Category: June 2017

It’s Day 45, my deadline for identifying replacement rental properties under the 1031 exchange rules!

Academy Ridge

I bought this one with my favorite real estate agent (before she went overseas to Spain and Portugal on vacation). This one is closed (sale is final, we bought it!),  and our new tenants are in the process of moving in. We’re also still doing little maintenance and repairs.

Yesterday we did evaporative cooler maintenance. I still need to get a locksmith out, because there is an enormous padlock on a side gate and the sellers didn’t provide a key. So the side gate is currently inoperable. I also still need to fix some of the irrigation system, even though Monica and John and I worked on it for awhile the other day. And the roof needs some maintenance. But overall, this house is going well.

 Eagle Crest

This one has been the ignored middle child. Everything has been going smoothly, so I’ve hardly paid any attention to it. We should have our final walk-thru tonight, and sign our closing papers tomorrow.

This is the smallest house of the three, at not quite even 1300 square feet, but it’s in the best school district in town. It’s also on the arroyo with views.

Next steps are to get a lease written, and an advertisement composed and posted and start collecting rental applications. It will also need a few maintenance items. A large tree has heaved the concrete in the backyard, and I’d like to add some patching so it’s not so much of a tripping hazard. Also there are likely to be additional little issues inside; I don’t know yet until I am able to spend some time in the house.

Peregrine

This one is annoying me. We were having enough issues with it over the weekend, that if my preferred agent had been back from Portugal, I might have tried to buy a different one. I actually did a thorough on-line search, but didn’t see anything else. It’s a bit panicky this late in the game.

This is the most expensive of the three, so my expectations are higher. Also I made an offer on this one in a rush, after getting worried about unexplained standing water at a different house. The house with the standing water was under budget, but this one is over budget. This final house is the one where I really need to nail the budget. With this house, we’re $20,000 over, which we’ll just have to borrow.

There’s nothing seriously wrong with this house, it’s just been a more difficult process and I don’t have warm fuzzies about this one. For one thing, my agent has been extremely busy (she and her family moved into a new house a week ago), so she hasn’t been quite as responsive as I’d like. That would have been fine if I wasn’t under such time constraints.

We rushed the inspections, scheduling them for Thursday instead of Friday (when John could have been there) in order to clear inspections over the weekend before my 45-day deadline today. But then my agent ignored my voicemail and my email on Thursday, and ignored John’s voicemail on Saturday. Finally on Sunday (yesterday) she surfaces and says, “Oh, do we have the inspection report?” Yes, we’ve had it since Thursday. Grrr. So we have not cleared inspections yet.

Also the inspections weren’t quite as good on this house. It needs a new hot water heater, which is straightforward enough. But there are also some plumbing and electrical issues that are somewhat mysterious, and it’s hard to know how much those will end up costing. There are also some cosmetic issues.

Another minor but weird thing is that it has a wood burning fireplace with a gas starter, but you still have to light the gas with a match, which then helps light the wood…which just strikes me as slightly odd and a bit dangerous. I’m all for gas…or wood…but not sure about the mix. I can imagine it confusing a tenant – it certainly confused me. I’ll probably want to change that at some point.

Another logistical issue is the owner wants to rent the house back from us for 20 days after we close. This is a bit risky – theoretically the owner could trash the house during that time (unlikely). Also it leaves me only a couple of days to get permanent renters in before I’m supposed to leave for California.

But in the end, this should be a good house. It’s in the same great school district as the Eagle Crest house.

Back-up houses

I get to identify back-up properties in the event that we fail to close on either the Eagle Crest or the Peregrine houses. Eagle Crest closes tomorrow, so I’m not worried about that one. Peregrine closes in a week. So anything I choose for a back-up, in case Peregrine doesn’t close, would have to still be available up to a week from now. Most houses in Albuquerque are still selling very slowly, but the best ones are selling within a day or two. So the trick here is to pick something that’s not the best – but is still worth buying should it come to that.

