Friday, May 27, 2005

Documents That Rule Our Lives

Once you purchase your dream home, the contract used to exchange the property between you and the seller will most likely wind up in a cabinet drawer, long forgotten until you want to review it for the next sale or purchase in which you're involved. The multi-page file (usually about an inch or so thick) has a long-term effect, but not a daily influence on your life.

Homeowners association documents, however, rule our lives more than we may realize. The Community Associations Institute(CAI), serves nearly 16,000 associations nationwide (out of the 250,000 that are in existence) and is one of the premiere think-tanks on property ownership associations.

If you're interested in keeping up with these matters, an individual homeowner can join for just $95 – community association memberships start at $150, depending on the number of units in your association.

Community Associations' homeowner documents govern the lifestyles of nearly 55 million American residents, according to the CAI. Over the last 35 years, homeowners have evolved these government-like organizations to where they control many aspects of what you can and cannot do with your house – inside and outside.

While homeowner documents are not allowed to discriminate, they can control some aspect of who can live in a development – i.e., senior adult living facilities, no pets (except for assisted living animals) and for some, religious affiliation (retirement home for members of a particular faith, for instance).

These regulations have become an integral part of most local real estate contracts, as well. The regional contract for the metropolitan Washington, D.C. area has a couple of paragraphs that deal with the ordering, delivery and review of condo and homeowners documents for the purchaser. The laws in each state regulate when the documents must be provided to a purchaser, how much time the purchaser has to respond to them and how old the documents can be. Which can cause a timing quandary at times for home sellers and Realtors.

For instance, in Virginia, the HOA documents must be delivered to the purchaser as soon as possible (up to a few days before settlement – but that's not advisable). They cannot have been ordered more than 30 days prior to the purchaser's review, and the purchaser has 72 hours to review them and can actually pull out of a contract if they don't agree with what they see in the docs.

Buyers, though, have found a crack in an otherwise ironclad contract. While they may not be able to pull out of a contract because of financing, home inspection, defects or any other problem with the transaction, some have used an issue with the HOA documents as a means of nixing the contract: "I don't like the fact that I can't paint my front door red," or "I like working on my car in the driveway," or any other part of the regulatory language they don't like.

When the HOA documents are ordered, several things set in motion. The association staff (if you have any – it might be an independent management company) could send an inspector out to your house to see if the property adheres to the rules – if not, the seller could get a laundry list of to-do items to bring the property under compliance of the rules. The staff also checks to see if the homeowner is behind on association dues and could place a lien on the property to be paid before the transferring of the deed.

With this said – do you know what's in your HOA documents? Are you adhering to them? If you've repainted your house with different colors than when you moved in, are they the right colors? Do the colors even still exist in the paint world? How about that fence you installed – will the architectural review committee (ARC) approve it once you start the selling process? What? You didn't know you had an ARC?

Get to know your association board (they're usually your neighbors); keep up with what the rules are and what changes are coming down the pike – and review the docs to see if something could be changed to keep up with the times … No dogs? What's this world coming to?

Published: May 27, 2005

Contracts: It's The Little Things That Matter

In contracts, it's all about the bottom line; the terms; how much the seller will net (or have to bring to the table in some instances); the closing costs for the buyer; and who's paying for what. A lot happens at the closing and it's important that the little things have been taken care of.

When your Realtor writes or presents your contract, it's imperative that he or she pay attention to detail. A lot can happen to the buyer or seller if a box is checked (or left unchecked); an addendum is left out; or something required of the contract is not completed.

The little items on a contract may cost you a lot of money or sabotage your contract altogether if not handled properly. Especially in a competitive situation, the listing agent is looking for reasons to reject contracts as much as reasons to keep one that's going to be the win-win scenario for his client. These little items may make the difference in accepting or rejecting your offer. Even if you're proposing more money, the terms may stop your offer dead in its tracks. Below are some "small" items that I'm talking about, that can cause of lot of headache or kill your contract if not handled well:

Inspections – There are various inspections that buyers can request (but in a hot market, they may not have such a privilege). The request is usually as simple as a checkbox. Thus, make sure your agent has the right box checked -- yes or no. I've seen some contracts where the agent/buyer apparently believed that since they didn't want an inspection, then leaving a "No" box blank is okay -- not so. Sellers want to leave nothing to the imagination and want you to say "no," if you're not requesting a pest, termite, home, or environmental inspection.

Disclosures – These are usually required by federal, state or local edict. The consumer will be asked to sign several forms that have nothing to do with the transaction as far as commitment is concerned, it's just a form designating that you've been told something -- Property Disclosure, RESPA Disclosure, agency disclosure, federal lead based paint disclosure, disclosure of brokerage relationship, and property owners/condo owners association disclosures are just a few of the disclosures that you might be required to sign. Leaving them unsigned could come back later to haunt you.

