Due Diligence – What Is Important When Buying Real Estate?

When you make a big purchase, or an investment, buy a car, sign up for healthcare, etc. you do you “homework” to hopefully make a sensible decision that gives you good value for the money you are spending.

When you buy real estate, which is likely to be the most expensive, most complex, and riskiest purchase you will ever make, there is an extraordinary amount of due diligence that you should do to reduce your risk and make a smart decision. It’s a time consuming, laborious, and expensive process of which most buyers fail to understand and complete. Most don’t even know many of the steps, or they don’t understand the time and cost required to perform the tasks, steps, procedures, analysis, review, etc. To give you a feel for it, here are the main steps in buying income producing property.

Pencil out your deal. In order to determine whether or not you are buying a fair deal, you must pencil out, or pro-forma, your particular deal. This involves investing rents, expenses, vacancy, financing costs, current leases, capital reserves and replacements and inputting those figures into your pro-forma. And you need to do your own research and use good numbers because if you take the seller’s figures, you’re going to find out quickly their numbers were probably overly optimistic. You might need a C.P.A. or financial advisor to help you.

Financing your property. You must also take the time to get qualified and procure several bids to secure the best financing for their property. Understanding the costs and terms involved in a financing agreement, and how those clauses could impact your investment returns and future financing options on the property is a must. Just accepting the loan documents, without your and/or your attorney’s review, is not prudent practice.

Title Issues, Site and Title Insurance. Title issues, at least expensive ones, are rare. But that doesn’t mean you don’t have to do all the needed review, maybe with an attorney, on every single purchase – because you do. You will have a title insurance policy to review, plus an abstract of title that could list easements, restrictions on use, and a schedule of exclusions related to the title insurance. Reviewing all of these, probably with an attorney, is an absolute necessity. And you probably have to have a survey done to see if there are any encumbrances on the property. You don’t want to discover an issue after you’ve closed escrow.

Property Inspection and Rehabilitation. You will also need to have a professional building inspector review the property and do a report of all the issues. Then have several different contractors to come bid on the work that is needed to get it into the condition that makes sense for your ownership and rental operation. These need to be done within the tight timeframe of your inspection period so you can terminate the contract if you find issues and the costs of renovation are prohibitive.

Dwelling and liability insurance policy. During your inspection period you should also get some bids for properly insurance your real estate. Sometimes there are insurance issues, and you may not be able to obtain a policy or the premiums may be unaffordable. For standard properties in decent areas, like apartments, it should be relatively straightforward and easy. But if you add in fire prone, flood prone, hurricane or high property crime areas, you might find a little more trouble obtaining a reasonably priced policy. Make sure to get some premium estimates early in the due diligence process.

Partnership, LLC, tax and ownership issues. If you are buying with other partners, or raising capital for the purchase, there are a myriad of legal partnership, LLC, and tax issues that need to be reviewed with a professional before your purchase. You need to set up the entity structure and tax items before you close escrow so all investors and partners are satisfied with the agreement.

Those are the main due diligence issues for an already built and operating income producing property. There are many other tasks and procedures depending on the circumstances of your purchase. So talk to your real estate broker, lawyer, C.P.A., escrow agent, title officer and others involved in your purchase for other items that need to be considered. And make sure educate yourself well before the process begins and give yourself enough time to do a good job of completing all these tasks.

Leonard Baron is America’s Real Estate Professor – his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate buyers how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com.

Posted on 08. Aug, 2013 by in Real Estate

Are You Overlooking Any of These Fair Housing Laws?

