. One very important thing to do is to be sure water doesn’t settle at the base of the house. Water infiltration is a house’s worst enemy because it will cause mold, invite termites and other critters, and deteriorate the house. So be sure water drains away from the house. That is, the yard should slope down and away from the house, and the downspouts should drain rainwater away from the foundation.
Property taxes and increases -- Figure about 1.25% of your home’s assessed value every year, but to be paid every six months. As the value of your home increases, so will your property taxes increase when the city or county assessor re-evaluates your property. If you are set up with an impound account, where your property taxes and home insurance (see next paragraph) are automatically paid each month, along with your mortgage payments rather than a large sum every six months, your bank or other lender will provide you with a notice of a property tax increase when and if your property was reassessed at a higher value. Keep in mind that property taxes are deductible on your Federal and State income tax returns. Also, should your property value decrease, you should apply for a reduced assessment of your property, which will lower your property tax bills.
Homeowners (hazard/fire) insurance. Figure about .25% of your home’s assessed value to be paid each year. Be sure that the land value is not included in your insurance coverage. Only the improvements (house and garage) should be included in the coverage (unless landslide and liquefaction insurance are added).
Utilities and services -- Trash, gas, electric, water, internet, cable, etc. Buyers should ask sellers for copies of their recent utility bills. Once you become the owner you might want to order an energy audit from the gas and electric companies to find out how you can reduce energy costs by analyzing heating and air conditioning efficiency.
HOA dues and increases -- Condo or townhouse buyers should expect HOA monthly fees to increase. Some increase yearly. Talk to the board members to find out if there are any plans to increase the fees and if there will be any special assessments. Find out if any major repairs to the complex are needed. Know if there are adequate reserves to cover major expenses. Special assessments can amount to a big hit on all unit owners. For example, if a new roof is needed, or the balconies need major repairing caused by water damage, the repairs can be costly. If there are thirty units in the complex, for example, and the repair cost is $90,000, each unit owner will receive a bill for $3,000. Usually, the bill can be paid monthly over one year, but that will add $250/month to your HOA bill.
Closing costs — Includes loan origination fee, title insurance, city and county transfer taxes, and miscellaneous costs. The total will be .8% to 1.2% of the purchase price, depending on which lender, title company, and escrow company are hired. Your realtor will gather all the costs and relay them to you. You will also receive from the escrow company a good faith estimate (GFE), and near close of escrow a HUD-1 estimated closing cost sheet.
Moving costs — Unless you do your own moving, get at least two estimates, so you will know all of your costs before buying a home. If you do your own moving, like renting a U-Haul truck, be sure to budget that expense and the cost of hiring two or three moving helpers, if necessary.
Cash reserves — Many lenders require buyers to have at least two mortgage payments in reserves, plus at least two months of property tax and homeowners insurance payments (called p.i.t.i., or principle, interest, tax, insurance). Some lenders require three or four months of these expenses in reserves. Some lenders don’t require any cash reserves. Find out your lender’s requirements.
Home furnishings — Budget for needed furniture, appliances, carpeting, lawn care items, window treatments, dishes, etc. Note: Never buy big ticket items on credit until after close of escrow. Buying a car, refrigerator, furniture, or similar items before COE will quickly change your lender’s analysis of your financing qualifications. Best not to buy anything on credit until after escrow closes.
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Chapter 13
Buyers’ cost-cutting tips
Here are five ways first-time buyers or all buyers can cut homebuying costs: 1) Get the seller to pay part or all of the buyer's closing costs. 2) Have the seller or buyer's agent pay the buyer's property inspection and appraisal fees. 3) Have the buyer's mortgage broker provide a first-time buyer's loan program that includes down payment and closing costs assistance. 4) Have the buyer's lender provide a low or zero down payment. 5) Purchase the home at a greatly discounted price.
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Chapter 14
Questions buyers’ realtors should ask sellers on
behalf of the buyer (some of these questions won’t be
appropriate, so choose the right ones) Some of these and
other items will be addressed in the property inspection
report:
+ Do you have the state-mandated disclosures ready? They
aren’t due until 3 days after an offer is accepted and
ratified, but many sellers have them ready when the
property goes on the market. Or at least the TDS will be
available. (The required disclosures are in this book’s
Chapter 25). Note: The disclosures are for MLS-
listed and fsbo homes.
+ What two or three things do you like most about your
house?
+ What kind of views are from your house?
+ What do you like most about the location?
+ What businesses, good restaurants, and other attractions
are in the neighborhood?
+ Is your house easy to show? 24-hour notice? By
appointment? (You should require visitors to provide a
lender’s proof of funds, or at least a lender’s preapproval
letter before accepting an appointment).
+ Have there been any water damage or insurance claims
during the past five years or during your ownership? Many
sellers order a CLUE report (Comprehensive Loss
Underwriting Exchange) for the buyer to read. Homeowners (only) can order a CLUE report for free online: https://consumer.risk.lexisnexis.com/request. Buyers can ask sellers to order the report (goes back seven years).
+ Any recent interior or exterior repairs?
+ Any additions or alterations? Any non-permitted?
+ Are the smoke and carbon monoxide detectors working?
(If the smoke detectors are older than age ten they should
be replaced before close of escrow (CA law). Are they
installed correctly and in the right locations?
+ What are the ages and conditions of the water heater and
furnace?
+ What is the age and condition of the central air
conditioning, if any?
+ What is the age and condition of the roof?
+ What appliances are included in the sale?
+ If there is a fireplace is it wood-burning or gas?
+ Does the yard slope down or up from the house? (Sloping
up causes water damage).
+ Does the driveway slope down or up from the street to
the house? (Sloping down from the street can be a security
issue).
+ Are you aware of any present or past earth movement or
liquefaction?
+ Is there a sump pump? If yes, what is the age?
+ Why do you think your house hasn’t sold yet?
+ How many showings so far?
+ What objections have you encountered?
+ What is your asking price based on?
Here are a buyer’s realtor’s due diligence items to determine how
low an offer may be accepted, and to establish the fair market value of a property.
+ Analyze the comps (comparative market analysis, or
CMA). Includes similar nearby active and recently sold
homes. Includes building size, lot size, garage size, age,
upgrades, and physical condition.
+ Days on market.
+ Location.
+ Seller motivation and why the owner is selling.
+ How long the seller has owned the house?
