So What Exactly Does it Mean to Buy a Property As Is?
Garage Sales are as is
“As is” is a real estate term that pop-ups frequently in the Los Angeles Market. Selling a property “as is” means that the seller makes no warranties about the condition of the property and will not fix anything or make repairs, nor will they lower the price or give credits because of the existence of problems or defects. In other words, what you see is what you get.
“As is” sales are common for foreclosures, short sales, trustee sale, probates, major fixers/teardowns, New construction (although they allow punchlists), and in strong seller’s markets- even some standard sales! Seasoned Real Estate investors are accustomed to AS IS Sales because they can understand the risks better working directly in the construction industry. For first time home buyers, you need to be extra careful!
Be extra careful with foreclosures or trustee sales, where the owner has never lived in the property. Since they have never occupied the property they are not required to make the standard seller disclosures.
Many sellers think that an “As Is” sale means that the buyer agrees to hold the seller harmless for all claims related to the sale of the property. Remember that old saying “Buyer Beware”?
This is not the case in California. State law (Cal. Civil Code 1102) mandates certain disclosures must be made with residential transactions, and that buyer and seller can’t waive these requirements.
An “As Is” clause should be considered putting the buyer on notice that no repairs or credits will be given.
“AS IS” still means that the seller must disclose all known material facts to the buyer.
What is a Material Fact?
Here is the test to determine if a fact is material or not is:
(A) Does the fact impact the desirability or market value of the property?
(B) If the buyer had known the fact, would they not have entered into the contract?
(C) Will the fact affect a buyer’s use and enjoyment of the property?
If yes to any of these questions, it is probably a material fact. In California, you do not need to disclose if someone died on the property or how they died, but it is usually a good practice to do so because the nosey neighbor will always tell the new owner about it so you might as well tell them first.
If a seller hides a material fact that is not visible or observable to the buyer, that is known to the seller, and that is discovered later, then the seller may be liable for negligent misrepresentation and failure to disclose and fraud in court. The statue of limitations is 2 years for these types of claims.
As is clause is not a way to avoid disclosure, but instead a way to shift responsibility for the condition of the property to the buyer.
When selling your property as is, it is highly recommended to either conduct presale inspections yourself to be provided to potential buyers, or allow buyers access to the property to inspect it themselves.
By providing buyers a presale inspection, or allowing them the right to inspect, you can dramatically lower your liability.
For buyers, If the seller demands no inspection contingency in offers, then as a buyer you have to bite the bullet and pay for inspection upfront before you are in escrow. It might really stink if you pay for the inspection and the seller chooses another offer, but its much better than the alternative, which is the seller accepts your offer and you find out there are huge problems and you might lose your earnest money deposit.
Lenders making commercial loans use debt coverage ratio (DCR) to determine how much money they will loan on a property. Remember, with a commercial loan, the bank is underwriting the properties ability to pay the mortgage not yours. Commercial properties are viewed as businesses, and the lender wants to ensure that the business can run successfully. The lower the the DCR the riskier the loan. When DCR goes below 1, the property negative cash flows. Commercial Lenders won’t loan on property that doesn’t cash flow. Occasionally they will make an exception to this rule for a strong borrower who has a schedule of real estate owned and cash flow from other investments- they do this in the expectation that as time progresses and inflation raises prices that in 2-3 years the property will begin to positive cash flow. Expect to pay a penalty on interest rate if they give you a very low DRC loan.
Lender’s usually want a minimum DRC of 1.15-1.2, meaning that the NOI is at least 115% to 120% greater than debt service. Higher DCR (such as 1.25, even up to 1.55) may mean lower interest rates to the borrower.
The debt coverage ratio is the property’s net operating income divided by the annual debt service (12 months of mortgage payments).
Cash on Cash is a percentage that measures the return on total cash invested in an income producing property. Cash on Cash gives you a quick idea of your return on investment. For instance: a cash on cash of 7% on $100,000 investment means at the end of the year, you take away $7,000 before taxes (Cash on Cash return does not take into account tax consequences on gain).
To calculate Cash on Cash, you need two numbers- the CFBT and Total Cash investment.
Let’s do an example-
Purchase Price: $500,000
Cost of Sale (2.5%): $12,500
Down Payment (20%): $100,000
Loan Amount: $400,000
Terms: 30 year fixed @ 5.5% $2,271/mo. $27,252 /yr
Important to note that principal reduction is NOT factored into cash on cash. In the above example $27,252 was made in mortgage payments, of that ~$450 a month went to principal reduction- so that at the end of the year, $5,400 went to principal and $21,852 went to interest. Some are tempted to add this principal reduction into the cash on cash return however, since it is not actual cash that you can invest, and is rather illiquid- you may only access 60% or the property’s value in a refi, and to realize any principal gain you must sell the property and incur a cost of sale and perhaps capital gains tax- Principal Reduction doesn’t count in cash on cash.
People have social security numbers, business have EINs, and properties have APN’s. An Assessor Parcel Number (APN) is a unique number assigned to each property by the government for tax collecting purposes. If you are wondering what your APN is, you can look it up by address- along with a bunch of other information in the public records at the Los Angeles County Office of the Assessor website.
