Category Archives: Blogs

For Tenants on Commercial Leases

Online shopping and the recession have hurt commercial retail owners. Many large stores have disappeared including Borders, Circuit City, Woolworth, Tower Records, CompUSA, and Mervyns. This has allowed some commercial tenants to have more negotiating power. So please make sure that when negotiating a commercial lease that you consider these tips to get a favorable lease now and into the future.

Your business will need to cover your share of common costs. Thus, you want to make sure that these pass-throughs are contracted at reasonable prices, to arm’s-length vendors, with a good reputation. Try to cap the pass-throughs.

Make sure your potential future landlord discloses any side agreements that may impact tenants. One such agreement may be a covenant that the landlord cannot lease to certain types of businesses that would compete with an existing tenant. This may be a complimentary business to your business or may over-lap in some way with your business and it is better to know ahead of time rather than finding out once moved in.

It is best to make sure that your lease is consistent with “good faith, reasonableness and timeliness” and doesn’t have an unenforceable clause. Also, don’t waive your right to a jury trial, jury’s can be sympathetic to a smaller business being bullied and the landlord may not want to risk losing in front of a jury. Landlords will try to limit their exposure so that damages you may be granted to be paid by the landlord will be limited to the equity in the mall. If the mall is highly leveraged and has gone down in value it could mean that you will not have any damages paid to you, thus making the lease effectively unenforceable.

Commercial investors are often highly dependent on a large anchor tenant and they may give the anchor a lot of power. This can act as an easement on you and can allow the anchor to veto things you may want to do. Ask for a waiver and that the anchor provides in writing that they will honor your quiet enjoyment.

If you wish to have an option to renew, make sure to have a clear measure of what the rent will be if you decide to renew. An option to renew is meaningless if they can set an unreasonable price that would drive you out of the space anyways.

It is a good idea if you have a commercial loan, line of credit, or think that you may in the future to have your banker look over the lease. You don’t want to interfere with covenants of a loan or prevent a bank from wanting to lend to you because unfavorable lease terms, such as not being able to assign the lease if you default on the loan.

Make sure to have everything in writing. Verbal assurances are very hard to enforce and statements that they have not or will not enforce certain lease clauses put you in a hard position if they decide they wish to enforce them. Similarly, you need to understand your lease before you sign it. It is important to have a lawyer review the lease and that you ask any questions of them before signing the lease.

Tell me your stories. I am not a lawyer and cannot give legal advice. However, I can help you with the commercial leasing process, in many ways through selecting potential properties, negotiating terms, etc. Please comment, write or call me, I would love to hear from you.

Homeowner’s Assocation – What They Won’t Tell You

In many communities there exists a homeowner’s association (HOA) that has varying responsibilities.  Generally, at minimum they are responsible for common area maintenance, trash removal, etc. However, they could be maintaining playgrounds, a club room, a pool, tennis courts, and many other things. When under contract to buy a new home in a community with an HOA, the contract will specify how long the seller has to get you the HOA documents and how long you have to respond to them, if need be.

In a very litigious area like the DMV, these HOA’s could be in the middle of litigation with a developer, contractor, or HOA members. Normally, the HOA should be notifying it’s members of litigation and according to disclosure laws they are required to notify you (the Buyer).

This discovery whether by the seller’s disclosure, your agent’s investigation, your investigation or your lenders investigation will lead to many questions. Is it a serious suit (costly with a sound basis) or is it a frivolous suit? Does the HOA have adequate insurance to cover legal fees and any award? If not, what does the association’s reserves look like and will there be heavy assessments to cover the costs of the suit?

When searching for answers to these questions you will likely not get them from the HOA or seller. The HOA will not give it to you directly as you are not a member of the HOA, yet. The seller will likely not be given the information from the HOA to give to you, because the information is covered by the confidentiality rules known as “attorney-client privilege”, and the association not the members is the entity that is the client.

So what are you left to do to get this important information about the strategies, cost, prognosis and legal fees of this litigation? Well whatever is public record, such as pleadings, motions, orders, you can certainly read if available in your jurisdiction. Also, the amount and type of insurance the HOA has may be in the HOA documents or can be obtained through the seller. With research you may be able to take an educated guess to the severity of the litigation and the exposure an individual HOA member may have.