+ The amount owed on the property and any liens or
encumbrances.
+ Whether or not the owner has already bought a
replacement home.
+ Whether or not the home is occupied or vacant.
+ Whether or not the list price was calculated accurately.
+ Number of price reductions, if any, and the reduction
amounts.
+ Analyze the local market trends and conditions –
property values going up or down.
+ Determine whether it is a buyer’s or seller’s market. Many
homes for sale = buyer’s market; fewer homes for sale =
seller’s market. Also consider whether prices are declining
or increasing, and how long homes have been on the
market.
Buyers are encouraged to ask these questions:
+ What will be our monthly payments? (Includes mortgage,
property tax, homeowners’ insurance, and HOA payments
if applicable). P.I.T.I. is common terminology for monthly
payments: Principle, Interest (mortgage payments),
property Tax, fire/hazard Insurance.
+ How much will we need for our earnest money deposit,
down payment, and closing costs? Will the seller pay for
any of our down payment or closing costs?
+ How long will the escrow period be?
+ Will the seller pay for the needed repairs based on the
property inspection report?
###
Chapter 15
Buyer taking title
Following are a few notes that I provided to a client wanting some basic information regarding the best way to take title. It isn’t meant to be advice as to how to take title. Instead, it is only to provide two common ways to take title and to explain the differences. My understanding is that the difference between two popular ways to take title -- Community Property (CP) and Community Property with Right of Survivorship (CPRS) has to do with the death of a spouse. With CP, 50% of the property value goes to the surviving spouse and 50% goes to the person(s) in the will. With the CPRS, 100% goes to the surviving spouse.
Advantages of a Living Trust include that the property is not subject to typical costs and delays of probate, and there is no court challenge, unlike the challenges to wills. Buyers should consult a tax advisor or qualified attorney since there are legal and tax consequences to consider.
###
Chapter 16
Condo and townhouse questions by buyers
The seller's answers should provide sufficient knowledge for a potential buyer to decide whether or not to make an offer on a particular condo or townhouse. Not all questions are applicable, and some questions will be answered during the buyer’s 17-day investigation period (contingency period). The questions:
+ Do you have the state-mandated disclosures ready? They include the HOA packet (CC&Rs, bylaws, financials, reserves. and the most recent 12 months of meetings minutes. They aren’t due until 7 days after an offer is accepted and ratified, but many sellers have them ready when the property goes on the market. Or at least the Transfer Disclosure Statement (TDS) and the Seller's Property Questionnaire (SPQ) will be available. The required disclosures are in Chapter 21.
+ Are there adequate reserves for repairs and maintenance? If yes, there shouldn’t be any special assessment. There should be at least 25% of the reserves budgeted for repairs and deferred maintenance.
+ Are you aware of any existing or forthcoming special assessments?
+ Are you aware of any litigation by or against the HOA? (Usually, it is the HOA suing the builder or developer for construction defects. Water-damaged balconies are common.
+ Are the smoke and carbon monoxide detectors working? If the smoke detectors are older than ten years they must be replaced before escrow closes (CA state law). Are they installed correctly and in the right locations?
+ What does the monthly HOA fee cover?
+ What does the HOA master insurance policy cover?
+ What amenities does the HOA provide (pool, spa, gym, clubhouse, etc.)?
+ What positive and negative comments do you have about the HOA and the management company?
+ What percentage of the owners are in arrears on their HOA fees?
+ How many parking spaces for your unit?
+ Is there storage space in the garage or elsewhere?
+ What is the current percentage of rental units? (More than 20% could be a problem for lenders).
+ Is the complex FHA-approved?
+ Have there been any water damage or insurance claims during the past five years or during your ownership?
+ Any recent or needed repairs in your unit or the building?
+ How good is the soundproofing? (The number one complaint from condo owners is noise through walls and ceilings).
+ Is there WIFI in the building?
+ What are the ages and conditions of the water heater and furnace?
+ What is the age and condition of the central air conditioning, if any?
+ What is the size restriction of pets if they are allowed?
+ What kind of view is there from your unit?
+ What businesses, restaurants, and other attractions are in the neighborhood?
+ Are washer/dryer hookups in the unit, or in the building?
+ Is there a fireplace? Woodburning or gas?
+ What appliances are included in the sale? What are their ages?
+ Will the HOA be responsible for any Section 1 termite damage?
+ What are the upgrades, and the upgrade dates?
+ Are the windows and patio door dual-pane insulating glass or single pane?
+ Is the building in an earthquake fault zone or on a fault line?
+ For townhouses: Does the yard slope down or up from the building?
+ For townhouses: Does the driveway slope down or up from the street?
+ For townhouses: If there a sump pump, how old is it?
+ Why are you selling?
+ Why do you think your condo hasn’t sold yet?
+ How many showings so far?
+ Any offers? How many?
+ What objections have you encountered from visitors?
+ Your asking price may be accurate. What is it based on?
Note: An interesting article regarding condo questions. Click here:
https://merrimackvalleymarealestate.com/questions-before-buying-condo/
###
Chapter 17
Moving into a new home? Things to do
+ Contact utility companies to be sure your accounts are set up. (electric, gas, water, trash).
+ Contact the post office to be sure your new address is current with the USPS.
+ Get phone numbers for the police and fire departments.
+ Get an internet connection.
+ Install new locks and hide a spare key outside.
+ Work on any remaining imperfections based on the property inspection report, particularly the heating and a/c systems, plumbing, electrical, chimney, fireplace, water heater, garage door opener, and sprinklers.
+ Contact your realtor regarding any issues or questions where you need his/her or other assistance.
+ Clean your new home before moving in furniture.
+ Clean windows and patio door to allow in more light inside.
+ Paint interior walls and ceilings if needed.
+ Order a sewer line photo inspection if it wasn’t done with the other repairs.
+ Clean leaves off the roof.
+ Unclog and clean rain gutters and downspouts.
+ Know where the following is located: furnace cut-off switch, main water cut-off, and any other water valves.
+ Know how to turn off the gas -- located at the gas meter.
+ Become familiar with the electrical panel and know how to pull the main breaker.
+ Replace furnace filter – for clean air.
+ Have heat ducts cleaned – for clean air.
+ If there is an old sump pump, replace it with a quality pump. Don’t skimp on a cheap one.
+ Meet your neighbors.
+ If an HOA, meet the president and other board members. Consider becoming a board member so you will have some control in the HOA complex.
