Real Estate Snippets

How Long to Sell My House

How long will it take my house to sell?  It's a question every real estate agent and every seller would love to be able to answer.  The difficulty is that every house is pretty unique.  Floor plans may be the same but most often colors, furnishings, and condition vary greatly which impact the time it takes for a house to sell.

There are ways to "guess-timate" the market time, however.  An agent can calculate the average market time for houses that have sold in that area in the last few months.   If the house being listed is similar to the ones that have been sold AND the prices are similar, the days on the market  MAY turn out to be similar as well.

Another calculation is called absorption rate.  This factor is found by dividing the number of houses in that area that are currently on the market by the number of sales that closed in the last 30 days.  For instance, if there are 742 houses available currently in St. Paul and 89 houses sold last month that would make the absorption rate 8.34.  That means it would take 8.34 months to sell all the houses currently listed in St. Paul if no more houses were listed!  That is a LONG time!

I think averaging the market time might be a more hopeful figure in today's market.  The safest answer to "how long" still is that my crystal ball hasn't shown me that answer yet! 

Value Range Pricing

In a seller's real estate market, buyers' agents developed gimmicks to win in multiple offer situations.  Now that it's a buyer's real estate market in Minneapolis and Saint Paul, the need for gimmick creation has been transferred to the sellers' agents.  Voila!  Value range pricing is being re-visited by listing agents.  Value range pricing actually publishes a range between the lowest price and highest price the seller will consider in an offer on their home. 

Okay, I'll bite.  Not every new idea is necessarily bad because it's new.  My logic is this.  When I represent the buyer purchasing a home in which I know the seller's lowest acceptable price, I'm still going to check the comps and see what the other homes are selling for in the area.  If the lowest price the seller will accept is still too high, I'm going to suggest the buyer write an offer below the lowest published price.  If the comparable homes in the area have sold for more than the lowest published price, I'll suggest the buyer offer the lowest published price.  Why pay more if the seller will accept less?

Just recently I found one home value range priced in our Regional MLS.  It's not common in the Minneapolis Saint Paul area . . . yet.  In some states, value range pricing has been around for a decade and is now really taking hold.  One example is San Diego county in California where value range pricing was done on 56% of the listings in 2004!  That's a lot of homes.  Value range pricing did not guarantee a higher purchase price for the home, but it did shorten the length of time on the market.  In Minnesota's real estate market that would be considered a boon on many listings.

Why the success of this marketing technique?  My first reaction is if the seller is willing to sell at the low price, why not list it at that price?  Why would buyers be more attracted to the house with a value range than one that is priced low?  What is the draw?  Is it possible that the buyer sees the "value" range much like buying clothing on sale?  They see the original price marked to the new discounted price and automatically assume they're getting a deal!  Bargain shoppers.  My mom bought 7 leaf bags of skeins of yarn which she never used because they were such a good deal!  Is that what value range pricing is doing for the buyer?  Thinking they have a bargain in hand?  My caution is to check comparable sales in the neighborhood.  The "range" the house is valued in may be higher than what others have sold for.  Ask your agent to check and make sure!

1031 Real Estate Exchange

Most often when we think of the word exchange, we think of returning an item to the store for a different size or we think of changing our currency for the currency of another country to which we are traveling.  Usually it's only the experienced real estate investor who thinks of an exchange as applied to real estate.

A real estate exchange or 1031 exchange was created to help investors defer paying capital gains taxes on their investment properties until a future date.  Capital gains taxes are charged on investment properties at the time of sale unless an exchange is arranged.  The rules are quite stringent for completing an exchange so it's wise to consult a real estate agent who is experienced in exchanges.

A summary of the rules follows:

• The property being exchanged must be an investment property.
• The property being exchanged (the property being sold) must be exchanged for a like kind property of equal or greater value.
• Like kind property means investment property exchanges for investment property.  For example, a residential rental property may be exchanged for a warehouse rental property.
• The money from the sale of the first property must be held by a qualified intermediary.  The seller cannot touch any of the money from the sale.
• The seller of the exchange property has 45 days from the closing of the relinquished property in which to identify 3 properties or 3 groups of properties which will be purchased to complete the exchange.
• The seller of the exchange property has 180 days from the closing of the relinquished property in which to close on one of the three properties or groups of properties identified as the exchange properties.
• Monies from the relinquished sale will be applied to the purchase of the exchange property.

