All Forum Posts by: Brad S.

Sorry about your father's dementia. :( 

As others' have said, it is smart to question what, if any, other opportunities there are with the portfolio. But, I think the smart thing to do is look at the actual #'s. What are the current rents, market rents, maintenance/capx costs and projections, what is the actual return on equity %, etc. That will give you a real barometer of the current situation. 

But, the #'s are not the only consideration, at least shouldn't be in my experience. I have had properties starting with great returns, that I would've happily gotten rid-of at break-even a few years later, if I could. I would rather have quality properties, in good areas, that have good demand and general growth. Unfortunately, those typically don't have the highest # returns, but they do tend to have good appreciation over time and may have less "hassle factor."

And, as @Katie Balatbat mentioned the property taxes on those properties are likely far below current market values, which is helping the cashflow situation. As an example, if the sfr's were bought 10-15 years ago, it is likely they have at least doubled in value in that time. So, 2.9m assessments back then would double for any new purchases, including out of state. That is not a reason not to make changes, just something to put in the evaluation. In CA we do have a pretty advantageous property tax system, at least for the moment (LOL). Property taxes are 1% of assessed value + local abatements/voter indebtedness, etc. Usually that works out to be around 1.15-1.18%, or $34,220 (assuming 15yrs ago total assessment of $2,9m @ 1.18%). This would roughly equal to a trended assessment of $3.82m today or an estimated $45k annual property taxes currently. As an extreme example - if you exchanged all of the investment properties with the same assessment factors, that would equal around $68k in property taxes or almost an additional $2k per month!

That's not the only consideration, but it is something to think about. It is a lot harder to get into CA real estate these days, then even 10-15 yrs ago. And I have had an out of state rental property taxes increase 50% over a 1 year period!

I would also consult with a CPA, as Katie pointed out there are specific tax law changes coming up which would be good to know about.

I would also assess which properties you consider "good" rentals and if their are any "not-good" or "marginal" rentals. Maybe they are in good growth areas where rents and values seemed to increase greater than average, or maybe they consistently attract good tenants, etc. Then, you can consider possibly  exchanging those that don't fit your goals.

In the current environment, I would be very cautious of making any sudden moves without fully assessing your current situation and returns. We are at very low affordability #'s which translates to higher values and with other stats, appears to suggest a relatively horizontal market with some dips for many years. That said, there are always opportunities somewhere and maybe multi-fam or other areas would be a good move. But, that requires analysis.

Also, there are many other investment opportunities with returns above what most real estate is offering now.

And, I think the assumption is that there are loans on ALL the properties? Are there any that are paid of and therefore a new loan on an exchange is moot?

And, and, since these properties are in CA, do any of the properties lend themselves toward adding an ADU and increasing the income potential. You may have easy opportunities to add income with some of the properties already owned.

@Kwok Wong

Your process seems reasonable, but here's a few things to keep in mind. I'll preface my comments by stating that I am a longtime appraiser. 

* 1 mile radius may or may not be a good locational criteria. In some market areas that is large and in others that is small. Also, in some markets, market demand changes from block to block. More important is to be in the same "market area." And that is best determined by understanding the local market and/or finding a trustworthy local expert who does. It is a fair start though, but I also like to have a map view to see if there are glaring value changes based on location from the subject. 

* 6 month comps - this is usually a good rule of thumb in a typical stable market, but can be somewhat confusing in a faster moving market. Again, knowing the market or having a local expert is important.

* 200sf variance doesn't always give you the full picture of a market. Of course, it isn't that useful with larger homes (exp - 2,000sf is does not necessarily have a significant preference difference than a 2,001sf house). But, in your situation it doesn't necessarily tell you about the general market. For example, there may be a significant difference for properties with 4 bedrooms and 1,700sf-ish etc, which may cause you to consider the extra value of adding a bedroom and sf. Or, in other scenarios, your subject may be overbuilt for the area, but you might not see that if you are only looking at those properties within 200sf. I like to get all the data and then I can filter as needed. But, looking at your spreadsheet, it does appear that you have sufficient data and it looks pretty consistent also.

