So I just had a phone call from a person that wanted to offer on a proerty that I had listed. Guess what? I am not kidding, the Seller about 30 seconds before signed the Purchase ad Sale agreement.  This means that it is an accepted offer and the property is considered “in contract”.

In the Phoenix Market and frankly in any other market it is important to get the contract accepted.  It is not that you have all of the information, it simply means that you have the property under contract.  I can assure you that by the time I request all of the due diligence, in this market the property will have gone to contract with someone else.

I am pretty good at being able to estimate the cost of running the building-stablized.  I also work with Property Management to know what the rents can or should be.

As far as the condtion of the interior (as we rarely get to see interiors) this is often a negotiated factor after inspections.

Remember that you also have an apprasial condition in the contract as well.

The way that I write a contract, we make sure that you have a due diligence period so that you can do your analysis of the proformance of the property.  Remember until we get past the due diligence phase of a contract, it really is all paper.

I never want someone to CLOSE on a property that is not right for their needs but without an accepted contract, we will never figure this out.

Do not think that low ball offers work in a good market.  They DO NOT!  Remember you still have the apprasial contengency.

Real Estate is location and pick you price range and location.

Here is something else that is non-negotiable. You must have a proof of funds for either the purchase amount (if cash) or for the down payment.  In addition, if you are going to finance part of the purchase ABSOLUTELY need to be prequalified.  Contracts are not worth much if there is not one or maore of these items in place.  Today alone I received two offers on properties and niether one had a proof of funds (both cash).  I immedaily sent an email to the agents for the POF and in both cases received it back in minutes.  Agents and Investors know that they need this piece.

Off Market Is not a deal as many think. Who cares if it is an advertised listing or an “Off Market”. If it is on the MLS for expample you are actually more protected legally as Realtors have rules that govern.  I have bought off market and while we did the best due dilligence possible, once we closed there always seem to be more hair on the dog so to speak.

I promise my clients that if we write on a proerty and it is not the right one that they will have the ability to cancel during the Due Dilligence period.  Please read my past blog on Critical Dates Letters as you will agian see how important that these are.

Stay tuned for more Broker’s Advantage Blogs next week.

And remember that I answer my phone.  Cal me 602-688-9279

Linda

 

 

Closing Protection Letters-What are they and when should you get one

A closing protection letter is issued in an Escrow and there could be several issues.  What are they?

First a closing protection letter is issued when money is deposited to the Title Company.  This is used to protect the money that is held by the title company to “protect” the money that they hold.  It is used to safeguard the funds from fraud and embezzlement.  It is also used to protect the money if the title company would close their doors.  Typically not in this market but in the late 2000s we saw this.

Who gets a closing protection letter?  The three main parties are the Buyer, the Seller and the lender if there is one involved on the Buyer’s side.

The Title companies all have a credit line and this line could be underwritten by a larger company.  So the Closing Protection letter may come from a different company but will have the Escrow number on it. This letter for the amount of the money held will go against the credit line.  This is standard practice.

If you are in the Seller’s position and earnest money is deposited, you definitely want a “CPL” to insure that your interest in the earnest money is protected. If for some reason the Buyer defaults and you have the right to the earnest money, you want to be sure that it is there when you obtain it.

If you are in the Buyer’s position and you have earnest money on deposit, you definately want a “CPL”. This protects your earnest money as the followed in the definition of the terms of the contract. When you deposit your closing funds whether it is additional funds or the whole amount, you should request an updated CPL.

If you are a Buyer and are obtaining a loan, the lender is NEVER going to send over the closing funds until they have a CPL as well.

So as you can see there may be three to four (or more) CPL in an Escrow.  These are highly recommended for both the Buyer and Seller.  As I have stated, your lender will require it.

Remember to post your comments and feel free to call me anytime.

We also have several new listings-https://justsoldit.com/team-gerchick-listings/

I answer my phone-602-688-9279

Have a great day!