Other Terms clauses – Escalation, home of choice, and rent back clauses are three clauses that you definitely want to nail down early in the contract. If you're escalating your price -- what's your top price? Saying that you'll outbid any other offer by $2,500, but not writing it down, may result in the price escalating far beyond your buying power. Don't assume, "It will never escalate that high," because you just don't know. Nothing is new in the contract-writing arena. More than likely, there are other buyers just as hungry for the house as you -- and they may have more cash in the bank.

If you don't want to go homeless after the sale, then stipulate in your listing agreement that you a) want to find a home of choice and that you b) may want to rent back from the buyer so that you have time to find your home of choice. In a seller's market, don't assume you'll find your next house in a couple of weeks. Be smart and stipulate to the buyer that you need time. Keep in mind, however, that you need to be careful about how long you need to rent back. Most purchasers will only be able to hang on to their mortgage rate for a maximum of 60 days. If you want to rent beyond that, they may not qualify for the loan.

Don't wait until the day before you actually write a contract to sit and read it over. Get to know this document ahead of time. There's no good reason for not knowing what it says and what it may require of you before you actually have to submit it for your next home. Discuss with your Realtor the approach you want to take so that you are prepared to handle emotions at the contract writing.

Published: May 20, 2005

Tuesday, May 17, 2005

Long-Distance Investing: Owning A Home Away From Home

Because of high-priced properties, investors are taking on new strategies to buy low and sell high. Instead of flipping foreclosures, investors are looking to purchase pre-construction units and resell them at the table on settlement day to another buyer. Still, others are beginning to take their profits and move their investment holdings to other undervalued communities away from home. The astounding inflation has not only out-priced some wannabe homeowners and move-up buyers, but investors as well.

So where can you get a good deal these days when you can't afford the market where you live? Think long-distance investing. Real estate has demonstrated its resiliency throughout the years and investors are banking on finding land, and homes, away from their home-base to continue building their real estate portfolios.

Keep in mind, an investor can make money off real estate in several ways:

Purchase fixer uppers, invest in fix up and flip

Purchase new and flip once construction is completed

Purchase, move in and hold

Purchase, rent and hold
Most people will gain equity through option number 3. But in an overly heated market, even those who can find the fixer uppers will almost pay market rate for their diamonds in the rough. And there are others who just don't have the cash to do any of the above.

Look elsewhere when this occurs. There are plenty of undervalued/fixer upper/foreclosure/vacation properties available in this great land, you just have to be willing to look more than across town to purchase them.

An investor friend of mine did just that recently. He sold one property in the Washington, D.C. area resulting in nearly $300,000 in profit. To delay capital gains and recapture taxes, he went to identify properties outside of the region to purchase using the IRS 1031 Exchange option. In simple terms, the 1031 Exchange is used when an investor wants to sell one, or several, real estate properties and reinvest all the proceeds into another real estate investment -- exchanging the property and its equity into other targeted investment properties. In this case, he identified properties about 250 miles from his last investment in south Virginia.

He purchased some development land that can be subdivided later for building, a residential rental property and then additional raw acreage near the future site of a highway bypass that should result in lucrative appreciation for commercial development in the future.

It's always seemed curious that while people are willing to purchase stock in companies hundreds or thousands of miles away, they find it hard to consider the same approach to real estate investing. Just as you can hire someone to manage your stocks in other companies, you can do the same thing with a real estate portfolio.

Property management is one of the largest segments of the real estate industry. Thousands of Realtors earn their living doing what investors have no time, expertise, or contacts to do: collect rent, pay all the monthly bills, receive calls from aggravated tenants, keep the land and property maintained, etc. Many property managers work with investors who live across state, country, and around the world.

Long-distance investing requires a bit more risk tolerance since now your investment has people living in it -- walking, eating, playing, fussing, raising a family, partying, and just enjoying life in your investment. That means some wear and tear on your commodity and someone has to watch out for the home maintenance and make sure it is taken care of, that renters pay on time, that your other bills are paid (association dues, taxes, memberships, etc.) and then sends you the remaining cash flow each month.

Nevertheless, it's an investment that has proven over time to be good to its beneficiary.

Published: May 13, 2005

College Housing Investing: Room And Board Is A Terrible Thing to Waste

With three teenagers in the house heading to college in a few years, and several of my friends facing the same demographic, the discussion turns to whether or not it's a good idea to purchase a house for your student instead of paying for rooming costs.

The College Board reports the average cost increase over the last five years has been about five percent per year. The 2004-05 national average cost for a four year public college or university is $14,640 per year; for a four year private college or university, it is $30,295 per year, according to Oppenheimer Funds' web site The Education Plan.

In the last 25 years, college costs have risen at twice and sometimes three times the Consumer Price Index. Over the last decade, after adjusting for inflation, the average four-year public tuition, fees and expenses rose 75 percent for both public and private colleges, according to the College Board, the organization that administers the SAT exams and other entrance programs for its 4,700 member schools.

Where the tuition used to be the primary expense, room and board are playing a significant role in higher education expenses -- many times exceeding the cost of tuition, according to the site. The College Board reports that the average monthly room and board cost is $6,222. Over a nine month school year, it would be roughly $690 per month. Can you do better than that if you own a condo, townhouse, or home in the college town?