###
Chapter 18
How sellers attract buyers
No need to reduce your asking price unless it is determined to be way too high. Instead, do some or all of the following:
+ Have a strong and effective marketing program designed to attract thousands of prospective buyers and real estate agents.
+ Advertise that you will pay part of the buyer’s closing costs. Many buyers will welcome this assistance because they struggled to come up with a down payment. You could also offer to pay the buyer's property inspection and appraisal fees at close of escrow.
+ Mention to buyers who are concerned about high-interest rates that they can get a 15-year loan, a 40-year loan, adjustable-rate loans, pay off part of their mortgage, or re-finance in a year or two.
+ Have the state-mandated disclosures ready for buyers to read. Buyers like to know what they are buying, and many will make higher offers on properties that they know are in move-in condition.
+ Be sure your asking price is accurate. Study and analyze the comps. If the price is too high you will eventually have to reduce your price, then buyers will wonder what’s wrong with the home. Note: The last part of chapter 19 explains how to properly use comps to establish an accurate asking price.
+ Consider doing at least some needed repairs, including termite. It is common in the San Francisco Bay Area for sellers to do a property inspection and have the report available for buyers to read before presenting an offer, and many sellers even do the repairs before putting their home on the market).
+ Have your home in immaculate move-in condition, including an attractive front door, clean walkway, and manicured front yard. First-impression curb appeal sells houses.
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Chapter 19
9 ways sellers can get the highest sold price
This chapter explains how to get the highest selling price the market will bear. Following these suggestions will attract the most prospective buyers, and the more buyers who preview your home the better chance for selling at top dollar. Thinking like buyers and considering what they want and need is a good start. Here are ten low-cost and no-cost ways to help get a high sold price:
Offer to pay part or all of the buyer's non-recurring closing costs (NRCC). Most buyers are short on cash since they have to come up with a down payment, moving expenses, and other costs. Adjust your list price to cover some of the buyer's closing costs. Advertise your generous offer on the MLS and other promotion pieces.
Have the property inspection completed before your home goes on the market. Buyers like to know what they are buying before making an offer. They want to know the condition of the property. Buyers will make higher offers on homes they know are in good condition, but also on homes they simply know about the condition. Some buyers will want to order and pay for their own inspection after the seller's inspection is completed, but most buyers will accept the seller's inspection. The property inspection includes all systems (heating/air condition, electrical, plumbing), foundation, crawl space, yard drainage, water heater, windows, patio doors, entire building, and mini-inspections of the chimney, fireplace, and roof.
Have the property inspection report available for buyers to read. Put it in a 3-ring binder and leave it on the kitchen counter. Include in the binder the seller's disclosures.
Do some of the repairs if the cost is minimal. That will relieve the buyer from another worry. Costly-needed repairs are another matter. The buyer will probably present to the seller a Request for Repairs form, and the cost of repairs will become negotiable. Termite Section 1 repairs are now part of the general repairs. (Section 2 repairs refer to possible future needed repairs if the condition isn't eventually corrected. Section 2 items are listed in termite reports but aren't included in the list of needed repairs).
Complete the state-mandated disclosures before your home goes on the market. This will provide the buyer with valuable information regarding the physical condition of your home. The purchase agreement's default shows seven days to provide these disclosures, but the buyer will be impressed by seeing the completed disclosures early.
Have your home in immaculate move-in condition. Be sure the front door, walkway, front porch, and front yard are attractive (curb appeal) because those are the first things buyers will see. Store or get rid of unnecessary items (clutter) to make the house look tidy and rooms appear larger. Clean up the back and side yards. Clean windows to allow more natural light into your home. Paint if needed. Clean or replace worn or stained carpeting and linoleum.
Have your listed home professionally marketed. That includes strong and effective advertising, open houses, email marketing, internet marketing, putting the listing on 750 real estate portals and websites and social media sites, contacting thousands of agents, and writing a compelling and attractive MLS remarks paragraph that will attract buyers' agents and buyers. This is important because most buyers are represented by real estate agents. Open houses can be very effective if hosted properly. A day or two before holding an open house distribute 100-200 invitations to nearby homes, and promote the open house on several real estate websites and the MLS. Local homeowners might want to "move up" or "move down," or they might have relatives and friends who want to live in the neighborhood. Since we don't know where the buyer will come from, it is important to have a strong and effective marketing program that includes many ways to attract the most prospective buyers.
Price your home accurately based on carefully analyzed comps (prices of nearby recently sold and active similar homes). It is usually a good idea to establish a list price a bit high to allow for negotiating room, but excessive over-pricing will cause homes to sit on the market unsold for months. Then to get the home sold the price must be reduced. Buyers will wonder what's wrong with the house. Depending on the kind of market (buyer's, seller's, equilibrium), pricing low might be the best way to sell at the highest price. This works most effectively in a strong seller's market (low inventory, more buyers than sellers, etc.). In this kind of market, a low list price will attract more buyers, the buyers will compete against each other, and they will often drive up the price to well over the list price. If the "generating multiple offers" is orchestrated properly it can bring extra money to the seller. Note: multiple offers are rare for high-end luxury homes because usually there aren’t enough qualified buyers.
Be careful and aware when pricing your home. Some real estate agents will "buy the listing," meaning they will tell the seller they can get their home sold at a higher price than fair market value and what other agents can. Example: The comps support a list price of $1,700,000, but the agent trying to get the listing says he/she will get the home sold for $1,750,000. So the seller hires the agent, the house sits unsold for 40+ days, then the agent tells the seller the price has to be reduced. It is a fact that the majority of homes with over-priced list prices take longer to sell and eventually sell at lower prices than homes with accurate list prices (Source: National Association of Realtors).
The following explains how to effectively use comps to establish an accurate asking price:
An accurate asking price will attract the most potential buyers, and the best way to be accurate is to carefully study and analyze the comps (comparative market analysis, or CMA). Creating a thorough and flawless CMA is an easy task if done right, which includes incorporating the following items and steps when analyzing comps. These steps apply to single-family residences (SFRs), condos, townhouses, and smaller multi-families (2-4 units).
Subject property details (the basis for comparing with the comps):
+ Address of the property.
+ Property type (single-family home, condo, townhouse, etc.).
+ Number of bedrooms and bathrooms.