While all property managers are likely (or should be) familiar with standard Fair Housing Laws, such as the prohibition of discrimination in the sale, rental, and financing of dwellings based on race, color, national origin, religion, sex, familial status or disability, there are also a variety of rules and regulations that have been implemented in the last few years that property managers may not be familiar with. Here is a summary of those recently implemented rules and regulations:

  • Civil Monetary Penalties Inflation Adjustment. The maximum civil penalty for a first violation of the Fair Housing Act was $55,000. Due to inflation, this has been increased to $75,000. Subsequent violators previously faced a penalty of $110,000, which has now been increased to $150,000.
  • Reasonable Accommodation for those with a disability. While not new, not everyone may be familiar with exactly what falls under the umbrella of reasonable accommodation. Currently, disability is defined by HUD as individuals with a physical or mental impairment that substantially limits life activities. These impairments can include visual and hearing impairments, cancer, heart disease, muscular dystrophy, diabetes, AIDS, mental illness, drug addiction, and chronic alcoholism. These additional protections include making reasonable accommodations in current property rules and policies in order to allow the disabled person to use the housing. Reasonable accommodations can range from assigning a parking space to a resident with a mobility impairment, to making an exception to a “no pets” policy to allow a visually or hearing impaired tenant to have an assistance animal. They also include things such as removing carpeting in a unit where a resident has severe chemical sensitivity. They also include giving mentally ill tenants the ability to seek treatment prior to evicting them due to violating property rules.
  • Newer buildings must abide by a different set of standards. For instance, for any buildings built after 1991 that has four or more units, kitchens and bathrooms must be able to be used by those in a wheelchair. Reinforced bathroom walls are also necessary in order to allow the future installation of grab bars. These requirements are for all 4 unit buildings that have an elevator. For buildings that do not have any elevator, these requirements extend to the ground floor units.

For more information, visit the Department of Housing and Urban Development website at http://portal.hud.gov/hudportal/HUD, or contact your local and state agencies for additional information.



Posted on 20. Oct, 2016 by in Articles

Audrey Wardwell, Broker/Owner
36 North Properties, Inc
CalBRE: 01746254
www.36northpm.com
p: 831-320-7116
f: 831-309-5584

The Mortgage Market Is About To Get Smaller

As 2014 begins a bureau created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, The Consumer Financial Protection Bureau (CFPB), will set new rules concerning mortgages. Lenders will be required to verify and inspect borrowers’ financial records. The rules discourage lenders from allowing borrowers to carry total debt payments totaling more than 43 percent of the person’s annual income.

That debt also includes existing debts like credit cards and student loans. Starting January 10th the CFPB will put into force a national standard for issuing mortgages that could help prevent the housing crash of 2008 and 2009. Earlier in 2013 CFPB director Richard Cordray called the new rules “the true essence of ‘responsible lending.”

All kinds of consumer advocates and mortgage professionals are lauding the new CFPB requirements. The new rules not only provide more responsibility for lenders, but it also protects them from lawsuits. “Lenders are going to be crossing their t’s and dotting their i’s like never before” said Bob Walters, the chief economist for Quicken Loans.

On the downside, there will be a big number of people who should have been able to qualify for mortgages that won’t be able to and will be shut out of the home-buying market. If you add to that the fact that mortgage rates have risen in the past 6 month and are predicted to gradually move up to the mid 5 percent range by the end of 2014, you can see that the mortgage market will be shrinking.

Others have commented that there’s a good chance that limits on the size of some popular mortgages will be lowered during 2014. CFPB director Corday noted that in the years leading up to the 2008 financial crisis, consumers could easily obtain mortgages that they could not afford to repay. In contrast, in subsequent years banks tightened lending so much that few could qualify for a home loan.

The new rules seek out a middle ground by protecting consumers from bad loans while giving banks the legal assurances they need to increase lending, he said in a press conference at the start of 2013. The new rules will limit offers like teaser rates that adjust upwards and large “balloon payments” that must be made at the end of the loan period.

They include several exceptions aimed at ensuring a smooth phase-in and protecting access to credit for underserved groups. For example, the strict cap on how much debt consumers may take on will not apply immediately. Loans that meet separate federal standards also would be permitted for the first seven years.

Balloon payments would be allowed for certain small lenders that operate in rural or underserved communities, because other loans may not be available in those areas. The bureau also proposed amendments that would exempt from the rules some loans made by community banks, credit unions and nonprofit lenders that work with low- and moderate-income consumers.

