Over Improving Your House

I can only say, your home or house, whether it is a single family or condominium, is not an investment. However, you must consider which improvements are worth doing and which are not. Your home is the place, where you live, whether you rent or buy. Now, you should only spend what you can afford on your home, but there are things you may put into your home that you would not put into an investment property, because you want whatever it is to enjoy your lifestyle more fully. It may be something like a spa tub. You may not recoup the cost of that tub when you sell the property, but your quality of life is so improved that it is worth the expenditure while you are in the house, but do not consider it an investment, but rather a luxury. And don't expect that it will increase your property value by the amount you spent or any at all.

I had a buyer look at a very pretty jacuzzi and say that would be an expensive sweater dryer for her. Some of these things, which you may think add great value, will not for the next buyer of the home. The spa tubs are a perfect example, because some people love them and others hate them. Unless, you are investing in very high end properties, you probably would not include something like a spa tub for a tenant, because of the cost, maintenance and propensity to have more problems than a regular tub. Would you make enough in rent to cover the cost of installation, maintenance and possibly replacement? Probably not and you would therefore not install it.

You must be careful not to over improve your home unless the expenditure absolutely does not matter, and you are prepared to take a loss when you go to sell the property. For example, if you have a two story row house with no parking in a neighborhood where the most expensive houses are selling for say $200,000.00 and all two story houses, and you put a $60,000.00 or more third floor on it, and you plan to leave the house in the next few years. Was the money well spent? Probably not. However, if you put central air, new plumbing, new electric, new roof, new doors, new windows, is it money well spent? The answer is usually yes; these items add value. If you go into a poor neighborhood, however, it may be hard to recoup the cost of something like central air.

If you go to my previous blog on COMPS or COMPARABLE PROPERTIES, you will gain an understanding of how a Realtor, or Appraiser for that matter, determine at what "price" a property should sell. What a Realtor or Appraiser is looking for, however, is a comparable property that is similar in size, close in proximity and has sold, hopefully, in the last six months. Thus, if you put a third story on the property, there may be no comps and no market for it. I am not saying no one will buy it, but if the price you need to get to come out even or even ahead is so great that your prospective buyer could buy in a better neighborhood and perhaps get something like a garage or parking, which your property does not have, they are likely to go for the better neighborhood.

Last year, I ran comparables for a property in the neighborhood, where my office is, which is the area South of Oregon Avenue, North of the Expressway, and West of Broad Street. Most of the Properties will sell close to $200k and up to perhaps $270K. There are a few along Broad Street and Marconi Plaza Park, which sell for more. The ones that sell for more have parking and many have been improved to be very high end properties. They tend to be larger and have a view of the Park.

At $270K in the properties not on Broad Street or the park, what do you get? Well, new everything plus hardwood floors, granite counter tops, finished basement, new windows and doors, 3 bedrooms, at least one bath, but more likely 1-1/2, a finished basement, high end appliances, new front, etc.. The subject property was originally, a three bedroom. The middle room, however, was reduced in size to accommodate the enlargement of the bathroom. The bathroom was definitely the nicest room in the house done in beautiful Italian Marble. The middle room was now reduced to a small office or storage; you definitely could not put a bed in the room. There was a third floor added and made into a large bedroom. The plumbing was run for another bathroom, but not built. There was a small deck off the back with a view of Center City. All of the mechanicals, window, doors, etc. were newer and good quality. The kitchen was newer, nice, but not as modern as what is currently selling as modern. The rest of the house was okay. It was very clean, well maintained, but rather vanilla. It was decorated to the owner's taste, but not to the taste of what is selling as "modern". Anyone looking at the house would want to decorate. They would probably want to further update the kitchen and put down hardwood floors. If you are spending $270K on a house in that neighborhood, you should get hardwood floors.

Now, I thought they could stretch and perhaps get the $270K, but they wanted $325K. Now, when you get into the $325K range, you can buy a bigger house, a better address, and perhaps parking. At $350k, there are a lot of choices. If I had taken this same house with decorating problems and put it off Fitler Square, it probably could bring a price between $500K-$600K, but not in this location. In this location, South Philly, there are a lot of other choices over $300K.

The moral of the story is that they "over improved their house". They were very insulted by my price. They did not give me the listing. The gave it to another office. The house did not sell. It ultimately, had a FOR SALE BY OWNER sign on it. I haven't followed through to see if they eventually sold it and for what price. But I tend to think that the house did not sell.

The irony, in all of this pricing of this property, was that they wanted to move to a larger, two story house with a grass yard, and parking in Packer Park that was listed for about $350,000. The difference in a 30 year, fixed rate mortgage at 7%, if fully financed between $325K and $350K is $2164 versus $2330. In this price range, it is not truly a big difference. Parking alone is enough to justify the price difference. Which house would you buy?

What "Kind" of Property Do You Want to Buy?

I think this question is the hardest question for most first time home buyers to answer.

What is my advice? Try to answer the following questions.

