Insightful Articles for Real Estate Owners

Co-op Mortgages

Options for Co-op Boards When Refinancing Underlying Mortgages

Many articles are written about cooperative (co-op) mortgages from a shareholder’s perspective. This article discusses the basics when it comes to refinancing the underlying mortgage of a residential co-op building. Having this understanding will help you and your fellow co-op board members navigate the many refinancing options that are available to you and your fellow shareholders.

What makes co-op purchases unique?

When you buy a co-op, you are not directly purchasing real property, you are purchasing shares in a corporation that owns real property. In addition to receiving shares of stock, you receive a proprietary lease for the unit you are purchasing. When you purchase shares in a co-op there are typically two mortgages that need to be paid. 1) Your personal mortgage (money received from your bank to buy the shares of stock) and 2) An underlying mortgage that the corporation owes to a bank or other lending institution.

Why Co-ops Have Mortgages

Many co-ops have underlying mortgages because one of the basic principles in real estate is leverage, meaning using other people’s money (OPM) to increase returns. Just like people go to a bank to borrow most of the purchase price to buy real estate (or co-op shares), builders and investors of residential properties must borrow money to build and/or buy their properties. When a co-op comes into existence this underlying mortgage, from the builder/investor, or prior rental property owner (if your building was converted from a rental building to a co-op) is transferred to the co-op corporation. The building is used as security for this underlying mortgage. As with any other mortgage there are monthly payments on this debt. Since all cooperators own shares in the corporation (co-op) all shareholders must share in the payment of the debt. A portion of the monthly maintenance charges that are paid by the shareholders is used to repay the underlying mortgage debt.

Lending institutions offer a variety of mortgages. Cooperatives have the option to choose the type of rate, loan amortization length, when principle is due, and several other options. Let’s discuss a few of the options available.

Options Available for Coop Mortgages

The menu of options allows you to customize a loan to your cooperative’s needs.

What factors affect your choice of mortgage?

Before committing to a mortgage it’s important to understand why you are refinancing your mortgage and how each of the options above helps you achieve your objective.

For example, if your objective is to keep your monthly maintenance charges as low as possible you may choose an interest only mortgage or a 30-year amortized loan paid for over a period of 10 years with a balloon payment after the ten years. The upside of these two options is that your monthly mortgage payment will be lower than a 30-year fully amortized loan (monthly payment of principle and interest) but there is a downside. The lower monthly payment options will leave you with debt at the end of the mortgage term. Your cooperative may find itself having to refinance the unpaid principle during a period of high interest rates.

The chart below will help you determine how each option effects your monthly payment and remaining debt at the end of the mortgage term.

Yield Maintenance

One term you may come across when looking to refinance the underlying cooperative mortgage is yield maintenance.

Yield Maintenance is a prepayment penalty. What makes yield maintenance so intimidating to non-financial board members is the complexity of the prepayment penalty calculation.

The calculation computes an amount that the co-op must pay, in addition to the unpaid principle balance, that allows the lender (bank) to attain the same investment return (yield) as if the co-op had made all scheduled mortgage payments under the terms of the loan agreement.

In other words, if after 6 years your co-op decides to refinance its 10-year, 6% loan, from Bank A, and replace it with a 4% loan from Bank B. Your yield maintenance prepayment penalty will be an amount when added to your unpaid principle balance (you still owe the bank principle since you have 4 years left on your mortgage) that will ensure Bank A earns the same return as if your co-op made all your payments over the full 10-year loan term. The yield maintenance calculation assumes that Bank A will invest all the funds in US Treasury instruments. The calculation of the yield maintenance requires present value calculations that you typically find in finance courses.

Other, more simple prepayments penalties involve a sliding percentage as you get closer to the maturity date. For example, a 5% prepayment penalty with five years remaining until maturity, reduced to a 4% penalty with four years remaining until maturity, reduced to a 3% penalty with three years remaining, and so on.

It’s important to understand your prepayment penalties because excessive penalties may hinder your ability to refinance your mortgage in the future.

Line of credit

We recommend that in conjunction with the refinancing of your underlying mortgage cooperatives should obtain a line of credit (LOC). A line of credit gives your cooperative access to additional cash on top of the net proceeds of a refinance. With LOCs you only pay interest on the money you borrow. There is an annual fee to keep the line active.

Summary

Many major banks and insurance companies offer refinancing of the underlying co-op mortgage. Your co-op should have no problem finding money when you need it for major capital improvements or refinancing of existing loans that are about a come to the end of their term. Understanding your choices will allow you to customize your loan to meet the needs of your co-op.

Air Conditioning Basics

Understanding Real Estate Building Components

As a real property owner, it’s important to understand the basics of every major structural component of your property. This article discusses the fundamentals of air conditioning.

A basic understanding of your air conditioning system impowers you with the ability to make an informed decision about one of the major components of your real estate; such as whether to repair or replace the system. At the very minimum, having basic knowledge of air conditioning will limit the ability of unethical HVAC (heating, ventilation & air conditioning) companies from taking advantage of you. If they see you have knowledge of the major components, and how they contribute to the process it may give them pause if they are considering ripping you off.

To make things simple we’re going to break the process down into small bite size chunks. We’ll start with the Objective, then move to the Components, then the Science and we’ll pull this all together.

