Black Diamond Real Estate

Because we are a small firm by design, we are personally involved in every step of the buying and selling process, from listings to showings and from contracts to closings. When you have any questions, you deal directly with us.

Calculating Square Footage

Guy with yellow construction hat on calculating Square FootageThe three most important factors that determine a home’s value are; location, square footage, and amenities (number of bedrooms, bathrooms, garages, porches, decks, patios, finishes, etc.). Of the three, location is the most important with square footage being the second most important. Knowing the square footage of the home is particularly important to most all buyers since it provides them with a convenient (although not always accurate, as you will see in this article) method for them to estimate the value of the home in comparison to other properties. Although neither the North Carolina License Law nor the North Carolina Real Estate Commission, require the reporting of the square footage of a home for sale, it is nonetheless common practice among Realtors to report it because of its widespread use among buyers (and Realtors) dividing the asking price by its square footage to arrive at the price per square foot of the property. Therefore, for the accuracy of measuring and calculating square footage, it is essential that Realtors follow the Residential Square Footage Guidelines endorsed and adopted by the North Carolina Real Estate Commission and the American National Standards Institute, Inc. (ANSI) when measuring and calculating the square footage of a home.

When Realtors input the square footage of a home in the Multiple Listing Service (MLS), the two most common mistakes made by new or inexperienced agents are representing finished basement square footage as “above grade (above ground) square footage”, and finished basements and rooms with ceiling heights less than 7’, in the home’s overall “living area” (total heated/finished square footage). An important factor in accurately reporting square footage in MLS is distinguishing between “finished square footage”, “unfinished square footage”, and “living area”. In order for the total square footage to be accurately represented in MLS as “living area”, it is required to have a heat source and be finished, and have a ceiling height of at least 7’, to be counted for marketing and advertising purposes to prospective buyers.

In summary, you may be thinking so what does this mean to me if I’m thinking of buying a home, or selling my home? It comes down to basically three things. First, if you are thinking of buying or selling a home with a basement, then any “living area” below grade (below ground) has less contributory value in comparison to the home’s above grade (above ground) square footage. In other words, a home’s basement below grade (below ground) square footage is worth less than its above grade (above ground) square footage. And, if the basement is finished and heated, it is worth more than a basement that is unfinished and not heated. Second, if the home you’re thinking of buying or selling has any rooms with a ceiling height of less than 7’, this square footage cannot be included as “living area”, regardless if it is heated and finished. In this case, it still may have some contributory value, but its value will essentially be treated by appraisers as a finished attic or as a finished basement storage area. Last and most important, since most buyers obtain a loan when purchasing a home, their lender will send an appraiser out to appraise the home when it is under contract, and the appraiser will not give the same amount of value for finished heated basements and rooms with ceiling heights less than 7’ than they will for an above grade (above ground) finished and heated square footage (living area). In other words, the appraisal may come in less than the contract price causing the buyer’s financing to fall through, and thus the sale.

If you are ready to buy or sell, call Mary Staton or Bert Ward at 336-213-0989 - they’ll be happy to answer any questions.

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What to Look For When Needing Rental Property Insurance

Bright sunshine through the tree branches - Photo by Jeremy Bishop on UnsplashMost anyone who owns a rental house (and there are a lot of people out there who do – more than you would probably think), knows that obtaining insurance coverage at a reasonable price can be challenging. If you are new to the landlord business, thinking about buying a rent house or thinking about switching insurance carriers, this article may be worth your time to read.

The first challenge is finding an insurance agent who will write the insurance policy at a competitive rate. Some insurance companies refuse to even write insurance on rental properties, while others will for a premium, and the remaining ones will write it at a reasonably good rate if the home measures up to their standards. Shopping around for a good insurance carrier is the easy part of the coverage process since there are a lot of insurance agencies in the marketplace to choose from.

The next step is where things can get tricky. In order for most carriers to write it, they will typically require an insurance inspector to make an on-site inspection of the property. If you don’t know what the important things they are looking for, be prepared to be blindsided. Planning and preparation ahead of the on-site inspection are all-important, to ensure that you are not surprised and that everything goes well. If the home is relatively newer in age, there is less to be concerned about than if you own a home that is older in age. Having said this, this article is written in mind for those looking to rent and insure an older home.

Some of the most important things the insurance inspector is looking for and will be taking pictures of to include in their report are; condition of the roof and whether the gutters are clogged or not, and if the gutter downspouts appear to be properly draining rainwater away from the home’s foundation; whether or not there are any big trees overhanging, or located near the home; whether the electrical panel has fuses and are in need of being upgraded to breakers; the condition of the power line connected to the house and whether or not it is in need of upgrading; the age and condition of the HVAC and water heater, and if they appear in need of repair or near the end of their life expectancy; if there are any grills located directly underneath the house soffit vents; and whether or not there is any firewood or wood debris stacked up against the home’s foundation. Of course, there are other things the insurance inspector will make note of in their report, but the aforementioned head to the top of the list.