If the criteria above is not met, the seller will have to pay the capital gains tax on the property s/he sold.  More information can be obtained here.

My husband and I own 80 acres which we have used as a weekend retreat and hunting land.  We have owned the property for many years, but never rented it.  We recently considered placing the property on the market.  One of the issues we considered in our decision making was the fact that we will have to pay capital gains tax on the "profit" from this land.   We realized that if we wanted to avoid that tax problem, we would have to turn the property into a rental for a minimum of 2 years and then "exchange" it by selling it and buying a new "rental" property.  Once we purchased the rental with the cash from the acreage, we could mortgage the new property and use the funds from that mortgage for home improvement or for any fun thing we'd like.  Prior to the purchase with the exchange funds, we could not touch that money.  We haven't yet decided if we want to "rent" our acreage or not.  It may just become an inheritance for our children, and they can worry about the taxes!

Lead Paint

Lead based paint can be a concern in houses built before 1978.  Many, whose childhoods occurred during the 1940's and 1950's ask, "Why is lead paint such a concern today?  We lived through it!"  An important point we forget is that the lead paint we lived through was usually recently painted and in good condition.  It definitely didn't look like this picture!  As a result, the danger to us as children was minimal.  The paint was neither chipping, peeling, or flaking . . . yet!  It was intact.  As with many hazardous items, the decaying process is when the real danger begins for worst exposure.

Oral consumption of lead paint or breathing in the minute particles from sanding can be very hazardous especially to unborn babies and young children.  High levels of lead in children can cause:

• Damage to the brain and nervous system
• Behavior and learning problems (such as hyperactivity) 
• Slowed growth
• Hearing problems
• Headaches 

High levels of lead in adults can cause:

• Difficulties during pregnancy
• Other reproductive problems (in both men and women)
• High blood pressure
• Digestive problems
• Nerve disorders
• Memory and concentration problems
• Muscle and joint pain

Precautions can be taken to prevent lead poisoning.  These include keeping the lead paint encased by keeping the surface free of peeling and chipping paint with frequent repainting; washing the peeling surface instead of sanding or scraping; not putting hands in the mouth that have contacted lead dust; not eating dirt; and not vacuuming lead paint or dust as it easily becomes air borne. 

Only one house in my real estate career had a lead assessment done.  It was not a surprise to discover that there were high levels of lead in the paint.  What was surprising is that the house also had lead in the wood varnish and in the wallpaper!  It seems lead was used in many mediums when it was popular.  Galvanized water pipes were a source of lead in old homes as well.  Allowing the water to run for a minute before using it is recommended when these old pipes are present.  Another place that often has high lead levels is the dirt next to the curb of the street.  Before unleaded gasoline was used, car exhaust would expel onto the curb soil causing high lead levels.  Children would then track this dirt into the house or play in the dirt and get lead poisoning from this source.

The Environmental Protection Agency has excellent info on their website regarding lead paint and the handling of it.  That website can be accessed by clicking here.

Purchase Agreement Contingencies

Buyers and sellers alike question what contingencies are on a purchase agreement.  A contingency is any condition that must occur before the purchase agreement becomes completely binding.  Essentially the first step (the contingency) must occur before the next step can happen.  Common contingencies include:

• The buyer's ability to get financing.
• A private home inspection arranged by the buyer.
• The sale of the buyer's house.
• Review of townhouse or condo association documents.
• Seller providing clear title.
• Well and/or septic inspections.

With any of the above contingencies, wording exists in the Minnesota Association of REALTORS approved forms to clearly define time limits and penalties if the contingencies are not met.  In the case of financing, the buyer's earnest money would be refunded to the buyer.  In the case of home inspection requests, if the seller chooses not to proceed with requested repairs, the seller can also cancel the purchase agreement and refund the buyer's earnest money.  Discovery of something disagreeable in association documents allows a buyer to cancel the purchase agreement and get their earnest money back.  Favorable well and/or septic inspections are required by some counties in order to close.  If the systems don't pass muster, the buyer again gets the earnest money back.  Clear title?  Without clear title, lenders will not fund the loan and once again the earnest money is refunded to the buyer. 

