Most of our blog posts relate to questions from our clients, or convey information our readers should know about buying or selling a home.  With this post we’re mixing things up a bit by also sharing our stories as professionals in the real estate industry. These are essentially the things we’ve learned. We hope you enjoy reading these stories as much as we’ve grown by living them.

The narratives run the gamut. You’ll find humor, poignancy, sadness, quirkiness and everything in between—it’s all a matter of course when the job is to serve others. The overriding theme is that virtually all of these vignettes are educational. Stay with the narrative and it’s quite likely you’ll learn something valuable. So let’s get started. With no further delay, here’s the lesson of the Smoldering Embers …

About 15 years ago one of our clients owned and occupied a condominium in mid-city San Diego. This condominium complex is a series of buildings and each building has four units—two units upstairs and two downstairs. My client’s condo is a downstairs unit facing north and the balcony/patios are on the east side of the building.

On a gorgeous Saturday afternoon the upstairs neighbor was barbecuing on the balcony. Like millions of Americans the neighbor owned a charcoal grill. As the neighbor removed the last items from the grill and placed them in a pan he heard the phone ringing. He hurried inside—forgetting to close both the cover on the charcoal grill and the sliding glass balcony doors—sat down the pan, and answered the phone. After talking for a few moments he grabbed his car keys and went to Albertson’s to pick up a couple of items needed to complete the meal.

There was a nice westerly breeze that day. As the wind blew, smoldering embers from the charcoal grill became airborne and made contact with the cloth curtains that hung inside the sliding glass balcony doors (remember, the same sliding glass balcony doors that were left open). The curtains ignited and the flame spread to the kitchen cabinets inside the unit and the balcony outside. The flames were accelerated with help from household chemicals beneath the sink and charcoal starter on the balcony. Soon the entire unit was engulfed in flames and so was almost half of my client’s unit directly below.

My client was out of town, the grill master had gone to the market, and apparently none of the neighbors noticed this building was aflame. Luckily, a local news helicopter crew was en route to cover another story and decided to circle back because the fire was more compelling. Of course the news crew notified the fire and police department. Otherwise it’s likely much more damage would have occurred.

As a property owner, would-be property owner, or tenant, there are several takeaways:

1) Stuff Happens! Always make sure you’re adequately insured.

2) This incident helps to explain why many landlords prohibit charcoal grilling on the balcony. If grilling of any kind is allowed it’s typically restricted to propane, methane, natural gas or electricity.

3) Flame retardant curtains may be a good idea in the kitchen/balcony/patio area.

4) When purchasing a home always ask if there have ever been any insurance claims. If so, there are additional questions you should ask:

>What was the nature of the claim?
> When did the claim arise?
> What was the extent of the damage?
> What was replaced or repaired?
> Who was the contractor?
> Were there permits required? (If so, request copies).
> Are there any receipts or warranties? (If so, request copies).
> Are the warranties transferable? (Read them and find out).
> What was the Date of Loss?
> How much did the insurance company pay?
> In dollars, what was the owner’s responsibility?
> In dollars, what was the Homeowner’s Association responsibility?
> Is there a Fire Incident Report?

Please note that Fire Incident Reports in some areas can take a week or so to obtain, and may not be free. In addition, payment may be required in advance.  (Depending on your locale it may not be called a Fire Incident Report. Regardless of the name, just remember it’s the equivalent of a police report, but from the fire department). Once the Fire Incident Report is received read it thoroughly! You’ll want to make sure any circumstances that lead to the previous fire no longer exist. For example, if a fire started because of a build-up of brush in the canyon behind the home, putting out the flames and repairing the structure doesn’t correct the problem if the brush remains.

5) A security system that links the smoke detectors/fire alarm to the local authorities is helpful.

6) A sprinkler system may have arrested the fire before it spread.

7) If there are prior insurance claims, obtain a quote for hazard insurance before the contract cancellation period expires. If the existing owner has a series of insurance claims your ability to obtain coverage may be impaired, and if coverage is available the cost may be higher. Also note that if you have a couple of claims on the home you’re moving from and the seller has a couple of claims on the home you’re buying, you may have an even greater issue. Again, if there’s going to be a problem, you want to find out while you can still cancel the purchase contract without penalty.

8) When buying a property that’s been in a fire make sure your home inspector pays particular attention to the previously damaged areas. The quality of repairs may not be up to par. In the incident described above, all of the damaged wood and ceiling insulation was not replaced. We’re not certain if the insurance company, contractor or homeowner’s association cut corners. Unfortunately, my client did not find out until years later when they hired our firm to sell the property and we conducted a pre-listing inspection.

There you have it, some of what we’ve learned.

Until the next post . . . may health and happiness abound!

We negotiate quite a few short sales on investment properties. Recently we’ve encountered several instances where one of our sellers has received a Notice of Default and subsequently rented the property. This is permissible in California with one caveat: The owner of a rental property that’s in foreclosure must provide the tenant with a written disclosure regarding the foreclosure status of the property.