Some thoughts:
Your subject is older than all the comps. That brings up the questions of is it different style than the surrounding houses, is that an issue or demand difference, etc. 

Unless I missed it, I don't see lot area sf listed. that can be a huge difference for some comps or subject. That would be important info to know.

Keep in mind that a 3/1 may have a significant decreased market appeal as compared to a 3/2. The lack of a second bathroom may be a deal breaker for some buyers and therefore, result in appeal differences. this may be especially true in 2 story houses, where you have to go to a different level to get to the bathroom. That's called functional obsolescence and may be a negative or give you a value-add opportunity by adding a bath on a level which lacks it.

That's enough for now

There are multiple issues with adu/jadu valuations:

* Lack of sold comps with similar jadu/adu's and therefore, their value is not accurately reflected yet.

* Appraisers with lack of skill or motivation (due to their low fees received or charged) which deters them from doing the work required for an reliable valuation.

* Residential properties (2-4 units) are mainly valued by sold comps and not with the income approach, since these properties are typically not purchased for their income potential exclusively.

* adu/jadu's add contributory value to the property as a whole, which may or may not = the cost to build them. In many markets, they are valued less then their cost, due to lower market demand for those amenities. 

Is this property in California?

If so, you are in very dangerous territory and should definitely STOP all your dealings with this transaction until you consult an attorney and the CA foreclosure consultant laws which specifically prohibits taking advantage of homeowners in foreclosure (in default) against predatory investors. 

I know you are trying to "help" the homeowner by allowing him to rent the house back and share in the future profits, but this sounds like one of the exact situations those CA laws were developed for. I remember a specific legal case which required the investor/buyer to pay back a homeowner $100k's in their lost equity, as well as forfeit all the monies the investor put into the house repairing it etc., and their was probably additional restitution they had to pay as well. 

Anyway, you would be very smart to immediately consult with an attorney very familiar with this process in CA. Again, assuming this transaction is in CA.

Here's some initial reading for you, which may help:
Civil Code § 2945.4 CC - Foreclosure Consultant Violations (shouselaw.com)

************************
Alternative options may be to purchase the 1st TD and do the foreclosure yourselves, or gather the cash and buy it at the trustee sale. 

Let us know what you choose to do and what happens .

Good luck!

Hey @David Maldonado

Longtime SoCal appraiser/broker/investor here. So, the Dejoy sale is 2 years old, as you said, and it has 2 ADU's (I assume ADU + JADU), or has a total of 3 units. And the Monroe house looks to be similar, with 3 units. So, neither of those are good comps for your proposed SFR + ADU. So, if an appraiser decided to use those, they should adjust downward for the 3rd unit and calculate a time trend adjustment for the older sale. But, more likely, they would probably just not use those, due to the 3rd units. Either way, they would adjust lower than the sale/list prices.

I did a quick and dirty mls search for that area (around Main St and North) over the past 12 months and found 2 active listings, 2 pendings, and 8 solds. I only found 1 comp with 1 ADU, 821 E Hermosa St, sold 8/2/23 for $749k and 1 pending 822 E Fesler St listed at $769k.

That suggests a huge disparity between those properties with 1 ADU and 2 ADU's. While that doesn't necessarily mean the 3rd unit is worth $300k+ more, it does point to much more market analysis should be done. But, unfortunately, most people ordering appraisals these days (typically AMCs - appraisal management companies) don't pay enough for good appraisers to accept their assignments, and therefore, many appraisal reports lack good results. So, they are more likely to rely on the easy data they find, without delving into the market data more to verify it. That said, the market analysis may still show a large appeal and therefore, price disparity for an sfr + 2 adu's as compared to an sfr + adu. That is the "fun" part of the adu market, until there is enough data to adequately reflect the market's reaction.

When I expand the search results to the Orcutt area, there is a sale of an sfr + adu, 1498 Claret Ln, sold for $1,165,000 on 3/7/24.