The Objective

Air conditioning systems fill a fundamental purpose, to cool an area inside your real property. Contrary to what some people believe, air conditioners don’t bring cool air to an enclosed space. Air conditioning systems take away hot air. The cycle of an air conditioner is to capture heat from one area (inside), transport and release the heat somewhere else (outside), and then repeat the heat capturing, transporting and releasing processes again and again.

Science plays a major role in the process of capturing and releasing heat. So take an hour, or two, look for those high school science text books (they may be a bit dusty) and I’ll wait until you get back. Just kidding, we won’t need them.

Before we discuss the science let’s look at the major components inside the air conditioning system.

The Components

The major components of an air conditioning system are:

The Compressor – A pump that pressurizes refrigerant gas and moves it to the condenser.
The Condenser – Removes heat from refrigerant. This heat removal from the refrigerant transforms gas into a liquid.
The Expansion Valve – Regulates the refrigerant flow into the evaporator
The Evaporator – Liquid refrigerant transforms to gas and absorbs heat from the surrounding air causing the air to cool. A fan blows the cool air into the room.

The diagram below illustrates how these components form a circular system.

In addition to the major components there are also other components that are noteworthy. They include:

Fans – Work with the evaporator to blow cool air into the room. Work with the condenser to blow hot air into the outside environment.
Thermostat – Used to regulate temperature in the indoor space.

The Science

The “secret sauce” of an air conditioning system is the Refrigerant. This is where the science comes in.

What is a refrigerant? A refrigerant is a substance that changes from liquid to gas (and gas to liquid) during the air conditioning cycle.

The science behind the refrigerant is what is called phase conversion. Phase conversion is when a substance changes from a liquid to a gas (for example, heating a pot of water and converting the water into steam) or when a gas changes into a liquid (for example, water that drips from your mirror after taking a hot shower).

During phase conversion heat is either absorbed or released by the refrigerant. When a refrigerant changes states from a liquid to a gas the refrigerant absorbs heat from the surrounding air. That’s why steam burns are more painful than burns from boiling water . There is more heat content in steam. Conversely when a refrigerant converts from a gas to a liquid the refrigerant releases heat into the surrounding air.

Unlike water that converts into gas at a temperature of 212 degrees Fahrenheit, refrigerants used in air conditioning systems boil at temperatures between 40-50 degrees Fahrenheit. This ability to boil at such low temperatures means that the refrigerant can be converted from a liquid to a gas at room temperature.

The Air Conditioning Cycle

Let’s put the components and the science together and create our air conditioning cycle.

The first stage of the air conditioning cycle starts with the compressor pulling in the refrigerant (in the form of gas). The compressor is called compressor for a reason. It literally compresses the refrigerant gas. Think of taking a bicycle pump and adding more air to your tire. The more you pump the more the air in the tire gets compressed. Also note, if you continue to add more air to the tire the pump gets hotter. This heat is absorbed by the refrigerant.
The hot, high pressure (compressed) gas is moved to the condenser. The condenser is located outside of your property. The purpose of the condenser is to discharge heat from the refrigerant. This removal of heat is caused by the natural movement of heat, which moves from hotter areas to colder areas. That’s why you can feel the heat if you stand next to something hot. Hot things give off heat to the colder surrounding environment. The hot gas from the compressor is hotter than the external temperature. As the hot gas begins to cool it starts the process of phase conversion. The refrigerant changes from a gas to a liquid. If you ever stand outside a condenser you can feel the hot air being blow from it.
Next this liquid/gas refrigerant mixture moves to the expansion valve. Here, the expansion valve starts the process of lowering the pressure of the refrigerant thereby allowing the refrigerant to expand into a gas.
The final stage of the process is the evaporator. In the evaporator the liquid/gas refrigerant mixture becomes a gas. Remember, the unique quality of air conditioner refrigerants is their ability to boil and turn into a gas at low temperatures (40-50 degrees Fahrenheit) . At room temperature the refrigerant can boil and convert from a liquid to a gas. If you recall the science of phase conversion that we discussed above; when a substance changes from a liquid to a gas it absorbs the heat around it. In the evaporator, cool air is created by the refrigerant taking the heat away from the surrounding air. A fan is used to blow cool air away from the evaporator into the room that you want cooled.
The cycle is complete when the gas from the evaporator is sucked in by the compressor (step 1 above). The cycle repeats itself until the system is shut off.

There you go. You now have the basics of a conventional air conditioning system. Variations of this system occur depending on the size. For example window air conditioners have all the components contained in a single location (the air conditioning unit) while central air conditioners have the compressor and condenser outside of the house. In large buildings some components are located on the roof and others in the basement. No matter what system you have use your new found knowledge as a springboard to a better understanding of your system

Real Estate Accounting

Cash Basis vs. Accrual Basis Accounting

Understanding the profitability of your real estate is an essential aspect of real property ownership. At a very minimum you should review the financial statements of your real property on a monthly basis. A monthly financial review is enough to ensure you’re building wealth or determining what course of action to take when things are going in the wrong financial direction. The foundation of every financial statement is the method of accounting used to prepare those financial statements. The two most common methods of accounting are the cash basis method and the accrual basis of method.

This article will provide you with a fundamental understanding of the differences between the cash basis method of accounting (cash basis) and the accrual basis method of accounting (accrual basis) and state the pros and cons of using each method as a real estate owner. Armed with this knowledge will give you better insight into the financial position of your real estate holdings. We will mainly focus our discussion on the Income Statement and take a brief look at the Balance Sheet.