First, What is my monthly cash flow? How much can I pay towards a mortgage payment? How much money will I need to improve a property? Do I have that money in the bank after I have paid for closing costs and moving costs to do the improvements I want to do? Can I live through the process of improvements? Do I even like to paint? Am I handy? Do I need to hire someone to do everything or can I do some things myself?

My suggestion is to consider location first. Perhaps, you want to pick a neighborhood, but pick a second neighborhood also where the properties may be a little less expensive. The result should be that when you are in your house in the first neighborhood, you could live relatively well in the better location, and in the secondary location, you could live even better. You have to carefully decide what you want outside your door. Do you want convenient public transportation? Do you want a corner store? How important is parking? What can you walk to?

In Philadelphia, the things that might sway me in the better location are the overall conditions. Is the plumbing, water heater, heater and electric up to date and show few problems? How are the walls, roof, kitchen and bathroom. If they are all without major issues, I would be satisfied. If the paint or wall paper is awful, I am not too concerned. I can live with it until I can do a fix. If there is wall to wall carpeting on the floor and I want hardwood, I am also not too concerned. To put down new hardwood floors in Philadelphia, is not that expensive.

I recently sold a house, which at the last sale was an "old house". The owners made good decisions. They replaced all but the big living room window. The kitchen was small, which they replaced. They put down beautiful hardwood floors. They put in a new sump pump and French drain. It was all money well spent, which added value to the house.

What I have left out is that they left a fake stone wall in the kitchen, paneling on the walls of the living room and dining room and flocked wall paper going up the wall where the steps rise. By the looks of it, the ceiling never had a drop ceiling, but instead acoustic tiles. The tiles, which they put up looked new and had an attractive pattern on them. They painted the flocked wallpaper white which gave a nicely patterned white wall, and imitated the treatments you can now buy at the big hardware chains. The paneling was painted a nice color and the fake stone wall was painted pink to match the trim of the kitchen counter tops.

To their credit, they also had very good taste. They had a very nice combination of modern and vintage, and everything just went together and worked. My client, who bought the house definitely did not want a house with paneling, but I think was struck with how the house just came together and visually worked. It had a nice feeling to it.

I sold another house recently where location and price were most important. Structurally, the house was good. But ultimately, the house needed new floor treatments, kitchen and bathroom, new stairs and painting throughout. The buyer had to go for an alternative form of financing, because the house could not be financed with a conventional mortgage, because of the bathroom. It did not have a sink. Now, if you are faced with this issue, there are mortgages you can get to buy the property in conjunction with a construction/improvement loan to make the repairs and improvements. The buyer, in question, had the cash in had to do the improvements and only had to do the first mortgage, but it is possible to do both.

Paneling and drop ceilings tend to be one of the biggest things that deters first time home buyers. I am deterred if it looks like the walls crumbled and ceilings leaked and they are covering up major sins rather than making repairs. But when you see a house that is covered with paneling and drop ceilings and it is clean and the basement is clean. The paneling was, generally, a decorating choice. Yes, it should be cheaper to buy this house. It should have a price differential with neighboring houses that allows you to hire someone to take down the walls and ceilings and put up new drywall and trim. You may find that you just need to make repairs to plaster. It is likely, however, that you will have to put up new drywall on the ceiling. Many of the old plaster ceilings are covered with wall paper, which was then painted. To try and take it down is a bigger job then gluing new drywall up and over it.

So, your first consideration should be location. Then, look at the major systems and roof . Then, look at the decor. There are lots of properties being sold as rehabs with 40-50 year old heaters. Be honest with yourself. Is it worth it to pay a little more each month to have a house in a certain location? Is it worth to to pay a little more each month to have a house, where I don't have to do a thing for a number of years? Is it worth it to have a house, where I don't have to do a thing and live in my second favorite location? Is it more important to keep the mortgage payment down and try to do things in the house a little at a time? If you begin to answer these questions honestly, you may have an easier time narrowing down the large lists of properties your Realtor sends to you. Hopefully, you will be able to make a decision in which you are more secure and happier in the long term.

VOTE IN! Should Foxwoods Casino Build on Market Street?

In today's Philadelphia Inquirer, there is a new proposal for the Philadelphia Slot Parlor slated to be on South Columbus Boulevard or for what us old school people still call Delaware Avenue. Instead of building on the South Philadelphia Waterfront, there is a new proposal to redevelop part of the Gallery and to move the Foxwoods Casino to Market Street.

I would love to know the opinion of my fellow Philadelphians. Please see the two polls at the right side of this page.

http://www.philly.com/inquirer/home_top_stories/20080911_Rendell__Nutter_hail_casino_plan.html

The Storms Rolling Through Today

I know I will ask this questions, again and again, because it has been a burning question and hopefully someone can answer me.

We were just in the front office watching the magnificent black clouds roll through with lightening in the distance and began talking about the storm coverage on TV. The people evacuate and the news cameras come in. We get a snow storm, and we are shown every Home Depot, super market, pile of salt, and how much snow is in each community over and over again.

