Archive for the 'Lessons' Category
Continuing from Lesson 25, we were told more stories about our instructor’s vast rental experience and actually covered some of the material regarding how to be a property manager and deal with renters/
We were told that it is difficult to budget for property management. This is true as stuff happens. Things break, and cost money to repair. Utah does NOT require one to maintain anything other than code violations and threats to life and safety.
Class started with a small argument as the teacher accused on the students of illegally managing other people’s property without a license. Agents seem bitter about this, since it probably seems unfair that they had to get their licenses, but hundreds of people manage illegally without doing so.
Our instructor confessed that Utah has less use for property managers than other states, as people here are very do-it-themselves…’cheapskates’ as he called them.
The rental market (like the home market) is hot right now. Rents are up roughly 25% over the last 6 months, and our instructor confessed that he plans to bring his rentals up to $700-800 for 2 bedroom units.
This is quite a bit higher than the $500 that many of these units were renting at two years ago.
He smiled as he told us that he likes to have his secretary call the larger apartment complexes and feign interest in learning the next year’s rent, and then he prices his rents slightly lower.
We were told that we can judge if our rent is too high or low based on the amount of demand and interest shown in a given price. Our insctructor told us that he’s tried to avoid renting BYU approved places in Provo, because BYU requires all sorts of difficult requirements of landlords (including prohibiting court action on tenants).
This can be difficult, as mediation tends to assume that both sides deserve something, so if a landlord is owed rent, chances are mediation is only going to get a partial collection.
He told us that he’s now in the process of buying a 24plex, which caters to immigrants, who he exclaimed are his favorite tenants.
He explained that the best way to check on a potential client and always get your rent is to charge $20-35 for a background check (which our instructor then credits to the rent if they pass). This he claimed, will discourage many undesirable applicants.
We were reminded that in order to keep good tenant relations we should in fact ALWAYS charge late fees. You must be uniform in your treatment to all tenants or risk offending the others.
Alrighty, lets get back into the classes.
Today’s class was taught by the principal broker over the brokerage that hosts our school. One of my classmates groaned “gah, he just tells stories and doesn’t even reference the chapter”
She proved correct, as the course was basically just a two hour extended story time covering our Broker’s gradual acquisition of 20+ rental properties since College.
It was pretty interesting, though some of it was rather redundant. The same classmate who had groaned earlier in the class shared her own particular experience with renting.
They had moved into a larger home, and decided to rent out their old one.
This is a brilliant idea, and the best way in my opinion to get started as a real estate investor. She however found herself desperate to fill the vacancy on the old home, possible as a result of trying to rent it at a slow time of year. No one wants to pay two mortgages.
This desperation led them to rent to the first renters they found, who turned out to be heavy drug users, ones who enjoyed knocking holes in the walls and trashing the home.
They had neglected to collect a security deposit, do a credit check (It’s only $20 people!) and had lost tens of thousands as a result. The renters ran off leaving a three month unpaid rent debt, which left my classmate in a rather desperate situation.
Our instructor remarked that most agents DO NOT act on deals that they find. He recommended selling them to favored clients to build goodwill if you weren’t going to take it anyway.
He also remarked that there is a HUGE turnaround on young agents in Utah and asked why we thought that was. I couldn’t resist.
I raised my hand “It’s a very difficult industry for new comers..”
He cut me off “Actually it’s a wonderful, one of the best industries for new agents”
I quipped back “But Brokers take such a huge portion of the commission and…”
Again I was cut off with nervous laughs, and the topics was changed ;-).
We were reminded that it IS ILLEGAL in Utah to manage a property other than up to 6 of your own, without a real estate license.
One useful bit, it is very wise to NOT live in one of your rental units. Doing so will lead to knocks on your door at all hours of the day whenever the tenant has a question or complaint. Management can be a headache.
Class concluded with a sample management agreement, which I will try to scan later. The moral of the many stories shared by our instructor was to always buy with bank’s funds, wait until a home has appreciated, then refinance and repeat.
Never use your own money as a down payment if it can be helped he stressed, it was better to refinance and use the excess cash to help buy the next home.
He advised keeping homes for as long as you could, in order to net the best possible benefit from bank financing. Inflation and tax benefits makes buying as much property as you can afford a very wise investment. If rental income covers your monthly payments, and appreciation allows you to pay down payments, it is possible for practically anyone to purchase several properties and own them outright by the time they retire at 65. Starting at age 20 can easily lead to you being a millionaire at 40.
Our Instructor warned that many agents have been schemed into joining pyramid and ponzi type scams that guarantee a retirement for agents by signing up other agents. This is a problem for many people in Utah.