One of the biggest problems with this situation is that many lenders are weary of lending in these situations where there is a degree of uncertainty and where the HOA may have a large exposure that is not covered by insurance. One thing you can do when ready to submit an offer on a property is have your agent find out what is it’s  HOA’s legal name.Then you or your agent can do a search of the local courts about whether there is an active case. The more information you are armed with the better as this is your home or investment and the leg work on the front end helps shield you from potential financial exposure, wasted money and time, and headache on the back end.

Please let me know if you have been through a similar situation. Buyers, Sellers, Lenders other agents all have varied and fascinating stories and I would love to hear yours. As always, if you have comments, questions, need advise, or just want to reach out to me, please comment, email or call me. I hope everyone had a Happy Holidays and has a Happy New Year!

2015 Residential Real Estate Predictions

In recent years, home value growth has been around 6%, however, it is expected to slow to around 3% in 2015. With the median sale price of U.S. single-family homes and condos in October reaching its highest level since September 2008, investors are predicted to be backing away from the feeding frenzy caused by the recent price appreciations and foreclosure market. Instead of the bidding wars seen in some parts of the market recently, home inventory should rise in 2015, creating a much more balanced market.

Investor activity has been slowing and this trend is expected to continue. Also, buyers are not as worried about missing their dream home, feeling more confident that another equal or better house will come on the market soon. Foreign investor activity is expected to continue at the current pace or even increase. This is due to either tax laws or other regulations in home countries, uncertainties with currency fluctuations, and the U.S. market feeling safer than their home countries.

Two big demographic trends will occur next year as well. Millennials have been primarily renters, postponing home ownership longer than previous generations. However, Gen Yers are now starting families and seeking security. Millennial buyers will represent the largest group of home buyers by the end of 2015, taking over from Generation X.

Another important demographic that should be making an impact on the real estate market is baby boomers. Baby boomers are ready to make their long awaited move. Baby boomers are moving closer to a son or daughter, grandchild, or downsizing. With less homes underwater, they are ready to sell.

The other side of the coin is the residential mortgage market. Mortgage rates may not remain at historic lows. As foreclosures and short sales age out of credit reports, more people may qualify for home loans. Also Freddy Mac and Fannie Mae, industry leaders, may ease mortgage eligibility standards. Freddy and Fannie recently announced a new program with a down payment as low as 3 percent.

If you have questions, comments, experiences, or stories to share please comment or contact me directly. I am here to help you and yours with your real estate needs. Have a Happy Holidays, Happy Hanukkah, Merry Christmas and Happy New Year!

Commercial Real Estate: What You Need to Know Before Getting Started

Many real estate investors start with residential properties, build a portfolio of residential properties and then look to investing in commercial real estate. The reason for this is that they are more familiar with this market, being home owners themselves and feeling that it is a safer investment and easier to manage. Whether I have just described you or you want to start with commercial real estate, there are a number of things that you should think about before you get started.

Commercial real estate is often defined as when you need to obtain commercial financing. This would be for any property that is zoned for commercial use and for residential properties that have 5 or more units. The commercial real estate financing comes with a higher down payment and higher interest rate. With the added financing costs, you will get a cheaper per unit cost as you buy more total units. Also, the time commitment to manage a 5 unit property versus a 10 unit property is not significant.

Get educated on the area you will invest and find traditional local cap rates and net operating incomes. Think outside of the box, you may be comfortable and familiar with residential apartments, however you may find it more lucrative, rewarding and complementary to invest in office buildings, retail, industrial, mobile home parks, land, etc. Find an agent that has many connections and talk to others you know with commercial investments. Commercial properties are often sold without even being listed, so knowing the right people can introduce you to a larger available inventory. A deal partner or private lender may be needed on larger deals and can be the difference between an fair investment and a great one.