I am left with one questions after watching some of these news stories.... What do people do with their shovels every year that they have to go to the Home Depot to buy more every single year?

Why Should You Hire a Licensed Real Estate Agent or Realtor® When Buying Real Estate?

To begin with there is a difference between a licensed agent and a REALTOR®. For example, I am licensed by the Commonwealth of Pennsylvania as a "Sales Associate". I am a Realtor®, because I am a member of the National Association of Realtors®. All licensees are not Realtors®. To become a REALTOR®, one must join the National Association of Realtors® and subscribed to a code of ethics.

The Association provides information and educational opportunities to members as a commitment to a higher level of knowledge of buying and selling real estate. In addition, I belong to the Pennsylvania Association of Realtors and the Greater Philadelphia Association of Realtors, which too are committed to a code of ethics and higher education of their agents and brokers. Anyway, there is a lot written about the above difference between licensees and Realtors®. Which should you use? Of course, I come out on the side of the REALTOR®, but will leave that to a later discussion.

My main concern, herein, is people that go out and do it on their own. It seems simple enough. Download a form, go to Staples and buy an Agreement of Sale, and you are on your way to buying a piece of property. But is it that simple? Of course not. And it gets more complicated every day.

In the last year, I had clients, who came from out of town, and bought eight properties. I had put in about eleven, low offers for them. One was accepted. It was a simple and straightforward cash purchase of a shell and went through smoothly. They did not see, however, the work that was done for them behind the scenes. So, they went out, on their own, I think banging on doors and bought seven more properties. They were all in shell condition.

Well, the one fellow was originally from Philadelphia and left Philadelphia, at a time when almost anything was negotiable. You had a Water Bill, Judgment, etc., you could negotiate it down. Well, that is not the case these days. The City wants to be paid. Now, I am not saying everything is not negotiable, but a lot of it is not. This year, I was able to negotiate two $15.00 trash tickets, which grew to $600 to $175 for a client, but it was not easy and had to get someone in the Mayor's office to help me. The legal department had actually sent me a bill for over $4,500 and insisted it all had to be paid. There were judgments that did not attach to the subject property, and I had to "go to the mattresses" to clear it up.

Anyway, and not to pick on these clients, they made major mistakes. I begged them, when I became aware of what they were going to do, to get title insurance. Without the Title Insurance, they could get saddled with all sorts of other people's problems. They did, but they took the titles with exceptions. Meaning, they took on prior owner's problems. So, they did not buy clear titles. The sellers did not pay off everything at settlement.

So, they had big water and sewer bills attached to at least one property. They thought they could go to City Hall and get the bill cut in half; they could not. It was a poor calculation on their part and meant they paid ten thousand dollars more for the property. I believe the property had about a twenty thousand dollar water and sewer bill. This property and some of the other properties with other problems, should never have been purchased, because with the additional bills, the price paid was not justified for the property in question.

They ran into other problems as well. Ultimately, they ran out of money, and decided to unload the properties. I did not take on the listings, because I knew I could not get the price they now wanted, which was typically $10,000 more for a shell (this was the price paid and bills paid + $10,000), and no work done. There was no justification, in this last year, to get a price increase like that for the property. It was the wrong time in the market and the locations not very good. I did not feel like I could get their price and felt like I would be wasting their time and mine. I suggested they put them on Craig's List.

So, they did. They received a phone call from someone, who was out to see one property. When the prospective buyer got there, the City was in the process of demolishing the property. Why? Because, when they bought the property, they did not order a Licenses and Inspections Certification. It is required when buying and selling property in Philadelphia. They would have known that there were violations and such a fate was imminent. However, until you run into trouble, it isn't really enforced by the City to get the certification. You don't need evidence of it when your deed is recorded like you do in some municipalities. So, now, they are not only left without a property, but also need to pay the city for demolishing the property, and reinforcing the adjacent properties' walls. Now, the cases described may be extreme. However, I have heard other stories like it.

What does a licensee do to spare you from these kind of aches and pains. First of all, they are working the business of buying and selling real estate every day. They know the pitfalls, and can keep you from making expensive mistakes. They can ensure that you don't miss steps in the process of buying real estate. They can represent you in negotiations to put together the best offer for a property, which includes not only price, but also insurance, mortgage, inspection, and environmental contingencies, which protect both you and your deposit monies. It is disappointing when a client uses a contingency to get out of a contract, and I have had it happened based on inspections and zoning. But I always have to make sure what is best for my client is done.

There are so many aspects to what is a simple home purchase that when using an agent, the consumer doesn't see. Did you know that if you owe support payments in Pennsylvania, you cannot buy or sell property. If you do sell the property, and the buyer unwittingly buys the property. The buyer is now saddled with the child support payment judgment against their property? In Philadelphia, a gas bill goes with the property. This bill gets terribly complicated when the property has a tenant.

