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John Souerbry's Blog

By John Souerbry | Broker in Palo Alto, CA
  • Real Estate Jargon: “Pass-Through Deposits”

    Posted Under: Home Buying in Palo Alto, Home Selling in Palo Alto, Financing in Palo Alto  |  February 18, 2013 8:48 AM  |  378 views  |  No comments
    Real Estate Jargon: “Pass-Through Deposits”Buyers, sellers, investors, welcome back to another installment of Real Estate Jargon, aka, simple explanations of real estate terms not normally found in everyday conversation.  Today we’re going to look at pass-through deposits and how they are used in real estate purchase transactions.


    Real estate Buyers specify in their purchase offer the amount of the initial deposit they will be place in escrow upon acceptance.  Buyers may offer to make additional deposits (increased deposit) of a specified amount at a specific point in time during the escrow period to increase the attractiveness of their offer.  But these deposits remain in escrow until the sale is concluded.  Therefore, they merely demonstrate the increased commitment of the Buyer without directly benefiting the Seller.

    Pass-through deposits take the Buyer’s commitment a step further by releasing cash to the Seller prior to close of escrow.  Here is an example of wording that might be found in an offer that includes a pass-through deposit:

    “Upon 30 days after acceptance, Buyer shall make a second deposit of Two Hundred Thousand Dollars ($200,000).  This deposit shall be non-refundable and shall be released to Seller within two business days after receipt in escrow.  The deposit shall be applicable to the purchase price.”

    Note:  Please don’t use this specific language in a purchase contract, it’s for illustration purposes only.  Consult with a licensed real estate professional or an attorney whenever preparing an offer to purchase real estate.  All of the terms of this illustration are variables, e.g. the deposit may or may not be refundable and may or may not be applicable to the purchase price.

    Pass-through deposits can be used with any type of real estate purchase, but are most commonly found in contracts for commercial properties, land that requires environmental testing and entitlement approvals prior to closing escrow, and luxury residential properties.  Buyers confident in their offer can use the pass-through deposit strategy in many different situations, such as when the Seller is in need of cash sooner than the scheduled escrow closing, or in highly competitive markets to make an offer stand out from the others.

    Sellers can also include a deposit pass-through when making a counter-offer!

    If you have questions about real estate terms or buy/sell/investment strategies, drop me a line!  john@jsrealproperty.com

     


    John A. Souerbry & Associates (DRE 01370983)
    www.jsrealproperty.com

  • Real Estate Jargon: “Supplemental Taxes”

    Posted Under: Home Buying in Palo Alto, Financing in Palo Alto, Property Q&A in Palo Alto  |  February 11, 2013 7:40 AM  |  366 views  |  No comments

    Real Estate Jargon: “Supplemental Taxes”Buyers, sellers, investors, welcome back to another installment of Real Estate Jargon, aka, simple explanations of real estate terms not normally found in nature.

    Today we’re going to talk about supplemental taxes in California, that little surprise bill that homeowners receive months after buying a property.  In short, supplemental taxes are the difference between the amount of property tax that has been pre-paid prior to a sale and the amount of additional tax that is due after a sale because of the higher assessed value (usually the sale price).  Confusing?  Most people think so.  Here is a simple illustration.

    Joan bought a house a few years ago for $100,000.  The tax rate in her area is 1.2%, so her annual tax is $1,200.  In April, she paid her property tax for the period April through December.

    A key concept to keep in mind is that property taxes are usually pre-paid.

    In June, Joan sells the house to Ed for $200,000.  Because the assessed value of the house is now twice what it was when Joan owned it, Ed has to pay twice the tax from the day escrow closed until the next payment is due in December.  Joan has pre-paid $600 for that period, but Ed now owes $1,200 for that period.  The additional amount Ed owes is the amount of the supplemental tax.  How the supplemental tax actually gets paid can be confusing, but please read on…

    Joan doesn't get a refund from the county for the amount of tax she's pre-paid when she sells.  The county keeps her payment and she is reimbursed for that amount by the buyer (Ed).  In the escrow process, Ed reimburses Joan for the taxes she pre-paid from June through December ($600) by depositing a check with escrow that covers closings costs and the pre-paid taxes.  Escrow closes, Ed moves in, his wife redecorates.  Life is good.  But the additional tax due has not yet bee paid.