What Does Basis of Accounting Mean?

In simple terms, the accounting rules that determine when, and how, you record financial events on your income statement is the basis of accounting. Stated differently, something in life is happening, or has happened, regarding your real estate that results in revenue or an expense. Accounting basis determines when and how much revenue or expense is reported on your income statement.

Let’s use the following examples of real-world events and see how we account for them in the cash basis and accrual basis of accounting. Assume it’s January 1, 20XX.

You received a $12,000 bill from your insurance company for 12 months of liability insurance coverage.
Ten days later, on January 11, 20XX you pay the $12,000 premium.
Your property management company sends an invoice to your tenant for $1,500 for January 20XX rent.
Your tenant pays the $1,500 invoice 5 days later.

Each of these events may result in an entry on your income statement depending on the basis of accounting used. Let’s start with the Cash Basis.

What is Cash Basis of Accounting?

The Cash Basis of accounting states that an entry is made to your income statement when cash is received, or cash is paid. Don’t take the word cash literally. Cash also means check, credit card, ACH, wire or any form of payment. The receipt of cash results in booking (booking means performing a journal entry that results in a change to your financial statements) revenue to your income statement. The payment of cash results in booking an expense to your income statement.

Pretty simple, isn’t it? Simplicity is one of the positive aspects (pros) of cash basis accounting. Follow the money. If no check, credit card payment or cash is received you recognize no revenue on your income statement. If you don’t cut a check, pay by wire or ACH, no expense is recognized on your income statement.

Let’s use the four examples above to see the Cash Basis Method of accounting in action:

What is the Accrual Basis of Accounting?

The Accrual Basis of accounting ignores when cash is received, or cash is paid, and records revenue when it is earned or an expense when it is incurred. I know I just lost some of you but stick with me.

What does earned mean when it comes to revenue? Earned means that you have completely done, or substantially done, what you promised to cause someone to owe you money.

What does incurred mean when it comes to expenses? Incurred means someone else has done something, or has substantially done something, to cause you to owe someone money.

Let’s apply these definitions to the four examples above to illustrate their meaning:

You received a $12,000 bill from your insurance company for 12 months of liability insurance coverage. Result: You book $1,000 in each month ($1,000 in January, $1,000 in February, $1,000 in March….$1,000 in December) over the next 12 months. Why? The insurance company has promised to protect your asset for 12 months for $12,000, therefore you record $1,000 for each month that your insurance policy covers. You record $1,000 as a January 20XX expense even though no cash was used to pay for the policy.
Ten days later you pay the $12,000 insurance bill. Result: No entry on your income statement. Why? Even though you cut a check for $12,000, cash paid has no impact on the accrual basis income statements. The income statement is only changed when the expense is incurred.
Your tenant is sent an invoice for $1,500 for rent owed to you. Result: You book $1,500 for Rental Income. Why? Your contract calls for payment in advance and you plan to honor that contract therefore you have earned your income and can record revenue on you income statement.
You receive the rent payment 5 days later. Result: No entry on the accrual basis income statement. Why? Even though you received $1,500, accrual basis income statements ignore cash received and recognize income only when you’ve earned the income.

Another important concept of Accrual Basis accounting is something called the Matching Principle. This principle states that you must match your expenses to your revenue in a given period. In other words, the pro of accrual accounting is that it provides you a true measurement of profitability (revenue minus expenses) in each period where revenue is recognized. Let’s clarify using one month with the above examples.

If the events above all occurred in the Month of January 20XX and they were the only transactions for that month your Income Statements would look as follows:

Wow! What a difference!

Let’s look at February 20XX and assume that we invoiced $1.500 for rent and collected the rent in the same month.

NOTE: Since we already paid the insurance invoice in January 20XX no Insurance Expense is recorded on the Cash Basis. The Accrual Basis shows $1,000 in Insurance Expense each month because your policy covers you for the year and one month is 1/12^th of the total $12,000 bill.

By looking at the above Income/(Loss) amounts you can see two “cons” of the Cash Basis method. It’s easily manipulated and can cause wild swings in Income/(Loss). What do I mean by easily manipulated? You can control the magnitude of your profit and loss by simply not paying an expense. If the expense is not paid, it’s not recorded, and your profits go up. Having to pay all those invoices in the future will cause your profits to go down because all those expenses will be jammed into one month. That what I mean by wild monthly swings can result from cash basis accounting.

What is the Difference Between Cash & Accrual Methods of Accounting?

The simple answer is timing.

Let’s take the same scenario and look at 12 months of financials statements using the Cash Basis Method and the Accrual Basis Method.

Several things to observe.

At the end of 12 months both methods show the same Year-To-Date Income/(Loss), but each month shows a different Income/(Loss). This is what I mean by Timing.
The Cash Basis Method shows a greater monthly fluctuation in Income/(Loss)
Conversely, the Accrual Basis Method has a smoother monthly fluctuation (in this case no change at all).
If you wanted to know how much cash was received or paid in a given month the Accrual Basis Income Statement won’t help you. The Cash Basis shows you exactly how much cash was received and paid out each month. If you’re concerned about tracking cash the Accrual Basis Method is more difficult to use. This is a “con” about the Accrual Method.