Know what you are getting into. Commercial deals can take much longer than a residential deal, so don’t rush it or get inpatient. The money wagered for the due diligence of a commercial property (inspection, appraisal, environmental, etc.) can cost $5,000 – $10,000 more or less, and this may be money lost if you decide it is a bad deal. Having a great real estate agent, can mean you know the costs and risk of ownership, and he/she can get you in touch with many people that can answer an array of questions. You want to know the cost of trash collection for the building, environmental considerations, and development and zoning zones in the area and future plans, etc.

If you are, were or want to be a commercial real estate investor or are in the industry, please comment or get in touch with me. Contact me anytime, I am here to help.

Real Estate Investment 101: Don’t Let Your Property Manage You

With interest rates low, housing prices relatively low, rental rates increasing, and rental demand increasing, investors are looking to housing. Safe investments, such as the 10 year treasury are not providing much return in this economic environment. Nationwide rental properties yield more than 6% on average, estimated by Goldman Sachs economists. In 2011 27% of home sales were by investors, up from 17% in 2010. In the 12 months ending March 2013 international investment in US real estate was 6.3% of the US home sales, $68.2 billion.

First time real estate investors have some important questions to ask themselves. First, do you have the time? Treat real estate investment like a part-time job with variable hours. Second, are you able to fix things yourself or manage contractors? Alternatively, you can hire a person like myself, a property manager, and have them find tenants, manage the property, make fixes, and collect rents. Depending on your budget, how you will finance, and what type and condition a property you get will determine your short and long term profit for this investment.

A good real estate agent should be able to take all these factors and give you an estimate and layout of the financials. One such measure is the cap rate. To find this, take the annual rental income expected from the property and divide it by purchase price. This gives an annual percentage return on investment. When you do this minus known and projected costs for the property, you could see how many years the property would take to pay back the initial investment and future years would then be purely income, if the property was paid in cash. The higher the cap rate the better, but be aware of local market trends and when you may want to sell your property as sometimes higher cap rates can be found in stagnate and depreciating markets, such as the current Florida market.

Look at current economic conditions, trends, and demographics. Markets with low unemployment, college towns, and positive job and migration growth trends are often good rental markets. Consider distressed properties. Shorts sales, REOs (bank owned), foreclosure auctions, probate sales, tax sales, and estate sales can be a good place to find investment properties at a great value. Prepare financially by saving up at least 20 – 25% of purchase price as well as six months of reserves to pay that property and two months of reserves for each of your other properties. Interest rates can be higher as well for investment properties.

Tour the property with a contractor and real estate agent to get quotes on fixing and updating items as well as insight into what will add the most value in the current rental or sale market, if you are flipping the house. Consider hiring a property manager. For 8-10% of your monthly rent a property manager will conduct regular property inspections, vet prospective tenants, collect rent, evict tenants if need be, and be on-call in the case of an emergency. If you will self-manage the property, find and vet good tenants with a good application and credit report, the National Association of Independent Landlords has a good one. Also have a good real estate attorney for closing on the property, for helping clarify tenants’ laws and to aid in eviction, if needed. To protect your assets, form a LLC or other entity that limits your liability. Carry the appropriate dwelling insurance policy and liability policy for the property. Please speak to legal and tax specialists to get legal and tax advice as to how best to plan, prepare, and manage your real estate investment.

Please share your real estate investment stories, comments, and questions. Contact me if you need help buying, selling, renting, managing a real estate investment or are interested in getting into it and want a consultation.

Rent-to-Own: You Are Ready, But Your Finances Are Not, Yet

So you love the area you live in and know you will be sticking around for awhile. You are a renter and want to own, but don’t have a down payment saved, your credit is low, your debt to income ratio is unfavorable, or some other factor is limiting you from purchasing a home at this time. A rent-to-own agreement may be a good solution for you.

In this type of agreement, generally, you agree to a sales price now, put some money down and pay a little higher each month above market rent that goes toward the purchase price when your option-to-buy matures. I say generally, because like all property agreements, there is so much flexibility and variability in what an agreement can look like, as long it is within the law two parties can put many different terms, options, contingencies, fees, etc. into this agreement.