So in a nutshell, what does all this mean to the person who is looking to obtain rental house insurance at the best rate possible? If you know what the insurance inspector is looking for, then you can plan ahead and address any issues with your home before the inspector comes out. If you fail to prepare in advance, you could run the risk of the insurance carrier refusing to insure your investment property based on the findings of the insurance inspector’s report. If you currently own a rental property that is being insured, but at a rate higher than you feel it should be, you may want to think twice about moving it to another carrier who may be offering a lower rate. Knowing what an insurance inspector looks for is especially important if you are not in a position to make any needed improvements to the home you may be currently renting, thinking about renting, or considering buying to rent.

If you are ready to buy or sell, call Mary Staton or Bert Ward - they’ll be happy to answer any questions.

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Functional Utility

When looking to buy or sell a home an issue that can come into play is a home’s functional utility.  The functional utility is an appraisal term that refers to a home’s ability to adequately provide for its intended use.  The most common example is a home with a pass-through bedroom resulting in a less than ideal traffic pattern. For example, my wife and I recently showed a three-bedroom home to a buyer but the third bedroom had a door off the hallway and one off the kitchen there was a den, functioning as a shortcut to the kitchen and the den for the other two bedrooms.  Although this home had an alternate route to get to the kitchen and den (down the hall, through the living room and through the dining room to the kitchen and den), the quickest and most convenient route was through the third bedroom. Our buyer knew that if she were to buy this home, it would be more functionally convenient to cut through the third bedroom to get to the kitchen and den, especially while getting ready for work in the mornings or going to bed late at night.  If a child was sleeping in the third bedroom, it would be inconvenient to walk around this bedroom to go back and forth to the kitchen and den as needed. In short, the functional utility of this third bedroom did not suit her family’s everyday need of convenience. While other buyers could make this floorplan work for their need of having three bedrooms, it nevertheless has an adverse effect on the home’s marketability and overall value.

If you are ready to buy or sell, call  Mary Staton or Bert Ward - they’ll be happy to answer any questions.  

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Functional Obsolescence

Functional obsolescence is an adverse functional issue of a property according to current market housing trends and buyer needs, wants, or desires.  It is the result of defects within a property. Whether a property has functional obsolescence or not is ultimately determined by the potential buyer of a property through their personal observations and how much they would be willing to pay for the property.  Functional obsolescence may be caused by a deficiency or a super adequacy. 

Superadequacy is typically associated with the features of a home that are above and beyond (over improvement) what is considered normal for the neighborhood and does not contribute to the overall value in an amount equal to their cost.  An example of super adequacy would be a home that has a two-car detached garage, in addition to the home’s two-car attached garage. Although the additional two car detached garage may have value to some buyers (especially in the county where having a workshop is often beneficial), the cost to build the extra garage typically exceeds contributory value added to the home’s overall value.  In most cases, however, the home with a two-car garage is all that is required or necessary for the majority of buyers and therefore the additional two-car garage represents diminishing returns.  

A deficiency is basically the lack of something that other properties in the subject’s neighborhood have, such as a Cape Cod style home with three bedrooms, one on the first floor with one bathroom and two bedrooms on the second floor with no bathroom.  

Some forms of functional obsolescence are curable while others are incurable.  The key difference between whether it is curable or not is whether the cost to cure/correct results in an incremental increase in value.  If it does it is considered curable. For example, adding a second-floor bathroom by bumping out a section of the roof line on the back of the home is a curable form of functional obsolescence.  This addition would typically result in an increase in the overall value of the house greater than the cost to add the extra bathroom, assuming the bathroom can be accessed by both bedrooms without passing through one of them to access it.  However, if the extra bathroom added is not appropriately functional, the cost to add the bathroom may exceed the incremental value gained by adding it. 

If you are ready to buy or sell, call  Mary Staton or Bert Ward - they’ll be happy to answer any questions about the functional obsolescences that may be happening around your neighborhood.

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Due Diligence Explained

Due Diligence ExplainedDue Diligence is a negotiated period of time in exchange for a negotiated amount of monetary consideration (if any), between buyer and seller.  The due diligence clause of the Residential Offer to Purchase and Contract is the “option” clause of the contract.