Linda

 

 

 

The Critical Dates of the Purchase and Sale Agreement

The critical dates are written into the Sale Agreement and need to be respected.  A Contract is not valid unless it has a beginning and end date. While these are governing dates there are other dates that are probably in the contract.

REMEMBER THAT ONLY A BUYER AND SELLER ARE PARTY TO THE CONTRACT AND ALL ADDENDUMS MUST BE SIGNED BY THE BUYER AND THE SELLER!!! I can’t tell you how many times I see agents trying to change (even with good intentions) the time lines or any other terms with an email.  This does not count.

The Title Company especially on an investment property, should provide what we call a critical date letter.  READ IT and make sure that you agree with the dates. If a date falls on a weekend or a legal holiday this may still be valid.  Remember that in Arizona unless it is stated that this is business days it will default to calendar days.  Also, the time for the expiratino is 11:59 PM AZ time unless stated otherwise.

Last year there was an agent that was representing himself and waited to send a Buyer’s Inspection Report until 11:59-but guess what he only emailed it to himself.  When we realized his mistake it was exactly 12:00 midnight and my Seller did not have to make any repairs.  Additionally, his Earnest Money was at risk and he utlimately closed. It was a nightmare closing but I got it done!

If a timeline is changed, the Title Company should issue a new critical dates letter.  Remember that the Title Company is the “keeper” of the contract.  The Critical Dates letter is very useful to be sure that everyone is on the same page!

Since I negotiated the contract, either from the Buyer or Seller’s side; I should know what the intent of the Contract will be.

One of the most frustrating items is that Lender underwriters I am not sure that they really ready the Contract.  I always am watchful of the transaction to be sure that the Lender is hitting their timelines as well.

This is simply another tool to be sure that everyone understands the contract and it’s deadlines.

There are some real differences between the AAR Residential contract the Commercial contract and by reading the Contract that you sign, you have committed yourself legally to the timelines.

We will speak later about the different timelines and how they can be used both pro and con.

Remember that the backside of the website contains alot of good information but you have to register to see it!

I answer my phone and look forward to speaking with you!

Hope you have a good time reading these Blog Posts! I truly want to help you understand investing!

Linda

602-688-9279

 

Hold open Title policies are very useful for a few reasons. First, what is a hold open policy?

A hold open policy must be requested prior to the Close of Escrow of the purchase of the property. This is used for investors that are intending to resell the property in 2-4 years. What this does is save the Investor fees for the owner’s title policy that is issued when the Seller sells the property.

The Buyer soon to be Seller will pay a small fee at Close of Escrow when they aquire the property. However, when this person sells the property there is a substantial savings in the Title Insurance. NOTE-The Seller must use the same Title Company when sellig the Property without fail. When we have a hold oen policy I disclose it in the listings to the agents.

What if the owner decides to kepp the property after close? It is important that the Seller contact the Title Company and have them close the policy in order to maintain the Title Insurance. There is not a fee for this but this is an often overlooked item.

What if the Seller is not quite finished with the repositioning of the property and the hold open time period os about to expire? It is easy to extend for a small fee. The Seller must contact the Title Company prior to the expiration of the policy and request an extension. There will be a small fee for this but it still saves quite a bit at closing.

There are different time limits on policies depending on who is the underwriter of the policy. The Buyer-Seller needs to decide how long that the repositioning is going to take and buy the policy accordingly.

Wait till next week for more education!

Remember that I answer my phone. It’s funny people say, “You answered your phone!”. I say “Well you called me!”.

602-688-9279

Take Care,

Linda

Understanding the how and when of onsite inspections is critical to the due diligence process

While listing agents want to push through to the physical inspection-I say wait and let’s be sure that we are ready to proceed.  Here are some tips and while this may not be all of the types of inspections that you may want to do but this will give you a really good place to start.

You really want to be sure that you have all of the books and records and the other materials that you need in order to proceed with physical inspections.  If you need to personally walk the units before you start paying for inspections-do this up front and as soon as you are able.  You can do this concurrently of reviewing the books and records.