+ Square footage of the living space and the size of the lot (living space doesn’t include garage, porches, or unfinished and non-heated basements).
+ Age (year built). (not important in most cases).
+ Physical condition of the property, including renovations, upgrades, other improvements, special features, and amenities.
The comps:
Sold: Sales of similar properties in the neighborhood during the past six months. Compare square footage and dollars per sq. ft. Example: If the subject property has 2,000 sf of living space, compare other recently sold homes with sq. ft. between 1900 and 2100, then compare the $/sf. of the subject property with the average $/sf of the comps. If the average is $800/sf, times that by the sq. ft. of the subject property, which will show the current fair market value of the subject property and what the subject property’s asking price should be. Also, consider the sold prices, dates of sale, and any unique characteristics. Sold comps are the most important because property values are established (prices are final), but final prices of Active and Pending listings are yet to be determined.
Active: Current listings of similar properties. This is your competition. Consider sq. ft., $/sf, asking prices, garage size, yard size, features, and number of days on market. Begin by comparing square footage and dollars per sq. ft. ($/sf).
Pending: (Properties under contract but haven’t yet closed escrow. Similar to Active properties but can provide more market activity.
Location
Consider the location of the property within the neighborhood. Examples: Close to power lines? Next to a dumpster? Next to a junky or depressed house? Too close to a school or ballpark (noise and traffic issues)? Proximity to schools, parks, public transportation, shopping, coffee shops, and gyms. Compare the views. Example: one house may have an unobstructed ocean view and the same type of house may have a blocked or no ocean view. Evaluate the overall desirability of the neighborhood, including crime rate, cleanliness, pride of ownership, proximity to amenities, walk score, and bike score.
Market trends and conditions:
Study the local real estate market activity. Are property values/prices appreciating, declining, or is it an equilibrium market? Consider general economic conditions that may impact the real estate market, like interest rates, employment rates, and other economic indicators. Any local regulations or zoning restrictions that may affect the property's use or value.
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Chapter 20
Marketing must be strong and effective when selling
Getting a house or any kind of property sold at the highest price possible requires a marketing program that attracts thousands of buyers’ agents and potential buyers. It takes a lot more than putting a for sale sign in the front yard and entering the data on the MLS and waiting for other agents to bring buyers. Here is an effective marketing program:
+ The listing is entered on more than 400 real estate portals and websites,
+ Blast emails to 35,000 Los Angeles County agents and brokers.
+ Enter on the MLS property profile sheet a compelling and convincing description of the property and the location (close to the ocean, LAX, etc., because many buyers are from other cities, states, and countries).
+ Up to 75 professional photos on the MLS and social media sites.
+ YouTube agent-branded professional video.
+ 3D walkthrough, 3D reel and floor plan, property video, and drone video.
+ one-page property website.
+ Property flyers and open house flyers.
+ For multi-million dollar homes there is a marketing program that reaches 5600,000+ targeted prospects in all of California, the U.S., and international investors.
+ When hosting open houses promote heavily by advertising on the internet and elsewhere, strategically placing up to 20 directional signs, and deliver 100-200 invitations to neighbors because they might have a relative or friend wanting to either live or invest in the neighborhood.
+ Open house email blast to 35,000 L. A. County Realtors and brokers.
+ Virtual tour linked to the MLS and the Internet.
+ Promote listing on social media -- Facebook, Instagram, YouTube, LinkedIn, and more.
+ Facebook paid ad for listing boost.
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Chapter 21
Condo and townhouse buyers and sellers – important info
For important financing and FHA requirements see Chapter 6.
Much more due diligence and investigation is required when buying a condo or townhouse than when buying a single-family residence (SFR). And sellers have more disclosures and reports to give to buyers.
After an offer is accepted and ratified, condo/townhouse sellers are required to give the buyers all HOA documents, disclosures, and reports. This applies to MLS-listed properties and for-sale-by-owners (fsbos). Following are the state-mandated disclosures and reports:
+ A copy of all of the governing documents of the common interest development (CID). If the association is not incorporated the documents shall include a statement in writing from an authorized representative of the association stating that fact. (Cal. Civ. Code § 4525)
+ A statement describing any restrictions in the governing documents limiting the occupancy, residency, or use of a separate interest on the basis of age, including a statement that the restriction is only enforceable to the extent permitted by Cal. Civil Code § 51.3. This is generally for HOAs of CIDs that meet the requirements to be senior housing facilities. Other types of age restrictions in CIDS are generally not enforceable. (Cal. Civ. Code § 4525)
+ A copy of the most recently distributed annual budget report (Cal. Civ. Code § 4525.) The annual budget report includes among other information a summary of the association's reserves, a summary of the association's property, general liability, and earthquake and flood insurance policies, a summary of the reserve funding plan and a statement as to whether the association has any outstanding loans with an original term of more than one year. The full list of documents contained in the annual budget report can be found in Civil Code § 5300.
+ A written statement from an authorized representative of the association regarding the association's current regular and special assessments and fees. Also, the statement shall include any assessment and fees levied upon the sellers and any monetary fines or penalties levied upon the seller's interest which are unpaid on the date of the statement. This statement shall, in addition, include information on late charges, interest and costs of collection which as of the date of the statement are or could be made a lien upon the seller's interest in the property.
+ A summary of any notice previously sent to the owner alleging any violations of the governing documents that remain unresolved at the time of request.
+ If there has been any litigation or dispute between the builder and the association, and no settlement agreement has been reached, a copy of the initial list of defects provided to each member as required by law including a final determination as to whether that list is accurate and complete has not been made.
+ If there has been a settlement agreement between a builder and the association information required by law regarding the settlement agreement including among other items, a general description of the defects the association reasonably believes as of the date of disclosure to the homeowner, will be corrected or replaced and other information regarding the defects claimed by the association. A full list of information to be provided can be found in Civil Code § 6100.
+ Any change in the association's current regular and special assessments and fees that have been approved by the board of directors but have not yet become due and payable.
+ If there are any provisions in the governing documents that prohibit the rental or leasing of any of the separate units including a description of the prohibition and how it applies.
+ If requested by the prospective buyer, copy of the board approved minutes of the board meetings, excluding executive session meetings, conducted over the past 12 months.
Applicable California Civil Codes:
For CC&Rs and disclosures – CC 4525, 4528, 4530, 4202, and 1102. The most important disclosure is the Transfer Disclosure Statement (form TDS).
