This article was posted on Sunday, Jan 01, 2017

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Continued from Part 14:  The items above are just examples.  Some of the clauses may be inappropriate for a home remodeling contract. There could be – probably would be – other provisions that an owner’s attorney might want to include. Emily was, however, a cheap-squat and didn’t want to pay to an attorney the couple of hundred dollars that may protect her from the potential loss of tens of thousands. She did not understand a review by a knowledgeable attorney was a type of insurance: it could limit her loss if something terrible happens. Instead, she placed her reliance on the lender’s Construction Loan Manager and the lender’s legal team. Sometimes that works out. Sometimes it doesn’t.

 Nothing ever goes perfectly smoothly. There’s always some give-and-take, but ultimately contracts were agreed to and arrangements were made with the lender to fund the project on their normal “milestone” terms. Emily’s responsibility was to shop after work and on weekends for the special materials and appliances she wanted.

Shopping was front loaded. She spent what seemed to be an awful lot of time looking for the right things and negotiating prices early in the renovation process, but once the items were selected Emily suddenly had nothing to do. The construction process no longer needed her. In some ways it was like having the dog run away the same day all of your quintuplets leave for college.

Bored, Emily was watching the news channel on television. Sometimes when the volume was up and she was actually listening to what they were saying she thought of them as self-licking lollipops. Tonight the mute was on and she was watching because, again, she had no date. The TV was the best kind of company: the kind that can be made to shut up.

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She was still living in one of the rent-a-bedroom homes that Banana Pudding operated. There was no reason to move. The SFR was net leased to Shortsy Cake as a day care center, so Emily couldn’t live there. The four one-bedrooms (soon to be three bedroom units) weren’t habitable at the moment, and she really didn’t think she wanted to live there, anyway. If she took one unit for herself, the rent loss would be much more than she was paying to Banana Pudding. She could take one unit and rent out the other two rooms, as Banana did, but Emily couldn’t see the net gain there.

The house where Emily lived (as all of Banana’s did) had four en suite bedrooms with one girl per bedroom. Public rooms were shared. They divided the chores amongst themselves. But this was not a unicorn and butterfly meadow. With four girls, sometimes two would gang up on a third, or even three-on-one. Then group dynamics would shift and tomorrow someone else would be the goat. In many ways it was like growing up with three competitive sisters and Emily liked the family-type atmosphere, fights and all.

Even though the housemates talked a lot about almost everything, Emily knew she couldn’t expose her budding real estate portfolio to the other girls. But everybody needs a secret friend, someone nobody else knows about and to whom you can tell everything. Emily’s friend was her journal. Her mind turned to her properties and what she wanted them to do for her. She remembered the thought she had long ago, that if she owned ten mortgage-free units, the cash flow would allow her to retire (not in luxury, just not have to work anymore) regardless of her age.

She had two properties with a combined five units. That’s not yet an empire, but it was certainly a seed. The fourplex was a recent acquisition, but she had reason to believe it might turn out ok. Even now, with the renovations only half-way completed, the occasional prospective tenant was stopping by and inquiring.

The problem was the SFR, the day care center. Shortsy’s lease was due to be renewed in four or five months, and that caused Emily to rethink the investment. If Shortsy moved, Emily didn’t want to go through another extensive period of anxiety, waiting for another commercial tenant that would lease an old SFR on a busy street, while she serviced the debt on a 100% vacant property. After thinking this over and arguing both sides, Emily came to the conclusion that she did not want to be in the day care business. She tried to argue to herself that she was in the real estate leasing business, not day care, but that discussion always ended with the realization that her prosperity was balanced on Shortsy’s business. If Shortsy, for whatever reason, could no longer pay the rent Emily would effectively have a 100% vacancy in that property. Emily was, in a functional sense, truly in business with Shortsy. And she no longer wished to be that much “in business” with anyone. If the fourplex had a vacancy, it was only 25% vacant. The fourplex had changed her.

Already, before the fourplex was even rented, she felt more comfortable with apartment units. Prospective renters are already knocking on the door, while it took months to rent the SFR. She decided to sell the day care property and get more units.

Emily approached the challenge of selling the SFR in her normal methodical way. Who is most likely to want to buy a commercialized SFR on a high traffic feeder street? Sole proprietors in professional fields, like lawyers, accountants, dentists, and Shortsy! She already had a successful business at the location and Emily hoped she’d jump at the chance to buy it if the price was anywhere close to reasonable.

To reach an agreement on price the seller could lower her expectations, or the buyer may increase his bid. Emily thought the latter would be more agreeable to her, so she resolved to do whatever she could to cause Shortsy to make the highest bid possible.

Emily staged the process.

Her first step was to arrange an appraisal of the SFR. Since she was in California, she did a web search for California Bureau of Real Estate Appraisers. Once there she clicked on the tab “Search for an Appraiser”.  That brought up a “Search for Criteria” page. Emily thought that local appraisers might be the best, so she searched the appraiser list by zip code. Where it says, “License Level”, she ticked “AG”.

There are four levels of appraisal licensing. Trainee (AT) is at the bottom. They can’t perform an appraisal without a supervisory co-signer. Basically, the trainee (as you would expect) is learning his craft on your property and your dime. The next level up is the AL license. This permits the licensee to appraise non-complicated 1-4 residential units with a transaction value of up to $1,000,000 without direct supervision. The Certified Residential (AR) license removes the value cap. This fellow can appraise any 1-4 unit residential property regardless of transaction value or complexity. The highest appraisal license is General Certified (AG). The Certified General license is required for non-residential appraisals. An AG appraiser has spent years in the business, has extensive professional education and passed a rigorous examination. For a variety of reasons AGs are not that much more expensive to hire than trainees, but they get a lot more work so sometimes it’s hard to schedule one.

