Development

Investing in Rental Property … A Primer

August 14, 2015 By Rick Jarvis

Everyone fears a broken toilet at 2 am ... — I may be jinxing myself but I have never had a toilet break at 2 a.m.

“I want to invest in rental property.”
“I want to flip houses.”
“I am thinking about owning some apartments … what the deal with those?”

We hear this constantly. And we love it because it means someone else is in the nascent stages of realizing what many have known for years – owning property is a fabulous way to build wealth.

Here are some things to consider.

Toilets Never (OK, Rarely) Break at 2:30 in the Morning …

It is amazing how many people have a fear of rental property and summarize their fear by saying, ‘I don’t want to be fixing a toilet at 2 in the morning.’ A quick secret – I have owned rental property for well over 20 years and I have yet to have a toilet break at 2 in the morning (and yes, I realize how badly I am jinxing myself). Have I had inconvenient timing on repairs? Of course. I even had a fire destroy a building (and no one was hurt, thankfully) but the unforeseen is the reason you buy insurance.

At the end of the day, the benefits of ownership far outweigh the cost of maintenance. When you grow your portfolio to a certain point, then you hire a management company and download the burden of maintenance to someone else.

Credit Reports Tell All

If you take nothing else from this article, please take this away – understanding what a credit report is telling you is the number one way to eliminate unnecessary work from your portfolio. While a busted pipe under the house is an annoyance, its impact is minimal when compared to a habitually late tenant or one who requires eviction.

Every time I found myself in front of a judge filing a ‘Pay or Quit’ notice or Unlawful Detainer, it was because I ignored my inner voice and took a flyer on someone with a marginal credit profile. All credit is not created equally … you need to understand what cause credit scores to fall and more importantly, why. I would far rather lease to someone with a bankruptcy or foreclosure than someone with a judgement from a landlord and utility company.

What Feels Comfortable?

I don’t have a great understanding of the retail market and thus, I own no retail space. I am also not familiar with executive rentals, so I don’t have high end residential properties for lease. I have a far better feel for 1 and 2 bedroom apartment rents, suburban and urban office rents and 3 bedroom house rents in good school districts. So guess what I own? Yep, apartments, some office and several single family homes in good school districts.

If you are going to invest in property, buy what feels comfortable to you. You will inherently have a better feel for the market and you will worry far less.

Know Finance

The best property owners do one thing extremely well – they correctly finance their properties.

Securing the lowest interest rate for the longest period is important, but sometimes flexibility can be important, too. Partial releases, renewal options, penalty-free payoffs, floating rates, caps and assumption clauses can all impact finance, too. Typically, if just a single family home, the Fannie Mae/Freddie Mac investment products will suffice, but when you begin to look into multi-unit properties or acquisition/rehab strategies, finance changes.

Correctly financing your property minimizes risk and increases cash flows.

Management Companies and Tenants

I like to think that there are two kinds of renters – future buyers and habitual tenants – and you need to treat each differently. Management companies, like Realtors, attorneys, architects, Doctors or accountants, do different things well. Don’t assume that a management company is good at managing all types of properties. Know who will best manage your property.

In Richmond, for example, the Downtown market can have student apartments, young professional apartments, ‘work force’ apartments and ‘affordable’ housing in close proximity. Each of these properties should be managed differently and often times, those who are good at one type are not as accomplished at the other.

Exit Strategy

Buying investment property can be easy relative to the sale investment property. The number of buyers for a single family home in (say) Brandermill is far greater than the number of buyers for a 12 unit apartment property in Jackson Ward. It does not mean that you should or should not buy one or the other, it just simply means that it may be easier to quickly unload a single family home than a 12 unit (or more) property.

Likewise, the way you sell each is different, too. A single family home rental offered for sale should be vacated, cleaned up and renovated to achieve maximum value while an apartment property should be sold while fully leased. Make sure to manage the leasing of the property well in advance of the sale to give yourself the best chance to maximize the contract price and minimize marketing time.

Summary

I highly recommend ownership of property as a vehicle to wealth accumulation.

Despite the ups and downs of the for sale markets in the last decade, rents have increased substantially and are currently as historically high levels. Having someone living in your property, making the payment to the bank through the rents they pay and hopefully putting a few dollars in your pocket along the way is one of the most risk free and time tested way of creating wealth over time.

And if your toilet breaks at 2 am you can call me to complain …

Homes in the Historic Districts

August 12, 2015 By Rick Jarvis

The word ‘Historic’ has different meanings for different people. When you say ‘historic’ to a Realtor in Richmond, Virginia familiar with Federal and State Historic Tax Credit programs, it means something pretty important.