Plenty of parents are opting for the home purchase instead of the dorm rental -- but that's not always the best way to go. Before you plop down money to purchase your kid's "dorm" unit, be sure to run the pros and cons, which are generally dictated by finances and time.


Here are some questions to answer before moving forward:

Does the transaction make sense financially at this time in your life?

Will the purchase create a positive or negative cash flow?

With that said, would the negative cash flow be less or more than the monthly expense of paying for a dorm room?

Where is the cost of housing going in the college town?

What's your rate of return on your down payment and closing costs over the next four years?

Will you be able to rent out other rooms besides your student/child to reduce your monthly cost?

How will this work out for you as far as taxes are concerned?

Do you have enough reserves to cover the breakdown of the air conditioner, furnace, hot water heater, appliances, winterizing, cleaning and maintaining of the property (In a dorm or campus housing, these expenses are covered by the college/university)?

If you decide the investment would be worth the financial expense, then you also need to take a look at time:

Do you have time, or resources to take care of the property management?

Who will you call cross-state or inter-state for repairs to the property?

Who will handle eviction of other students in the house if they fail to pay rent?

Will your child/student be responsible enough to report, and repair, any breakdowns in the house/investment you've made to save money so that the property is maintained and doesn't become a money pit?
On a final landlord note: now that you're entering the investor field, you must also adhere to the Fair Housing Act. This means you cannot discriminate against any renter based on the seven protected classes: race, color, nationality, sex, familial status, religion, and handicap. This doesn't include other protected classes that might be required on a local basis, such as sexual orientation, source of income, matriculation, political affiliation or more. For more information on this area of the law, visit

There are more aspects to owning a rental property in your child's college town than just having a cheaper place to house them instead of the dorm. Be sure to conduct your research, determine your financial and time limitations and act accordingly.

Published: May 6, 2005

Land Zoning: How Pig Farms and Schools Co-exist

It's not a very exciting topic at first glance, but the way your lot was zoned at one time does not necessarily mean it will never be changed. Farms become single family communities, which in turn can become apartment dwellings, which can in turn be converted over to industrial space. It just depends on the needs of a community and what's happening with the land at the time those needs arise.

Today's elementary school could have been yesterday's pig farm, depending on the zoning regulations at the time. Gray Elementary School in Delta, British Columbia, Canada, was once such a farm. The kids now walk through the halls of the school where at one time, their bologna was raised. Kind of a stop-in-your-tracks thought, but one that sheds some light on how a city develops as its population grows.

When you're looking at a house with thick woods behind it, one of the first thoughts in your mind should be: "How is that zoned?" The zoning will determine the development allowed -- what kind of buildings (and businesses), the number of houses on an acre, the square footage of the lot and building, the height of a building, the use of the land -- working, playing or living, etc.

Your first search should be with the county or city planners office to nab a look at the master plan -- which can be redesigned as often as every five years or on the outside, every 25 years. It mostly depends on the speed of growth in your community.

Zone assignments can get pretty comprehensive and a zoning definition in one county doesn't necessarily carry over to the next county -- for instance, what is "M?" One could think it means "manufacturing" right? Not so fast. One person's manufacturing could be another person's mixed use. It just depends on how the city planners, in a particular area, decided to define its zoning definitions.

For instance, I counted 46 zone designations inside of roughly 29 districts covering land use for all sorts of reasons, at the Los Angeles City of Department of Planning. Residential (R zones) and commercial (C zones) are two of the most commonly known and understood, but have you heard of a zone for oil drilling (O zones), equine keeping (K zones) or submerged land -- such as fishing and shipping (SL zones).

If you're buying a home with an O zone rating -- you may want to look for another lot. Even though the plush, lush forest looks good today, later, you could wake up to large earth-moving equipment and oil drilling machinery.

Knowing your zones, is the key to unmolested landownership. While the labels for zones change locality to locality, here are some commonly used alphabetic symbols used in city planning:

A -- Agriculture -- this isn't just farms but could include some open spaces, such as ball fields, recreational areas and parks

B -- Business district -- many times this is the downtown area, but can relate to a particular area designated by the city planners

C -- Commercial -- can include retail space, manufacturing, office parks, etc.

H -- Historic or health care zones

I -- Industrial

L -- Low density or limited zone -- this is really open to interpretation town by town

M -- Manufacturing can be for light manufacturing to heavy and include textiles to automobiles

O -- Oil zone or Open Space

P -- Public facilities -- fire/safety, police, libraries, etc.

R -- Residential -- an R rating can mean plenty of things: single family, multi-family, large lots, small lots, acreage, condos, etc.

T -- Transit mixed use -- an area where planning is developed to take advantage of the public transit system of a community

U -- University/college zones

To seek out specific zoning in your area, search for "[Your Town] zoning" which should drill down the rules and regulations in your jurisdiction.

Published: April 29, 2005