Moreover, your agent can help you with financing options, grants, information on pricing in your area, and ultimately, make your purchase as stress free as possible. Your agent does not just help you "shop" for a house.

If your income taxes are anything, but very straightforward, you are likely to hire someone to do your taxes, who is current on tax laws and what can be done to give you the best result. You could scan through the IRS instructions and website to get the same result, but how long will it take you? And will you get it right? You should view such a large purchase as buying real estate similarly. You can research and get it done, but will you get it done correctly in the end? To have the representation of an agent and broker when going through the process, the result will be a better one and easier.

COMPS - Comparable Properties

I began writing a different blog today; one on the seminars, books and tapes available for inexperienced real estate investors to make one rich overnight. I realized in trying to put it together that the most abused term was "COMP". People are constantly calling me to run "COMPS" for a property that they are interested in, and for a property I have never seen. I can send "sold" listings for an area, but in no way do they represent "COMPS".

What should a "COMP" be? First, it should have sold, if possible, in the last six months. Second, it should be in close proximity to the subject property. Third, it should be a similar property. Then what?

I like to visit the subject property. (I will be using a row house in this example.) Does the property have a new roof? What is the condition of the yard? The alley walls? The back of the house? The front of the house? The kitchen? The bathroom? The water heater? The heater? The plumbing? The electric? Is there air conditioning? Is the basement finished? What are the floor treatments? What condition are the walls and woodwork? Are the bedrooms well laid out and do they have closets? There are more things for which I am looking, but these questions give you an idea.

Next, I look on the MLS (Multiple Listing Service) to see what SOLD properties I can find to use as comps. Again, I look for properties, 3-5, selling in the last six months, close to the subject property and similar in size and features. Now, of course, there are some assumptions made based on the photos and descriptions. So, how do I come up with an asking price?

1. What have the comps sold for?
2. Was there a seller assist?
3. What was the initial asking price?
   
4. How many days was the property on the market (DOM)?
5. What does the comp have that the subject property does not have?

So, let us take a look at the following example comps.

SUBJECT PROPERTY DESCRIPTION

• House has been well kept by owner. The bricks are original and have been re-pointed; they are in good condition. The windows and doors are new throughout. The back, yard and alleyway walls have no issues. The house has central air. The heater and water heater are five years old. The plumbing is new PVC. The electric is modern. There are old hardwood floors in beautiful condition. The kitchen is older and a little worm, but usable. The bathroom is in mint condition, but old. The basement is cemented, and clean. There is a new rubber roof with a 15 year warranty.

Property A

• Sold: $150,000
• Seller Assist: $7,000
• Initial Price: $145,000
• Days on Market: 30
• Additional Features: new brick front, new windows and doors throughout, nicely finished basement, new hardwood floors in living room and dining room, modern kitchen (not high end), new bathroom, new PVC, new electric, new water heater and new heater, new hardwood floors, central air and a new roof with a 15 year warranty.

Property B

• Sold: $120,000
• Seller Assist: $0
• Initial Price: $145,000
• Days on Market: 145
  
• Additional Features: cement basement/walls need stucco, older re-pointed brick front, older windows and doors throughout, wall to wall carpeting and linoleum in the kitchen, newer kitchen, new bathroom, new PVC, new electric, 10 year old water heater and 5 year old heater, and a new roof with a 15 year warranty.

Property C

• Sold: $180,000
• Seller Assist: $12,000
• Initial Price: $175,000
• Days on Market: 90
  
• Additional Features: central air, beautifully finished basement with wet bar and powder room, new brick front, high end, new windows and doors throughout, high quality hardwood floors upstairs and downstairs, new, modern kitchen with stainless steel appliances and granite counter tops, new bathroom with spa tub and stall shower, powder room on the first floor, new PVC, new electric, new 100 gallon water heater, new heater, and a new roof with a 15 year warranty.

Now what do I do with the information? First, I determine the net price.

Property A

• Sold: $150,000
• Seller Assist: $7,000
• Net Price: $143,000

Property B

• Sold: $120,000
• Seller Assist: $0
• Net Price: $120,000

Property C

• Sold: $180,000
• Seller Assist: $12,000
• Net Price: $168,000

Second, I add or subtract from the Net Price.

Property A

• Net Price: $143,000
• Subtract $10,000 for new brick front (cost is about $20,000, but subject property has a nice front, which does not need to be replaced
• Subtract $3,000 for refinished basement
• Subtract $5,000 for new kitchen/partial credit
  
• Adjusted price = $125,000
  

Property B

• Net Price: $120,000
• Add $1,000 for basement stucco
• Add $3,250 for 9 windows and 2 new doors
• Add $3000 for hardwood floors
• Add $5000 for central air
• Add $600 for central air
• Adjusted price = $132,850
  

Property C

• Net Price: $168,000
• Subtract $10,000 for new brick front (cost is about $20,000, but subject property has a nice front, which does not need to be replaced
• Subtract $6,000 for refinished basement
• Subtract $8,000 for new kitchen/partial credit
• Subtract $4,000 for new powder room/partial credit
• Subtract $3,000 for better bathroom
  
• Subtract $2,000 for better windows and doors
• Adjusted price = $135,000

Now what should I do with these "Adjusted Prices"? I will weight them. I have determined that Property A is most similar, sold quickly suggesting it may have been appropriately priced and will make the following calculation. I will say that Properties B & C are equally, in their own way, similar to the subject property, but since C sold faster I will weight it slightly better than B.