Historic Tax Credits were a critical instrument for developers to renovate a large part of Downtown Richmond.

The HTC programs provide a powerful financial incentive to renovate properties in accordance with historical guidelines.

While the nuances and subtleties of the programs are many, the programs have been used extensively within the development community to bring many of the warehouses and other ‘historic’ properties of Shockoe, Manchester and Scott’s Addition back to life. And while the impact of these large scale renovations are readily apparent, few realize that the same programs can be used for smaller properties, including single family homes (subject to some different rules).

Anyone interested in using the Historic Tax Credit programs should spend a few minutes with a qualified architect, architectural historian or highly experienced contractor (we would be happy to make some recommendations) to get a sense of how the programs operate. They are complex and we do not recommend a DIY approach until you have navigated the process several times.

Below is a list of homes available for sale in these districts.

** DISCLAIMER – being on the list below simply means the property is located within the district and not necessarily that it qualifies for the credit prgrams. Before purchasing any of the properties in expectation of qualification for the Historic Credit programs, one should verify that the property qualifies.

St John’s Church
Franklin Street
Shockoe Valley
Jackson Ward
Boulevard
Hermitage Road
West Grace Street
Church Hill North

Dollar Per Foot, a Critique

July 29, 2015 By Rick Jarvis

‘How much a foot?’
‘What is the per foot on that home?’
‘Feels like a lot per foot!’

‘Dollar per Foot‘ is probably the most used of the comparative statistics in the valuation of housing today. Every buyer references it at some point during the home buying process — as do most sellers. And so do Realtors, architects, appraisers, developers, builders and your local tax assessor.

And while we are all guilty of using $/SF at some point, we need to be extremely careful to make sure we are using it correctly.

Dollar Per Foot is (Unfortunately) the Main Comparison Metric

The name itself suggests that the measurement is the ratio of the price of the home relative to its size.

Stated differently, if you were to buy one square foot of the home, how much would it cost?

But it isn’t quite that simple because the $/SF metric does not account for anything other than the FINISHED amount of square feet in the home relative to its price.

$/SF is measures the FINISHED space in the home and views all SF equally, including finished basements and 3rd floors

Do you what factors are not considered to be in the $/SF measurement?

garages
unfinished basements
oversized lots or extra lots
water frontage
fencing
screened porches
exterior hardscapes/landscaping
other outbuildings
roof decks
views
age of systems
poor floor plans
beds/baths

Do you know what else $/SF doesn’t adjust for?

finished 3rd floors are given the same credit as the first two levels
finished basements are give the same credit as the first two levels
finished bonus rooms or other finished rooms over garages or outbuildings

So as you can see, the $/SF is a metric with many flaws.

So is $/SF Worthless??

Far from it.

Citizen 6 in the Fan District — Do you think new homes built in decidedly modern aesthetic are accurate indicators of $/SF in Richmond’s Fan District?

$/SF can be a great measurement when the following conditions are met:

the homes being compared are similar in age
the homes being compared are on similar lot sizes
the homes being compared have the same amount of unfinished space
the homes being compared have similar materials

When you are comparing two homes in the same neighborhood, with similar characteristics, then using $/SF as a measurement is fine.

However, far too often, the $/SF is used far too broadly and without any consideration for the many factors that can skew the results. I cannot tell you the number of times I have heard a client say that Home A is a better $/SF than House B — and thus a better deal — without making any adjustments for a finished 3rd floor or far better lot.

Some Great $/SF Applications

One the best applications for $/SF is seeking the neighborhood highs and lows.

In every neighborhood, properties will trade in a range where no home’s value rises above or sinks below. Finding these data points can be extremely helpful when trying to establish pricing, especially when pricing unique properties.

MLS provides a function that will allow agents to quickly identify neighborhood value characteristics.

The more narrowly the homes in the data are defined, the more valuable this feature becomes in establishing the limits for the values. Agents familiar with this feature will be able to help a buyer or seller understand where the subject property fits into the range of values.

Using $/SF as a Time Machine

In case you missed the memo, 2008 – 2012 was a rough stretch.

Almost every market was impacted — equities, banking, real estate, manufacturing, retail — no asset (and no individual) was spared its wrath. The financial crisis was a wholly unpleasant adjustment in values and real estate arguably led the way.

As we continue to put that ugly period further in the rear view mirror, many who made purchase decisions at or near the apex (2006/7) wonder if the 20-30% loss has recovered enough to now sell. Using $/SF as a measurement is one of the best ways to tell.

As you can see from above, a yearly breakdown of $/SF vividly illustrates the relative health of different marketplaces. Using the same geographic data but changing the time periods measured is a fabulous application of $/SF and can lead to some great strategy decisions.

