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Something to Think About #50 – Uncle Sally’s Nephew, Part 13 – by Klarise Yahya, Commercial Loan Broker – BRE: 00957107, MLO: 249261

Posted on 01. Nov, 2016 by in all, Magazine Articles

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Continued from Part 12:  The incentives broke out thusly:  If another agent had sold this property at full asking price, Stu D. Chicken’s office’s share of the commission would be half of 5% of the original $550,000 price, or $13,750. Instead, his office got all of 5% of $400,000 ($20,000). In either case, Stu D. would get a part of what the office received.

The five heirs would each have had $110,000 (minus commissions and costs) at a sales price of $550,000. Under the final agreement, they got $80,000. They accepted this because . . . bird in hand.

In exchange for a 5% down payment (in this case) and normal fees and expenses, Emily got a 30 year fully amortized fixed rate loan for $560,500 on the four one-bedroom units (purchase price of $400,000 plus actual repair costs of $190,000 minus down payment).  If she was careful, that would leave her enough money to add the bedrooms with her own money. The first half of her plan was successful.  

Emily didn’t waste the nearly two months between submitting the loan request and actually closing escrow. It wasn’t that lenders were all that busy. It was because it had become harder to qualify for a loan and that many experienced underwriters had quit the business. Their young replacements just asked so many questions and demanded so much documentation. “Ms. Low-Confidence Newby, meet your new boss, Mr. Stricter Qualifications.”

Emily brought her contractor into the loop. She explained that her hope was that the units could be brought back to almost “as new” condition from the studs out, but with kind of an Art Deco look. The contractor knew exactly what Art Deco was, but confirmed it with her in case she somehow had a different impression.

“That was a popular style in the 1920s and 30s”, he said. “In the late ‘30’s Art Deco was simplified into Streamline Moderne, which was popular until the late 1940’s.

This building was constructed just after WWII, so some variation of Art Deco would be appropriate. I think we can do a fantastic job with your building. You probably want to keep the old claw foot tubs and we’ll get replica sinks and toilets and water tanks. If you want, I’ll ask my wife to make some renderings so you’ll have a really good idea of what it’ll look like. You’re gonna love it!”

Emily was shocked. “How do you know so much about that?” she asked. “Aren’t you supposed to be a contractor, and not a designer?”

“My wife”, he said. “Missy’s been designing homes for a living since before we were married -after awhile it sort of rubs off.”

In due time the contractor’s wife called for an appointment. Emily then contacted Stu Delano Chicken for permission to show the units to her contractor. The units were already empty. Stu D. agreed, in the manner of curmudgeons everywhere.

On the appointed day Emily, the contractor and the contractor’s wife met at the property. Stu D. showed up right on time to open the units, and then handed the keys to Emily with instructions to “bring ‘em to the office when you’re done”.

The contractor, Hiram Abiff, went about his business. Emily and Missy toured the interiors of each unit. It wasn’t really necessary as the units were stacked one on top of the other and had exactly the same floor plan (but half were reversed) – you see one, you see them all — but Missy didn’t seem to mind, and Hiram was still busy doing his thing, so it gave the girls time to talk. Missy used a computer program to make a rendering of one unit, and then decorated each room in an Art Deco fashion, complete with furniture. The furniture brought the rooms to life.

Halfway through the third unit Emily put her hand on Missy’s arm and said, “I’ve got something to tell you. The units have to be restored one-bedrooms. The bank won’t sign off on anything else. But after they do, I hope to turn each unit into three bedrooms. I think there’s enough living area to do it. Do you think that’s possible? Could you make some drawings of what a unit would look like as a three bedroom?”

Missy sensed a bigger paycheck. “Of course! But if we’re going to do that, maybe we should tell Hiram, don’t you think?”

Hiram appeared and Emily told him her plan: permitted one-bedrooms, then after the bank gives final approval to the completed renovation Emily was to use her own money to move some walls around, add a bathroom, and wind up with three permitted bedrooms and two baths in each of the four units.

The contractor thought it was a great idea. “There’s plenty of living area to do that. But you should make very sure the changes are permitted. If we turned the units into three-bedrooms without permits, they won’t count for appraisal purposes. Eventually, when you refinance or sell the units, the appraiser will only value them as one-bedrooms because that’s all that was permitted to be here. On the other hand, if you make sure to get the permits for the added bedrooms, the units will probably be appraised as three bedrooms and that would be a lot higher, I’d think. Would you like me to run up some rough plans so you can see what the final floor plan might look like?”

Hiram borrowed Missy’s notebook and drew a scaled outline of a unit. The main door to the unit was off the center hall. If a person were standing in the doorway there would be a living room extending the full width of the unit. Behind the living room and against the outside wall were two guest bedrooms. The last bedroom in the series, there at the back, was the master bedroom.

Along the inside wall, beyond the living room was a dining room with built-in china cabinet, a kitchen, and large master bath. If these units were turned into three bedrooms, the great weakness would be the single bath.

The twin unit on that floor was flipped so the bathrooms would still be against the inside wall. This meant that the kitchens and bathrooms of all four units backed each other (or were stacked atop each other). All the prospective bedrooms would have window access to the outside.

Missy recovered the notebook and quickly added designer touches: wood floors, molding, retro-looking kitchen appliances and bathroom fixtures. Then she made some minor alterations and presented the rendering to Emily. “Technically, this is probably more like Streamline Moderne rather than pure Art Deco,” she explained. “Art Deco was a 1920s to 1930s fashion. After WWII we had Modernism. Streamline Moderne was the fashion linking Art Deco with Modernism. It had rounded corners, the occasional glass brick interior wall (or half-wall), and lots of chrome. It also featured light earth-tone colors with darker trim pieces. We won’t be doing round corners due to the expense, but otherwise Streamline Moderne will be period perfect, don’t you think?” 

Emily looked up from the screen and asked how much Missy was going to charge for her design work. Missy shrugged. “Nothing”, she said. “Most people just let the contractor design anything he wants. Very few people pay for independent design work anymore. So I do this as sort of a value-added feature for the people Hiram works for. I like to think he gets a little more work that way.”

Emily moved her attention to Hiram. “So have you had enough time to come up with a final bid?” she asked.

Hiram asked, “Would you like two bids? One for restoration and another for the remodel into three bedroom units?” Naturally, Emily said, “Yes”.

“Well,” Hiram said, “These are 1,200 sq. ft. units. The original construction plans are no longer available, but I’d be very surprised if they were built as one-bedrooms. I mean, most three bedroom homes of this era were less than 1,000 sq. ft., weren’t they?”

“But the tax assessor has them down as one-bedroom units, so that’s what they have to be”, Emily responded.

“What if we kept the units as one-bedrooms, but moved the partition walls around a bit to give us a bedroom-sized storage room and another bedroom-sized play room? After the work is signed off, we could put in the closets and turn them right into bedrooms? You’d still have to get permits before turning the bonus rooms into bedrooms, of course.”

“Ok,” Emily said, “but what about a second bath?”

“We can make the master bath extra large, with a tub at one end and a separate shower stall on the other end. If you ever want to add a bath, you’d just have to put in a toilet and sink and a small partition wall to make the second bathroom. One bathroom would have a tub, and the other a shower. Most of the plumbing would already be there.”

Remembering that the original bid was for $190,000, Emily asked, “So what do you think all this would cost?” 

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. If you are thinking of refinancing or purchasing real estate, Klarise Yahya can probably help. Find out how much you can borrow. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email Info@KlariseYahya.com 

If you’ve missed some of the prior articles, basic guidelines on successful investing are in my book “Stairway to Wealth” available at www.LuLu.com

 

 

 

 

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