The Balance Sheet

The Balance Sheet, also called the Statement of Financial Position is a financial statement that records your Assets (amounts owed to you or things you own), your Liabilities (amounts that you owe), your Equity (the amount of the Assets you own). In a simple example, assume you purchased your first piece of real estate for $100,000. How did you pay for it? You took $20,000 out of your savings account and borrowed $80,000 from the bank. Your Balance Sheet would look as follows:

Note that the reason it’s called a Balance Sheet is because Assets will always equal Liabilities + Equity (A = L+E). Every asset you own is either paid for with your money, someone else’s money, or a combination of the two.

If you decide to use the Accrual Basis of accounting you must also have a Balance Sheet. The Balance Sheet works in conjunction with Accrual Basis Income Statements. The reason for this is that one of the purposes of the Balance Sheet is to “store” cash transactions that are not yet recognized on the Income Statement.

If we go back to our Insurance Expense example, we paid $12,000 in January but we’re only recognizing (recording as an expense) $1,000 in Insurance Expense in January. Where did the other $11,000 go? On your Balance Sheet, in the form of an Asset called Prepaid Insurance. Why as Asset? Because you paid for 12 months of coverage but only booked one month ($12,000 multiplied by 1/12^th of a year = $1,000). The other 11 months of coverage is owed to you. If you recall, anything that is owed to you is an Asset.

I don’t want to get too deep in the weeds with the Balance Sheet but the above example should give you a feel for the additional complexity (a “con”) of the Accrual Basis of Accounting.

Note that there is no need for a Balance Sheet for the Cash Basis of Accounting because every dollar of cash received or spent appears on the Income Statement.

In conclusion, if you have a fundamental understanding of both methods of accounting it doesn’t matter what method you use. The only difference between the two is the timing of when transactions hit your Income Statement.

Below is a quick grid of the “pros” and “cons” of each method. If you’re still unsure it’s always best to request the cash basis of accounting since it’s easier to understand, does not require a Balance Sheet and you’ll be able to track your monthly cash inflows and outflows.

How to Find a Great Real Estate Lawyer

4 Easy Steps to Locating the Best Real Property Attorneys

Finding a great real estate attorney is not something that you leave to chance. Investing the time to find, and build, a successful client/attorney relationship will last a lifetime. This article will help you use your search time wisely and find the attorney you deserve.

We have broken down the process of finding a great real estate attorney into four steps:

The Search
The interview
The Analysis
The Decision

The Search

The first step in your search for a great real estate attorney is to clearly identify your specific real property needs. Real estate is not simply about buying and selling real property. Other real estate needs include: title disputes, breach of contract/contract disputes, landlord/tenant disputes, easements, transfers of title & ownership, property liens, insurance litigation and more.

After you determine your specific needs contact your State and Local Bar Associations and use their referral services to help you find a real estate attorney. State bar associations maintain records on complaints and/or disciplinary actions taken against attorneys licensed in their states. To find a listing of state bar associations visit the American Bar Association website (https://www.americanbar.org/groups/legal_services/flh-home/flh-bar-directories-and-lawyer-finders/). . The website lists the state bar associations.

The next step in the search process is to visit the websites of each real estate attorney. Read the attorney bios and write down the years of experience, background and law schools in which your candidate attended. Is the information clear? Do you feel comfortable with the content? Does the website look professional? What credentials are discussed? Use this information to create your first ranking.

After you’ve done your initial online research talk to friends, family or colleagues and ask for recommendations. You may be asking, “why don’t I ask my personal contacts before researching online?” We recommend doing independent research first to avoid limiting your selection process. Let’s face it, if someone gives you a legal referral, you’re likely path is to look that referral up online and then end your search if the website looks good. You won’t think about better options. By starting your search with a clean slate, the population of potential real estate attorneys expands and increases the odds of finding the right attorney for you.

After you’ve done your independent search compare the personal referrals you receive and see if those real estate attorneys match the attorneys you found on your search. If so, move those attorneys up on your ranking sheet. If the referrals are not the same as your independent searches check the referrals for any complaints or disciplinary actions with the State and Local Bar Associations. Consider what made you not choose those attorneys during your initial search. If the referrals get a clean bill of health from the Bar Association add her/him to your ranking sheet.

The Interview

Use your ranking sheet to set up a free consultation with each attorney on the list. If one or more of your candidates don’t offer free consultations determine if they should be removed from consideration. Why pay for a consultation when you don’t have to? We suggest scheduling as many consultations as you can in a single day. It’s far easier to compare candidates while the meetings are in the forefront of your memory.

It’s important to come prepared for your consultation. Remember an attorney’s time is money. Organize all documents you want to present to the real estate attorney. After the initial introductions get to the point of why you need her/his services. Bring a written outline of questions. Include names, addresses and dates of events, if necessary. It should go without saying to come with a pad and pen to take notes.

Some questions you may consider asking include:

Legal fees – How are going to be billed, hourly, or is there a flat fee for the service?

Availability – Does the attorney have the time to represent you?

Timeline – How long will it take to begin the process? What is a reasonable expectation for a conclusion? Does the attorney foresee any issues moving forward?

Odds of success – No attorney can guarantee an easy path to success, but they should give you an idea if your case has merit and prior outcomes of success with similar cases they’ve handled.