They Can’t Take Your Home
Class began with us being reminded and warned that we should make sure that we pressure lenders to meet deadlines. I can understand this as being excellent advice as personal experience has taught me that most lenders are either incompetent or just very unprofessional. It seems unfortunate that lenders are able to act in this way however, as it’s bad business and needlessly complicates things.
The borrower in Mortgage transactions is considered the mortgagor, and the lender (who receives the mortgage as security from the borrower) is the mortgagee.
Through court action, a bank can foreclose, which requires that the Sheriff give notice of sale. He must post at the property, three public places, at place of sale (usually county courthouse) and publish in local county newspaper three times (once a week).
The property is then auctioned to the highest bidder with proceeds going to the cost of sale, debt, borrower, and any excess goes to the owner. A deficiency judgment can then be issued if the auction comes up short.
Under a mortgage, there exists a six month period of redemption in which a borrower can reclaim his or her property. Deeds of trust here in Utah do not have said period of redemption.
Missing one payment can quickly cause a lender to file a notice of default. This notice is sent to interested parties. This will be provided to anyone who wants a notice as long as they pay $10. They can go down and request a copy for when one is sent out.
90 days after the notice of default a lender may proceed towards a trustee’s sale. Notices of trustee sales are posted in the local newspaper along with times of auction and the names and location of the parties involved.
The morning of an auction requires that buyer be able to pay within 24 hours as well as a $5000 cashier’s check. Trustee’s websites tend to keep details up to date on auctions and cancellation notices.
In addition to foreclosure, Liens can affect your ownership rights to a property. Involuntary liens such as mechanic liens (for work done on a property) and judgment liens resulting from court rulings. A judgment lien can affect ALL of your properties, and can result in your property being seized to satisfy the judgment. The priority behind the liens is based on the date of docketing. Property taxes always get the highest priority as liens, and then priority goes to other liens in the order which they were recorded.
Original workers and subcontractors can file mechanic’s liens within 90 days of completion of the work which they were not fully paid for. Some contractors file liens as soon as they get their contract so as to guarantee early priority in payment.
Interestingly, if you are contracting for more than $2000 work, you must hire a licensed contractor and get a written contract as well as all permits and pay everything in full per contractual terms. You must create a bond in order to avoid being personally liable should anything go wrong. Doing all these things will keep you from being liable to any subcontractors and protect you from mechanic’s liens.
Per the Residence Lien Recovery Act, there exists a fund called the Residence Lien Recovery fund which, assuming you complied with your bonding and contract, will pay any subcontractors who were not paid by your contractor.
After four years a property can be sold for unpaid property taxes. A homestead exemption protects family homes, which the head of family can claim for their primary residence. By filing one, you can be protected against certain types of liens such as lawsuits.
The maximum possible exemption provided by a homestead (which is normally filed before a suit is determined) is $20,000. According to our instructor, there is a ding on your credit as a result of filing one…though I personally doubt that. A possible disadvantage to a homestead is it can prevent lenders from lending on a home with an exemption. This is a wonderful way to protect your equity, as many homes, at least here in Utah tend to have lower amounts of equity within them. Essentially, as long as you have less than $20,000 in equity, you cannot lose your home.
You don’t need an Agent
We are warned that Utah law is a tougher exam than the national exam. In order to be a licensed agent in Utah, as well as most states, one must pass both a state and a national test. Utah law is intended to protect consumers from agents and seems pretty thorough.
25% of the Utah test involves understanding a HUD closing statement. National exams seem to test more common sense whereas Utah law tests one’s knowledge and understanding of Utah statutes.
The executive director of the Real Estate Division in Utah is appointed by the Department of Commerce’s executive director (who is appointed by the governor). This office tends to be rather long, as most directors remain for 5 – 10 years. Currently an attorney heads the position, and will do so until removed by the governor.
The Real Estate Division sets the fee (which is paid every two years) for license renewal, as well as manages and enforces laws applying to agents. They also control licensing, for example ruling that property managers must hold the same real estate license agents hold. They also send out a semiannual newsletter. This newsletter outlines actions taken against licensed agents, mortgage brokers and appraisers which can include fines and license revocation.
The commission has 5 members, one of which is a non licensed agent. They must have at least 5 years experience, and are selected from different counties in order to provide equal representation across the state.
In Utah you need a license in order to deal with any real estate transaction other than your own. This brought about a discussion the mentioned a few interesting things. We were warned to not show more than six homes a day to a client in order to avoid overwhelming them. We were also advised that we could use a broker as a convenient excuse to lie to clients. For example, if a client inquires about a reduced commission, we can insist that our broker prohibits that.