Using $/SF in Reverse

Often times, we recommend to our clients to look for HIGH $/SF to find underpriced housing.

Wait … what??

In certain cases, $/SF values considered higher than the neighborhood averages may indicate that the improvements on a piece of property are low and might be a good spot for an addition or lot split. Having a situation where the value of the land is at or near the value of the improvements often times means opportunity for the shrewd investor.

Many of the close in neighborhoods of the 1920-1940's have many homes with extra lots suitable for building as part of the sale — The remarks in this listing from 2005 references an extra lot. Note the dimensions in the Legal Description and the actual Lot Dimensions to see that they were combined at some point.

As an example, decades ago, it was a fairly common practice for an owner to purchase the adjacent lot to give their home extra privacy. Over the ensuing decades, these unimproved lots were often merged with the improved ones and simply sold as a package. As pressure to create more housing closer to the city center continues to increase, a growing number of builders are looking for infill lots and will pay a premium for the opportunity to build a home upon them.

Similarly, it is fairly common to see a small ranch or colonial-styled home nestled in amongst larger homes, especially in the neighborhoods of the 1930’s to 1960’s. If market values within the neighborhood exceed the cost of construction by a wide enough margin, these undersized homes present opportunities to add space to the home and create value.

Knowing how to set search parameters in MLS to identify possible opportunities for the contractor/developer/flipper can be of great service to the investment-oriented client. Mastering this application of $/SF will help an agent identify these ‘value-add’ scenarios and create both loyal clients and repetitive income streams.

Condos and $/SF

The Vistas includes TV and phone in the dues. Few projects include this expense.

In case you haven’t noticed, condos tend to trade a higher $/SF than single family homes. Far more often than not, the $/SF for a condo in the city of Richmond is anywhere from $5 to $20 higher than comparable single family.

Likewise, the $/SF for condos can vary wildly not only from project to project, but often times within the same building.

Why is this?

Condos compute square footage differently. They generally measure floor space while single family measures from the outside of the walls — thus condo $/SF tend to be higher than single family homes.
Condos tend to be more valuable on the upper floors or where the views are best. A condo on the 2nd floor looking at the parking deck should have a different price than a 10th floor condo looking at the River
Condo A might include more in the dues than Condo B and thus trade a premium.
Larger condo units sometimes include more parking than smaller condos — even in the same building.

So when applying the $/SF measurement to the condo market, you really need to makes sure the external factors influencing values are taken into consideration before any decisions are made.

Summary

Beware of the overuse of the $/SF metric as many sound decisions have been undermined by the misuse of the statistic.

As we continue to speed towards the era where more and more data is more and more available, we need to remember that access and analytics are two different things. The creation of new and complicated statistics is easier than ever before, but it does not necessarily mean they are relevant, accurate or applied correctly.

At the end of the day, the $/SF statistic is one of many and tells only one piece of the overall story. Make sure to understand its application and relevance before you make your decision.

Price or Terms – Which are More Important?

July 14, 2015 By Rick Jarvis

In the real estate business, the focus of almost every conversation is price.

‘How much are they asking for their house?’
‘What is the assessment?’
‘What does Zillow say it is worth?’
‘They paid WHAT?!?’
‘The offer is for HOW MUCH?!?!’

You never hear:

‘I can’t believe the rent back was for 3 days!’
‘The due diligence request was TOTALLY reasonable and allowed for the correct framework for agreement.’
‘Wow! What a shrewdly written escalator clause!’

Listen, the price a property transfers for is obviously important, but it is not the only part of making a good deal. Many other factors contribute to the making of a really great deal, other than what someone paid.

Price or Terms, You Decide

A real estate contract is made up of two things – the PRICE for the property and TERMS under which both sides must abide. It is the former that garners all of the attention but it is the latter that matters more in many cases.

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Look at it this way – how much space in the contract is dedicated to each aspect?

In Section 4 of Page 1 of the Richmond Association of Realtors Residential Purchase Agreement, you will find the following language discussing price:

“The purchase price of the property is __________, which shall be paid to the seller at settlement, subject to the prorations described herein…

The standard contract then goes on for another 8 pages to cover the other items that go along with the purchase of a home!

Just to clarify – the purchase price is handled with one sentence yet the rest of the contract is 8 pages long. And just so you realize, the contract is 8 pages BEFORE adding the required disclosures and any addenda.

Does that tell you anything?

Did you realize the ‘Standard Provisions’ alone run from A through K? Did you realize that Section #21 is labelled ‘Other Terms’ and is blank? Did you realize we can add as many addenda to the contract as we need to?

Wow.