The Analysis

Now that you have answers to all your questions it’s time to sit down and compare the answers. As you go through this process use your instincts to guide you as well as the answers in front of you. How do you feel about the answers you received? Are some answers more complete, and detailed, than others? How did you feel when talking about your case? Did the attorney make you feel important or did she/he discourage you? Did the attorney use too many legal terms that made you feel lost? As you weigh the answers you will start to revise your ranking order based on who you prefer and who you should immediately eliminate.

With the remaining candidates on your ranking list compare the fee structure. If there is not a material difference between the candidates consider if the price difference changes your ranking order. Also review the availability of the attorneys and make sure your schedule coincides with his/her availability.

How much did you personally like the attorney? How much did the attorney like you? We’re all humans and we tend to go the extra mile when we like who we’re working with. I hired an attorney who offered me an option to save money by changing the fee structure in the middle of the engagement. Being pleasant and professional with your attorney does pay off.

The Decision

After you’ve finalized your analysis it’s time to decide on an attorney. Before contacting the attorney tell a family member, friend or colleague why you chose your attorney. Stating your reasons out loud will either reinforce your decision or let you know you have more analysis to do. Once you’re confident with your decision reach out to your selection and ask her/him for an engagement letter. This document should include items such as: description of the legal services being provided, fees, retainer policies, costs and expenses, billing polices, and what happens if you don’t pay.

Review any documents your attorney provides you and ask as many questions as needed before signing.

Never sign a document without fully understanding each parties’ rights, obligations and responsibilities.

Now that you have your new attorney trust her/his process. Good luck.

Energy Procurement for Real Estate Owners

Have Energy Service Companies (ESCOs) in Deregulated States Been a Sham?

Utility expenses can be some of the of the largest monthly real property expenses. When several states decided to deregulate the supply of electricity and natural gas many real estate owners expected to see significant savings on their utility bills. Unfortunately, these expectations have not materialized.

This article will provide you with a brief background on energy deregulation, why savings for real estate owners has not occurred, and provide you with pitfalls to avoid when dealing with an Energy Service Company (ESCO) that can save you money.

Summary of Deregulation of Energy

In 1996 several states began the process of deregulating the utility industry. Prior to deregulation one utility company supplied the commodity (electricity and/or natural gas) and delivered it to its customers.
Deregulation gave utility customers the opportunity to choose their commodity supplier. This gave rise to the commonly used acronym ESCO (Energy Service Company). The goal of deregulation was to create competition and drive utility prices down. Deregulation didn’t change the utility company that delivered the commodity to your real property, but it did give consumers the option of who supplied the commodity. This splitting of commodity supplier and commodity deliverer at times resulted in receiving two bills, one from the energy supplier (ESCO) and one from the company that delivered the energy to your property. Deregulation did not give consumers the opportunity to choose which utility company delivered the commodity because those incumbent utility companies needed to stay in place in order to maintain the infrastructure that delivered the commodity to your property.

Not every state offers energy deregulation so it’s important to check with your local public service utility company to see if your state is a deregulated energy state. Below is a current listing of deregulated states for both electricity and natural gas. The grid is customized for residential real estate owners (some states are deregulated but don’t offer residential property owners a choice of suppliers).

The Goal of Deregulation

The goal of deregulating the energy industry was to bring prices down. Prior to deregulation utility companies faced no competition and therefore had no incentive to lower prices. Allowing other companies to enter the marketplace would expand customers’ choices and force the suppliers to compete for your business using lower prices as their main tool to attract customers

Unfortunately. deregulation has not brought about the desired results. An April 2019 report by the American Public Power Association (Link: https://www.publicpower.org/periodical/article/residential-rates-deregulated-states-saw-uptick) , found that deregulation has not lowered energy prices, as compared to regulated states. There are many theories as to why deregulation has not significantly lowered energy prices. Let’s discuss a few reasons.

Why Deregulation Has Not Lived Up to the Hype

Deregulation has not delivered the results desired due to several factors. The good news is that some of these factors are controllable. Let’s start with the non-controllable reasons.

Non-Controllable Reasons

(1) States that mandated deregulation were typically states that traditionally had higher energy prices, as compared to the national average. One of the main drivers of these higher energy prices is related to fixed infrastructure costs. The infrastructure costs, the costs to produce and deliver the commodity, play a role in driving prices. If you’re in a state that consumes less energy per customer the fixed costs are spread among fewer consumers, as compared to states which consumes a larger energy supply per customer. Deregulation does nothing to lower those infrastructure costs or increase the number of consumers demanding the commodity. Therefore, deregulation cannot help lower energy cost as it pertains to this effect on prices.

(2) Energy prices are driven by global markets. Deregulation cannot lower the price when unexpected supply shortages occur due to natural disasters or terrorism; and it cannot lower excessive demand due to unfavorable weather conditions. The law of supply and demand and the expectation of price movement by speculators plays an important role in price movement.

(3) Another uncontrollable driver of energy prices is each state’s level of access to alternative energy sources such as hydroelectric and renewable energy. The more competition to supply energy, the more pressure there is on prices to decline.

Controllable Reasons

There are also many controllable decisions you can make to avoid mistakes that are costing consumers in deregulated states. We recommend that you use a broker or energy consultant to help you avoid some of the pitfalls that occur when real estate owners directly negotiate with ESCOs.