It’s unlikely that we’ll have any trouble closing and need a back-up. The most common reason that house sales fail to close is if the buyer fails to get their loan. That won’t happen in this case. Another common reason is if the house inspection shows serious issues. That’s why I wanted to get all our inspections cleared before today. A final reason is if the sellers back out of the deal. In a fast moving market, sellers will sometimes back out when they realize they can sell the house for more than money than they had originally accepted. In a slow market like Albuquerque, it’s unlikely that the sellers would back out. But it’s possible – sometimes people’s plans change.

Even though it’s very unlikely that we would end up needing to buy a back-up property, I find that I’m nervous turning in the official form. It’s like turning in a final exam – except more is riding on it.

What’s next

I’m done identifying houses, whew. Whatever is on my 1031 form by the time I submit it this afternoon is what we’ve got.

Next I need to get everything insured, get utilities set up in my name, finish the maintenance items, advertise, show the houses to prospective tenants, screen applicants, and get leases signed.

In my mind, I categorize the maintenance and upgrade items into three categories. The first is all the things that need to happen right away. Leaks fixed, everything working, etc. The second category is minor things that I’m going to change when I get around to it. This would be upgrading dated fixtures (lights, faucets, handles etc.), paint touch-up, landscaping improvements, etc. The third category is major upgrades.

There are several major upgrades I’m anticipating doing eventually. All three houses have off-white carpet in the bedrooms, and in some cases also the hallway and living room. That’s not sustainable for a rental, so eventually I’ll pull out all the carpet and replace with tile.

Two of the three houses have evaporative cooling. Tenants who are moving into the area from out-of-state, tend to find these to be challenging. Evaporative coolers also require more maintenance for us. And they’re considered less desirable by most people. John and I like them because they humidify the air, but they are more fiddly.  At any rate, I’ll probably eventually replace both evaporative coolers with central air.

And finally, the Academy Ridge house is going to need a new roof within the next 5 years.

With all those planned upgrades, plus debt servicing, we won’t actually draw an income from these houses for quite some time. But the hope is for them to be an income source during retirement.

Trivia for the day: The Eagle Crest house and the Peregrine house have the same address number. No seriously, it’s the same number, just a different street. What are the chances of that?

I have never seen a more confused approach to a house. We were trying to sell it, then we were going to live it in, then we were going to rent it, and now I guess we’re going to live in it after all.

John lived there happily for 10 years, from 1997-2007. No confusion there. But ever since then, its been a random mess. Sometimes it’s been rented, sometimes it’s sat empty. It’s spent many, many months on the market, not selling. Meanwhile it’s needed expensive repairs, including a new well. So it’s been a financial liability more than an asset, as well as a source of worry and uncertainty, for the last decade.

But the views! (everyone says), the views!

Yes, the views are unparalleled.

Incredible views.

Astounding, awesome views!

Peaceful, expansive views.

Unbelievable views.

Last summer we decided we’d move into it (because of the views). But in addition to being very dated inside, the layout is regrettable. We spent months designing a big remodel with a large addition.

John built this scale model (there’s a second story too, that’s not pictured). I collected hundreds of idea pictures and put together multiple powerpoint presentations. My folder for the remodel takes up 1.63 GB on my computer, and consists of 243 files.

But our remodel designs turned out to be too expensive to build.

So we recently went ahead and started a low-end remodel intended for tenants, with the idea that we’d rent it for a couple years until the market finally improves, and then sell it. The kitchen and baths had not been updated in the 30 years since it was built. The basic remodel would help it rent, and later sell.

Except now we’re going to move into it after all.  So we’re in middle of remodeling for tenants, but oops! I guess it’s for us!

I know that eventually I will be very happy and grateful to live in such a stunning location. And with some courtyards built, I think it will look and feel less like an aging box stuck on top of a hill.

But right now, it’s difficult. The confusion and direction changing has been a bit whip-lash-y.

As recently as a couple of weeks ago we were sticking to budget-conscious decisions with the remodel. We chose simple, neutral colors and styling that would appeal to almost anyone because, as we kept telling ourselves, “It’s a rental!”