For more details search: Complete Davis Stirling condo HOA
For the entire-Davis-Stirling Common Interest Development Act, copy/paste:
https://www.cacm.org/files/2019%20Davis-Stirling%20Common%20Interest%20Development%20Act.pdf
For material facts – CC 2079. (Forms TDS and SPQ are required).
For pest control/termites – CC 1099. (Required only if in the purchase agreement or by the buyer’s lender).
Summary of required disclosures
It is important for both sellers and buyers to know what documents and items the seller must give to the buyer. Per California real estate law (Dept. of Real Estate) the seller must provide the buyer with the following disclosures:
Transfer Disclosure Statement (TDS), Natural Hazard Disclosure (NHD), lead-based paint disclosure, water heater bracing, smoke detector and carbon monoxide disclosure, any insurance claims during the past five years, insurability of the property, copies of any and all HOA documents (CC&Rs, bylaws, etc.), disclosure of any pending or anticipated litigation by or against the HOA, the most recent 12 months of HOA minutes for regular or special meetings, the names and contact information of all HOA officers and management company), private transfer fees, pet restrictions, smoking restrictions, assigned parking spaces, financials, details of the reserves account, Articles of Incorporation, any pending or anticipated special assessments, and anything the seller is aware of that adversely affects the value or desirability of the property. All these items are required for units in active HOAs, and several items are required for non-HOA units.
###
Chapter 22
Condo/townhouse insurance
What does the HOA master policy insurance cover and not cover? Be sure you know because you don’t want any surprises in the event of a catastrophe or any insurance claim. The most common type of HOA insurance covers only the exterior of a building and the common grounds. But what about the interior? For example, your water heater springs a leak and water leaks through a wall and seeps under the wood floors in the kitchen and dining room. Will the HOA insurance cover the damage? Very unlikely. Without that insurance coverage it could cost thousands of dollars to replace and/or repair the damaged interior structural items. What if your guest slips on the floor or front steps and breaks a hip or arm? What if there is a break-in and your jewelry and computer are missing when you return home from work? It happens often. A common attitude is that calamities happen only to others. Follow these steps to be adequately protected:
1. Read the insurance section of your CC&Rs to find out what is and isn’t covered, and give a copy to your insurance agent.
2. Get a quote for needed coverage not included in the HOA master policy. Most likely the items not included in the HOA policy will be contents (personal items and furniture), interior damage, and liability for guests’ injuries. Most owners and HOA complexes don’t have earthquake insurance because of the high deductible and premium costs.
3. Take pictures or videos of your entire interior and personal items, then make a list of items and estimate their value. Give a copy to your insurance agent.
###
Chapter 23
Fsbo Tips
+ Write a compelling and informative flyer that will attract many potential buyers and agents, and include many photos and a virtual tour. Promote your home and the location (example: "Only three miles to the ocean and the most beautiful beach.").
+ Install a For Sale By Owner (fsbo) sign in your front yard and as close to the street as possible. Most buyers drive the neighborhoods where they want to live.
+ Attach a flyer box to the For Sale post, and keep the box full of flyers.
+ Hand out 100-200 flyers to neighbors. One or more neighbors might have a friend or relative who wants to live in your area, and a neighbor might want to buy a rental home.
+ Promote to Realtors online (via e-flyers). Very inexpensive. For $50 you can promote to 10,000 L.A. County Realtors. You can promote to 35,000 agents. This is important because most buyers have agents, partly because it doesn’t cost them any money, since the seller pays the broker fee for both sides.
+ Buy a one-page property website, and promote it via your e-flyer and all other types of promotion you have. Very inexpensive.
+ Promote your home on YouTube.
+ Market on social media sites – Facebook, Instagram, Twitter, LinkedIn, etc.
+ Host open houses.
+ The following link contains some helpful information. Click here:
https://u.realgeeks.media/tricityhometeam/ebooks-handouts-flyers-etc/fsbo/fsbo_marketing_tool_kit.pdf
Three more tips: 1) Be sure prospective buyers who want to preview your home have pre-approval letters. Otherwise, they aren’t ready and able to buy, and they will waste your valuable time. 2) If an offer is accepted, contact the buyer’s lender every few days to be sure the loan processing is going okay. 3) Have your state-mandated Transfer Disclosure Statement (TDS) completed and ready to show buyers. Buyers like to know what they are buying, and if they know they will often make higher offers. Another reason the TDS should be ready before an offer is presented is to let the buyer know if there are any serious physical issues with the property. It's better for the seller to disclose early rather than wait for the buyer's property inspection. (The TDS is required by law for listings and fsbos).
Mandated disclosures required before selling a home in California: The Transfer Disclosure Statement (TDS) is the most important disclosure (Ca Civic Code 1102), Natural Hazard Disclosure (NHD), Statewide Buyer & Seller Advisory, Supplemental Disclosure Questionnaire (SPQ), Smoke Detector Disclosure Statement, Water Heater Disclosure Statement, Lead Paint Disclosure (if built before 1978), Environmental Safety and Earthquake Disclosure, and the Preliminary Title Report (provided by the title company).
Important note: When showing your home to visitors or holding an open house, and you want visitors to wear booties or remove their shoes, have a chair or bench near the front door. Many people have fallen when putting on booties or removing shoes while standing.
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Chapter 24
Selling and buying tips
Selling tips
If you want to get your home sold fast and at the highest price the market will bear, put yourself in the buyer's shoes. In other words, make it attractive and easy for a buyer to buy. Example: Your home is listed at $800,000 and you want to sell for at least $790,000. However, buyers were not making any offers for various reasons. One common reason is many buyers are strapped for cash, even if their FICO scores and earnings are high. So what should sellers do to take advantage of this situation? 1) Offer to pay for a few relatively inexpensive items that will help buyers with limited cash. Paying for part or all of the buyer's non-recurring closing costs, or the buyer's property inspection and appraisal fees. 2) Advertise the items you will pay by having your realtor enter in the agent remarks section in the MLS property profile sheet: "Seller shall pay for buyer's closing costs up to $4,000. Or, "Seller shall reimburse buyer for property inspection and appraisal fees." But this gets better for the seller. Since the seller's "gift" helps the buyer, he/she may make a higher offer. Furthermore, if the timing of the market is favorable (seller's market), you could sell at an even higher price by generating multiple offers. Timing the market is possible but not easy. The best time to buy is at the bottom of the real estate cycle and when prices begin to increase. The problem is that it is hard for anyone to know precisely when the bottom is hit and prices begin to increase.