    Rather than collecting the $600 supplemental tax from Ed at close of escrow, the county sends out a separate bill months later.  In many counties, they mail supplemental tax bills to new homeowners around March/April for sales that closed in the previous calendar year.

    Supplemental tax bills often confuse new homeowners for two reasons:  1) their agent didn’t do a good job of explaining to them what I explained above and/or 2) the supplemental bill arrives in the mail near the time the April payment is due, causing the homeowner to wonder if this is an alternate bill or an additional bill.

    Why doesn’t the county just collect the supplemental tax at close of escrow, since the tax rate and new property value are known at that time and taxes are supposed to be paid in advance?  It’s one of the great mysteries of government operating procedures.  Of all the explanations I’ve heard, the one that comes closest to being believable was shared with me by a retiree from the county assessor’s office:  “Sure, a system could very easily be put in place so that supplemental taxes could be paid through escrow at closing, but then the county would have to lay off union workers who prepare and process the supplemental tax bills.” 

    If you have questions about real estate jargon or buy/sell/investment strategies, drop me a line! john@jsrealproperty.com

    NOTE:  For those outside California, I should explain that property taxes are paid in December and April here.  I’ve managed rental properties in Hawaii (paid every 6 months) and Nevada (paid every 3 months), so I know every state has its own schedule.  Thanks for bearing with me on my California-oriented illustration.


    John A. Souerbry & Associates  (DRE 01370983) 
    www.jsrealproperty.com

  • Real Estate Jargon: “Note Burning Party”

    Posted Under: Market Conditions, Financing, Agent2Agent  |  August 30, 2011 1:07 PM  |  1,208 views  |  No comments
    Buyers, sellers, investors, welcome to another installment of Real Estate Jargon, aka, simple explanations of real estate terms not normally found in everyday conversation.

    Growing up in a small town, I was surrounded by people who practiced small town values that included honesty, charity and thrift.  All forms of debt, including car loans, home mortgages, and business loans, were seen as temporary inconveniences that should be paid off as soon as possible.  One of the earliest remembrances from my childhood was going with my parents to a “note burning party” at a home down the block.  I didn’t understand what the party was about, but I soon discovered there would be grilled hamburgers and hot dogs, cold drinks, and a cause for celebration.

    In the 1950’s and 60’s, the standard practice for those intending to remain in their home after retirement was to pay off their mortgage first, then retire.  Back then, most mortgages took 10, 15 or 20 years to pay off, which could be accomplished easily within the span of a working career.  Retirees lived out their golden years free from debt and passed the family home to the next generation unencumbered.

    When I attended my first note burning party on a bright weekend afternoon, we played in the neighbors’ yard until the man of the house tapped a fork loudly against a half empty beer bottle to get everyone’s attention.  With great ceremony, he produced a large document that he stuck onto the end of a stick.  He and his wife then held the stick as they placed it directly over the heat of the grill until the document caught fire.  Everyone applauded as the paper turned to flame, then to embers, then to black specs that fell onto the charcoal below.  I didn’t know it then, but that document was a symbolic, hand-made copy of the mortgage note that the couple had received in the mail marked “PAID IN FULL.”  In our small suburban town, we attended several of these parties each year.

    Today, mortgages are frequently refinanced and cashing out equity is commonplace.  Few notes are ever paid off and I’ve never attended – or even heard of – a note burning party since reaching adulthood.  But I hope that I will receive an invitation to one soon.

    I hope you found this information interesting and helpful.  If you have questions about real estate jargon or buy/sell/investment strategies, drop me a line!  john@jsrealproperty.com

    For local, regional and national market information, check out our 1 Minute Housing Market Report when you visit www.jsrealproperty.com .

    Visit my web site!  www.jsrealproperty.com

    Follow me on Twitter!  www.twitter.com/CalBrokerJohn

    Do something nice for someone today!  Everything comes back around…

     

    Copyright 2011   John A. Souerbry

  • Think Your Local Bank Is Local? Maybe Not…

    Posted Under: Financing, Agent2Agent  |  August 10, 2011 4:52 PM  |  1,050 views  |  1 comment

    One hundred years ago, local banks with a single office served many of the small towns throughout America.  These were the ultimate “relationship bankers” with managers and tellers who knew every depositor by name and upon occasion made loans on a handshake. Through consolidation, expansion, and other forms of re-structuring, banks have grown well past the borders of their original communities to become regional, national, international, and global.  Some banks that were unable to make the transition have become casualties of the modern era of banking.

