All Forum Posts by: Brad S.

Hey everyone!

This is mainly for those who have recently built or got contractor/builder quotes for building an ADU. I am curious as to what your are finding the current building costs are?

I am working on putting together a building system to be around $150/sf hard costs for a build. The idea is to systemize the process and be able to offer a good quality product for a lower price than is generally available, and still make a decent profit. And we would start with building ADU's, since that seems readily systemizable and a popular trend with good demand.

So, does $150/sf sound attractive to you if you were in the market to build an ADU? between 800sf-1,200sf

I am mostly looking for California opinions, but all are welcome. TIA

I am also posting this under other categories, so I apologize for the redundancy.

Hey everyone!

This is mainly for those who have recently built or got contractor/builder quotes for building an ADU. I am curious as to what your are finding the current building costs are?

I am working on putting together a building system to be around $150/sf hard costs for a build. The idea is to systemize the process and be able to offer a good quality product for a lower price than is generally available, and still make a decent profit. And we would start with building ADU's, since that seems readily systemizable and a popular trend with good demand.

So, does $150/sf sound attractive to you if you were in the market to build an ADU? between 800sf-1,200sf

I am mostly looking for California opinions, but all are welcome. TIA

I am also posting this under other categories, so I apologize for the redundancy.

Hey Alison,

I'll take a brief stab at your questions.

1) That is called seasoning. Seasoning refers to the amount of time passed since the loan was originated. So, right now your loan has over 8 months of seasoning. Although, I used to do loans many years ago, I don't currently, so I don't know how much seasoning most lenders require these days. Depending on the specific loan and borrower, many lenders go by Fannie Mae (FNMA) guidelines.  FNMA is a government sponsored enterprise (GSE) which buys many of the loans directly from lenders, right after the lenders originate them. So, therefore, FNMA sets guidelines which many lenders follow. I don't know what their current seasoning guidelines are. I thought they were 6 months but I am not sure. So, yes, that is lender specific, you can check with your current lender if you want.

2) NO, you can go with any lender you want, you have no obligation to stay with your current lender. A specific direct lender/bank (BofA, Wells, etc) are typically limited in the loan products they offer, and they may not be as competitive as others. Sometimes it is wise to use a reputable mortgage broker, since I mortgage broker is independent of specific lenders and has access to many lenders and lending programs. That way, they may be able to find you a better mortgage deal, more suited to your situation, etc. I may be able to point you in a direction, if I know where the house is located, but you can also snoop around BP and find some mortgage brokers or lenders, etc.

3) NO, technically, appraisals do not "expire." Practically speaking, lenders will typically only use an appraisal within 180 days, but that is up to their specific guidelines. Really can't answer the last part of your question regarding if the value should be higher now in July, as compared to October. That is very market and property dependent, meaning where the property is located, how the general market conditions are at the time and the appeal of the property, etc. If the #'s work now for a refinance, then there probably isn't a reason to wait.

4) Not really - basically you want the house to be in good condition and present well, so the appraiser will see it that way. I mean rehabs and upgrades may help, but generally not worth the money to hope you get a higher value, unless you are already planning on doing a rehab or upgrading the house. Generally, if the property needs to be rehabbed or upgraded and you are planning on doing it anyway, then yes, do it and do the refinance later, but I am guessing you aren't needing significant rehabbing. So, just make sure it presents like a well kept, clean, nice house when the appraiser comes.

Hope that helps.  

Quote from @Jay Hinrichs:

Quote from @Account Closed:

While this is probably true for many properties, my guess is many investors don't want to count on losing money or carrying a house for many years, just to offload it at a loss.

While I'm sure most of us appreciate your vast nuggets of relevant brilliance 😵‍💫🥸 To be cordial and fair, I decided to ask for some assistance from, what may be a more evolved human existence, Mr. Chat. Here's what he came up with:  ...remember, these aren't from me, I'm just the messenger.

1. "You truly have a knack for turning every conversation into a masterclass on irrelevance."
2. "Your words are like a well-crafted symphony of pointlessness."
3. "I'm always in awe of your ability to fill the air with such beautifully useless words."
4. "If there was an award for saying the most meaningless things, you'd be the undisputed champion!"
5. "Your talent for stating the obvious is truly unparalleled."
6. "You have an impressive gift for speaking volumes without actually saying anything of substance."
7. "I must say, your ability to consistently contribute empty chatter is quite remarkable."