However, when you are ready to start the actual physical inspections, remember that you have a time clock ticking.  Make sure that you can get all of the reports in prior to the expiration of the inspection period.

There are several types of inspections for different reasons.  Be sure that you want to order the right kind.  Here are a few examples:

  • Physical Inspection
  • Wood Infestation Inspection
  • Sewer Inspection
  • Septic Tank or alternative waste inspection
  • Environmental Inspection
  • Survey
  • Roof Inspection
  • Asbestos Inspection
  • Mold Inspection

There may be a number of other kinds of inspections depending on your needs and the type of property.  It’s pretty easy to see that you could rack up some significant costs on inspections.  It is critical to know what the property needs now and what may be needed in the immediate future or even the long term future.

At the very least, get a physical inspection and wood infestation report.  Many people do not realize that in the standard AZ Listing agreement, the Seller has already agreed to place a clear Wood Infestation report with Title.  The physical report may or may not lead to other kinds of inspections.

While I never discourage Buyers from obtaining any inspection type of report, I like to see a Buyer start with the basics.  It also depends on what type of property that they are buying.  A gas station-you be an environmental report. Maybe not as important on a Multi Family.

On a multifamily property, maybe a roof inspection is more important.

If the property is older, a sewer and pipe inspection may be critical.

You need to rely on your Broker and primary inspector to guide you but make the ultimate choice of the kinds of inspections needed again for your piece of mind.

Next week let’s discuss Title Hold Open policies. What you don’t know what this is?  You are in for good information.

Remember that I answer my phone-602-688-9279

Linda

 

The Books and Records of a multifamily can be not only hard to understand but incomplete as well!

When I am asked to review books and records, it is always important to understand two items.

First, knowing what to look for as real expenses. Most owners and property managers simply lump both operating and capital expenses together.  Here is the good news-this is an easy way to evaluate the “major” work done to the building.  Here is the bad news-this makes it harder to ascertain the real operating numbers on a building.  Remember that capital expenses are considered nonrecurring expenses.

A good rule of thumb is to see if these expenses are completed on a routine basis.   Pest control may not be done every month, maybe every three months but a termite treatment would be considered a capital expense.  Carpet may or may not be considered a capital expense as this may need to be replaced whenever a tenant moves out but tile flooring is a capital expense. Maintaining the landscape is an operating expense but installing new landscape is a capital expense.  When I look at books and records and I see a plumbing expense over $500 I will question what it was for. Often I can find new hot water heaters in the books and records.

Once we have removed the capital expenses from the operating numbers, this makes it easier to do an honest evaluation on the property.  WAIT I said that there are two factors that I look for on Books and Records.

Secondly, it is important to make sure that all expenses are accounted for.  One of the biggest issues that I see with books and records on the MLS is that uneducated agents (again why you need use an experienced commercial Broker) is that they will not add a vacancy rate or management fees on the MLS.  This will give you a higher cap rate but not accurate figures.  When I question them, here is what I often hear, “Oh, the owners manage the building themselves!”, or “The building is full.”  When I respond, I will ask, “Does this mean that the owner will manage for my clients forever for nothing?”‘ or “Does this mean that the owner will guarantee 100% occupancy forever?”.  The answer is of course not.  Then my answer to the agent is get your numbers right.   Even a self managed building should show these numbers.

Often the taxes and insurance are not shown on the books and records.  This may be due to the fact that the owner has the building self managed and pay these expenses out of the their account vs. the property manager’s account.

What about additional income? Laundry, storage and pet fees etc?  Some property managers keep the late fees as part of their income.  So this as additional income may not be used.

Once you have the actual numbers and they have been verified, it becomes pretty easy to figure out if the property makes sense.

In the Phoenix market, where rents are easily increased, I usually run two spreadsheets.  One with the VERIFIED actuals and one with the projected income based on the actual expenses.