    Mega-growth in banking hasn’t changed the consumer’s preference to deal with people they know and the bank’s advertising message portraying themselves as locals.  But how local is your bank, actually?  A little keyboard poking revealed facts about the three California banks shown below with their parent corporations.

    Bank     Owned By

    Bank of the West         BNP Paribas (France)

    Union Bank of California     The Bank of Tokyo-Mitsubishi UFJ, Ltd. (Japan)

    California Bank & Trust   Zions Bancorporation (Utah, USA)

    While the managers and employees who work for these banks obviously do not commute to the branches from corporate headquarters each day, it is interesting to know which local banks are truly local.  Is yours?

  • Real Estate Jargon: Deposits That “Pass-Through” or are “Released” To The Seller

    Posted Under: Home Buying, Home Selling, Financing  |  August 4, 2011 8:13 AM  |  1,055 views  |  No comments

    Buyers, sellers, investors, welcome back to another installment of Real Estate Jargon, aka, simple explanations of real estate terms not normally found in everyday conversation.

    Deposits are initial payments made by buyers to secure a sale.  A commitment to make an initial cash deposit is included in almost all purchase offers.  When the offer is accepted, the deposit is held by the escrow company until the transaction is completed, then released to the Seller as part of the total payment for the property being sold.

    But what if the transaction will take more than the traditional 30 to 45 days to complete?  For longer escrow periods, which are typical for commercial properties, apartment buildings, and land that is to be developed, the buyer may offer one or two additional deposits during the escrow period, and may even offer “pass-through” or “released” deposits to make their offer more competitive.  Here’s how those work.

    Let’s say our buyer is making an offer on an apartment building and wants 30 days to conduct inspections and needs an additional 60 days after inspections to arrange financing and close escrow.  To make her offer more attractive to the seller, she includes a promise to make an initial deposit when escrow opens and a second deposit at the end of the inspection period.  Knowing that other buyers may also include second deposits in their offers, she goes a step further and offers pass-through of the second deposit to the seller.  Typical wording for an offer to include a second deposit that passes through to the seller might look like this:

    “Upon 30 days after acceptance, Buyer shall make a second deposit, totaling Two Hundred Thousand Dollars ($200,000).  This deposit shall be non-refundable and shall be released to Seller upon receipt in escrow.  The deposit shall be applicable to the purchase price.”

    Note:  Please don’t use this specific language in a purchase contract, it’s for illustration purposes only.  Consult with a licensed real estate professional or an attorney whenever preparing an offer to purchase real estate.

    If her offer is accepted, this means that if she doesn’t find anything during the inspection period that causes her to cancel the purchase, our buyer will make the second deposit to escrow and that deposit will be immediately released to the seller.

    The strategy of using a second deposit and pass-through to increase an offer’s competitiveness doesn’t work in all situations.  It can’t compensate for a purchase price that is too low or for other terms that a Seller might not find attractive.  But it can help to strengthen an offer if the seller needs cash prior to closing.

    I hope you found this information helpful.  If you have questions about real estate jargon or buy/sell/investment strategies, drop me a line!  john@jsrealproperty.com

    Visit my web site!  www.jsrealproperty.com

    Follow me on Twitter!  www.twitter.com/CalBrokerJohn

    Do something nice for someone today!  Everything comes back around…

     

    Copyright 2011   John A. Souerbry

  • Real Estate Jargon: “Mello-Roos”

    Posted Under: Home Buying in California, Financing in California, Property Q&A in California  |  May 9, 2011 9:30 AM  |  1,130 views  |  No comments

    Buyers, sellers, investors, welcome back to another installment of Real Estate Jargon, aka, simple explanations of real estate terms not normally found in nature.

    In 1982, the California legislature passed the Community Facilities District Act, nick-named “Mello-Roos” after its co-authors, Henry Mello and Mike Roos.  The Act authorizes creation of “Community Facilities Districts” that can sell bonds to finance development and maintenance of public infrastructure in specified areas (the “districts”).  The Act was the government’s response to the taxpayer revolt in 1978 that resulted in the passage of Proposition 13, which limited the ability of local governments to raise property taxes at a rate higher than the rate of inflation.  In other words, Mello-Roos assessments were specifically created to raise additional tax revenue in a way that skirted the requirements of Prop 13.  Mello-Roos districts survive today because of the obvious need for construction and maintenance of roads, parks, schools, community centers, etc.  The Act also allows for expansion of police and fire service to newly developing areas within a community facilities district.