You can learn more about the details that the CFPB’s website which is a great source of information on new laws that govern the use of credit and consumer rights. Property managers, here’s an idea for you. Why not send a link to this article to your owner-clients and your prospective client list as a “heads-up” for the year ahead.

As I often like to remind us, being a font of information and the latest insights can separate you from your peers, leading to more referrals and a bigger book of business. On second thought, if you send this article to your owner-clients and your prospective client list, maybe it would be more prudent to copy and paste sections and leave off the last 3 paragraphs.

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Audrey Wardwell, Broker/Owner
36 North Properties, Inc
CalBRE: 01746254
www.36northpm.com
p: 831-320-7116
f: 831-309-5584

Posted on 27. Feb, 2014 by in Business

Why You Should Not Use Excel For Accounting

First, let me confess that I love Excel. Having used Excel for years, I’m fully aware of its strengths, and will continue to use it to create spreadsheets, graphs, and tables. But for some unknown reason, there is a small group of property managers that continue to extol the benefits of using Excel as their primary accounting software.

I have to admit that this has me stumped. The accounting software of today in no way resembles the awkward software of yesterday. Today, most software products are designed with the end-user in mind, and include easy system navigation, intuitive data entry screens, and system tutorials to make it easy to learn your way around the system.

If you’re using Excel to run your property management business, you may want to consider the following:

Excel’s Primary Functionality is NOT Accounting – Excel’s primary function is creating spreadsheets, not processing transactions, or producing financial statements. Yes, it can be used for those things, but typically with accounting software; not in place of it. As a result, users will spend an inordinate number of hours entering Excel data manually, because it does not have the capability to share data. So anytime your tenant pays rent, you’ll be posting that payment in your checkbook, your accounts receivable journal, and your tenant record. With regular accounting software, you post it once.

Propensity for Errors Increases – The lack of a central database and no double entry accounting system in Excel also means a lot more repetitive data entry. And each time you have to re-enter the same data, the likelihood of making an error increases dramatically. Also consider that without the safeguard of a double entry accounting system, it’s very easy to end up with out of balance accounts.

Lack of a Reliable Audit Trail – Accounting software has become valuable to business owners because of the ability to ensure that data is accurate and secure. Excel offers no such protection; meaning that formulas can be changed, entries accidentally (or purposely) deleted, and transactions erased, all without leaving a trace of the original entry behind.

Ease of Use – or Lack Thereof – While it’s fairly simple to create spreadsheets in Excel, making it a functioning accounting program requires another level of skill that most Excel users will never attain. Creating an invoice, printing a statement, or processing a financial statement in Excel can take up valuable time, while accounting software allows you to create those items in minutes.

While Excel will continue to provide a valuable benefit to property managers, it can provide many more benefits and less headaches by using it for what it was designed to be.

Audrey Wardwell, Broker/Owner
36 North Properties, Inc
CalBRE: 01746254
www.36northpm.com
p: 831-320-7116
f: 831-309-5584

 

 

 

 

Posted on 19. Feb, 2014 by in Business

Put it in Writing

Put it in WritingOften, when renting an apartment, tenants are overwhelmed by the amount of information they are given, from the initial apartment viewing, to filling out the application, to getting approved, to finally, moving in.  While it’s important to let all prospective residents know and understand the rules they must abide by when moving into their new apartment home, it’s even more important that the rules and regulations be put into writing.

While standard information such as lease term, rental amount, and deposit information is almost always included in every lease, it’s important that other items are written into the lease as well.  It’s also a good idea to mention these items to residents so that they are aware that they are there.  After all, most tenants do not read their lease from beginning to end.