A rent-to-own deal offers prospective buyers an opportunity to settle into a home while they obtain the financing needed to purchase the home. These agreements typically range from 1 to 3 years for the lease period. If you are in an appreciating market, then locking in today’s price would be beneficial to you when purchasing the house allowing you to purchase a house you may not have afforded at the time.

Typically, the down payment and the monthly credit toward the down payment are forfeited at the end of the lease period if you do not exercise your option to buy. This money is seen as the money paid to have that option-to-buy, but if you buy then typically it is put toward your down payment. It is helpful to discuss the rent-to-own agreement with a lender, as some lenders may look at the rent credit as a seller concession and won’t include it in the down payment. You also want to think about what happens if the property goes up or down in value, the agreement can have a contingency that addresses this, as specifically if the price goes down and the property doesn’t appraise at the purchase price you set, then you may not want the property or can’t afford the extra payment needed. It is highly recommended to have an attorney look over the agreement and advise you.

If you have been through a rent-to-own as the buyer or seller, or have comments on it, please write. If you want more information about this type of agreement and what is possible, please contact me.

Make Your Offer Stand Out

Depending on the market you are in for real estate, there are some hot ones and relatively cold ones. Even in currently cold markets, there are sub-sections of the market that are hot. The home that is well taken care of and priced right will sell relatively quickly with less of a discount in most markets. There are ways to have your offer stand out above the others, so you can get your dream home.

First, you need to do the soul searching faze. There are many tools to aide in the process and a great real estate can be one of them. Sit down and write down your home priorities. Then come back to those priorities the next day and write down why they are important to you, in terms of your preferences and lifestyle in the past, currently and what you want in your future. Ask your real estate agent for tools to get you thinking about all the aspects of your new home that you should think about.

Once you have identified your likes and dislikes, have been educated about the market, and have seen first hand some properties, you should be ready and willing to make a great competitive offer for homes that have recently come on the market especially for hot markets that will be competitive. Your real estate agent should be able to help gauge how quickly a home may sell.

All the leg work is so you feel good about making a quick competitive offer. To sweeten the deal for the buyer there are a number of things you can do. If the seller/market is asking for 1% earnest money deposit, offer 1.5% or 2%, which displays your commitment to purchasing their property. Shortening the time of your contingencies and  possibly removing some put the seller more at ease, by removing or lessening hurdles for the home to be sold. Having a great mortgage brokerage that is trusted and will vouch for your good qualification status can be helpful. Limiting what you may be asking the seller to do in the initial contract, such as the removal of something from the house or yard, will make it more stress free and more attractive for the seller.

Also make sure your agent knows you well, why you love the property and encourage them to express that to the seller. A seller loves to hear positive feedback on their home and knowing more about who may occupy it after them may encourage them to pick one buyer over the other, when the offers are similar.

If you have stories about comparing offers, making offers, comments, questions, etc, please write below, send me an email, or give me a call. I would love to hear about your experiences and answer your questions. If you are thinking about getting started in your home search, contact me so I can send you information and questionnaires to get your started in the process.

All Home Improvements Are Not Created Equal

You want what you want in your home, yes, and you should have it! However, just be aware that some of the improvements that make you more happy and comfortable in your home may not add the value upon resale that you invested. Some improvements could actually decrease the value and make the home harder to sell. So even if you don’t plan on selling for awhile, be aware of how your home improvements may affect the value and marketability of your home down the road.

You want a bigger master bedroom or kitchen, great, but don’t delete bedrooms from the house or make bedrooms so small that they are the size of a large walk in closet. If you need to claim space from a room, chose rooms that have ample space to donate. Or for a kitchen open up your floor plan to keep similar functional spaces, but increase the portion of the room you desire, like a larger kitchen.

Check with the code or a real estate agent when converting spaces to bedrooms. That study is not a bedroom until it has at least a closet, and hopefully a adjoining or close full bathroom. The basement room is not a bedroom until it has a specific sized ingress egress window that meets local fire code, a closet, and hopefully a full bathroom nearby.

We have all driven by that house that looks like a toddler stuck some Lego pieces together awkwardly. Added space can raise the value of a house, but don’t make it an eye sore. Be careful to work with an architect, draftsman, etc. to render a picture that has curb appeal by seeming to fit with the original design, roof style and line, etc.