Buying tips
Buying a home is usually quite easy: get pre-approved for a loan, find a desirable home in a good location, find a good deal, make an offer, get it accepted, remove contingencies, and close escrow. However, when homeowners want to sell and buy at the same time, it will be more complicated. Here are four challenging situations: 1) selling contingent on closing escrow on a replacement home, 2) buying contingent on selling the existing home, 3) simultaneous escrow closings (when a seller's sold home closes escrow and the seller closes escrow on the replacement property at the same time), and 4) tax-deferred 1031 exchanges.
A seller’s net sheet shows the proceeds from a sale.
A seller's net sheet is calculated by taking the sale price or an offer and subtracting all encumbrances on the property, closing costs, and miscellaneous fees. But to include all costs, add things like moving costs, buying furniture, property taxes, and homeowners insurance.
A basic buyer’s net sheet shows the total cost when buying a home. Begin with your purchase price. Next, add:
1. New loan/mortgage fees.
2. Bank/loan Fees
3. Prepaid expenses
4. Escrow and title closing fees
5. Lender’s title insurance premium
6. Recording and processing fees
7. Seller concessions
8. Proration of county and city transfer taxes
9. Other costs
10. Various HOA transfer fees if applicable.
Total cost: $____________
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Chapter 25
Seller’s mandated disclosures before selling a home in California
+ Transfer Disclosure Statement (TDS) is the most important disclosure (CA Civil Code 1102).
+ Natural Hazard Disclosure (NHD).
+ Seller Property Questionnaire (SPQ).
+ Smoke Detector and carbon monoxide Disclosure Statements.
+ Water Heater bracing Disclosure Statement.
+ Lead-based paint Disclosure (if built earlier than 1978).
+ Environmental Safety and Earthquake Disclosure and booklet.
+ Insurance claims during the past five years.
+ Insurability of the property.
+ Preliminary Title Report -- provided by the title company.
+ Many cities require a pre-sale inspection report.
+ For condo/townhouse owners and other PUDs (planned unit developments): the entire HOA packet (CC&Rs, bylaws, financials, reserves, last 12 months of meetings minutes).
An informative disclosures article Copy/paste:
https://www.nolo.com/legal-encyclopedia/residential-home-sellers-california-your-disclosure-obligations.html
Mandatory fixes before a home can be sold.
- Mold and water damage
- Pest infestation.
- Wildfire infestation.
- Fire or electrical hazards.
- Toxic or chemical hazards.
- Major structural hazards or building code violations.
- Trip hazards.
-
Here is a helpful article for sellers and buyers. Copy & paste:
https://www.ownerly.com/home-buying/what-if-seller-refuses-to-make-repairs/
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Chapter 26
Condo and townhouse disclosures
+ Transfer Disclosure Statement, or TDS).
+ Natural Hazard Disclosure, or NHD.
+ Lead-based paint disclosure.
+ Water heater bracing.
+ Smoke alarms and carbon monoxide disclosures.
+ Insurance claims during the past five years.
+ Insurability of the property.
+ Copies of any and all HOA documents (CC&Rs, bylaws, etc.).
+ Articles of Incorporation.
+ Disclosure of any pending or anticipated litigation by or against the HOA.
+ Most recent 12 months of HOA minutes for regular or special meetings.
+ Names and contact information of all HOA members governing the Property (officers and management company).
+ Private transfer fees.
+ Pet restrictions.
+ Smoking restrictions.
+ Assigned parking spaces.
+ Pending or anticipated special assessments.
+ Anything the seller is aware of that adversely affects the value or desirability of the Property.
###
Chapter 27
Good and HOT news for multi-family investors
A refresher for investors:
+ Small and mid-size apartment buildings are rarely bought by hedge funds. Therefore, it is “open season” for individual investors to buy duplexes, triplexes, quadruplexes, and up to 30-unit apartment buildings. Multi-family properties are in demand. Hedge funds invest in large apartment buildings (100+ units) and blocks of SFRs, so you won’t be competing with them.
+ Los Angeles County has an endless supply of renters because most people can’t afford to buy even a small condo. The demand is high and is expected to grow for years, and rent rates are expected to continue increasing.
+ The perfect real estate investment has five attributes: passive income, equity, appreciation, leverage and depreciation (a “paper loss” that the IRS allows to be deducted from active income which you pay tax on).
+ Apartment building values are based on the financials (profit and loss statements and rent rolls) and cap rates. The higher the net operating income (NOI) the more the property is worth. Income properties are valued based on NOI per year (revenue minus expenses).
+ Cash flow = NOI minus debt service payments (mortgage payments). Note: Since the value of a property increases as the NOI increases, you can force the value up by raising rents and occupancy. This is called Forced Appreciation. + Quick note on cash flow (the difference between the NOI and the debt service payments, or mortgage payments). Here are three formulas:
Yearly cash flow = NOI minus debt service payments.
Cash in the deal = down payment + closing costs + rehab costs.
Cash-on-cash (%) = cash flow divided by cash in the deal.
+ One common way to avoid tax liability is to do a 1031 Exchange. To accomplish this correctly the owner needs to consult with a 1031 Exchange Intermediary and a tax specialist.
+ The Dodd-Frank Law is not applicable to duplexes and larger buildings as long as they aren’t owner-occupied.
+ “Free” management fee? Very possible. If the right property management company is hired and the property owner has a rider under the management company’s master insurance policy, the savings from reduced insurance premiums can be greater than the management fees.
+ Multi-family properties of 5+ units valuations are based on the numbers, specifically their net operating income (NOI) and cap rate. NOI formula: NOI per year = revenue minus expenses. Cap rate formula: Cap rate (%)NOI divided by price. The higher the cap rate the better. A related formula: Value of property = NOI divided by market cap rate. A good deal is when the cap rate at which you are buying the property is greater than the market cap rate. Ideally, the purchase cap rate will be greater than the market cap rate. The higher the cap the lower the price.
Note to investors: Having homes that are rented out all year or the majority of the year can provide a stream of steady income and tax benefits, as well as building equity. Landlords can get a tax deduction on the rental income by depreciating the property, which means deducting the cost of buying or improving a rental property. You can also use any expenses (including your mortgage, utilities, repairs, etc.) to help offset rental property income by deducting the expenses from personal tax obligations. This means that a portion of the income is tax-free.