And that's all there is using the mls with the newish search field for ADUs. Another option for appraisers is potentially find any sfr sales with guest houses and/or duplex properties and analyze and adjust accordingly. They might also need to spend a lot more time diving further into the mls listings to search through the comments to see if any adu properties are hiding. 

Anyway, I'm happy to discuss specifics if you want. Feel free to dm me.

Best advice I have is join Apartment Owners Association of California, aoausa.com

They have a lot of resources for landlords. 

First of all, sorry for your loss.  :(

A few things here prior to making any decisions:
* Get an idea of what it's current value is now, both rental and sale value?  ...talk to an experienced local realtor/broker, etc.

* Assess what rehab work needs to be done and assess the potential rehab costs. There are still materials and maybe some other specific trades, which you and your sons may not be able to do.

* Ask that same real estate professional above, if it is worth doing the rehab, if you decide to sell? In some markets and at certain times, it may not make a significant difference compared to the time and money you would put in to do the rehab.

* To the same real estate professional, find out their opinion of the area and the current and potential growth and appeal of your property and the neighborhood (market) to potential buyers and renters. You may also want to call local property management companies to get their estimated rental amount and their feel for the rental appeal of your property in the area, etc.

* Talk to your tax professional and find out what your tax implications are from inheriting the property to buying out your brother and putting it in an LLC, etc.

* Also find out if the property's tax assessment changes with any of the scenarios above. In my state, CA, there are drastic property tax changes which need to be accounted for.

* Get an insurance estimate for a landlord policy, to put into your rental equation.

Basically, you want to assess the current situation prior to making any actions, and decide what the best avenue is for you. You may find that the equity is best put into a rental in a different market, more inline with your goals, or maybe it makes more sense to sell and put the money into dividend stocks until the market/s are more favorable to future appreciation, etc.

Seems like you are doing it right with educating yourself and asking for advice prior to making your first investment move. I also think it's normal and somewhat helpful to have some fear, anxiety, concern, etc. But, that should help keep you focused and not hold you back from taking action. 

I have done many deals where I was nervous and anxious and questioning myself, but after a while you work through it and do it anyway ... but smartly.

The first thing you should do, if you haven't already, is take a good look at your current situation (income, expenses, job security, etc) and project into the future of what you want your life to look like and then work backwards filling in the gaps. In other words, if you are going for a certain amount of passive cashflow in the future, then you can work on understanding the moves you should make today to set yourself up for that future. Experienced investors will tell you that real wealth is made from appreciation and growth. It is basically preparing yourself for success and putting yourself on that path. I have many examples of both mistakes and successes regarding that principle.

Anyway, I am also in CA and my first rental was out of state. What helped me take the leap was following others that already had a team set up,  and they had already researched markets, vendors, etc, making the whole process easy. I only needed to verify them and generally their conclusions, but there was no sense in reinventing the wheel from scratch. And this was the late 90's so there were a lot less resources readily available, as compared to today. I still follow one of those people today and trust them and their conclusions 1,000%, based on my experience with them.

Once again, I feel the place for you to start is to get very clear on where you "want to be", then you will be able to get a clearer idea of what to do today to head that direction. 

And keep reaching out and asking questions or for help, as many of us have a lot of experience and are happy to share our insights.

As an appraiser, I will take all the info on the house and use it to estimate the quality and condition, in order to compare it to comparables (recent sales) with relatively similar quality and condition. So, if your repairs significantly increased it's quality or condition, it may contribute to a more favorable outcome. 

But, basically it sounds like you just repaired significant damage issues back to its' typical state. So, really, you probably just saved the valuation from being negative due to those damages, as opposed to increasing any value. 

Many people seem to complicate valuation issues more than needed, a strait forward way of looking at it is simply asking, "Would a buyer pay more for ...?"

As an appraiser, I am merely trying to see the market reflections of what a buyer would most likely pay for a property. And in this case, my guess is that a buyer would not pay more just because you fixed damages.

Hope that helps.

Ok,. I got a little carried away with my other post. I must've been day dreaming!  :)

If this is for a rental or sale, then moderately finish the garage, economically, so someone can use it as additional detached living area/office, etc.