Here are some things that property managers should ensure are included in every lease and mentioned to each tenant as well:

  • Rental due date.  While most leases will stipulate that rent is due the first of each month, most  management companies will offer a grace period of a few days.  If rent is considered LATE on the 1st, put it in the lease, likewise if the late period starts on the 3rd.
  • The penalty for late rent.  This needs to be spelled out as well.  Tenants must be informed what the penalties will be if the rent is late, and if extenuating circumstances will ever apply.
  • What utilities, if any, are included in the monthly rent.  If gas is included in the monthly rent, state that in the lease.  Likewise, if the tenant is responsible for electric, that should be stated in the lease as well.
  • Apartment alterations.  This can be a sticky area, and one most likely to be abused.  If tenants are required to get permission from management prior to making ANY alterations to the unit, it must be spelled out in the lease.  This includes anything from painting the walls, to installing a ceiling fan.  If this is not spelled out in the lease, tenants cannot be penalized for any property alterations found upon move-out.
  • Authorized landlord entry.  Another sticky area.  Years ago, when I rented a house, the owner of the house thought nothing of using her key to enter the property, clip roses in the backyard, and complain to me about the unwashed dishes in the sink.  Only legal action could keep her out.  While landlords are perfectly within their rights to enter a property during an emergency situation, 24 hour notice is typically required to enter any other time.  It would be in your best interests to put this in the lease.  And obey it.
  • Pet policy.  If your property doesn’t allow pets, put it in the lease.  If you do accept pets, layout any restrictions (dogs under 25 pounds), and any pet deposits required.  Also be sure to note whether the deposit is refundable upon moveout.

By providing your tenants with a comprehensive, in-depth lease, you can avoid any misunderstandings and possible legal issues later.

Posted on 10. Jul, 2014 by in Articles, Business

El Niño Information

What is El Niño?

El Niño is a naturally occurring event in the equatorial region which causes temporary changes in the world climate. Originally, El Niño was the name used for warmer than normal sea surface temperatures in the Pacific Ocean off the coast of South America. Now, El Niño has come to refer to a whole complex of Pacific Ocean sea-surface temperature changes and global weather events. The ocean warming off South America is just one of these events.

Why is it called El Niño?

Fishermen off the west coast of South America were the first to notice appearances of unusually warm water that occurred at year’s end. The phenomenon became known as El Niño because of its tendency to occur around Christmas time. El Niño is Spanish for “the boy child” and is named after the baby Jesus.

What cause an El Niño?

In normal, non-El Niño conditions, trade winds blow in a westerly direction along the equator. These winds pile up warm surface water in the western Pacific, so the sea surface is as much as 18 inches higher in the western Pacific than in the eastern Pacific. These trade winds are one of the main sources of fuel for the Humboldt Current. The Humboldt Current is a cold ocean current which flows north along the coasts of Chile and Peru, then turns west and warms as it moves out into the Central Pacific. So, the normal situation is warmer water in the western Pacific, cooler in the eastern.

In an El Niño, the equatorial westerly winds diminish. As a result, the Humboldt Current weakens and this allows the waters along the coast of Chile and Peru to warm and creates warmer than usual conditions along the coast of South America. As far as we know, other forces, such as volcanic eruptions (submarine or terrestrial) and sunspots, do not cause El Niños.

How often does El Niño occur and how long does it last?

El Niños occur irregularly approximately every two to seven years. Warm water generally appears off the coast of South America close to Christmas, and reaches its peak warmth in the eastern Pacific during the late fall of the following year. After peaking, the waters will tend to cool slowly through the winter and spring of the next year. Effects can be felt continually around the globe for more than a year, though this is generally not the case in any one place.

What effects does El  Niño have on the world climate?

A strong El Niño is often associated with flooding rains and warm weather in Peru, drought in Indonesia, Africa, and Australia, torrential downpours and mudslides in southern California, a mild winter in the northeast, and fewer hurricanes in the southeast. Keep in mind that these effects aren’t guaranteed, but an El Niño makes these conditions more likely to happen.

El Niños occur irregularly approximately every two to seven years. Warm water generally appears off the coast of South America close to Christmas, and reaches its peak warmth in the eastern Pacific during the late fall of the following year. After peaking, the waters will tend to cool slowly through the winter and spring of the next year. Effects can be felt continually around the globe for more than a year, though this is generally not the case in any one place.

How does El Niño affect bird and sea life?