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Chapter 28
Capital gains article – one of the best
The following informative article will save you a ton of money when selling your home. However, it shouldn’t be a substitute for consulting with your tax advisor. Enjoy the article. Click here:
https://www.youtube.com/watch?v=M21Z6_K_sbI
For your convenience here is a capital gains worksheet:
How to calculate capital gain
| Your home’s original sales price when you bought it (not what you brought to closing). |
|
| Additional costs you paid toward the original purchase (include transfer fees, attorney fees, and inspections but not points you paid on your mortgage). |
+ |
| Cost of improvements you’ve made (include room additions, deck, etc. Improvements do not include repairing or replacing existing items). |
+ |
| Add the above items to get your adjusted cost basis: |
= |
| The proceeds from selling your home (the amount of money you realized from the sale, less selling expenses, such as brokerage commissions, inspection costs, legal fees, title costs, money you spent to fix up your home to prepare it for sale, and so on. |
|
| The adjusted cost basis figure from above. |
- |
| Your capital gain: |
= |
A Special Real Estate Exemption for Capital Gains
Up to $250,000 in capital gains ($500,000 for a married couple) on the home sale is exempt from taxation if you meet the following criteria: (1) You owned and lived in the home as your principal residence for two out of the last five years, and (2) you have not sold or exchanged another home during the two years preceding the sale. You may qualify for a reduced exclusion if you otherwise qualify but are short of the two-out-of-the-last-five-years requirement if you meet what the tax law calls “unforeseen circumstances,” such as job loss, divorce, or family medical emergency.
Calculating cost basis.
The cost basis for real estate is generally what you paid at the time of purchase. If you have made capital improvements to your home (that is, an addition or permanent structural change to a property that improves its value), you can add the cost of the improvements to your cost basis. For example, you buy a house for $250,000 and pay the mortgage off over 20 years. While you own the house, you hire someone to install a deck that costs $10,000. The cost of the deck would be added to your original cost basis, making your adjusted cost basis $260,000. If you then sell the house for $310,000, your total gain on selling the property would be $50,000 (the sale price minus your adjusted cost basis).
If you receive real estate as a gift, the rules above for gifts would apply.
The examples listed above are fairly straightforward, but calculating cost basis can be complicated. In order to make sure you're maximizing your tax benefits, consult with a financial advisor or tax advisor. They'll be able to assess your individual situation to make sure you’re being as efficient as possible from a tax perspective.
###
Chapter 29
Proposition 19 explained
If you or a relative or a friend are homeowners age 55 or older, the following may be interesting and helpful if you plan to sell your home and buy a replacement home in California.
Proposition 19 replaced propositions 60 & 90 with major changes. Following are the basic requirements and features:
+ Homeowners age 55+ can sell and transfer the tax base of their existing primary residence to a replacement property anywhere in California (before Prop 19 only a few counties participated).
+ For 3 groups of California homeowners: Age 55+, severely disabled, and victims of wildfire or natural disaster.
+ No more restrictions on the value of either home.
+ Sellers can perform this transaction up to three times (previously allowed only one time).
+ Sellers can purchase a replacement home before selling their primary residence.
+ Prop 19 became effective April 1, 2021.
Meanwhile, this video will explain Proposition 19:
https://www.youtube.com/watch?v=2cZ9caMYvNs
Note: Homeowners should contact a professional tax advisor before selling or buying their properties when utilizing Proposition 19.
Required paperwork AFTER completing a Prop 19 transaction:
The State Board of Equalization (BOE) created several new forms as part of the Prop 19 implementation process. When completing a Prop 19-eligible transaction you will need to fill out one or more forms, depending on which eligibility criteria you meet. These forms are being made available to all county assessors throughout the state. If your local assessor has not yet made these forms publicly available, don't worry because you are entitled to tax savings benefits based on meeting the eligibility criteria, not on the existence of the forms. You can submit the forms once they are available in your county, and you will be entitled to Prop 19 benefits. Also, your tax advisor may have these forms. Please contact your tax advisor for financial issues and matters like Prop 19.
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Chapter 30
Fsbo sellers beware of lowball offers and unscrupulous investors
Many fsbo buyers and investor-flipping companies are “bottom fishers” and make lowball offers because they think sellers are saving money by not having to pay a commission (broker fee). They also ask the sellers to pay for all repairs, including termite Section 1 repairs, which include expensive fumigation (tenting), and dry rot repairs usually found in bathroom sub-floors. Unscrupulous investors are trickier by presenting an acceptable offer, then they wait until close to the end of the 17 days for the buyer to investigate the property (inspections, etc.), then they present a Request for Repairs form asking the seller to be responsible for all repairs, including termite Section 1 repairs. Or they will often ask for a huge credit or a price reduction. However, you certainly have the right to refuse. But if you refuse, the buyer can cancel and get his/her entire deposit back. The problem for the seller is that the selling process will have to start all over again, which costs money and valuable time. My advice is: first, know your buyer, then compose a counteroffer that prevents the buyer from getting a credit or a lower price, or just refuse the request for repairs or a credit.
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Chapter 31
Sellers beware of deep-discount flipping companies
This is a heads-up for homeowners who need or want to sell their homes quickly. Be aware of and don’t get duped into selling to real estate flipping companies like “We buy houses,” “We buy houses for cash,” and “We buy ugly houses.” They prey mostly on owners of distressed, pre-foreclosure, off-market, long-time-on-market, and fsbo properties. It will be a costly mistake to sell to those companies for several reasons. The biggest reason is they buy houses 35% to 50% lower than fair or true market value. Unfortunately, these unscrupulous companies will survive at least for a while longer because they have strong (but deceptive) marketing programs. They also have a few dirty tricks. One damaging trick they have mastered is to offer a fairly high price, then after the seller accepts the offer they negotiate a lower price based on any needed repairs. They will usually win the negotiating, especially if the seller needs to sell quickly, which is usually the case. Unfortunately, this could also get worse for the future buyer because the flipper company (the new owner) will renovate the house with low-quality material and workmanship, then put the beautiful house on the market. However, the good news is that the future buyer will order a professional home inspection during the 17-day investigation period after the offer is accepted, and will either get the seller (flipping company) to upgrade the shoddy workmanship and inferior material or cancel the contract.
