Barb Van Stensel, Realtor - Chicago, Illinois

I am reviewing some properties for one of my investors today and it just amazes me that people think, wish, hope, that they can get a certain selling price on their 2-4 unit building here in Chicago but the rents aren't supporting the value!!!

Let's look at what the investor and the bank looks at:

• Leases
• Who pays the gas on those leases?
• Is the water metered or non-metered?
• How much is the insurance for the building?
• Real Estate Taxes
• Electrical Bill for Common Areas
• Maintenance (snow removal, landscaping, plumbing breaks, accidents, painting, light bulbs)

Then they look at this:

• Remaining Life on Roof on Building and Garage
• Remaining Life on Stoves
• Remaining Life on Refrigerators
• Remaining Life on Furnaces
• Remaining Life on Central Air
• Remaining Life of Hot Water Tank
• Remaining Life of Washer(s) and Dryer(s)

So the bank and my investor know how long each of the above Seven Systems would be and so what they do is look at the cost to replace and divide the remaining years of life those Seven Systems and then divide it by twelve months to come up with the required reserves that need to be subtracted from the monthly income to replace those Seven Systems.

Oh, we forgot about the vacancy rate. Well, I didnt' but I hope I got your attention on this one. You are basing your value on 100% occupancy and that everybody pays on time. Wrong. Dead wrong. I would average in two months of income losses each year for your building right now, in this economy. That is harsh but I am not in Cinderellaland here folks. You need to be realistic about how the bank, the investor looks at their pocketbook and how empty yours may be. Don't get mad at me. I've seen alot of landlords and accidental landlords being eaten alive financially because they don't understand this system.

So, a three unit for non-owner occupancy requires, I believe 25% down payment right now with the banks.

So, you have a property that is selling for $1M and has a GRI (Gross Rental Income - not monthly but annually) of $63,000.

1. Your real estate taxes annually are $8,500 or $708.34 per month.
2. Then there is the water bill for building which has 2 bathrooms and a washer, dishwasher, refrigerator bar for all three units. The water bill is "unmetered" and so instead of $100/annually as this listing agent reported, you are going to be receiving bills in the area of $125 a month for water.
3. You have common electrical for the motion detectors and hallway lights and that will run you $45.00 a month (high end).
4. $100.00 maintenance for lawn, snow, fertilizer, the man or service crew behind these must maintenance needs.
5. Your insurance is based upon the value of the building, the number of units, whether it is owner occupied or not, it's modernization, your credit and then your coverage and deductibles.

So, let's now look at the monthly reserves. Monthly reserves are the Seven Systems mentioned above that have a ceretain life (also know as "life expectancy") to them. Once again, you need to take the cost to replace these items and divide it by the number of years that the manufacturer determines. So,

• a new tear off rubber roof would run for an average size building in the neighborhood of $10,000 with a life expectancy of 20 years.
• If the roof on the building is "pitched" then a tear-off roof (I would suggest architectural shingles for buildings, especially in Chicago because of all the wind) would run you approximately $4,500 and the life expectancy is 20 years for architectural shingles. 10 years for standard shingles.
• The garage roof would cost $1,500 for a tear off (I suggest, like most garages, they have slats for sub-roofing) and I would replace with CDX 1/2" board with ice/water shield membrane around all edges and pitch lines. The additional cost for material and labor for adding the CDX and Ice Shield/Water Membrane is roughly $500 - $750 more but well worth it!
• Stoves: Depending on the stove: Estimate $400 to replace the stove with a life expectancy of of 15 years.
• Remaining Life on Refrigerators: $550 to replace the refrigerator with a life expectancy of 15 yaers.
• Furnaces: $3,000 to replace the system with a life expectancy of 18-20 years.
• Central Air - $2,500 to replace the unit with a life expectancy of 12 years (if you don't wrap it up type during the winter and keep putting freon in it every season.
• Hot Water Tanks: Life expectancy is only 10 years (but I have seen them last alot lot longer) with a replacement cost of $1,100 for labor and material.
• Washer and Dryers: Cost varies and life expectancy is between 12- 15 years.

SO NOW, LET'S DO THE MATH:

MONTHLY INCOME: $5,250.00

$1,000,000 Selling Price with 25% Down Payment:

Mortgage: $750,000 @ 6.5% = <$4,875.00>

MONTHLY EXPENSES:
Real Estate Taxes: $708.34
Water $125.00
Electrical $45.00
Insurance $75.00
Maintenance $100.00

TOTAL MONTHLY EXPENSES: $1,053.30

LOSS OF RENTAL INCOME (VACANCY RATE)
$1,200/RENTAL X 2 MONTHS = $2,400
divided BY 12 MONTHS = $200.00 $200.00

RESERVES:

We are going to estimate that everything
is new on this building for knowledge purposes.

