August 2012 Form of the Month

A Property Expense Report is a prudent tool used to inform potential homebuyers about the monthly costs they will incur on becoming the owner of the listed property.

How much is it really going to cost me?

You’ve located the ideal home for your buyer. They’re ready to submit an offer when you are suddenly asked about the property’s suitability: What will be my actual monthly carrying costs to own this home?

Simplistic prevailing wisdom tells us the cost of owning and carrying a home consists only of:

• a principal and interest (PI) payment; and
• taxes and insurance premiums (TI) on the property securing the mortgage.

Collectively, the payment of these costs is referred to as PITI, typically collected in monthly payments received by the lender when loan-to-value ratio (LTV) exceed 80%.

But don’t let your buyer be fooled by PITI’s appearance as crafted by their mortgage lender!

The true cost of owning and carrying a home extends broadly beyond these four basic elements. In addition to PITI, an owner incurs monthly costs necessary to the proper operation and maintenance of a property – to carry it once it is acquired by your buyer. And if your buyer isn’t capable of paying these costs, they likely aren’t capable of sustaining the ownership of a property you are so eager to place them in.

Related article:

Turn renters into owners by demonstrating homeownership’s savings

The seller’s agent’s perspective: buyers get it when sellers give it

A seller’s agent must have a firm grasp on what he is selling to most effectively market it. This includes an awareness of the property’s improvements, conditions of title, location aspects and its ongoing carrying costs before the property is listed, or at worst, before it is marketed to prospective buyers.

If the seller’s agent fails to disclose to a buyer known and readily knowable conditions affecting the desirability of the property before it is placed under contract, the seller’s agent exposes himself and the seller to liability for misrepresentation due to deceit. [Jue v.Smiser (1994) 23 CA 4^th 312]

To mitigate such risks, information about a property’s operating costs is best learned by the seller’s agent through a pre-listing interview with the seller, kindly requesting of the seller to prepare and return a Property Expense Report to collect the data for marketing the property. [See first tuesday Form 306]

In the report, the seller discloses the monthly expenses which they incurred as the recent carrying costs of the property – similar to the costs experienced during the past month by any owner of the property. You cannot get better first-hand information than that! [See first tuesday Forms 306 and 150 §11.8]

The Property Expense Report serves a dual purpose at this critical stage: it informs both the seller’s agent of the property – it also informs potential buyers of the same, again before going under contract.

Thus, the report is effectively used in the marketing package given to all buyers who express an interest in the property beyond the basics, such as price and square footage. Knowledge of the ongoing operating costs puts a would-be buyer on notice of the anticipated future carrying costs he will incur beyond the monthly PITI amount paid to the lender – translating an abstract dreamy-eyed notion of ownership into concrete numbers.

A tip for buyer’s agents: if the seller or seller’s agent is reticent about providing this information before you prepare and submit and offer to buy, the most effective way to get your buyer this data on the carrying costs of a property is to include a contingency provision in the buyer’s purchase agreement calling for the seller to prepare and hand the buyer the carrying cost report.

Doing so protects your buyer, allowing him to cancel the purchase agreement if the operating expenses disclosed are unacceptably different than expectations, no different a decision than had the facts been disclosed upfront by the dilatory seller’s agent. [See first tuesday Form 150 §11.8]

Monthly carrying costs timely disclosed

While renting, many operating expenses are shouldered by the landlord. Thus, they are off the tenant’s radar. These expenses include such things as water, cable, sewage, sanitation, public lighting, homeowners’ association (HOA) fees and the physical maintenance of the property to keep it in the condition when purchased.

However, the first time something does not function in the home, the new homeowner will quickly realize they cannot simply pick up the phone and compel their landlord to correct the deficiency – they have to either roll up their sleeves and fix it themselves, or call a professional – incurring an expense of time or money (or both).

The Property Expense Report received by the buyer prior to setting the price on conditions of purchase (going under contract) is beneficial to the decision-making process of any buyer. It reveals the monthly operating (carrying) costs they will need to pay in addition to principal and interest payments, such as:

• electricity;
• gas;
• water;
• TV (cable/satellite);
• internet service;
• trash;
• property taxes;
• owner’s insurance;
• lawn/gardening;
• pool care;
• maid/housekeeping; and
• maintenance and repair. [See first tuesday Form 306]

Further, the report discloses the existence of any payments owed by the seller on general obligation bonds which are liens on the property, such as Mello-Roos or property assessed clean energy (PACE) payments. These payments made by the seller will be nearly identical to the payments to be made by the buyer, as these costs are mostly fixed and do not change much with the transfer of ownership.

Added to the total operating expenses are the PITI loan payments made monthly. Together, this equals the total monthly expenditures of ownership, reflecting the required monthly carrying cost needed to occupy and maintain the home at a level consistent with that of the seller. [See first tuesday Form 306 §2.21]

At the end of the report, pre-paid deposits are entered by the seller, providing the buyer with a general  estimate of the similar deposits he will likely have to make to establish service under their name at the property. These are one-time fees incurred due to the move, as opposed to recurring monthly fees.

Flaunt your energy efficiency!

Though the benefit of the Property Expense Report to the buyer is clear, how can a seller’s agent go above and beyond to use a Property Expense Report to better market his listed property to locate a buyer looking for value?

The seller’s agent’s fundamental marketing task is to communicate to potential buyers the merits of the listed property. In particular, this includes any energy-efficient upgrades the listed property has received, lowering its monthly operating expenses and making it a better deal than similarly priced homes in the neighborhood.

Editor’s note – Of course, there is the seller’s agent’s duty owed to potential buyers to disclose those aspects of the property that adversely affect its value and are known to the seller or the seller’s agent. [Jue, supra]

For an energy efficient home, a Property Expense Report, prepared by the seller on the monthly carrying costs the buyer will experience as an owner of the property, is used as a marketing tool to exhibit the property’s heating and cooling costs as being significantly lower than that of competing properties.

Communicate the savings to potential buyers by comparing the energy-efficient home with that non-energy-efficient home down the street. This will show the buyer exactly how much they will save in ownership costs each month – dollars in the bank which have a present value to be considered as part of the price paid. A high-functioning agent will further demonstrate the long-term savings the buyer will receive over the years  by calculating the monthly expenses as disclosed on the report.

Crucial data on the carrying costs of a property goes a long way towards distinguishing the subject property from other listings. Do so to ensure that potential buyers are fully aware of all the cost-saving features the property has to offer. [See first tuesday Form 306]