But now all of a sudden we wish we had done custom this-or-that, because it’s going to be our house now. And we’re halfway through the remodel!

I guess remodeling it “as a rental” will save us money. But if I had realized we were going to live there, I would have liked to have at least spent a little more time paying attention to the details. Instead, I wasted months last fall designing an unrealistic remodel, only to be paying very scant attention to the actual remodel now, as I frantically and distractedly try to buy 3 rentals to fulfill our 1031 exchange.

And it turns out our contractor isn’t any good. He’s nice enough, but his subcontractors keep doing really boneheaded things. His plumber flooded the bathroom and ruined the cabinets (that we weren’t planning on replacing). There’s also been unnecessary holes and patching in the drywall. And just lots of things getting broken. The irrigation system was broken and flooding all over the ground. They tried to start the evaporative cooler, but didn’t hook the pump up right and it was flooding all over the ground. And they just left it like that, for us to discover a day or two later.

Plus, of course they are behind schedule. I had planned to move in July and go on vacation in August. Now, it doesn’t look like moving in July will be possible after all.

And they’ve damaged my red hide-a-bed couch, which I was quite fond of. Now it’s got white bare spots that cannot be fixed, in addition to being filthy dirty.

I know not everyone would be into a bright red couch, but I loved my couch. It made the guest room cheery.

I feel really guilty and shallow because Stephanie is dealing with life and death in Africa, and I’m crying over an old red couch. But that’s what it is.

This is probably going to be the most boring blog post you’ve ever read, unless you’re really into real estate contracts and 1031 exchanges. I mean, if you’re already even a little bit tired of hearing me talk about houses, don’t even start with this one. I’m totally with you – I’m tired of hearing myself talk about houses. For me, it’s been stressful!

We made an offer on our third and final (hopefully final, right?!?) rental purchase on Friday (Peregrine Road). We offered list price, and a closing date of July 3.  It’s safer to close prior to the end of our 45-day identification period, but we can’t, because we got slowed down so much by the septic fiasco on the first house we tried to buy.

Here’s why it’s safer to be completely closed by the end of the identification period: we can’t use the 1031 exchange to buy any property we haven’t identified during our 45-day identification period. Our 45-days is up on Monday (June 26). So if, for some reason, one of our properties doesn’t close, I can’t go find another one after Monday. I have to have everything identified by Monday.

What I can do, is identify a couple extra back-up properties on Monday – I just list them on the form. Those are the ones I could buy later, if something went wrong with one of the ones I’m trying to buy now. But there’s a limit to how many back-up properties I can list (usually 3; in my case it depends on the value of the properties, but it works out to be 3.)  But I’m not under contract with those properties. They’re just out there for sale. So someone else could still buy them, meanwhile. And the longer I have to leave them sitting there available, the more likely someone else would buy them.

I have to identify back-up properties by Monday, but since there’s a chance I might need to buy one of them later, if my seller backs out of a deal, or something happens between Monday and closing, I want as short of a period between Monday and closing as possible.

So for example, if I were to close on my third house sometime in August, and something went wrong during all that time and I failed to close, none of my back-up houses that I identified on Monday would still be available to buy in August. Other people would have bought them by then. Then I would pay $75,000 in taxes. Ouch, right? People think of capital gains as only 15%, but in our case it’s 35%, for a lot of complicated reasons including depreciation recapture, plus onerous California tax rates.

So, when I made an offer on the final house, I put the closing date for July 3, which is as soon as realistically possible to get inspections done and title cleared. That leaves only a 9 day gap between Monday and closing, where something could go wrong. And hopefully at least one of the 3 back-up properties would still be available, 9 days after being identified. So not a big risk.

On Saturday, our agent called and said that we were in a bidding war, and tried to see how lenient we would be with our terms. We agreed to an extra $5,000 in addition to the purchase price, and agreed the owners could stay until July 24 because their new place isn’t ready yet. So I expected a counter offer with those terms, and a rent-back request. Rent-back is when the owner rents the house back from you after you bought it, usually for a month or so while they find and close on their new house. It’s extremely common in California, or wherever property is expensive. It’s not as common in New Mexico.