APN’s in Los Angeles usually have three sets of numbers in this format:
Example Los Angeles APN
The assessor keeps volumes of books of the plat maps of each property in the city. Here is what the corresponding book and page number looks like for the example APN:
The Book and Page Number are in the Top Left Corner. I Highlighted Lot #3
The term ‘assessed value’ of your home is the government’s tax value of your property in the public records. Annual property taxes are calculated from the assess value. When you purchase a property, this is an event that triggers a reassessment from the current value. The new assessed value of the property is the purchase price.
This property was purchased in 1959. The current assessed value is only $170,000, the market value of a home of this size would be $3,500,000
Be careful calculating taxes based on what the owner is currently paying. If they have owned the property for a long time, thier assessed value will be less than the purchase price and your new taxes will be higher. Estimate your property taxes as 1.25% of the purchase price.
Your properties assessed value increases by no more than 2% a year . The assessed value 2% limit is set by Proposition 13. A lot of homes in Los Angeles that have been owned for ten, twenty or more years, have much lowered assessed values then their market values. This is because the market value of property in California has risen at a higher rate than 2% a year.
During a market downturns, where the assessed value of your property may temporarily be higher than the market value, you can request a decline in value reassessment by using Proposition 8 that will lower your property taxes.
Proposition 60 & 90 allow you to transfer your tax basis in the property once during your lifetime. This is only for people over 55.
An Arms-Length Transaction is real estate jargon for standard sale. The property owner has final decision making power and these deals typically close in 30-45 days. Examples of other types of sales include: Auction, Probate, Short Sale, Bank owned, and off the market sales.
In Arms-Length Transaction both parties in a transaction came together freely, and willing, to determined an acceptable price. The arms length transaction sale price becomes an indication of the fair market value of the property at that particular time.
When you are using the comparable sales method to determine the value of a property, you must take into consideration the type of sale of the comps. Distress sales should be adjusted for their discounted price- in a short sale for example, they can take anywhere from 3 to 8 months to close and a 5% to 10% adjustment upwards for the inconvenience factor is appropriate.
An example of a sale that would not be an arms-length transaction is the sale of a property to a family member, or relative.
The latin root of Amortize is ‘mort’, which means death
Amortization is the process of repaying a mortgage loan’s principal and interest through monthly payments. Each payment reduces or amortizes the loan balance. Interest is “front loaded” meaning that although your payment remains the same each month, a higher percentage of the payment goes to interest at the beginning of your loan.
Since your payment is fixed, inflation works in your favor. You are borrow today’s dollars and paying them back with the futures inflated dollars. This lessons the blow of interest.
A lot of home owners may be surprised at just how much interest they end up paying over the life of their loan. I like Bank Rate’s Mortgage Calculator. Load an amortization table and you might be surprised!
A 15 year fixed mortgage will pay less interest than a 30 year fixed. But which is better? The advantages with a 15 year fixed mortgage is that you will get a slightly lower interest rate than the 30 year fixed. The disadvantage is that your monthly payments will be higher. I usually recommend to get a 30 year fixed mortgage, because you can always choose to make an additional payment or two each year that will accelerate it to a 15 year schedule, however if you run into trouble one year, you won’t have to worry about getting behind. I understand that some owners won’t make the additional payment unless they have to, and in that case a 15 year fixed might be better.
An Addendum is a fancy name for a form that is basically just a blank sheet of paper. When you think of Addendum, think Add. You can add an addendum to the transaction and make it part of the contract. Addendums are usually used when there is a long list of things that won’t fit into the line or two of writing space on most forms, or for clarity sake to have everything organized on one page.
There are also specialized addendums, such as Wood Destroying Pests Addendum, Backup offer addendum, Time Extension Addendum, Short sale Addendum, REO Advisory- but these tend to operate like their own separate form.
“Active” listing status means that the property is currently listed for sale and has not received an accepted offer. The property is on the market and up for grabs. Sometimes while the status is active the listing agent will already be working with an offer (becoming more common nowadays). The seller may accept an offer and the property says active but it is not available. This happens because the listing agent must manually log into their MLS account and change the status to looking for backup or pending themselves. Most agents get around to doing it the first day an offer is accepted.
An Amenity is a special feature(s) of a property that adds value, and increases comfort, convenience, or enjoyment.
Examples of common amenities in homes are: Pool, close to nice public park or local farmers market, Views, walk-able neighborhood, sidewalks, Mature landscaping, tree lined street, Outdoor BBQ, jacuzzi or spa, fruit trees, security system, gated entrance, guest houses, pergolas, roses, steam shower, house wired for sound, good school district, fireplaces, sunlights.
Examples of common amenities for condominium buildings: In unit laundry, elevator, front desk, rooftop deck, extra storage space, valet, gym, pool, dog run or dog park, tennis courts, security cameras, concierge, conference or party rooms, no common walls.
MLS Condo listings have an amenities field that lists the amenities the condominium building has