This law went into effect on January 1, 2013 and is found in Section 2924.85 of the California Civil Code. The statute, in pertinent part, says: “Every landlord who offers for rent … and who has received a notice of default … shall disclose the notice of default in writing to any prospective tenant …”

As seller/landlords, it’s important to know that under this statute, if the disclosure is not made, you are legally exposed. The tenant has two possible remedies:  1) The tenant can void the lease, vacate the unit, receive one month’s rent or twice the actual damages—whichever is greater, plus a refund of any prepaid rent and any other remedy the law may provide; or, 2) The tenant can elect to continue in the lease and receive one month’s free rent. The landlord’s exposure may be broader than it appears at first blush. Notice the clause that says “and any other remedy the law may provide.”

The disclosure must be in English with verbiage substantially the same as below:

“The foreclosure process has begun on this property, and this property may be sold at foreclosure. If you rent this property, and a foreclosure sale occurs, the sale may affect your right to continue to live in this property in the future. Your tenancy may continue after the sale. The new owner must honor the lease unless the new owner will occupy the property as a primary residence, or in other limited circumstances. Also, in some cases and in some cities with a ‘just cause for eviction’ law, you may not have to move at all. In order for the new owner to evict you, the new owner must provide you with at least 90 days written eviction notice in most cases.”

The statute remains in effect until January 1, 2018 (unless otherwise amended).

So remember, if you’ve received a Notice of Default on a property you intend to rent, YOU MUST INFORM THE PROSPECTIVE TENANT!

DISCLAIMER: The writer is not an attorney. This is simply a layman’s understanding of the statute and is offered as general information only. Please confer with an attorney before offering to lease a property that’s in foreclosure.

-F.R. RES

Like many others in the real estate and mortgage industry, I cringe each time one of the new credit score commercials are aired. I’m sure many of you have also seen these promotions. The scene typically opens with a credit applicant conferring with a loan officer or credit decision maker, confidently proclaiming a version of the following: “I’m more than qualified for this loan, Mr. Banker, because I’ve checked my credit score with Credit Café (or some similarly named credit monitoring service) and I have a 725 mid score, so the only thing you should be asking is what color I want, and if there is anything else you can do for me.” Yes, it’s a bit over the top, and often misleading. Granted, if you have a 725 score you’ve done a pretty good job of managing your credit profile, but it doesn’t automatically give you carte blanche when it comes to obtaining a home loan.

In fact, when seeking a mortgage the 725 mid score may not be enough. What the TV ads don’t say is that lenders also want to see credit depth. Credit depth is a minimal acceptable level of positively reported credit and debt management experience. For example, on a particular loan product, the lender’s underwriting guideline may call for a minimum score of 700, but that minimum score is virtually always coupled with a depth requirement that calls for a minimum of 3 open accounts, reviewed for 24 months or longer, with at least one account having a minimum balance of let’s say, $5000. That’s why the score alone can be misleading and shouldn’t be used to give the impression that a potential borrower qualifies, when at best it simply means they’re eligible.

So why is there a credit depth requirement? To make sure that substance accompanies the shine. For example, let’s assume that Ann and Arnold Public are 57 years old and were married 35 years ago. Arnold is an engineer and Ann is a professor of music. The Public’s are also parents to a set of twins, Daniel and Dana. They bought their first home in 1981, a $280,000 condo in San Francisco, and obtained a 15 year mortgage. They paid off the condo in 1997 and purchased an $800,000 home in Forest Knolls. The home in Forest Knolls was also paid-off in 15 years. During their 35 year marriage they have also bought and paid for eight (8) vehicles, and paid-off another $6,000 per year in revolving debt. Three years ago the state of California found itself in financial exigency and could not pay all of its public employees, so Ann lost her job as a professor. Now living on one income, Ann and Arnold got behind on a few bills and their mid credit score dropped to 630. Ann has finally returned to work and the Public’s have started to rebuild their credit rating.

While Ann & Arnold were struggling through the downturn, their twins, Dana and Daniel were enrolled in college. Dana applied for a student MasterCard as a freshman and was approved. Dana is now a junior. She’s had her MasterCard for 22 months, has an $800 limit, and always pays as agreed (the minimum payment is $16 per month). Dana’s credit score is now 705, seventy-five points higher than her parents. That’s right, Dana has managed to pay $16 per month for 22 months–her total financial history–and repaying $352 has gotten her a 705 score. Her parents, on the other hand, have borrowed and fully repaid over $1,000,000 in mortgage loans, $310,000 for automobiles and $200,000 for revolving debt, totaling over 1.5 million dollars through 35 years of marriage. In doing so they’ve proven repeatedly that they’re seasoned users of credit and responsible managers of debt. Unfortunately, their credit score, which is essentially a financial snapshot, doesn’t currently reflect their true nature as financial consumers.

This is why credit scores alone can sometimes be deceptive. Attractive scores don’t always equate to substance, buying power, or even creditworthiness. Likewise, scores that are less than stellar don’t necessarily mean that a borrower is a poor credit risk. Yes, Dana the daughter has a perfect credit record, in the same sense that a 15 year old who received their DMV Learner’s Permit this morning has a perfect driving record. But, as they’d say in Texas, she’s all hat and no cattle. Again, that’s why lenders want to see credit depth. Ann and Arnold, even with the subpar credit scores, are a much better risk. They have substance, experience, and consistency that spans almost four decades.

If you’ve got the credit scores with the depth to match, and are so inclined, put on your peacock feathers and strut like there’s no tomorrow. Otherwise, be wary of claims suggesting all you need is a particular score and the lending world becomes your oyster—it may become your foil.

-F.R. RES