The purpose of due diligence is to give the buyer an opportunity to investigate the property (allow time to get the home inspected and appraised, for example), in order to make an informed decision to either move forward with the purchase of the property or terminate the contract.  Although the Offer to Purchase clearly states that the “property is being sold as in in its current condition”, the home inspection may reveal hidden defects or material facts about the property that were not known to either the buyer or seller at the time the contract was executed.  If such concerns arise, the buyer will typically submit a Due Diligence Request and Agreement form to the seller (prior to the expiration of the due diligence period) in order to renegotiate the contract for consideration of repairs or concessions, rather than terminate. The seller then has the option to either renegotiate the contract or not.  If the seller agrees to renegotiate the contract (make repairs, reduce purchase price, or pay closing cost, for example), they will need to sign the Request Agreement before the expiration of the due diligence period. If the seller refuses to make any concessions, then the buyer has the option to proceed with the purchase or terminate the contract (In fact, the buyer has the option to terminate the contract prior to the expiration of the due diligence period, without any reason, and before entering into a written and signed Due Diligence Request Agreement).  In the event the buyer terminates the contract, they will forfeit their due diligence money as it is non-refundable. Their earnest money deposit is refundable however, as long as the buyer terminates prior to expiration of the due diligence period.

When negotiating the due diligence period and amount of money, the buyers typically want a three week examination period with as little money down as possible.  Reasons for this include allowing sufficient time to get the home inspector and appraiser out to the property and complete their reports. Since the buyer incurs these expenses, as others, they are not looking to invest a lot of money that is non-refundable should the home inspection uncover a bunch of issues.

From the seller’s perspective, they are looking to be compensated appropriately for tying their home up under contract during the due diligence period.  Should the buyer decide to terminate the contract, the due diligence money is the seller’s compensation for the inconvenience of having taken their home off the market.  Therefore, it is in the seller’s best interest to get as much due diligence money as reasonably possible. It basically boils down to how much the due diligence time is worth to the buyer and the seller, with consideration of fairness taken into account in regards to their respective interest.  

Since buyer and seller are often at odds over what’s in their best interest, obtaining a reasonable and appropriate amount of compensation can sometimes be challenging for the seller.  For example, if the home has been on the market a while and there is only one interested buyer in the property, the seller may be in a weaker position to negotiate the most favorable terms to them.  However, if the home is a new listing and priced to sell and/or has multiple offers, then the seller is in a stronger position to negotiate the most favorable terms to them.

In a perfect world, all sellers would have a pre-home inspection done on their home and repair all serious/material issues before they list it for sale.  All repairs that were made and any that were not, would then be disclosed to the prospective buyer before entering into a contact. In this situation, both parties would gain a peace of mind knowing what the home’s current condition is while increasing the odds that the sale will close with mutual satisfaction.

However, since we live in the real world, some sellers do not want to spend the money to have their home inspected since they may not have the money nor be interested in spending the money to have any repairs made.  While I understand this position, especially if the seller doesn’t have the money, it can end up costing them more money in the long run having to renegotiate the contract (or cause the buyer to terminate the contract) than if they made repairs prior to listing their home for sale.

At the end of the day, if both buyers and sellers enter into a contract in good faith and feel like they are being treated fairly, then most sales end up closing.  The sales that typically don’t close are usually the result of one or both parties engaging in win-lose negotiating tactics, or from having unreasonable expectations.  If either the buyer or seller (or both) feel that they are being treated unfairly, they will typically try to find a way to respond in kind, causing the sale to implode.

In summary, negotiating the due diligence part of the contract is a function of time in relationship to how much it is worth to the respective buyers and sellers.  In other words, the less time desired should equate to less due diligence money down, whereas the more time desired should equate to more due diligence money down.  

If you are ready to buy or sell, call  Mary Staton or Bert Ward - they’ll be happy to answer any questions.

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Extraordinary Assumption

An extraordinary assumption is an assumption which if found to be false could alter the opinion or conclusion of an appraiser’s opinion of value.  An example of an extraordinary assumption is that a home’s well and septic system are permitted, operational, and not in need of immediate repair.  It is beyond the scope of an appraisal assignment for an appraiser to uncover such hidden defects since they are not home inspectors nor well and septic inspectors.  In other words, the assumption is that all homes are free of material defects unless there are obvious observable issues with the home, such as foundation cracks, holes in the roof, etc.  In this case, the appraiser would make a notation in the appraisal report and make a condition adjustment.
 
As you may recall from my blog post Willful Seller Omission that we found out that a home had a non-permitted septic system after having it inspected.  The appraisal was completed before this material fact was uncovered and was not reflected in the appraiser’s opinion of value.  Had the appraiser been aware of this at the time, it would have adversely impacted their opinion of value since the home was not marketable for owner occupancy without a valid permit. 
 