(1) Not understanding the purpose of an ESCO – There are common misconceptions about dealing with ESCOs that lead to a less than stellar performance. Using an ESCO does not guarantee that you get the lowest prices at the time of purchase. Electricity and Natural Gas are globally traded commodities. There is no way to time the markets to get the lowest prices. The odds of doing this is equivalent to trying to buy Microsoft on the New York Stock exchange at the lowest price of the year.

ESCOs can help you in executing your purchasing strategy whether it’s buying a commodity for a fixed, variable or mixed price. They also can execute contracts with various lengths ranging from months to years. Competent ESCOs understand their client’s tolerance for risk and execute a purchasing strategy to meet those needs. For example, ESCOs can create budget certainty for real estate owners by executing a fixed rate electricity contract for one year. With a fixed rate utility contract as market prices increase your commodity price stays fixed for the duration of the contract.

With this strategy there is a downside if prices fall, you’re locked into paying the agreed upon higher prices. In other words, ESCOs can help real estate owners determine if they want to bear the risk of price movements or not. Conversely real estate owners can purchase the commodity at the market price if they feel energy prices will decline. This strategy puts all the risk on the real property owner if prices rise. Many ESCOs offer their clients a mixed price where part of the price is variable and the other part is fixed. This is a way to hedge against extreme upward price movement while still being able to enjoy cost savings if prices go down. Since ESCOs have years of historical price data and a closer ear to the market they can give you insight on pricing strategies and the timing of when to lock in rates. Note, ESCO’s may not have your best interest in mind so it’s advisable to hire an energy broker/consultant.

(2) Not understanding the ESCO Contract – Energy supply contracts can be very confusing and filled with hidden traps and teaser rates. Many lay people fall victim by going after the cheapest prices and fail to understand that these rates are only temporary. A broker or energy consultant can help you compare apples-to-apples and not have you chasing shiny objects that disappear after a few months. Pricing alone won’t save you money. Energy contracts have monthly quantity limits. If you exceed the monthly quantity you may be paying market prices on the excess quantity used. Ask your ESCO for protection for exceeding the monthly quantity limits.

(3) Not paying attention to details – Many consumers in deregulated states have squandered away any potential saving by not paying attention to the details in their contract. One of the most costly mistakes real estate owners make when signing up for fixed rate contracts is to allow their fixed rate contracts to expire without renewal. When fixed rate contracts expire they become market rate contracts. During periods of rising prices many real estate owners have found themselves unknowing in a variable rate market contract during the peak heating or cooling season. Staying vigilant and continually monitoring your contract will prevent this mishap from occurring.

Finally, make sure you’re paying the correct sales tax rate on your utility bill. Utilities sometime mis-classify the type of real estate and subject you to higher sales tax rates. This scenario typically happens when a residential customer is charged commercial sales tax rates.

As stated, energy costs can be a significant portion of the total expenses in owning real property. If you live in a deregulated State you may not automatically find the cost saving you’re looking for. That does not mean you don’t take advantage of the lowest energy supply rates available. Cost savings is relative, just because your state’s average utitity bills have not gone significantly down does not mean you don’t have a responsibility to try to minimize them. Use the grid below to see if your state is deregulated, and offers choice to residential property owners, then find an energy broker/consultant to help you determine your risk profile and then match the available deals to your needs.

Note: “No” means there is not choice of supplier for residential property owners. “Yes” means there is choice for residential property owners. If a state is deregulated but only offers choice to industrial and commercial customers it is marked as “No”.

State	Electricity	Natural Gas
Alabama	No	No
Alaska	No	No
Arizona	No	No
Arkansas	No	No
California	No	Yes
Colorado	No	Yes
Connecticut	yes	No
Delaware	yes	No
District of Columbia	Yes	Yes
Florida	No	Yes
Georgia	No	Yes
Hawaii	No	No
Idaho	No	No
Illinois	Yes	Yes
Indiana	No	Yes
Iowa	No	No
Kansas	No	No
Kentucky	No	Yes
Louisiana	No	No
Maine	Yes	No
Maryland	Yes	Yes
Massachusetts	yes	Yes
Michigan	Yes	yes
Minnesota	No	No
Mississippi	No	No
Missouri	No	No
Montana	No	Yes
Nebraska	No	yes
Nevada	No	no
New Hampshire	Yes	No
New Jersey	Yes	Yes
New Mexico	No	yes
New York	Yes	Yes
North Carolina	No	No
North Dakota	No	No
Ohio	Yes	Yes
Oklahoma	No	No
Oregon	No	No
Pennsylvania	Yes	Yes
Rhode Island	Yes	Yes
South Carolina	No	No
South Dakota	No	No
Tennessee	No	No
Texas	Yes	No
Utah	No	No
Vermont	No	No
Virginia	Yes	Yes
Washington	No	No
West Virginia	No	Yes
Wisconsin	No	No
Wyoming	No	Yes

How to Avoid a Bad Real Estate Agent

Many first-time real estate purchasers and sellers take the easy route when it comes to finding a real estate agent. They ask someone they know for a name and contact information, call/email the agent and ask a few questions (mostly how much in commissions they pay) and then they sign the contract.

If only life were this easy we’d all be happier. This situation reminds me of a sign I once saw in a popular local restaurant, “we don’t make fast food, we make good food”. Nothing worthwhile comes so quick and easy and not taking the time to do your due diligence can cost you in time and money.