I had a client this past week not understand that without this being done completely, I would not provide the analysis on the building.  This type of analysis usually takes me 3-4 hours to completely do depending on the information that has been provided.  Often it is a back and forth between myself and the other agent in order to get the correct answers.  The above mentioned client was frustrated with me instead of welcoming the information being done correctly.

Often times we can obtain a building that other investors overlook due to the inability or lack of knowledge to understand the books and records.  This is a great benefit for my clients.

Next week we are going to discuss inspections and I will give an overall view of what kinds and when they are needed.

Remember that I answer my phone and WELCOME you comments at the bottom of this Blog!

Have a great day!

Linda 602-688-9279

Let’s speak about Rent Rolls in income producing properties!

Rent Rolls on an income producing property can either generate an offer (whether you are a Buyer or a Seller).  Giving the most up to date and accurate information is critical not only for a Buyer or Seller but the lender and also to attain an overall view of where the property stands. This means not only performance but also in the market place.

Rent Rolls and what should be on every rent roll:

  1. Date
  2. Tenant name
  3. Effective Date of Lease
  4. Expiration or Month to Month
  5. Security Deposit (both nonrefundable and refundable and these need to be stated)
  6. Market Rent
  7. Amount of Rent
  8. Rental Sales Tax column and who pays it
  9. Additional fees (Pet, Parking and Storage as an example)
  10. Total Monthly fees Due from Tenant
  11. Date last paid
  12. Any balances due from Tenant
  13. Another column should be for notes

It should  be noted that all of these items should be able to ascertained from the leases (and/or addendums).

Protecting your Rent Rolls:

The rent roll for an income property is absolutely critical whether you want to sell, buy or even keep your property.

If you plan to sell this should be prepared and available to the Real Estate Broker and all potential Buyers.  When I list a property, this is why I want copies of ALL leases.  One of the first things that I like to do is take the leases and create a rent roll, then compare my rent roll to the Property Manager’s Rent Roll.  There are often differences but are usually easily handled will good communication with the Property Manager.  For example, maybe I was not given an addendum.

If you are a Buyer, you certainly want to see a rent roll.  It is a great way to evaluate the Property and even the job that the current Property Manager is doing.  If the current owner cannot provide you with a rent roll, the best idea is to start with the leases.  Then you have the ability to ask good questions instead of simply asking for a rent roll that may or may not be accurate.  Remember that a Lease is a legal contract and if you are buying the building, you are also buying the leases as they will convey as written to you.

If you are planning on keeping the building, you should evaluate your rent roll for accuracy at lease once a year.  What is you want to re-finance the property?  The Lender will ask for a complete rent roll almost immediately.  Do not overlook this very important piece of your investment.

One of the most common errors I see on rent rolls are concessions.  FIRST, if you are going to give a move in special, no not give it in the first month.  Do it at least in the 4th or 6th month.  Here is an idea that I like to use.  Do not give a rent concession, but a grocery store or gas gift card.  You can expense this but not HURT the rent roll. On a fourplex a $25.00 per month per unit has either decreased or increased the value by approximately $25,000.

One last thought on your rent roll-this is a very valuable tool and a great way to evaluate your rents against the market and also a ten thousand mile overview of your Property Manager.

Questions, call me 602-688-9279.  Next week I will be discussing the essence of books and records.

Have a great week and remember that I answer my phone!

Linda Gerchick, CCIM

Broker’s Advantage

BEFORE I list an investment property for sale, there are several items that I really like to prepare.  Sometimes it may take a month or so to complete some of the items that are needed.

First and foremost, I want to see the rent roll and books and records.  Rent rolls are so important to the overall sale ability of the property.  I personally do a drive by to view the area and the property. It is also important that I get to get into the units. Wouldn’t be awful if we get a great contract and good buyer and when we get to inspections there are inspection or maintenance issues that will kill the deal wither on appraisal or inspection? I never want a Seller to spend money where it is not needed but sometimes it is really important.

Next week I am going to blog in depth about the rent toll and books and records.  This will be one of the more important blogs that I will do this quarter.