...that's enough for now...

OK, Appraiser insight here (Me):

if I understand correctly, the property is currently an sfr as-is, which has a value $40k less than if it were converted back to a duplex. 

Do you know if it was legally converted from the duplex to the sfr?  ...with permits, legal under current zoning, etc. If it was done illegally, the lender most likely would've wanted the appraisal done as a duplex, while taking into account what it would take to convert it back (adding the few walls, as you say). The appraiser could do what's called a "cost-to-cure" adjustment, taking into account the cost to convert the sfr back to a duplex.

If the sfr is legal (converted with permits, etc), the lender probably asked the appraiser to appraise it as-is, as an sfr. 

Understand, this isn't an appraisal issue, it is a Lender issue. The appraiser is just going by the lender's guidelines and direction. As an appraiser, I can appraise it as a duplex, and put a cost-to-cure adjustment to account for the conversion back to a duplex, or I can appraise it as an sfr (assuming it can legally be an sfr). It doesn't matter to me, as the appraiser, but the lender tells me how they want it. Depending on their underwriting guidelines, I assume. 

Usually, duplex zoning (or higher density zoning) would also permit sfr's, so, my guess is that it is legal as an sfr. But, the conversion from the duplex to an sfr may not have been legally done. that's something that should've been taken into account by the appraiser, if they reasonably should've been aware of that issue. 

You could ask the Lender if they could value it as a duplex and have the appraiser give it a cost-to-cure adjustment. You should try and make the case that it's Highest and Best Use is as a duplex, and it was a duplex and you plan on converting it back to a duplex, etc. And it can readily be done with minimal cost and effort. Usually they have a threshold (per their guidelines) for a cost-to-cure before it's an issue, around $10k or so, depending on the property value possibly.

But, it also sounds like you don't know exactly how much it would be valued as a duplex. It may or may not be $40k higher. The appraisal would not/should not have said that.

Also, FYI, the appraisal is not YOURS, it is the LENDERS'. It is done for the Lender, as the client, not the Borrower. This is a common misperception. You didn't mention this, I am just clarifying for informational purposes.

Quote from @Zoey W.:

This makes NO sense to me as I thought property taxes CANNOT be increased by more than about 2% each year IF you are holding onto the property long-term either as primary residence or as a rental. My property taxes right now are $1,600/year and I bought my house for 590k last year. I certainly hope it will NOT increase property taxes by more than 2% or 5% each year??? How on earth can property tax jump from "$1,956 next year to $4,785" as google states. That is CRIMINAL. 

***********************
Not sure what your google result is referring to, but as others have said, there is a cap in AZ. Per AZ Prop 117, starting in 2014 property values used to determine property taxes, cannot increase more than 5%. That is NOT the same as "property taxes cannot increase more than 5%." It only refers to the value on which the taxes are based. So, if your house is valued at $100k (for tax purposes), then your property's tax value could not increase over $105k the following tax year. Then your prop taxes are based on a % of that value, including state prop taxes + local assessments, abatements, etc. And part of that % depends on the local jurisdiction.

Now, AZ assessments have a Full Cash Value, a Limited Value, and an Assessed Limited Property Value (LPV). I am not going to research the definitions of those, you can look up how AZ and your local property taxes are assessed, from your county assessor website. But, a quick search suggests property taxes are based on the LPV.

Now, YOUR taxes are likely currently based on the old value, which is most likely only the land value, since it is a new home. So, your $1,600/yr taxes on $590,000 purchase price equates to 0.27% tax rate (unusually low since it is on land only). Now, using a rental we have in AZ, we are taxed appx 0.98% of the LPV. So, if you are taxed at a similar rate as us, your taxes may go to somewhere around $5,782/yr, or 0.98% of $590,000.

In other words, your property taxes may have never been $1,600, that was most likely the Seller's property taxes, and the assessor will catch you up with your current house value, now that the vacant land has a house on it, or value of $590,000 when you purchased it. There may've been disclosures in your purchase documents stating something about that. In CA we have those disclosures and there are also supplementary taxes assessed at the time of purchase. 