In non-El Niño years, upwelling of deep, cold ocean water brings up nutrients that lie near the bottom. Fish living in the upper waters feed plankton that are dependent on these nutrients. Kelp forests also depend on cool, nutrient-rich water for survival and growth. An El Niño reduces the upwelling of cold water off the coast of the Americas. When this happens, fish either die or migrate into areas where they’ll find more to eat. With the fish gone, sea birds that depend on them may die or go elsewhere. Kelp forests are often destroyed by storms and ocean swells.

Off California, fish populations may also be reduced. Marine mammals, such as seals and sea lions, that feed on fish may be affected. Californians may see an increase in dead and live strandings of seals and sea lions along the coast, and poor seal and sea lion pup survival at island breeding sites. However, despite the increased number of deaths of marine mammals during an El Niño, scientists report the long-term growth rate for California sea lions and harbor seals to be 6 to 10 percent annually. An occasional increase in strandings or deaths of these animals is not a threat to their overall population.

How can we predict El Niño?

In the tropical Pacific Ocean, the National Oceanic and Atmospheric Administration operates a network of buoys that measure temperature, currents and winds in the equatorial band. The collected data are evaluated by complex computer models designed to predict an El Niño. Even these complex models, however, cannot predict the exact intensity or duration of an El Niño, nor can they predict how areas will be affected.

What is the difference between El Niño and Al Niña?

Both refer to different phases of ENSO. El Niño refers to a pattern characterized by the tropical Pacific’s warmest water spreading eastward to the coast of South America. The opposite condition is characterized by unusually cold ocean temperatures in the tropical Pacific; hence the strongly contrasted name, La Niña.

Information obtained from: https://www.wildlife.ca.gov/Conservation/Marine/El-Nino#26072346-what-is-the-difference-between-el-nio-and-la-nia

Preparing Your Properties for El Niño

While preparing for winter weather is a common occurrence for property managers throughout the country, the preparation for this year’s winter may be slightly different. The National Oceanic and Atmospheric Administration (NOAA) has predicted the return of El Niño this winter; one of the strongest on record. The return of El Niño means a shifting weather pattern, increasing the likelihood of increased moisture across a wide swath of the U.S.

With El Niño expected to impact Southern California, as well as Nevada, Arizona, New Mexico, through Texas to Florida, the chance for inclement weather in these areas increases dramatically. And while this changing weather pattern can create havoc for most of us, property managers face a more daunting task; preparing their property for the possibility of increased inclement weather. And while none of us can accurately predict what the weather will be in the coming months, it’s important for property managers to be ready for the possibility of increased wet weather and intense storms. So what are some of the steps property managers can take today to be better prepared for the possibility of El Niño affecting their properties?

  • Make sure that property insurance policies are current with adequate coverage. One of the things that you don’t want to happen is for a catastrophic weather event to occur and you’re your current policy is inadequate or lapsed.
  • Make a point of checking windows and entryways, repairing or replacing loose panes, bent storm windows, or inadequate weather stripping.
  • Check roofs for any loose shingles or potential leaks and repair them promptly.
  • Walk the grounds and check for loose branches, damaged or dead trees, or other landscaping that could pose a hazard during a brutal winter storm.
  • If your properties are in a low-lying area, be prepared for the possibility of extensive flooding from extended periods of rainfall. This can include everything from having sandbags ready to be deployed, to having an escape route planned out for residents in case of catastrophic flooding.
  • Be prepared for other events such as loss of power for extended periods of time – which can mean no heat in some areas. Again, having an emergency plan can help.
  • Stock up on flashlights, blankets, and non-perishable food items, and advise your residents to do the same.
  • Be sure to convey this information on a timely basis to your residents; perhaps holding a special information day, or distributing emergency and evacuation plans with monthly rental receipts.

While no one can tell if severe weather will make a beeline for your properties, being prepared will help both your tenants, and your staff handle just about any situation they may be faced with this coming winter.

Posted on 12. Nov, 2015 by   in Articleshttp://36northpm.com/blog