It is true that these companies sell houses quickly, that is if homeowners are willing to take a financial beating. However, a savvy Realtor with a strong and effective marketing program will also get homes sold quickly AND at the highest price the market will bear. In fact, that is part of a realtor’s contractual fiduciary duties to the seller.
My advice to homeowners who have been solicited by these devious “We buy houses” franchises, or to owners who have been thinking of selling to them, is to talk to a good realtor or a real estate attorney. A good realtor can get your home sold quickly and at the highest price possible, and will watch out for your best interests and legal requirements. It doesn’t matter whether the property is distressed, selling “as-is,” or an immaculate move-in-condition house. Good realtors will do what they are supposed to do plus help with your closing costs and help find or create a good deal on a replacement home if that is desired.
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Chapter 32
Good investors improve neighborhoods
They also increase property values and improve the economy. They hire realtors to represent them if the realtor:
+ knows where to find the right kind of property (fixers, distressed. off-market properties) and knows how to find or create good deals.
+ knows how to present low offers that will be accepted.
+ knows how to present an offer with no upfront money or proof of funds.
+ gets the seller to pay the realtor’s broker fee.
+ studies and analyzes the comps and after-repair value (ARV).
+ coordinates smooth and problem-free transactions.
+ gets offering memorandums (OMs) and rent rolls for multi-family properties.
+ works hard before and during the entire transaction.
+ has a spotless record with the DRE and no complaints.
+ every realtor action is in the best interest of the investor.
Reminder: Having homes that are rented out all year or the majority of the year can provide a stream of steady income and tax benefits, as well as building equity. Landlords can get a tax deduction on the rental income by depreciating the property, which means deducting the cost of buying or improving a rental property. You can also use any expenses (including your mortgage, utilities, repairs, etc.) to help offset rental property income by deducting the expenses from personal tax obligations. This means that a portion of the income is tax-free.
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Chapter 33
1031 Exchange -- Explained
The basics:
A 1031 or “like-kind” exchange, named from IRS Code Section 1031, is an investment tool that property managers and investors can use to defer capital gains tax (among other useful benefits). It is also a way to postpone capital gains tax on the sale of a business or investment property by using the proceeds to buy a similar property.
The crux of the process is the exchanging of two or more properties. In the most common type, a deferred exchange, you start by selling a property. This is often referred to as the “relinquished” property, as you’re giving it up. Next, you select three replacement properties. Then, you purchase one of those properties before the end of the 1031 exchange timeline. The next three paragraphs are from the IRS. More explanations follow the IRS article.
IRS article:
Like-kind exchanges -- when you exchange real property used for business or held as an investment solely for other business or investment property that is the same type or “like-kind” -- have long been permitted under the Internal Revenue Code. Generally, if you make a like-kind exchange, you are not required to recognize a gain or loss under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, you must recognize a gain to the extent of the other property and money received. You can’t recognize a loss.
Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building.
Form 8824, Like-Kind Exchanges, is used to report a like-kind exchange. Form 8824 Instructions provide information on general rules and how to complete the form.
End of IRS article.
1031 exchange – explained (continued).
A key rule about 1031 exchanges is that they’re generally only for business or investment properties. Property for personal use, like your home or a vacation house, doesn’t count. Securities and financial instruments, such as stocks, bonds, debt instruments, partnership interests, inventory and certificates of trust aren’t usually eligible for 1031 exchanges.
A 1031 exchange is fairly complex, so you must (required by the IRS) hire a qualified intermediary (QI), and you should consult with a tax specialist. You can read the rules and details in IRS Publication 544, but here are some basics about how a 1031 exchange works and the steps involved.
Step 1: Identify the property you want to sell. A 1031 exchange is only for business or investment properties. Properties for personal use, like your primary residence or a vacation home, don’t qualify.
Step 2: Identify the property you want to buy. The property you’re selling and the property you’re buying must be "like-kind," which means they’re of the same nature, character or class, but not necessarily the same quality or grade.
Step 3: Choose a qualified intermediary. One way to make sure you don't receive cash prematurely is to work with an intermediary (also called an exchange facilitator). They hold your funds in escrow until the exchange is complete (assuming the sale and the purchase don’t take place simultaneously). Note: Choose a QI carefully. Flakey intermediaries sometimes go bankrupt, which could cause you to lose money, and you could miss key deadlines and end up paying taxes now rather than later.
Step 4: Decide how much of the sale proceeds will go toward the new property. You don’t have to reinvest all of the sale proceeds in a like-kind property. Generally, you can defer capital gains tax only on the portion you reinvest. So if you keep some of the proceeds you might end up paying some capital gains tax now.
Step 5: Keep an eye on the calendar. For the most part, you have to meet two deadlines or the gain on the sale of your property may be taxable. First, you have 45 days from the date you sell your property to identify potential replacement properties. You have to do that in writing and share it with the seller or your qualified intermediary. Second, you have to buy the new property no later than 180 days after you sell your existing property or after your tax return is due (whichever is earlier).
Step 6: Be careful about where the money is. The idea behind a 1031 exchange is that if you didn’t receive any proceeds from the sale, there’s no income to tax. So, taking control of the cash or other proceeds before the exchange is done may disqualify the deal and make your gain immediately taxable.
Step 7: Tell the IRS about your transaction. You will need to file IRS Form 8824 with your tax return. That form is where you describe the properties, provide a timeline, explain who was involved and detail the money involved.
Three more things to know about 1031 exchanges:
- You still have to pay tax, but later. A 1031 exchange doesn’t make capital gains tax go away; it just postpones it. A capital gains tax bill will come due at some point. However, if a 1031 property remains unsold at the time of the owner's death, heirs of the property may be able to minimize or altogether avoid the tax implications via a stepped-up cost basis.
- The properties don’t have to be similar; you don’t have to swap a rental property for an identical rental property or a parking lot for a parking lot. "Like-kind" generally means you’re swapping one investment property for another investment property. For example, you can exchange a quadruplex for a commercial building. (Again, be sure to see a tax specialist before taking action).
- Relationships matter. Your qualified intermediary or exchange facilitator can’t be a relative, your attorney, banker, employee, accountant or real estate agent. People who have served you in any of those capacities in the past two years are off-limits. And you can’t be your own qualified intermediary.
Want to learn more? Read Investopedia’s article: https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx
End