Property A

• Adjusted price = $125,000 * 50% = $62,500
  

Property B

• Adjusted price = $132,850 * 20% = $26570
  

Property C

• Adjusted price = $135,000 * 30% = $40,500
• 
  

Now, I add the three weighted numbers together, I arrive at the following price: $129,570 with a range of $125,000 - $135,000. The example above is one way to run comparables and determine an asking price. There are other methods to determine an asking price and range, but this method is what works best for me.

I warn the consumer that when running comps on the national websites that many times the comps have not sold in an acceptable time frame, they are not close to the subject property and the conditions of the properties are not analyzed. The price range may not even be accurate, because, like in Philadelphia, prices can sometimes change quite dramatically just by crossing a street.

CAPITALIZATION RATE - INVESTING IN PROPERTIES

People are often confused about investing in real estate for investment purposes. When I am speaking of "investment purposes", I am talking about a long term investment where the subject property is a rental property. People know if the mortgage payment per month is $600.00 and the rent is $800.00, they are making money. Or are they?

The best way to analyze a property's potential is to use the income approach and the capitalization rate. What is it? It is how the property will pay for itself or cash flow. Often you will hear people talk about "cap rate". Again, what is it? It is a measure of how fast an investment will pay for itself. Thus, if your "cap rate" is 10% , the investment will pay for itself in ten years. And again, if the cap rate is 5%, the investment will pay for itself in 20 years.

How do you calculate the "cap rate"? It is a ratio between the net income and the price or cost of the asset. So, how do you calculate net income? The example below will give you an idea of how this calculation works. I will use a $1000 rent for the example. I am also assuming this is a 1200 square foot, single family house.

Gross Income (Rents x 12) $12,000
Real Estate Taxes $ 1,000
Utilities (Paid by landlord) $ 500 (Assuming in Philadelphia landlord is paying Water and Sewer - typical)
Insurance $ 1,000
Management Fees $ 720 (6% - could be higher)
Maintenance & Repair $ 600 ($0.50/ft - using 1200 square feet)
Replacement Reserves $ 420 ($0.35/ft - using 1200 square feet)
Snow Removal & Misc $ 400 (estimated)
Vacancy & Collection $ 600 (5%)

Net Income $ 6,760


Now you know what your net income looks like. However, some of these expenses listed above could be different in reality. For example, management fees could be more. In Philadelphia, it is likely that the insurance and taxes could be lower. Also, I have built into this formula that the property is in good condition when rented. I am assuming the roof, systems, kitchen and bathroom are reasonably up to date and functioning.

Now, you need to address the Capital Cost or Asset Price. See the example below.

Purchase price $60,000
Closing Costs $ 4,500 (7.5% - Philadelphia typically 6-9%)
Improvements $10,000 (Estimated)
Asset Price $74,500

The next step would be to take a look at the ratio.

Net Income/Capital Cost = Capitalization Rate

$6,760/$74,500 = 9.07%

Thus, the investment would pay itself off in a little more than 11 years. This is a very good capitalization rate.

Conversely, you may be looking at properties where you know the price. You can quickly calculate a number on gross figures to know whether it is worth even looking any further. I am seeing a lot of properties, currently, that are multi-family. They are collecting, let us say for this example, about $1800/month and asking $500,000 for the building. So, if I want an 6% cap rate, I don't have to go through great calculations to see what is what.

Gross Income/Capital Cost = Cap Rate

$21,600/$500,000 = 4.32%

STOP HERE! We have not used the net income nor have we added closing costs and improvements, and we are at a 4.32% Capitalization Rate. When we add and subtract the rest, the rate will only go down.

If you want to see what you should pay, let us assume that there are 3 units each paying $600 per month. Let us also assume that the building is 2000 square feet.

Gross Income (Rents x 12) $21,600
Real Estate Taxes $ 1,200
Utilities (Paid by landlord) $ 1,000 (Assuming in Philadelphia landlord is paying Water and Sewer - typical)
Insurance $ 1,200
Management Fees $ 1,296 (6% - could be higher)
Maintenance & Repair $ 1,000 ($0.50/ft - using 1200 square feet)
Replacement Reserves $ 700 ($0.35/ft - using 1200 square feet)
Snow Removal & Misc $ 400 (estimated)
Vacancy & Collection $ 1,800 (5%)

Net Income $13,004

So, if our net income is $13,004 and we want an 6% cap rate, which is the average for apartments, what should we pay for the asset?