Terms

The contract cover numerous bases:

Financing
Inspections
Title
Numerous Disclosures
Closing
Fees
Representation
Default

While it is not standard practice to negotiate each of these individual points in a standard residential contract, there is room to push and pull in order to either create wiggle room or close some outs (depending on which side you are on.) When you begin to examine other types of real estate contracts (commercial property, leases, options, land, new homes) then you introduce elements that fall outside of the generally accepted norms.

At One South, we pride ourselves on having a great deal of exposure to contract structures and practices due to our experience in many different arenas. Here are some things to think about.

Know Your Outs

Getting into a contract is easy but getting out can be hard, expensive, or worse – both!

Knowing on the way in, how you can get out, is important. And while you should not enter into a contract with someone for anything if your expectation is to get out later, if circumstances change and a seller is not in a giving mood, you may have to exercise an out.

In any contract, there are points where contracts can be far more easily ‘blown up’ than other points. Likewise, the closer you get to the settlement date the harder (and more expensive) it becomes. Understand the potential points in a contract where you can extricate yourself without penalty (or even lawsuit) before signing on the dotted line.

Know What Matters to Both Parties

This was an actual event — while driving home from vacation, my middle daughter in the front seat turned to my eldest in the back seat and said, ‘My sunglasses are in my bag in the back. If you get them for me, you can borrow my headphones.’ My eldest reached into the back and, without incident, got both the sunglasses and headphones. This NEVER happens in my house. NEVER. Any request made by one daughter to the other is generates a heated negotiation that usually involves me either turning up the TV or leaving the room.

This time, for reasons I am still unsure as to why they happened, it was different. My younger led with an offer of value to receive value. It was a stunning display of WIN – WIN. As a Realtor, I had never been so proud of my young negotiator.

via GIPHY

The lesson is as follows — we all value things differently. My middle daughter does not hate my choice in music nearly as bad as her sister so her headphones were of far more value to the elder one. But since she was sitting in the front seat and we were driving west in the afternoon, sunglasses were important. It was a perfect trade.

For someone who is attempting to sell a home and buy another one, time and flexibility matter. Allowing a seller not only the time, but the certainty to go out a buy their next home is HUGELY important to them. The use of a ‘Rent Back’ agreement is appropriate.

I once saw a seller of a large lot home toss in the John Deer tractor for free … and the purchasing suburbanite with a push mower ate it up! The ‘Bill of Sale’ is the correct tool in this scenario.

Being able to pay in a currency that matters more to them than you is always smart.

The Richmond Association of Realtors offers us over 150 different contract forms to use.

Understand Contract Structures

A contract is a flexible and malleable instrument … it can do a lot of things. Having been exposed to not only the common practices in the residential market, but the commercial and development market has given us insight into a wide range of techniques.

In the recent spring markets, multiple offers were far too common. Securing the winning offer when 3 or more people are bidding is hard. Most offers in a competitive situation include escalation clauses. Writing an escalation clause that secures the property while simultaneously paying as little as possible is an art.

Another example might be a using study period (in lieu of property inspections) and/or other phraseology to limit exposure for both parties. Often times, limiting both upside and downside is a technique that can provide a framework for a buyer and seller to reach an agreement.

Lastly, when working with buyers that need to sell a property before they qualify for another, the ‘Contingent Upon Sale’ and/or ‘Right of First Refusal’ contract is often required. It is critical to not only understand the differences, but the correct application of these contracts to best serve the client.

I shudder to think of the number of times a bid was lost or a price was escalated unnecessarily from faulty structure or from not understanding contract options.

At the end of the day, trade price for terms and you will win far more than you lose.

Conclusion

This post could have been faaaaaaarrrrrrr longer.

It is hard to say demonstrate competent contract writing in blog form as each set of circumstances is unique. The subtleties and nuanced structures should vary by the parties involved, marketplace conditions and each individual’s goals.

And while expressing what we know succinctly is challenging, I think it is fair to highlight some of deals we have negotiated to give you a sense of the depth of our experience:

176 unit apartment to condo conversion
Both the site acquisition and subsequent sales of new infill homes in Richmond’s Fan District sold prior to construction
100 acre land sale and rezoning from agricultural to commercial that involved parties from multiple markets
Using a 1031 tax exchange construct to acquire a single vacation home by liquidating a 22 property portfolio
Acquisition of several warehouses to be rezoned and subsequently renovated into Historic Tax Credit based mixed-use properties
Lease purchase of a single family home in suburban Richmond
Multiple new home sales as both listing agent an buyer’s agent
A non-warrantable warehouse condo with partial seller financing
Multiple acquisition/renovation and subsequent lot split in an urban neighborhood
Thousands of single family homes sales as either agent or brokerage

We know a thing or two about using the contract to our client’s advantage.

