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.

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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