Net Income/Cap Rate = Cost of Asset (What should be paid including closing cost and improvements)

$13,004/6% = $216,733

If you are trying to achieve a higher cap rate, be aware that many properties allowing for higher cap rates, will usually have higher vacancy rates.

Now, of course, there are other factors to consider when purchasing the property. Will the rents increase? Will the expenses increase? I could go on and on, but the questions may blur the idea of what I have explained herein. Thus, when considering purchasing and investment property, consider how the property will cash flow to see if you are making a good investment or not.

How is a Property Zoned? Licenses and Inspections in Philadelphia

There are endless things, which can be written about the title I have chosen, but I will keep this simple and to the point. As part of your offer, when purchasing a property, you want to make sure that there is a zoning requirement listed as a contingency. Therefore, if the Licenses & Inspections certification comes back with zoning that is different from what you have required on the Agreement of Sale, you are not obligated buy the property.

Recently, I had an offer accepted on behalf of a buyer for a RESIDENTIAL DUPLEX. It was advertised as a DUPLEX. It was laid out as a DUPLEX. I had no reason to think it was not a DUPLEX; they are all over the City of Philadelphia. When we received the L&I certification from the sellers, the property was zoned as a SINGLE FAMILY RESIDENTIAL property, and the block was zoned for SINGLE FAMILY RESIDENTIAL properties alone. The sellers thought they had purchased a DUPLEX. Now, the reality was that many of the properties, on the block, were set up as DUPLEXES. The tax assessors listed them as DUPLEXES on the tax roll to get a higher tax rate, but they were still zoned as SINGLE FAMILY RESIDENTIAL properties.

The process to get it corrected, in brief, was as follows: first, apply for a zoning change; second, get turned down, because the block does not allow duplexes (this process takes about 30 days); third, apply for an appeal. The appeal requires architecturals, forms, plus property considerations like the size of the back yard versus the number of units . If you opt to pay the additional fee for the process to be expedited, you are talking about 2-3 months for the appeal process. Otherwise, it will take at least 4-5 months. There is no guarantee in the end that you will get a satisfactory result.

Now, today, I went to check on two garage spaces. I knew ahead of time that one was zoned "G2" and one was zoned "R10A". Yesterday, I printed a 43 page description of what G2 meant. It was Greek. I was not sure what was permitted and what was not. I called zoning they walked me through the 43 pages and I circled the two lines, which applied to the use my prospective buyer has in mind. It is allowed.

Today, I went to the Municipal Services Building, and down into the concourse level to Licenses & Inspections. I requested the files on both properties. There were none. The G2 seems to be fine regardless. The R10A, however, would need to go through the same process that needed to be gone through with the above duplex. It makes no sense. The owner, before the current seller, was an auto mechanic and used it for his shop. The building looks like a space for a business like an auto mechanic . However, there was, as suggested by the employees at Licenses and Inspections, probably a city ordinance that changed the zoning on the entire block.

Then, I tried to find out what R10A would allow. I could not find it in writing, but learned while at Licenses and Inspections today that the only real exception, to this type of residential zoning, would be a work/live situation for a medical doctor. At least, this is what I understand.

Now, there is no way the property in question is a residential property. We are still, through political connections, trying to find out if the prospective buyer could put the building into the use that he has in mind. So far, the answer seems to be yes. But we have nothing in writing. And are waiting on return phone calls.

The point in providing this information is to tell you to be very careful when buying something other than an obvious single family residential property. Know what the zoning is and know if the use about which you are thinking is permissible. Do your homework! Don't waste time being under contract and having two or more months go by to find out you cannot use the property how you had imagined.

The Tax Credit for Home Buyers under The Housing and Economic Recovery Act of 2008

There is a great incentive for FIRST TIME HOME BUYERS and/or people who have not owned a home in the last three years in the form of a Tax Credit provided by the Housing and Economic Recovery Act of 2008.

How does it work? I will try to make it as simple as possible

1. House must be purchased between 4-9-2008 and 7-1-2009
2. The house must be a primary residence
3. House ownership of spouse will affect your qualification
4. Income: Single: up to $75,000; Joint Filers: up to $150,000 (Singles earning up to $95,000 and Joint Filers earning up to $170,000 can get a partial credit)
5. The credit for Singles and Joint Filers is $7,500. The credit cannot exceed more than 10% of the sales price of the home.
   
6. The credit may be deducted on the 2008 or 2009 return depending on when the house is purchased
7. This credit is deducted from TAXES OWED and not from GROSS INCOME
8. If the credit is more than taxes due, you will get a refund of the credit amount
   
9. This credit is not a gift
10. The credit must be repaid, interest free over 15 years beginning two years after purchase of house
11. If the house is sold, the full balance of the credit must be paid off at the time of settlement

Anyone, who qualifies, should take this credit even if they are going to put the money into savings account. It is interest free and payable over 15 years.