The most difficult contingency in today's market is the sale of the buyer's house.  Sellers are willing to accept an offer contingent on the sale of the buyer's house because they want a buyer, but the chances of the buyer's house selling is much slimmer than 5 years ago.  Again a time limit is spelled out in the purchase agreement and earnest money is refunded to the buyer in the event their house does not sell. 

Contingencies are protections many times for the buyer, but they are also like stepping stones to the closing.  One has to step from the first contingency to the next and then the next before the house can successfully close.

A Lesson in House Values

Your house as seen by yourself. Your house as seen by the buyer. Your house as seen by the lender. Your house as seen by the appraiser. Your house as seen by the assessor.

Each of the people involved in your transaction see the same house very differently. Yourself:  You love your house and your emotions color how the house looks. The buyer:  Likes the house but has not yet become emotionally attached so the house still can use some improvement. The lender:  Must have enough value in the home to cover the amount they are going to loan the buyer. The appraiser:  It's the appraiser's job to determine if the value is enough to cover the amount of the loan IF you stop making payments and the bank must foreclose. The assessor:  Most counties have guidelines for how much your taxes can leap, but the assessor's job is to find as high a value as possible so you continue to pay high taxes.

Improvements

The city assessor's visit gave me some insight on property taxes.  Several times he mentioned that our repair of the walls, replacement of the trim, replacement of windows and the roof were not considered "improvements" from a tax perspective.  Improvements would be adding a bathroom, finishing an addition, or finishing the basement or attic.  So, increasing the condition of our home from poor to good, may increase the value somewhat but evidently not as much as adding an improvement.  Interesting.  Do any others out there know if this impression is correct or not?  If you do, use the comment box to give us your information!

(c) Bonnie Erickson 2006

Contract for Deed

Sometimes the term rent to own is confused for a contract for deed purchase.  A contract for deed is very different than renting to own.  If you think about it, both terms describe themselves.  Rent to own is renting while you try to figure out how to own.  A contract for deed is a contract that sets up terms by which you can receive the deed for the land.  Sounds pretty simple really, but when you're not experienced simple things can become complex because of simple mistakes.

A contract for deed starts out with a purchase agreement, just like a regular house purchase.  The difference is a regular house purchase is usually financed with a mortgage through a bank or mortgage company.  A contract for deed financing is between the seller and the buyer.  The contract for deed defines the terms by which the buyer can receive the deed to the land.  The terms include:

• the purchase price
• the downpayment amount
• the loan amount
• the interest rate
• the term of the loan
• what the monthly payment will be
• whether there is a ballon payment

It also clarifies:

• whether there is an existing mortgage
• who pays the property taxes
• how much change can be made to the land during the contract period
• whether the seller can place a lien against the property
• the amount of improvements that the buyer can make to the property without the sellers' written permission

Additional things are covered in the contract for deed as well, but many of the items above could be a blog entry on their own.

Contracts for deed are often used in rural areas of Minnesota or by private investors who wish to sell without incurring a large lump sum of capital gains taxes.  Rural areas often used contracts for deed because raw land is often not considered sufficient collateral for a traditional mortgage.  There is the added value of community pressure if someone defaults on their payments or if the seller does something shady.  The neighbors hear about such defaults and there is community pressure to be honest and/or to perform.  Often contracts for deed have a higher interest rate than traditional mortgages as well.  The risk to the seller is higher, therefore, the interest rate goes up.  To protect buyers from greedy sellers, the State of Minnesota has a legal cap on the interest rate.

Additional quirks about contracts for deed will be addressed in future posts.

(c) Bonnie Erickson 2006

Rent to Own

Signs on telephone poles which proclaim "RENT TO OWN" entice people who are unable to qualify for a mortgage.  Sometimes these programs are legitimate and sometimes they are not.

