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?
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 costsand 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.
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.
http://www.philly.com/inquirer/home_top_stories/20080911_Rendell__Nutter_hail_casino_plan.html
I would love to know the opinion of my fellow Philadelphians. Please see the two polls at the right side of the page on my blog. Please answer the poll and leave comments at the link below.
http://laurenherlich.blogspot.com/2008/09/vote-in-should-foxwoods-casino-build-on.html
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.
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?
So, let us take a look at the following example comps.
SUBJECT PROPERTY DESCRIPTION
Property A
Property B
Property C
Now what do I do with the information? First, I determine the net price.
Property A
Property B
Property C
Second, I add or subtract from the Net Price.
Property A
Property B
Property C
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
Property B
Property C
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.
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I work in the Philadelphia Market with Buyers, Sellers and Investors of Residential Properties, Mixed Use and Small Commercial Properties.
Please visit www.LaurenHerlich.com.
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