Expectations a Buyer Should Have When Buying a Row House

The first thing to remember when buying a row house is that the property is not new. The next thing to consider is the location. In the city of Philadelphia, what is essentially the same house can be $20,000 or $250,000. It all depends on where it is located.

Now, I would point out the description of the property being sold, and the price. If the property is being touted as A "REHAB", and the price is at the top for the area, you should expect a new rubber roof, a new soil line, up to date electric, GFCI outlets in the kitchen and bathroom, new kitchen with at least a garbage disposal, new bathroom, hookups for washer and dryer, new heater, new water heater, central air, new floor coverings, new paint, new or doors in good condition, a well maintained front and back, an acceptable chimney liner, the yard surface should be sound as well as the walls of the alleyway. Even though the house may be 50 or 100 years old, it should appear to be a new house.

Now, if the property is being sold as a "REHAB" and the price is not at the top of the market, then I would not expect to get a house with the full list above. You may find that there is no central air, the heater or water heater was not replaced, etc.. You should expect that in your first few years of ownership that you will be spending some money to do some of the improvements that were not done by the previous owner. These improvements should not exceed the difference in price between this house and the house described in the above paragraph.

Then, there is the property that needs "UPDATING". This phrase can mean all sorts of things. This property can be the "bargain" or a "disaster". I like, in this group, what I call Grandma's House. It is the property that has been paid attention to by the current owner for the last 30 or 50 years, but has not been redecorated. The systems, the roof, the appliances, the bathroom tile have been continuously maintained or updated, but the house still has drop ceiling and paneling. In this house the paneling and drop ceilings were decorating choices and not put up to cover anything, but perhaps, wall paper. You will find, when you go through this house that is is clean and always has a clean, well organized basement. Even though this house needs work to make it "look" up to date. It generally provides an attractive price and a livable house, which can be updated and decorated as you go.

There is another house that needs "UPDATING". This house is not like the one above. Generally, it is livable, but almost everything is suspect. You may find a 50 year old heater, water stains on the ceilings, old soil lines, out of date electric, and a "real" need to do something about the cosmetics. This house is fine to buy if you get it for a price at the lower end of the area and have the ability to do the improvements, and are aware of approximately what it will cost to do the improvements. Do not buy this house if you think you will not be able to afford the improvements or cannot live through the improvement process. You will be miserable.

Then, there is "AS IS". "AS IS" can mean all sorts of things. It generally means that the seller will not do any improvements or give you a credit as per the results of the home inspection. Some "AS IS" properties are actually in great condition and some are not. I think this is a situation of "Buyer Beware". Even though it is "AS IS", make sure that you have a HOME INSPECTION CONTINGENCY AND A WOOD INFESTATION CONTINGENCY to make sure that you know exactly what you are buying or not buying. If in this situation, the seller has put something in the disclosure like a new roof that does not exist, I would expect at least a partial credit for the roof even if the seller is calling the sale "AS IS". You, however, may not get the credit.

Therefore, when buying your row house consider the following:

1. Location vs. price
2. Condition vs price

Be honest with yourself. Are you a person that is handy? Do you like doing the repairs? Do you mind living through the work process? You must be honest with yourself when making this decision. If you are a first time or second time buyer, make sure you can afford your monthly payment and make sure you can afford to make the improvements that will be needed as you go along.

Realtor Recommended Home Inspectors

I am responding, in this post, to the credit counselor I mentioned in the GRANTS AND CREDIT COUNSELING post.

He accused Realtors and Real Estate Agents of Recommending Home Inspectors that just pass houses without disclosing the "real" condition of the property so that the deal goes through. It is a ridiculous accusation.

In my office, agents use and recommend different home inspectors. I have had buyers go out and hire their own. I attend all of the inspections so I can be informed and witness any problems, which may exist with the exception of the roof. I attend the inspections to help my client's bargaining position and to ask questions, which my clients do not necessarily have the experience themselves to ask. I do not go on the roof, however.

What I am looking for in a home inspector, which I said before is one who will take the risk to provide estimates and also take pictures. I want a home inspector, who is patient with my buyer and will answer their questions. I want good service. Why?

1. To let the buyer know what the actual conditions of the property are,
2. To give my buyer negotiating leverage,
3. To give my buyer the ability to get out of the contract and retain their deposit money,
4. And to make my buyer's home purchasing experience a good one.

There are two things to remember. First, the home inspector is a licensed person and has potential liability. They generally look for everything! They do not want any stone unturned. Yes, sometimes they scare the buyers, and sometimes that is a good thing! Sometimes the buyer should get out of a contract.

Second, your Realtor is a licensed person, and has liability if they are not representing your interests. Further, reputation is everything to a Realtor. If you bought a house, and your Realtor worked in cahoots with the home inspector to hide the real condition of the property, would you recommend that person? No, of course not. Referrals are the life blood of a Realtor, and what this credit counselor accused us of is absurd!