I also want copies of ALL pages of the leases.  Even if the tenant is month to month.  This is not disclosed to the public but it is important that we have these on file.  We also, go through the leases to make sure that they match the rent roll.

If there is a laundry room lease I will need this as well.

It is important that if the property is owned in an entity or trust that I receive these documents as well.  Not only do I need to verify that the person signing contracts is the correct person but the Title Company will need this as well.

The Insurance Loss run is needed and I will help the Seller prepare a schedule of personal property and capital expense list.

The Seller’s Disclosure Statements will need to be prepared and signed.

Once these items are done or being done, I then schedule professional photos or videos depending on the property.

As you can see there are a number of items that are done prior to and at the time of listing.

In future blogs, I will be discussing marketing and the extensive marketing that I invest in my Seller’s properties.

If you need to speak to me; please call my cell at 602-688-9279.  Remember that I built my reputation on the FACT that I either answer my phone or return my calls promptly!

Linda

Businesses make promises to its customers.  A brand promise spells out what customers can expect from the organization’s product or services.  Those promises are communicated verbally and in writing in a multitude of ways every day.  For example, a company’s website or app lists details about the products or services.  Marketing materials such as flyers, brochures and ads tout visually and in writing what is special about the company’s offers.  Employees talk up the organization’s purpose.  Signs scream the business’ intent.  The mission statement communicates the company’s promises.  So do corporate filings for publicly-traded entities.  And Contracts and Sales Agreements spell out in legally-binding detail the particulars of the brand’s commitment.

That is just the tip of the ‘brand promises’ iceberg.  Brand promises are also communicated through professional oaths as well, like a physician’s Hippocratic Oath to “do no harm”.  Attorneys take an oath when they are admitted to a State Bar Association. And CPAs take an oath after passing the exam.  For example, the North Carolina CPA oath says:  “I will support the laws and regulations of the State of North Carolina and the United States. I will perform my professional duties to the best of my ability and abide by the rules of professional ethics and conduct; and I will uphold the honor and dignity of the accounting profession by serving with integrity, objectivity, and competence.[1] That communicates what a CPA in that state has committed to do. That professional designation implies brand promises to clients.

There are a myriad of other actions and representations that spell out what a brand pledges to do or provide for its customers.  Those promises are sometimes legally-binding and ethically-binding, but they are always socially-binding.  There is a social pact between a seller and a buyer based, in part, on the brand’s promises.  Companies are expected to live up to their brand promises.

For example, for many years Bounty paper towels proclaimed that it was the “quicker-picker-upper” in its ads and on its packaging.  Introduced in 1965, this Procter & Gamble brand touted fast absorbency as a key selling point.  In 2010, they changed their brand message – and thus their overall product promise – to say the “clean picker upper”.  The package also says “One sheet keeps cleaning” and, on the back of the wrapper, it says “thick and absorbent Bounty helps you clean up quickly and easily, so you can get more out of each day.”  Procter & Gamble’s marketing team felt that consumers wanted a competent clean they could trust on surfaces their families encounter every day so their brand’s promise shifted to a “functional benefit” rather than how fast Bounty could pick up spills.  Bounty promised that a single sheet of their paper towel was strong and absorbent enough to get surfaces clean. The subtext was that they were promising to be cost effective for frugal shoppers who watch how many paper towels they use each time there is a mess that needs to be wiped.   And, for the most part, Bounty is a solid brand that has lived up to its promises.  But, what happens when a company fails to live up to one or more of its brand promises repeatedly?  Routinely?  On a regular basis?

Do Companies break promises regularly?

In a 2001 Gallup research and development survey of more than 3,100 customers, less than half of current customers felt that the brands they use keep the promises they make.  Specifically, just 38% of U.S. bank customers felt that their bank always kept its promises, while only 31% of auto owners felt that their car’s manufacturer always kept their promises, and a mere 22% of the previous year’s airline customers felt that the airline they flew most always kept its promises.[2] So, sadly, customers have become accustomed to companies breaking promises.  That may be, in part, because only 27% of employees report that they always deliver on the promises they make to their customers.  So most companies break brand promises and their customers know it.