Emily entered the zip codes within a five mile radius of her SFR, and ticked “AG” before clicking on “Submit”. The program generated eight prospects.

She knew that the lender would get his own appraiser, but Emily really wanted an independent estimate of the value of her SFR. She was realistic. It was never her thought that she could sell the property for more than its market value, and an appraisal was the best way to document the value. If a prospective buyer asked her the price (and you just know they would!) she could show them the appraisal, done by a third party. That should carry more weight than some number she just plucked out of the Plucking Place.

Emily called each of the eight appraisers, asking about availability and fees. Mostly, however, she was listening for those subtle things that told her if the person was somebody she would like working with. Her first time through the list, she winnowed it to three candidates. Then she chose among them and made arrangements with Val Ewed, who sounded like an old man who’d seen everything and still wasn’t impressed.

Emily knew that Shortsy was almost certain to ask Val why he was appraising, so one of the stipulations with Val was that when that happened he should say only, “Never asked. Could be almost anything.”

She then called Shortsy and told her the insurance company wanted to send an inspector out next Saturday, when no children would be there. Would that be ok with her? Shortsy had never heard of an insurance company doing that, so her antenna went up right away.

The third step was to call a list broker and buy gummed labels of all the dentists, accountants, architects, medical doctors, and yes, other day care centers within a five mile radius of her SFR. The List broker told her that all together there were almost 1,000 of them, which surprised Emily.

Then she googled for “real estate postcards” and got an on-line service. She filled out the order form, included pictures of the front of the property and the phrase “For Sale by Owner” in 18 point type. She submitted for 1,000 postcards.

The basic process now in place, Emily sent postcards to the dentists. She hoped at least one or two dentists would respond and she could let Shortsy know that she had to show the property to “someone”. The next week she planned to send to the day care centers. Shortsy was on that list, and Emily was sure she would see her location was for sale. She’d put two and two together, for sure. And in the weeks after that, Emily expected to send the postcards to accountants, medical doctors, and architects.

Emily had this idea that sudden, significant disadvantageous change activates something close to the Kubler-Ross paradigm: denial, anger, bargaining, depression, and acceptance. Now that the decision to sell was made, she wanted to try to bring Shortsy to the “bargaining” level as quickly as she could. She hoped that the fear of sudden loss would generate denial on the part of Shortsy (“It can’t be that! She refinanced not long ago to buy that fourplex!), followed by anger (“How could she do this to me!”), then bargaining. That was the station Emily wanted this particular train to stop at. If it skidded past and got to depression – let alone acceptance – Shortsy would not be the one who bought this property.

Emily had no compunction about manipulating Shortsy this way. She knew it would be best for her and for Shortsy. All she was trying to do was to help Shortsy make the very highest bid she could, just as any true friend would.

The down payment wasn’t much of an issue. Emily was pretty sure the SBA had high LTV loans available. And she remembered that Shortsy was thinking of getting a second location, so the money for that could go towards the down payment.

Nobody likes sticker shock, so the payments had to be considered. There was a maximum price Shortsy could pay and still have her principle and interest payments to be not much more than the rent she’d been paying.

Emily thought that if Shortsy was suddenly faced with moving her day care and (probably) losing a large percentage of her established client base, she would consider buying the property herself. If the down payment was manageable and the mortgage payments not too much greater than the rent she was already paying, well, there was a really good chance Shortsy would buy. And if she didn’t, too bad. The postcards were already being printed.

Emily called her loan officer, the one she’d worked with on both the SFR and then the fourplex, to discuss the sale of the SFR, and confirmed that the Small Business Administration had a low down payment program for owner-users of business properties.  Emily knew at their next visit Shortsy would bring up the sale. When she did, Emily would casually mention that, “Yes, one of the people who saw the property is interested. He told me that the SBA was lending on things like this and the loans were easy to get. I confirmed with my loan broker. We’ll see what happens.” Emily was trying hard to be the best friend Shortsy had.

Well, that’s basically what happened. The postcards were mailed. People started driving slowly past, some of them stopping on the street to examine the property more closely. Every week or so there were calls to inspect the interior, which Emily finessed by stating “It’s a day care center. They don’t want strangers upsetting the children. Let’s make the inspection for Saturday, when it’s empty.” A few low offers dribbled in. Every time it happened, and even sometimes when it didn’t, Emily reported to Shortsy, “Another offer came in, an owner-user this time. Maybe we’ll have a bidding war.”

It didn’t take long before Shortsy reached “bargaining”. She asked to meet and talk about buying the property. Emily suggested the Starbucks where they had those Double Chocolate Chunk Brownies. She thought Shortsy might need some sugar before the meeting was over. And she once again reflected on how fortunate Shortsy was to have her as a thoughtful friend.


This article is for informational purposes only and is not intended as professional advice. For specific circumstances, please contact an appropriately licensed professional.

Klarise Yahya is a Commercial Mortgage Broker – BRE: 00957107,  MLO: 249261. If you are thinking of refinancing or purchasing real estate, Klarise Yahya can probably help. Find out how much loan the building will support. For a complimentary mortgage analysis, please call her at  (818) 414-7830 or email [email protected].