The seller’s agent argued that since no mention of it was made in the appraisal report that the home was financeable and that they had talked to another lender who said they would make the loan on it.  There are two major problems with this Realtor’s and Seller’s line of thinking.  First, if our buyer would have purchased the home, there was no guarantee that a new permit would be issued leaving our buyer with a financial burden when it came time for her to sell this home at a later date.  Second, if the buyer’s agent knowingly lets a buyer purchase a home when financing is involved, they could be complicit in participating in mortgage loan fraud.  If the buyer were to lose their job, and default on their mortgage, then the lien holder could uncover this defect when they foreclosed on the property and pursue legal action against the Realtor and mortgage lender, if the lender was aware of it too. 
 
Before anyone makes assumptions about your home, if you are ready to buy or sell, call  Mary Staton or Bert Ward - they’ll be happy to answer any questions about the Extraordinary Assumptions. 
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What is a Hypothetical Appraisal?

A hypothetical condition is an assumption made contrary to fact, but which is assumed for the purpose of forming an opinion of value.  The most common example of a hypothetical assumption is an appraisal for new construction, "subject to completion". In this case, the home’s appraised value is based on the current market value as if complete, even though the home may not be finished for several more months.  The lender uses this appraisal for the purpose of construction lending by allocating installment construction draws to the contractor from the borrower's construction loan. When the home is completed, the lender sends the appraiser back out to certify the home's completion, typically but not always, for the original hypothetical appraised value.

If you are ready to buy or sell, call  Mary Staton or Bert Ward - they’ll be happy to answer any questions.  

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Gross Rent Multiplier

Ever wonder how most real estate investors determine how much to pay for an investment property?  The most common method used is called the Gross Rent Multiplier (GRM).  To determine the GRM, the investor identifies three similar properties in similar neighborhoods that were rented at the time of sale and divides their sales price by the monthly gross rent.  For example, three similar homes recently sold in the same neighborhood. Home A sold for $75,000 with a monthly rent of $600, giving it a multiple of 125. Home B sold for $80,000 with a monthly rent of $650, giving it a multiple of 123.  Home C sold for $90,000 with a monthly rent of $750, giving it a multiple of 120. The investor now has come up with a GRM range of 120 to 125, giving them measurable data to determine how much they should pay for a similar type of investment property.  The tricky part is knowing about or finding other investment properties that were rented at the time of sale.  

If you are ready to buy or sell, call  Mary Staton or Bert Ward - they’ll be happy to answer any questions.  

 

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Contingent Offers

A common dilemma many buyers face is whether to buy their new home first or sell their existing home first. If you don’t need to sell your home in order to buy your next home, then buying first is the most convenient option. If you sell first you may not be able to find your next home right away and may have to rent an apartment or home before you do. If neither of these two options are appealing to your situation, there is a third option, making a contingent offer to buy your next home.

In this situation, the contingent buyer should have already put their home on the market and identified a new home they would like to buy with the intention of closing on both their existing home and new home simultaneously. This can be tricky because it is risky business for any seller to accept a contingent offer without the buyer at least having their home under contract. If the buyer doesn’t have their home under contract, sellers are not inclined to accept a contingent offer since they don’t know when or if the buyer will get their home under contract. For the purpose of this article, we’ll assume that the contingent buyer has their home under contract.

So what happens next? Once the contingent buyer enters into a contract to purchase their next home, the seller is entitled to receive a copy of the contract on their buyer’s home in which they may or may not share confidential information such as names and purchase price. The reason to provide a copy of the buyer’s contract is to demonstrate that they do indeed have a contract on their home, showing the due diligence expiration date and closing date. Since a buyer can back out of the contract during the due diligence period for any reason, or no reason, it is important for sellers to know how long this period is. The shorter the period, the more attractive the offer, since time is of the essence. Once the due diligence period lapses, the earnest money comes into play and the chances of the contingent buyer backing out are less likely. In other words, the contingent buyer’s contract on their home is more likely to close giving the seller a greater peace of mind. Notice how I said more likely to close. There are still instances where your contingent buyer may not close, such as the buyer losing their job and having no choice but to breach their contract. Generally speaking, the best offers are the ones that are not contingent upon a buyer having to sell their home in order to buy your home. Having said this, if you don’t have any other offers or the contingent offer is substantially higher than the other offers, it may be worth the risk of entering into a contingent contract.

If you are ready to sell and buy but you have questions about the process, call Mary Staton or Bert Ward - they’ll be happy to answer any questions about the Contingent Buying.

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