Before signing an agreement with a real estate agent invest a little of your time in getting to know more about your agent to ensure you’re getting what you pay for. Below are six questions that you need answers to so that you can increase your chances of finding the right real estate agent.

Who knows this agent?

Start with the referral process. I know what you’re thinking, “didn’t you just say not to use the referral process to find an agent?”. No I didn’t. I said don’t solely use the referral process. Getting a referral is a great starting point but don’t be lazy, you have more legwork to do. Having friends, colleagues, or family share their experience is helpful in narrowing down your search but be mindful that everyone has different circumstances and just because your cousin loved his agent doesn’t mean you’re going to get the same level of service. And even if you get the same level of service you have to take into account that everyone has different standards. Don’t let someone’s lower standards influence your decision.

How many years of experience in my marketplace?

How connected is your agent with the local community? Some of the best deals occur when somebody knows some “inside” knowledge. I’m not talking about unethical behavior but there are times when knowing the gossip or backstory of why a person is selling/buying or how flexible/inflexible they are helps move the deal along. You also want the inside scoop so you don’t waste your time on a deal that will never take place. The agent may also know industry people in other trades (inspections, construction, banking) that could strengthen you negotiating position or cut through red tape. Remember that the true value of a real estate agent is not just showing real estate, it’s their ability to seamlessly guide you through the process.

How many years of experience in other market places?

Having experience outside of your market gives an agent a different perspective and approach to navigating through difficult situations. Being a real estate agent is like any other profession. If you do the same thing over and over again you tend to get stuck in a box and lessen your creative problem solving skills. You also don’t want an agent who is so boxed into their own market that they don’t try new idea (i.e. social media to sell) because “it’s never worked in the past”.

What licensing & certifications does this agent bave?

Each state has it’s own state agency that oversees the licensing requirements for real estate agents. Check with your state’s real estate regulator to find out if your agent is licensed and if so, does the agent have any disciplinary actions. Make sure your agent at a very minimum is a member of the National Associate of Realtors (NAR). The NAR has a code of ethics that every member has agreed to abide by. There are other certifications that realtors have: CRS (Certified Residential Specialist): Completed additional training in handling residential real estate, ABR (Accredited Buyer’s Representative): Completed additional training in representing buyers in transactions, SRES (Seniors Real Estate Specialist): Completed training aimed at helping buyers and sellers aged 50 and older. If a realtor you really like does not have one of these additional certifications it shouldn’t be a deal breaker but having additional certifications does show the realtor is committed to expanding their knowledge in their profession. At the bottom of the article there is a link to the National Association of Realtors member search.

Is this the agents sole source of income?

This question may seem intrusive but knowing that your agent’s sole source of income comes from being an agent will tell you (1) how successful they are at their job and (2) how much of their time can be devoted to your needs. I’ve personally experienced dealing with an agent who was a yoga instructor. She used real estate as a “side gig”. After our contract expired, with no results, I found a full time real estate agent who showed me what a professional realtor experience was. You want an agent who is free to provide you service when you need it (i.e. during working hours or after hours) and not have to wait until your realtor gets off from their other job(s). You don’t need to know how much money your realtor makes but you should know if he/she has divided loyalties that may get in the way of serving you.

What is the agent’s social media presence?

When you search their name what do I find? Does the broker have no online presence? Does their social media content give you a better feeling for who they are? If available, read online reviews with a grain of salt. Anomalous online review websites can be manipulated by posting exaggerated negative comments by dissatisfied customers or excessively positive comments by friends and family.

After you’ve done your homework and found all the answers to the above questions satisfactory schedule a face-to-face meeting with your final choices. Ask for, and check, their references If all things are equal choose the agent who makes you feel most comfortable and trust the process.

‘’If you’re interested in finding a member of the National Association of Realtors click on the link to begin your search.

https://www.nar.realtor/rofindrealtor.nsf/pages/FS_FOFFICE?OpenDocument

4 Things to Do After the Annual Budget is Done

Many real estate owners are so caught up in the preparation of their annual budget that they forget the value of creating a budget. Budgets are not passive tools to look at once every year, they are active tools in which real estate owners must use to make proactive decisions to manage their real property.

As a real estate owner your budget should be used to:

1 – Determine controllable versus uncontrollable costs
2 – Play what if analysis
3 – Measure the success of your strategy and planning
4 – Prioritize your decisions.

1 – Determine Controllable vs Uncontrollable Costs – After the final budget is prepared it’s a good practice to review the revenue and expense line items and determine which line items can be influenced by your short-term and long-term decisions. For example, real property taxes can’t be altered by a short-term decision. Therefore they are an uncontrollable short-term expense, but may be a controllable long-term expense by challenging your real property assessment. Alternatively, deciding to increase your insurance policy deductible to lower your premiums, repair rather than replace a major building component , institute tighter controls over staff overtime are actions that can control short-term costs. Categorize all your line items into short-term/long-term controllable versus non-controllable. This exercise allows you to focus and brainstorm on what line items you can positively effect and also gives you insight on how difficult it is to positively influence many real property expenses.

Note, each decision you make will come with consequences (increasing a deductible will lower monthly premiums but subject you to higher out of pocket costs if an insured loss occurs, it may be more costly in the long-run and disruptive if the component you keep repairing finally breaks down for good, increased staff over-site may cause employee resentment & turnover.) but these discussions should occur.