    While some see Mello-Roos as a proper way to target the cost of public projects to local residents who derive the greatest benefit from them, others see Mello-Roos as a monument to government inefficiency and corruption.  As homeowners living within a district, or home buyers considering the purchase of a home in an existing district, what does it mean to us?

    Our first concern is the on-going use of Mello-Roos bonds in the community.  Some communities issue Mello-Roos bonds routinely to pay not only for construction of new facilities, but also to fund routine facilities maintenance and other recurring government services.  If the community is hooked on Mello-Roos money, it’s an indicator that Mello-Roos debt will never be retired – it will simply be periodically replaced with new bonds so that homeowners will be paying Mello-Roos taxes forever.  This is not true in all communities, however, as many are able to discipline themselves to use Mello-Roos purely for funding capital projects that are paid off on a specific date.  As current or potential homeowners in a district, we should research the use of Mello-Roos in the district to determine if the tax is temporary or functionally permanent.

    We also want to know if our Mello-Roos tax payments can reduce our personal income taxes.  Unlike regular property tax payments, Mello-Roos tax payments that fund capital projects can’t be used as a tax deduction on our personal income taxes.  However, we can write off tax payments that go towards Mello-Roos bonds used to fund recurring maintenance and services activities.  Our property tax bills should answer this question for us, but our tax professional should confirm whether the deduction is available to us or not.

    I hope you found this explanation of Mello-Roos helpful in your home buying or real estate investment decision process.  If you have questions about real estate jargon or buy/sell/investment strategies, drop me a line!  john@jsrealproperty.com

    To receive in-depth local, state and national market information, subscribe to my Housing Trends eNewsletter at www.jsrealproperty.com

    Copyright 2011   John A. Souerbry

  • Protecting Your Personal Information During a Buy/Sell/Rent Transaction

    Posted Under: Home Buying, Home Selling, Financing  |  March 16, 2011 12:09 AM  |  1,300 views  |  4 comments

    The mountain of sensitive personal information collected during a real estate transaction can be huge.  Whether buying, selling or applying to rent, someone wants to know just about everything about you.  Where you live, how much money you make, how much you have in the bank, tax identification numbers, birthdays, plus all the private bits of information that it takes to verify those things.

    While providing this information is necessary, it can also be risky.  The potential for identity theft or fraud is substantial.  Here are just a few things buyers, sellers, borrowers and renters can do to protect their personal information during a transaction.

    1. Verify that the people you are doing business with will safeguard your private information.  Ask your agent, loan officer or landlord about their file security procedures and how your file will be stored when it’s not in the physical possession of a trusted person working on your transaction.  Ask about simple things like locking file cabinets, secure computer systems, etc.
    2. When you must email personal information, protect it with passwords and/or encryption.  Work out a password in advance with the person who will receive the information and change the password frequently.
    3. When someone you don’t know contacts you saying they need sensitive information from you for your transaction, verify who they are with a trusted person before providing the information.
    4. Never fax or text sensitive information.
    5. When delivering sensitive printed information to your agent, lender, or landlord’s office, never leave it at the front desk or allow the receptionist to place it in the company mail system.  Always hand it to the person you intend to receive it.
    6. Whenever possible, don’t make payments with personal checks.  For big $$$ expenses and purchase deposits, get a cashier’s check.  For small $$$ items, use money orders.  Circulating your name, address and bank account number to people you don’t know is risky.
    7. Never share more information than what is specifically requested.
    8. Never share personal information about others without their written permission.
    9. Never discuss personal information on your mobile phone while in a public place where you could be overheard.
    10. Never throw away documents containing sensitive information, always shred or burn them.

    Information security has become an important consideration for real estate offices, mortgage companies and landlords, and systems and procedures have improved greatly to protect consumers from security breaches of all types during a real estate transaction.  Still, information security requires the consumer to remain vigilant.

     

     

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    If you have questions about home buying or selling, drop me a line!  john@jsrealproperty.com

    To receive the latest Bay Area, California, and national real estate market information, please stop by www.jsrealproperty.com and subscribe to our Housing Trends eNewsletter.

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