Real Estate and Minivans, Sedans and Convertibles…and 2015, too.

December 30, 2014 By Rick Jarvis

I think all salespeople, as we age, tend to do more of our selling by telling stories and using analogies than we did when we got started. Call it experience or call it wisdom (or just call it being old,) but the ability to take a current situation and compare it to a universally recognized feeling somehow makes it more real to our clients. When you can take an odd situation and make it feel familiar, it helps the client feel at ease with their decision. Familiarity begets comfort.

So recently I ran into an old friend at lunch who I do not see often. He owns a small business selling supplies to local restaurants and has been doing so for many years. Of course, he asked how the market was (all friends ask their Realtor buddies this question.) I told him it was good (which is true) but I sure would love it if people felt a little more like they did in 2006 again. If it was 2006, we would be almost TOO busy (if there was such a thing) as our company had matured greatly since we opened and I wanted to see what we were capable of in the best of times.

I said I wanted the market to feel like they were all driving convertibles again. He looked at me and grinned as he knew exactly what I meant.

We All Drove Convertibles

From 2004-2008, the development market was booming.

The long neglected neighborhoods in Richmond were in the midst of a rebirth with condos, creative office spaces and apartments all being redeveloped at an astonishing pace. The banks were willing participants with (relatively) easy terms and a shared belief that the market was bulletproof. Lending was based as much on momentum as anything else. The development community was ripe with opportunity and the developers had both the skill and capacity to really execute projects. The Richmond we knew in 1995 looked nothing like the one in 2005. It was one of the most amazing transformations I had ever seen in a 10 year period.

The best analogy was it felt like we were driving a convertible on a sunny day with no clouds and a slight breeze with the radio (or CD, or XM, or iPod) playing our favorite tunes over and over. It was a good time.

Driving in a Downpour

And then a few raindrops began to appear.

While there were hints of the coming changes as far back as the summer of 2007, the definitive marker for the bursting of the bubble came in September 2008 with the announcement Lehman Brothers had collapsed. By early 2009, all of the feelings of being bulletproof and carefree disappeared into thin air.

Beginning in late 2007, and continuing well into 2011, banks decided the best way to stay in business was by NOT loaning money. New home buyers disappeared completely and subsequently, droves of sellers decided to hand their keys back to the mortgage companies which had given them loans only a few years earlier. No one wanted to make a decision, especially not one with any risk attached to it, and the market froze. With no loans, there were no transactions and with no transactions, values plummeted.

Sticking with the driving analogy, we had gone from (in 2006) driving a convertible along the beach without a care in the world to (in 2009) driving an old minivan in a downpour, in the dark, on an unfamiliar curvy road somehow knowing that the bridge ahead was probably already washed out.

I don’t think anyone wants to live through that economy again.

Driving Home From Work in April

As we enter 2015 the world has changed yet again. It is better, for sure, but we are not back to where we were…and maybe that is a good thing…at least for a while.

For the last two consecutive spring markets, we have seen rapid absorption, price appreciation and a gradual relaxation of some lending standards. The last two fall markets have been shakier. Spring momentum of 2013 and 2014 stalled by the late summer and some of the gain of the first half were gone by the end of the year. While other current economic standards (oil, stocks and bonds, employment, inflation) all seem to be in pretty good places, no one will mistake 2015 for 2006. Alas, it is no 2011 either, and that is okay by me.

The bottom line is we are now in a place where buyers and sellers can make plans based on expectations rooted in realistic probabilities. And while we have not returned to a market where the inputs (new housing, interest rates, development) are back to pre-recession levels, they are on the way back to normalizing themselves. With normal inputs comes stability and with stability comes predictability. At the end of the day, words like ‘predictable’ and ‘stable’ are good words for real estate.

Driving home to turn on the grill is never a bad thing, is it?

To use the driving home analogy a final time, imagine driving home from a good day of work on that first warm day of spring. It may be a bit chilly to roll the windows down, but you so anyway. And while you darted out a few minutes early from work, you still didn’t miss all of the traffic (and even hit a pothole or two) but it somehow seems okay after living through the ride on the curvy road in the rain. And despite the fact the days are not perfect (yet), you know summer is coming and with it grilling outside with friends, family and familiar faces all in good moods ready to enjoy life for awhile.

The drive in 2015 is less about the car and more about the attitude. Lets all sit back and enjoy the ride, whether in a VW Beetle, Dodge Stratus, Mustang GT or Maserati Quattroporte…

Investing in Rental Property … A Primer