Interestingly, there exists a convenient loophole for those interested in selling a home for another. You ARE permitted to sell a home for a commission IF you have them sign power of attorney over to you. This could get you in trouble if you do it routinely, but it could be convenient in certain circumstances. You would want to be particularly careful to avoid soliciting others to do this however.
The class then began to attack “Fizzbos” (For Sale By Owners) with claims of how agents can sell homes for more than an owner trying to sell themselves. Claims that 90% of all owners end up with an agent eventually, most within the first two weeks sounded lofty and dreamful. To be honest, I have seen quite a few owners sell their homes themselves with good success. The key seems to be pricing right, and knowing the market. If you’re clueless, you probably WILL get more if you get a GOOD agent. A bad agent could be worse than what you’d do yourself.
We were warned not to be a broker. Brokers are broker than the agents the instructor joked. He is the broker of the school and is a millionaire, so he may have a vested interest in reducing competition. In order to be a broker in Utah you must first spend 3 Years being an agent.
Licenses in Utah no longer require High School diplomas. The test costs $68 and can be taken infinitely, but you do have to pay each time you take it. You are not allowed to bring in Solar or programmable calculators. You cannot pay with cash; you must use a cashier’s check or money order in order to take the test. They can be taken either during the morning or the afternoon and you are given up to four and a half hours to test.
Within 90 days of passing the test, you must decide if you want to be an active agent or an inactive one (pay the license fee). A nonresident can be licensed in Utah as long as they have an active license in their home state and pass the Utah licensing exam. One last note of interest is that of irrevocable consent in which you state your address. If you are served, and you haven’t updated that address you are still considered served.
When you come to a brokerage, they take control of and store your license in their office. So until you become a broker, don’t expect to see that baby on the wall.
Can’t sue me, I’m no expert!
My final ‘required’ course was taught by a CPA who is also a residential appraiser (Utah divides appraisers into residential and commercial). He got right to business, by handing out his business card to the class. I have already shared my opinion of appraisers in other lessons, so I have become rather skeptical when it comes to appraisers. That said, I was willing to give the guy a chance as most CPAs I have known have been pretty smart people.
He explained that he felt the best way to teach an appraisal class would be to share a sample appraisal which he has done. He began by sharing every appraiser’s secret weapon. Tax records. My ears perked up when I heard him explaining online records: “As Bart Simpson would say, ‘It’s on the computers now.’” Being an avid Simpsons fan, I must confess I have never seen that episode.
Sadly, things quickly became boring as he continued explaining property taxes and answered a barrage of rather silly questions from the class. I’d list them, but sadly none of them were dumb enough to be amusing. They were just silly questions.
I was surprised to hear him claim that corner homes are on average worth less than other lots. It had always been my impression that the opposite was true. He supported his claim by stating that the double traffic from bordering two roads will bring down the value in areas with any degree of traffic.
He mentioned that you can check to see if your home is in a flood zone by checking with FEMA. This can have an obvious affect on a properties value, particularly if the home cannot be insured. There are few areas in Utah Valley that are flood zones, places such as the riverbottoms are surprisingly not a flood zone, although homes very close to Utah lake are.
He explained that he will not actually evaluate a foundation or home structure. He claimed that he only looks at it and makes a guess. While I realize the instructor is not an engineer, it is troubling that an appraiser could give a high appraisal to a home with a faulty foundation. He claimed that he had never been sued, and was happy to proclaim that he wasn’t an expert on home structure, danger, or appearance - that he just gives a guess of what he thinks the property is worth. He continued on by telling us that he looks at very few of the home’s actual features, and that at times can do a ‘drive-by’ appraisal without actually having to go inside the home.
Perhaps that attitude is one of the reasons why there is little to no consistency in the appraisal industry. He did admit that he can pad an appraisal to come out to basically whatever he wants it to by changing the neighborhood he draws his comps from. Appraisals (and CMAs) rarely draw all of their comparables from similar neighborhoods, so if I wanted my home to appraise for double I could do so by comparing it to homes in the best part of town…or I could get it appraised for half it’s value by comparing it to places on the other side of the tracks.
It was interesting to learn that many appraisers use Marshall & Swift to determine the cost of building an equivalent home. Something I didn’t know, but that makes sense, is that new homes are actually more expensive than other ones. There is a premium paid for a new home, and as such it may actually depreciate in value initially (depending on the market).
He continued explaining the appraisal line by line and did so clearly, until he went off on a rant about 0% down loans and all the evil which they have brought about. I disagreed with a lot of what he said, but I’ll go into that some other time.
He stated that most appraisers are willing to give some leeway on their appraisals, and will often increase by 5% if you ask them to. I guess that says it all. If you want to have any influence on what the property appraises at, make sure that you talk to the appraiser.