But we never got a counter offer. On Sunday, the house went pending. So once again, I assumed we didn’t get the house. But when I spoke with my agent, it turns out they accepted our offer, yay!

But my agent seemed to think we weren’t closing until July 24. Huh? I can’t identify back-up property that would still be available by the end of July. Anything sitting on the market that long isn’t worth buying. Plus, our offer was to close on July 3, and if they didn’t counter offer, that means they accepted our offer, right?

My agent got irritated and said we had authorized a July 24 close when we spoke on Saturday. And I said, we’re fine with them occupying until the 24th, but I want a rent-back agreement. We’re not postponing closing.

Meanwhile, I kept asking my agent to set me up with a new on-line search, because I need to identify my back-up houses for the 1031 exchange form by Monday. But I don’t think that she’s ever done a 1031 exchange before, so she didn’t understand when I said that I need to identify back-ups. I think that she thought I was just trying to get out of the purchase of this house and buy a different one.

So it got a little tense. But finally today, she figured out what I was talking about, and negotiated a rent-back agreement (in our attempt to be cooperative, we’re actually giving them free rent for the 20-odd days).

She sent me the amendment with the rent-back agreement, and I was confused, because it said we were changing the closing date from the 24th to the 3rd. I called her and said I didn’t think the wording was right, because the purchase agreement already says the 3rd, so we don’t need to change the closing date. We just need to give them their 22 days of occupancy after closing.

Turns out – get this – turns out, the sellers changed the closing date from the 3rd to the 24th on the paperwork after we signed it (thinking it was fine, and thinking that we had agreed to it), and they initialed the changes. But nobody ever told us. We never saw, or initialed, those changes. So then I wondered – did they change the price too?!?

Actually, they didn’t. We had authorized an additional $5,000, which they didn’t write in, but they did write in the new closing date, based on a misunderstanding. So we’re still at list price, which is good, but the closing date and the rent-back are not settled yet.

We’re trying to get it all straightened out. So far today, my agent has written two different amendments, both of which have minor issues with them, so hopefully the end to this long tale will be anti-climatic.

John doesn’t know any of this, by the way. Not since Sunday. He flew to San Diego on Monday, and then on to Livermore last night. Monica was here offering moral support for 2 weeks, but she left this morning. So I’m just going to have to nail this all down on my own in the next couple of days. The amount of money is frightening; these rentals are a huge chunk of our retirement, and I’m just trying to do a good job with it.

Tomorrow morning is the inspection on this last house. I’m the only one (other than the inspector) who is going to be there, because John’s still in California and my agent has a doctor appointment. Luckily, the inspector will prepare an inspection report which John can read, even though he won’t be there to talk to the inspector in person.

Wish me luck in the morning. I’m hoping the inspection is good – I really don’t want to have to try to buy yet another house. I’ve sorted through literally hundreds of houses on-line, and looked at dozens in person, with 4 different realtors. And I still have to identify my 3 back-up houses this weekend.

Remember back when I was cheerfully posting photos of every house I was looking at, like a real-life “House Hunter’s” show? It’s so not like that anymore.

I really like the first house we’ve bought so far! That’s the one on Academy Ridge with such a nice backyard. It’s a comfortable house on the inside too, and I like the layout.

I advertised it for rent on Thursday and got completely inundated with inquiries! I am apparently not asking for enough rent. I had to take the ad down after just one day, because I had plenty of applicants.

I thought about re-advertising at a higher rate, but on the other hand, it’s nice to have plenty of good applicants and to get it rented right away. The couple I believe will be renting it (and hopefully signing the lease tomorrow), are a young doctor and nurse.

They are very appreciative of the yard, and I believe they will keep it up. If not, I will. It’s on a drip system, so it won’t be too hard to go out and do some maintenance occasionally. I love doing landscaping, and looking forward to having time to do more of that.