Another name for "rent to own" is lease option.  The lease option is really two agreements combined together.  The first agreement is a lease like any other rental agreement.  The lease defines how much rent the tenant will pay for what period of time.  The second agreement is the "option to buy" agreement.

The option agreement is really a contract to make a contract.  The contract "creates a right to buy, sell or lease property for a fixed price during a set period of time." (Minnesota Principles of Real Estate by Rick Larson).  If the buyer is renting the home, the owner and renter may make an agreement that the renter can buy the property for XYZ price by a specific date.  The price is already negotiated.  The date that the renter must complete the purchase is also already defined.  The option to buy agreement binds both the buyer and seller to the purchase price and time.  The seller cannot sell his property to another party until the option to buy expires or is released in writing.  The option agreement is supported by valuable consideration (money, other property, chattel, or a promissory note).  In other words the buyer has to pay the seller something to enter into the option agreement.

Even though the option agreement does not create a legal interest in the title for the buyer, the option agreement is still enforceable if the seller dies.  The buyer can still "exercise" their option to buy the property under the agreed upon terms.  The sellers' heirs would have to abide by the written agreement.

There are many variations on the lease option or rent to own scenario.  Some private investors will allow a tenant to rent on a "rent to own" basis without a large up front amount.  The investor might collect as little as $1,000 up front and then charge a monthly amount as part of the option/down payment for the buyer's future financing.  Rent might normally be $1,000 and the person buying might end up paying $1,500 each month with $500 being placed in the investor's account as part of the option payment and/or future down payment toward the purchase.  The extra monthly amount would be lost if the renter does not perform on the purchase of the property within the time frame.  This kind of scenario is why I am hesitant about rent to own programs.  The renter might be better off paying less rent and working with a mortgage officer or credit counseling agency to clear up their credit problems with the extra $500 each month. 

There are some lease option programs that are legit.  However, if it sounds too good to be true, it usually is.  As the saying goes, "There ain't no such thing as a free lunch." 

(c) Bonnie Erickson 2006

Rehabber

That's my bright green hammer.  It goes with my bright green measuring tape and sheetrock knife.  The funny thing is the measuring tape and utility knife have disappeared.  The hammer is still around because it's only a figment of my imagination.  My kid has a bright green sheetrock knife and tape measure.  I wonder if mine sprouted legs and went to his house!  I own these tools myself (not my husband's) because I am a "rehabber".

I was recently asked what the term "rehabber" means.   This question made me aware that "rehabber" must be a bit of jargon that I did not realize was jargon.  The further mystery to this question was that it was posed by a REALTOR®.  I'm not sure which career uses "rehabber" in their vocabulary since a couple agents didn't know the term.

The Erickson definition of a "rehabber" is a person who buys a distressed property and fixes it up to resell at a profit.  A perfect example in the Minneapolis Saint Paul market is the "Ug Buys Ugly Houses" people.  The kind of distressed property that is chosen varies by the person who is buying the property.  Some rehabbers only like minor cosmetic repairs so buy houses needing only paint and carpet.  Others like to really tear into a house.  The worse the house condition the better they like it.  For all rehabbers the key is to buy the property at a discounted price, to not exceed the budget in making repairs, and to make repairs and upgrades that will be attractive to the potential buyer.

A rehabber is different from a person who "restores" a house.  A person who restores a house is usually doing it as a labor of love rather than as an investment.  In a "restoration", authentic materials are used rather than today's equivalent.  Hours are spent scouring salvage yards for matching old doors and woodwork.  Extensive labor and money is invested in fixing old windows in order to retain the original wavy glass.  Woodwork is hand stripped and refinished.  Exact copies are made for missing pieces. Medallions are copied.  Push button switches are found for the electricity.  Old lights are rewired and rehung.  Plaster is patched rather than replaced with wall board.  Old tubs and sinks are refinished instead of replaced.  Restoring a home means to return it to its original condition, not just to repair it.  Restoration is a laborious and expensive job.

Rehabbers do not restore, they repair.  If they do it quickly and well, there is the potential for profit.  What the public needs to remember is that the rehabber's profit is their "salary" for the labor and time they invest in the project.  They deserve to make a profit is they have done their job well.

(c) Bonnie Erickson 2006