So, in CA, if someone buys a property for $500k, and the previous assessed value is $100k, the new owner pays the taxes based on the original $100k, but will get a separate tax bill for the additional $400k in new value (calculated to the end of the fiscal year). And the following tax years will have adjusted to the higher $500k assessed value.

This is a common mistake - not taking into account the potentially higher new property taxes based on the new purchase price/value, especially on a new house.

mrlandlord.com

Quote from @Account Closed:

Got it. What I was trying to explain was that we typically evaluate a deal first - look up values, locations, financials, evaluate seller motivation, etc. Including the owner/property mgr's estimate of condition and blend that with our own assumptions. Then we negotiate on price and terms based on the provided information and our assumptions. Then we would due our full DD (walk the units, etc) to verify everything and further negotiate if things were not as they were presented. But, I understand that's not what you were asking, and walking the properties, as your doing, shows your serious and also shows they're somewhat motivated and should help with the rapport.

But, you evaluate the sfr's the same as you would the other deals you have done. And the 5+ units find out what a typical range for cap rate is for the area, as well as typical expense ratios, maintenance, etc. Ask local commercial realtors for that info. Many times you may be able to pinpoint opportunity with the Subject's current expenses, by finding ways to make them more efficient, thereby increasing cashflow and value.

It sounds like this would be a potential candidate for syndication, unless you can find someone/people/group to partner on it. In my market, there is a lot of money on the sidelines looking for deals with good returns, and good operators, so you may find that in your market also and find enough for a sizeable downpayment from them.

You could also find a lender that will do a blanket mortgage, where they would aggregate all the properties under 1 loan, then you just need to again, find the investors to put up the portion of the downpayment you need and offer them equity and/or return.

Seller finance - As you mentioned, you can offer a fair deal that makes sense to you and the seller, explaining how you will take over responsibility of everything (management, etc), and you can give $ (fill in blank) down and pay him the rest of the downpayment in installments from the cashflow on the property and then refinance him out of it later. This is where it makes sense to know their motivation. If they are just ready to retire and they self-manage now and they are tired of the headaches, etc, then you emphasize how you are willing to take on all the headaches, etc, and pay him in installments at some agreed upon rate and terms. Also, they may have a tax advantage to sell this way, not having the whole gain all in one tax year.

Once you buy with seller financing, maybe you can add value to a couple of the properties and sell those for a profit, using the profits to pay him the rest of the downpayment, allowing you to get a loan for the rest. There are multiple creative possibilities.

Good Luck

My first concern would be, are you sure it's a "deal?" I know it's a portfolio of 60 units, but that doesn't mean it's a "deal." You said he is open to "reasonable" offers, but what does that mean to him ...and you. A reasonable offer to him may be a non-deal for you. Evaluating a potential deal like this takes quite a bit of time and energy, and may lead to a dead end. 

So, what would you want out of this deal? Below market price? Above market return/cashflow? Would you want to profit from the sell some of the units and keep the rest, or? I would get clearer on your intentions, and then evaluate his motivations, and see if you can make them align. Otherwise, you may be going down a route leading to nowhere. 

So far, nothing you wrote hints to him being motivated to sell below market. They are class A properties, 100% rented close to market rents. That sounds more like a dream for him as an investor with no evident reason for him to accept a discounted price or terms. I know he's older, but why wouldn't he want to pass them on to his son or family?

Anyway, to evaluate the portfolio, I would first get all the addresses and financials for at least the past 2 years. We get the financials on multi-fam properties (5+ units) and just the rental amounts and terms for the <4 unit properties, to start. Then put it all on spreadsheet/s. Evaluate the 1-4 unit properties for value (find comps), list current scheduled rents, estimated vacancy/collections, expenses, etc and you can have another column for a proforma, if rents could be raised, etc.

For the 5+ unit properties, you need to determine the market cap rates for the area and compare them to the actual performing cap rate of the Subject properties. This is why you get the financials, to see what the actual #'s are. Then you can evaluate if there is room to improve, what discount you would need, etc. 

But, for me, there would really be no reason to spend the time walking the properties first. I would just assume average condition for the units to evaluate them, until you could verify that. But, without being clear on motivations and if there is a potential deal here, walking the properties may just be exercise. 

Quote from @Eliott Elias:

I want 30% equity all in when I am done with any project. 

 Can you share a recent deal or 2 you've done, and the general #'s, and location, with us?

Thank you