MONTH RESERVES REQUIRED FROM INCOME:

Roof on Building $41.67
Roof on Garage $13.89
(3) Refrigerators $9.17
(3) Stoves $6.67
(3) Furnaces $37.50
(3) Compressors $52.08
(3) Hot Water Tanks $27.50
(3) Washer & Dryers $62.50

TOTAL MONTHLY RESERVES REQUIRED: $250.98

TOTAL MONTHLY EXPENSES: <$1,504.28>

NET OPERATING INCOME: <$1,329.28>

This is a negative NOI people. Investors want a cash flow when they put 25% down. Your property is not worth $1,000,000 to the bank or the investor. You will not sell. Bottom.

DISCLAIMER: Remember this is based on a new building. The expenses and maintenance will be higher on older buildings with older mechanics.

NOTE: If your property is vacant, the bank will estimate your rental income at the low end of the market rental income factor. The "long term tenants" a/k/a "below market rent" will be the factor and will also be the low end for your selling price.

You have questions? You know where to find me.

BTW, that agent reported an annual $51,200 on NOI! I saw a loss of $15,951.36 (that included the mortgage payment). And you wonder why you didn't sell?

Did you know that houses and buildings move? Those cracks that appear with age or settling could always be there.

I want you to look at your hand right now. Go ahead and look at it. See how your skin expands and contracts when there is movement?

Think about when you were a baby. Did somebody put a new body suit of skin on you as you kept growing? No? Yes?

Now, I want you to think about the climate you are in. I'm located in the midwest and hence we have frigid winters and hot summers. So, a house made of frame has a tendency to expand and contract during those seasons. You say, "No Way"? Well, then tell me why your feet and hands have a tendency to swell up during the summer?

If you have a brick building, go outside and look at where the foundation and the concrete sidewalk connect. Go ahead. Now, some of you may have that black tar. Some may have concrete built up in a "swoop" type of technique. Others may have a gap.

One of the problems with moisture on the exterior of the foundation walls of an old or new building, is the connection between the foundation and the sidewalk. If you do not have an good overhang on your roof line (16-24"), you probably are one that has been having problems with seepage into your basement, or a funny discloration to your exterior wall, or that green mold growing on the outside wall ... you know the stuff.

One of the best ways to stop the problem from beginning or when you purchase that older building is to have it inspected by a professional. Not a hobbiest - you know, the ones that can do everything.

I just received a call from a friend and client who told me that this "handyman" she hired a couple years ago put concrete between the foundation and sidewalk in the "swoop" method but it is crumbling all apart and is breaking up. Hmmmmm..... the best way to fill the crack or space between a multi-seasonal home location is to use a silicone material that is condusive to multi-seasonal weather changes.

Think about it. It's like the homes that have the hairline cracks above your doors and someone muds over it and says "that will take care of it". That's true, it will .... but they forgot to finish the sentence "for now". Years ago, I ran into a nice little product called "Crack Be Gone". It is a silicone spray that you lightly spray over that hairline crack. You don't stand it down after you spray. You wait for a couple of hours and then you can paint right over it. So, when you house moves again, sways to the breezes, or the earth shifting, it'll hold and you won't have to worry.

As my Dad has always said "Do it right the first time, and you won't have to worry about it."

Home Fixing Tips 101

Q: What is Flex Appeal?

A: It's home that has a floor plan that evolves with life.

Q: Do I need to have curb appeal and flex appeal?

A: The market is looking for it.

Market surveys taken show that a home with good curb appeal will get a higher price as well as faster marketing time. And, yes, when you look at the U.S. Census Bureau's findings that show that we had a 12% mobility rate in 2008 and then it is backed up by the National Association of Home Builders that reflects that the average new-home size stop growing in 2008 after a 35- year run.

In real estate forums that I hold here in Chicago about investing in real estate, I have seen consumers faces drop on two facts:

• Homes never appreciated before 1960; and
• The average size home was approximatley 1,000 - 1,200 square feet for a family which usually contained 3 bedrooms and 1 bath with an unfinished basement.

The average home in demand these last 5-7 years was roughly 3,600 - 4,000 square feet for the same family here in Chicago.

Now, homeowners are staying in their homes longer (smart thinking) and remodeling, updating their homes. They are getting back to the thinking of "yesteryear".

Q: How does Flex Appeal help me when I'm selling my home?

A: The consumer doesn't want to add more square footage but wants to be able to reinvent the existing rooms that are in the house. For instance, 11204 Kohl Drive has a Family Room that could also be used as an office. The deck area outside of the kitchen and the family room allows for extended entertaining should you have the masses visit you and square footage is short by just opening them up as well as the door in the kitchen area and you have one extended living area.

View of Family Room French Doors off of Family Room
makes for great extended living

Now, if you look at the top photo and you see that area above the garage and family room? Well, that's got a lot of Flex Appeal. Come look.

Q: Okay, so what can be done with this area?