Grants and Credit Counseling

I don't know how it works in other parts of the country, but in Philadelphia, there are multiple types of Grants for which a buyer can qualify. Most of them are income related. Some come from the City of Philadelphia, Some from the State of Pennsylvania, and some from lenders.

What a buyer must be aware of is that the ones from the State and City require credit counseling. In fact, the counseling must be done before an offer is submitted. Thus, if you are low income or moderate income and pursuing one of these grants for closing costs, you must be very proactive and get in to meet with a credit counselor. The lenders may also require credit counseling, however, that must be determined on a grant by grant basis. In Philadelphia, there are many of these groups, which provide the counseling. There are too many to list here. Some are quite good and responsive, and some are not. Either way, be pushy and get in to see the counselor so that you can get on with buying real estate.

An agent in my office recently submitted an offer without realizing the counseling had to be done. So far, they are okay. Her buyer is on top of everything and the two have been scurrying to get everything done. They called all over to get the counseling done. They finally found a counselor who would meet with them Saturday night. She had to drive her client to the appointment so she ended up in attendance.

She said the Credit Counselor was very bright, but spent a good deal of time bashing Realtors. Misrepresented what we make. In fact, doubled it (what we make). Told the buyer not to tell the Realtor if they really liked a property. Told the buyer not to use a home inspector recommended by the Realtor, because they would just pass the house in order to get the sale pushed through. Also, told the buyer not to sign a buyer broker agreement. I have so many issues with what this man said and I was not there! I will address these issues in separate entries!

"AS IS"

We had a discussion today in the office as to what "AS IS" means. We agreed, as per our discussion, that it could have a couple of different meanings in a real estate transaction.

First, it could mean that what you see at "offer time" is what you are buying. Therefore, make sure you make a good visual survey of the property before making an offer, or perhaps, do a property inspection prior to making an offer, or bring a trusted, licensed and insured general contractor through for a good look at property and get his/her estimate for needed items and improvements wanted.

Or Second, it could mean that you still have the right to do inspections, but no ability to negotiate price based on the findings on the inspection(s). In this case, you would include a contingency or contingencies in the contract, which allows you to either accept, or decline as a result of the inspection and get your deposit monies back. So, you would hire a home inspector to inspect the property. When the report(s) comes back, you have a chance to review it/them and sign an acceptance or declination of the contract. If you decline, you are to get your deposit money back. If you accept, you will not be allowed to negotiate the price or assist based on the results of the home inspection.



Thus, if "AS IS" is presented to you, the buyer, in contractual form, make sure you have a contingency to get out of the contract if the "AS IS" condition turns out to be above what you have budgeted for improvements, or future improvements, or in other words the condition is worse than anticipated.

If the seller will not allow you to have inspection contingencies then do it before making an offer or find another property. Of course, there is an expense involved in doing inspections, so make sure you are serious about the property before either entering into a contract or have lots of extra cash on hand to do multiple inspections on multiple properties.

What do you do about your deadlines in an Agreement of Sale?

It is best to address all of them immediately.

Most people will need to do the following:

• Make a mortgage application
• Make sure the property is insurable
• Schedule inspections
• Make a second deposit
• Perhaps, review leases or condominium documents
  

None of these items are based on one another. All of their contingency periods run simultaneously. Thus, a second deposit is not based on the result of the home inspection, etc.. Generally, it is due earlier. Thus, make sure your Realtor gives you a list of deadlines and begin making the phone calls as soon as you have the contract in your hand. You want to make sure you meet all deadlines and protect your deposit and not accidentally default.

Home Inspectors

How do you pick a Home Inspector?

It, typically, is not something you are doing regularly. So, you will not have your favorite home inspector like you may have your favorite electrician or handy man. Thus, what should you look for in a home inspector? And how should you find one?

1. Ask your Realtor for a reference or several, look on the web, look in the phone book
   
2. Call and ask them a few questions:

• Will they give estimates on critical items?
• Will they go up on the roof?
• Will they take pictures?
  
• How long will it take to get the report back?

I would expect that they will give you estimates on critical items. If you don't have estimates, then you must meet and arrange with each contractor to meet you at the property to give estimates. And these meetings must happen before your contingency period lapses if you intend on re-negotiating the price based on those inspections, or rescinding the contract.

I would also expect that the home inspector goes up on the roof and takes pictures so that you the home buyer can see the condition of the roof without climbing the ladder yourself! Again, although, in general, it is easier to get the roofer on the roof than other contractors to come out, who must go into the property, it is best if your home inspector does it at the time of the home inspection. You can always follow up with a roofer.

Pictures... they are nice to have, but best for the roof ,and next for critical items. I would insist on the roof, and would like the critical items, but would not turn away a good home inspector if he/she only gave me roof pictures.

Some provide the report right on the spot. That is a really nice service, however, if they will email within 24 hours, it is also good. It still should give you enough time to review the report and respond to the sellers.

When your offer is accepted, and you have an inspection contingency, please schedule it immediately.