2 – Play What If Analysis – What do I mean by “what-if analysis”? After the budget is done assume everything goes wromg. Assume that 90%, instead of 100%, of the billing revenue is collected. Assume a major building component fails. Assume utility prices skyrocket. What is your plan to keep things afloat? Where are you getting the money to pay your bills, pay for repairs, pay staff? After going through these scenarios it may prompt you to get a line of credit or forgo lump sum payments to vendors (to get a discount) and choose longer term payment options.

3 – Measure the Success of Your Strategy and Planning – Review your budget each month to determine if you have deviated off of your expectations. If you have , why? Routinely monitor the variances between the actual and budgeted amounts. This exercise is not to criticize or point fingers at the creators of the budget but to facilitate a discussion on actions to take. Too often real estate owners judge the quality of a budget by the size of the line item variances between actual and budget. This is a waste of time. If the purpose of budgeting was to guess how accurately one could predict the future than this measurement would be justified. This is not to say that accurate budgeting is not important and time should be invested in the process of making a budget as close to reality as possible; but line item accuracy resulting in no variances is unrealistic. I’ve seen and heard of numerous stories of people needlessly spending money because they were “supposed to spend” an amount, and never did. They needlessly spent the money anyway because they wanted to make sure the line item wasn’t cut in the subsequent year’s budget. Additionally, don’t get caught up in constantly revising the budget to show people the accuracy of your budgeting prowess. Don’t waste your time on window dressing accuracy. Focus on game planning your next moves if large negative variances occur.

4 – Prioritize Your Decisions – Real estate owners are like everyone else, we have unlimited wants and limited resources. Budgeting helps you consciously prioritize your wants and your needs. By looking at where the money is spent you can see your priorities. Are most funds being spent on maintaining the status quo, increasing the market value, or improving cashflow? Is raising revenue a goal or keeping revenue flat? Are long term plans put on the back burner? Repair or replace, which do you side with? It’s interesting to find real property owners who say one thing and have their budget show a totally different point of view. Numbers don’t lie. See if your money does actually go where your mouth is.

After the budgeting process is over it’s a good idea to review the budget and ask yourself if the budget reflects your ideology as an owner. If it doesn’t then consider redoing the budget so that you’re not faced with making conflicting decisions when reality hits you. You don’t want to find yourself authorizing expenses that enhance market value when your budget reflects only spending funds on the nuts and bolts.

In summary, budgeting is an important best practice that should be followed annually and reviewed at least monthly. When it’s finally done you must understand the final product. Without a true understanding you simply have a bunch of numbers on a sheet of paper.

4 Things to Know Before Hiring a Property Manager

Hiring a great property manager can be tough. Many people make the mistake of not taking the time to think about the qualities that make up an ideal property manager. Some people make the colossal mistake and hire a property management company and trust them to assign a property manager to their property. Others do slightly better and are introduced to their property manager but the real estate owner(s) treats the meeting more like a “meet & greet” than an interview of someone who may to protecting their most valuable asset.

Managing real property is not easy. It requires a broad knowledge which includes, but is not limited to: understanding building components, managing building staff & third party vendors, knowledge of insurance & claims, knowledge of finance & accounting, providing quality customer service, organizational skills & time management.

Before you make the decision to hire a property manger there are four key areas where you and the candidate should be aligned.

(1) What Does the Property Manager Specialize In? – Property Manaers are no different than any other professionals. They all possess key strengths and have areas where they can improve. Your job as a real estate property owner is to match the property manager’s strengths with your real property needs. For example, some property managers have a mechanical or engineering background, others are excellent communicators and coordinators of personnel, others great marketers. Know what your needs are as a property owner. If you are a board member of an aging condominium you may prefer a property manager with more capital projects experience. Conversely, if you owns a rental property you may prefer a property owner with extensive vendor contacts and cost management experience to maxi,Ive your return on investment.

(2) Experience & Access to Resources – As stated above, no one can have an endless depth of knowledge on all areas of property management but your property manager should have access to resources where he/she can quickly prevent or resolve problems that will occur. In larger property management companies there may be many internal resources. In smaller companies the property manager may rely on vendors or external colleagues to get information they lack. Either way ask the question, “if something goes wrong outside of your core knowledge what do you do?”.

(3) What Processes Exist? – Every well run property management company should not only have an internal process for managing their business but must also have a process for managing your real estate. As a real estate owner you must ask the questions and understand what is the property manager’s process for handling complaints, emergencies, vendor bidding, paying bills, staying on top of real property laws, etc? What about the internal control processes of their business? How do they monitor the quality of the property managers work? What financial internal controls exist to prevent fraud?

(4) Personality Is Imporatant – Never underestimate the power of personality. This is not just a matter of liking your property manager but having your tenants/residence and you like your property manager. Never commit to a property manager without a face-to-face or video conference meeting. What type of greeting do you receive? Was their appropriate eye contact? How many “please” and “thank you(s)” do you hear? Manners go a long way in deescalating issues. They also build trust.

If you don’t have prior property management experience the ability to determine the skill level of a property manager can be challenging. As an owner you need to know what type of property manager you’re looking for. Don’t make the mistake of treating a property manager like an employee. They are your vendor and the really good ones will act like your partner..