A:

• Bedroom - big one
• Guest Quarters - enough room to allow for a sofa, bed, dresser, side chair
• Media Room - Video, Game Playing, etc.
• Library - built in bookcase, window boxes that open for additional storage
• Office

Buyer's don't want wasted space. It is a fact. My mother used to complain about that all the time. Every house that my Dad built - "I need space, I need space". Dad took the 1,600 square feet and made every ounce of space work with every house. For instance: A built-in china cabinet with glass insets in the dining room area to display the fine crystal, collectibles. The end of the dining table went up against that wall. Yet when you walked around into the kitchen, that wall space had wood doors where the crystal, collectibles were view from the dining room and shelves and pull out drawers below for the linens, the place settings, etc. That's a Flex Plan. Making something useful for immediate use or possible future use and being able to alter it down the road.

A Flex Home ideally is to make sure that rooms are ready for current and future needs. For instance, when my Dad built my Aunt's home, she had multiple schlerosis and so he made the bathroom doors wider for wheelchair access but then thought about the hallways and he made them wider to accomodate not just my Aunt's needs but the future needs for them down the road. And yes, they had a screened in porch which was finished off and changed into a family room when they adopted my two cousins.

Flex Rooms, Flex Appeal, Flex Homes .... whatever you want to call it, has been around for a long time. In fact, it was the norm for centuries in Europe and Asisia where the house is smaller and people used flexing to accommodate their life.

One of the things that I look for in each home that I list, is the ability to have the Flex Plan. Rooms should have options for future use. They are there if you look hard enough.

By the Way, This Home is For Sale.

Asking Price is $447,000

It is the Builder's Owner Residence

The Bonus: HE will pay up to $2,000 in moving costs when you buy his home.

I have had some discussions this past week about the challenges of financing and the options that are available right now. I'm hearing "take the 5/1 ARM because it is a lower rate and you can refinance in five years".

Sounds pretty good to me or is it?

"Take the 5/1 ARM because the rate is lower then the 30 year fixed and besides, you'll be out of the property before then." Or will you?

So which is it? SALT or SUGAR?

See, I'm thinking and thinking till I can drive myself crazy with the decision but then I'm looking at how Lee Iococca, that saved Chrysler back in the 1980's when their stock went down to $5 and neither my brother nor I would take a gamble with Chrysler because neither of us could afford to loose more money, is now going to loose his pension and forbid that he has to turn in his car that he was promised until "death do us part" or purchase it under the new Chrysler ownership.

What does this have to do with anything? Well, I do not think that most of us have still learned our life's lessons and I bet that some will grab that 5/1 ARM because it is such a deal like the negative ARM that was introduced way back or maybe it is a deal.

Then I'm looking at the fact that one in eight properties is in pre-foreclosure right now and this is just the beginning. So, I'm thinking with all the default on mortgages due to whatever reason and there are alot of them and alot of sad ones on top of it, I'm looking at values will still decline and if someone put 20% down on a property and they loose part or all of that equity and are flat lining then when they refinance their home down the road for a similar rate that would be reflected in today's 30 year fixed but now will the bank require the homeowner to pay PMI because the equity is less then 20% and so now PMI rates are anticipated to go up even more and twhile I may be driving you crazy by reading this .... I'm then thinking that the homeowner will and could possibly, actually be paying more down the road becaue PMI may be added to a tidy sum of let's say $225 additional a month and all to save how much right now?

Whew!!!

SALT OR SUGAR?

picture from Microsoft Office.

When hiring an electrical contractor make sure that they are licensed, bonded and insured.

If you have an older home and you need to have your house rewired make sure that you understand the term "rewired". See, most older homes that haven't had the lath and plaster removed still have the old cloth wiring or bx inside the walls. BX cannot be classifed or will be removed or considered rewired. So, when you get a quote say for instance $2,100 to have the entire second floor to be rewired .... understand that that may mean only two lines out of 10 on your second floor because the remain 8 may be BX!!

When getting a quote, make sure that while a friend may recommend this awesome contractor, you want to check for references and not just the quality of the work.

For instance:

• If screws are "accidentailly" left lying around on your hardwood floors and you or the contractor(s) step on one and they gouge and scratch your floor, who is going to pay or take responsibility for that mistake?
• When they are done with work for the day, do they clean up the area and remove the debris and not out in your back your in a contractor bag where you are going to have to separate the old line from the plaster and lath where they opened up the wall?
• When you ask for specific things to be done, get it all in writing down to the last switch.
• You want dimmers in your house? Know that there are different styles and kinds and what your electrical contractor will put in and what you want may be different.
• Will they get the job done in a timely fashion?
• Are they always on time?
• If they are going to be late, do they call the night before or a couple hours before they are due to your home or do they call after they missed their appointment?

Always get another quote to compare pricing, product, efficiency, professionalism.

What until I tell you about the plumber that brings his own door mat and wears booties when he visits my client's homes!

I hope this gives you some insight when it comes to electrical.

Lessons Learned from the Home

Barb Van Stensel
Keller Williams Realty
Chicago, IL
773.746.5395