Of course, no company is perfect because companies are comprised of people, and people are not perfect.  To err is human.  So, it is understood that brand promises are sometimes broken unintentionally due to human error and because of issues beyond a company’s control.  For example, airlines cannot control the weather but they take the blame for flight delays due to ice, snow, hail and lightning.  Also, logistics companies Fed Ex and UPS deliver nearly 6.5 billion packages a year, 99% of which are on time and undamaged, but some packages get lost or damaged or both.  It happens despite massive, intricate systems that protect against such errors.  No company is perfect and none gets it right 100% of the time.

That said, every organization should be committed to doing its level best to uphold the pledges it makes to its customers.  But, as the Gallup poll indicates, many companies aren’t doing that.  So, what happens when companies regularly fail to live up to the promises made?   After all, if most companies are breaking promises and people expect it, is that really a problem?  Simply put, yes, it is a problem in the way that a ticking time bomb is a problem.

Several things that happen when a company breaks its brand promises.

  1. Customers are disappointed.
  2. Customers feel disconnected from the company and its employees.
  3. Customers learn not to trust the brand.
  4. Customers feel disrespected.
  5. Customers no longer feel a sense of loyalty to the brand.

When that happens, brand dismantling begins.

What is Brand Dismantling?

Brand dismantling is what happens when a company regularly breaks its brand promises.  It can happen to any brand that consistently or cavalierly fails to deliver on the commitments it makes to customers.  So what exactly is brand dismantling?  It is the corrosive and ultimately destructive effect that broken promises have on the strength and stability of a brand.   Sometimes the effect is slow and is not felt right away.  Over time, customers slowly reduce their business or remove their business altogether, taking with them friends, family, and colleagues.  The attrition is like a slow leak.  In the case of a company that sells a product, customers might start trying competing products in search of one that is better.  Or, if the brand promises broken were by a company that provides a service, customers might start asking for references to other vendors.  The decline happens bit by bit.

However, thanks to social media, brand dismantling is happening more quickly now than ever before.  Betrayed customers not only suddenly and abruptly disappear — taking friends, family, and colleagues with them – but they also take people they don’t personally know but are connected to through social media.  The bigger the person’s social media platform and megaphone, the more devastating the impact to the company.  Broken brand promises can destroy a company with alarming speed, especially when one tweet has the potential to be retweeted ten thousand times over and viewed by over a million people within a matter of minutes.

Case in point.  Chipotle’s brand promise is that they make food with integrity.  Their entire brand was built on the promise of serving fresh, local food that is ethically grown and locally sourced. Their website even proudly claimed that the company used only vegetables grown in healthy soil.   So, it was more than a shock when hundreds of consumers across 13 states were sickened after eating contaminated food from Chipotle in 2016.  The news spread on social media like wildfire.  It sent the company’s stock, which had hit a record high in 2015, spiraling downward 40%.  It also launched a federal criminal investigation because Chipotle could not identify the source[s] of the contaminated ingredients that went to stores at specific times.  They broke brand promises by having an outsourced supply chain, which meant they lacked end-to-end visibility of the food from the source to store delivery in the chain.  This allowed the contamination to spread.  The lesson?  Be careful what thy promises to thy customers.  It wasn’t just that they made hundreds of customers sick, it is that their main brand promise had been badly broken and customer trust was crushed.

Though scarce, trust in brand promises is universally a top priority for consumers in determining whether to do business with a company.  That trust is in very short supply, and it cannot be bought, stockpiled or artificially made.  It must be earned by organizations through their actions daily.  It is not something that is ‘one and done.’  Consistency is a key factor in gaining and keeping consumer’s trust in a brand promise. It is not about fulfilling the promise once and moving on to the next exercise, effort or engagement.  Only routinely kept promises will nurture brand reputation and generate customer loyalty.