When thinking about spending your home improvement dollars, know the current market trends to stretch your dollars and maximize the return on your investment. Today this means wood instead of carpet, new light switches, refinishing popcorn ceilings, paint versus wallpaper, and many more. A good contractor, real estate agent or other real estate professional can assist you with these decisions.

Be forewarned that expensive to maintain luxuries can detract from your homes appeal, as the new owners may not want the amenity and will factor in the cost to remove it. This is highly dependent on what price point you are at and the market you are in. Some of these items may be putting greens, koi ponds, swimming pools, fountains, hard to maintain landscaping, etc. By all means enjoy your chicken coop, but be prepared to remove it before listing your home for sale, or include in the disclosures that you would be willing to do so by closing.

For more information about these tips and more tips related to selling a house, please write or contact me. Please also share your tips and stories about home improvements and how they relate to your home sale.

FHA Mortgage Waiver for Short-Term Renovation Investors Soon to End

In response to the mortgage crisis and recession, investors that were interested in rehabilitating a home quickly, under 90 days, using federally-insured low-down-payment mortgage money were granted a waiver to do so. Prior to this waiver, investors interested in using FHA loans to fix-up and sell a house had to wait 90 days until they could sell the house. Under the waiver the investor could fix it as quickly as they wanted and sell it to a new buyer at a higher price using FHA financing. The waiver will come to an end on December 31, 2014.

The waiver has allowed for approximately 102,000 homes to be sold within this shortened time frame. The waiver has allowed the housing turn-around to happen at an accelerated pace, affording for lower turn around costs and thus better access to moderate income buyers.

The anti-quick flip rules were put into place due to fraud and abuse in the FHA system. In the 1990s, FHA saw teams of scam artists that would buy a house in disrepair, slap some cosmetic fixes onto it, get a false appraisal done, and advertise that much more was new or updated than actually was. Buyers then were paying more for these homes than they were actually worth.

Unfortunately, it is a double edged sword. While the anti-flipping restrictions can lower the likelihood of predatory investors, it also causes undue extra expenses to incur that are passed onto the moderate income buyers and in-turn can price homes out of their reach. An experience and qualified investor can often properly rehab a home within 30-60 days. The excess time to hold, pay for, insure, etc. is an unneeded extra expense and ties up the investment capital needed to do more rehabs in a given time period.

With FHA endorsed loans projected to be about 565,000 this year down from a normal year of between 800,000 – 850,000, a more than 30% decrease, there is a lot of pressure on the entry level market. There must be a happy medium. A shorter time frame, 45-75 days would be an option, with more emphasis on regulatory and punitive policies to find and punish the con-artist and their associates.

If you have been victim to this, have ideas about how to remedy the situation, further information, or anything else to add, please leave a comment.

Validated Monthly Recurring Income: Do You Have Enough?

In this age of computer-driven underwriting, even the countries wealthiest are sometimes getting rejection letters for financing or refinancing real estate. Most notably, recently former Federal Reserve Chairman Ben S. Bernanke’s refinance rejection. Likely caused by his recent disruption in steady regular employment income due to retirement. Since his Fed retirement he has made over $250,000 and has lucrative ventures on the horizon, Brookings Institution fellow and a book contract.

Borrowers beware. Lenders are scrutinizing “validated income” with a new vigor. Especially important to the retired individuals and the self-employed, borrowers with good sums of liquid assets, high credit scores can be turned away for insufficient regular cash flow to meet debt to income ratios.

Lenders are looking for consistent, often at least monthly, draw downs of retirement accounts that they can project to continue for at least three years. This continued, consistent and regular draw down should occur ideally before a loan application.

If you are in a similar situation, please contact me and we can sit down and look at what your projected debt to loan ratio may be and plan ahead as to how to prepare your finances for an upcoming financing event. We will also work with skilled lenders of your choice to explore your options. This could be an upcoming situation for a parent, sibling, etc. with social security income, rental income, occasional retirement draw downs, etc. So please share this information with all that you know and love that may be affected.

If you have a similar story or situation and want to share, please post a comment.