An Amazing Summer

Fall has arrived and there’s a lot to look forward to, but this past summer has been an exciting ride.

From the start, I knew that the summer held two fishing trips to Alaska – my first two Alaska fishing trips ever.

What I didn’t know is that I’d also have leg surgery and then purchase a house on Lake Almanor, a dream I’ve had for many years. I wasn’t sure I’d ever get Linda to go along with the idea.

The fishing trips were great and I’m almost completely healed from surgery. I’m grateful for my good fortune. The house at Almanor is the most exciting event of all.

It was mid-June when Linda and I decided to look at lake-front properties on Almanor. Our agent showed us just about every house on the lake under $1.3 million dollars. I concluded that in order to afford a home, it would have to be under a million.

We had most of that in the bank, some anticipated income and a home equity line of credit of our primary residence. We made a $950,000 offer on a house listed for $1,050,000 and they countered at $975,000. We accepted the counter and began inspections.

The house was nice, but had its flaws and as the inspections continued we began to have our doubts. Not only was the house in poor condition, but a western exposure and a steep incline to the water discouraged Linda.

We decided to exercise our right to withdraw.

Another house came on the market. The price was over our limit, but I told Linda we could figure out how to afford it. I knew in my guts that the house would sell quickly and I didn’t want to experience the pain of failing to make a solid offer and losing out on this rare find. After much debate, we made an offer and it was accepted.

I was ecstatic about our luck in finding this house. We could afford to buy it, but could we afford to own it? We closed escrow on about August 1. After consulting with my accountant and attorney, I decided to consider several options for owning the property and holding title.

My accountant believed that I should make the house a rental and take advantage of the two weeks per year that I could stay in the house. This option would be best if we wanted to get the most out of our money. But, I wanted to be able to stay in the house a couple months out of the year – not two weeks.

My attorney suggested creating an LLC, but he wasn’t sure about our ability to make the house a rental and also gain more time on site.  An LLC could be a  partnership, but the house would still end up being a rental – limiting personal use.

There was a posible Trust situation that would allow Linda and I to use the property as much as we wanted, but we would have to committ the property for our life time. I decided not to look further into that idea.

Another option would be to find a partner, get some of our money back and have somebody who would share in the expenses. I’ve been in many partnerships, but never on a vacation home. Ultimately, Linda and I have chosen the partnership route. We haven’t closed the deal, but it looks like we have found our partner. I’m happy with this plan and financially it is definitely a good option. We are in the process of creating a parthership agreement that defines how the property will be shared.

The view from the Lake House

This panoramic shot shows the back of the house, the deck where we spend time, the back lawn and the key feature – Lake Almanor.

The Search – Vacation Home

For years I’ve wanted to own a second home at Lake Almanor in Northern California. As a kid, my brother and I experienced the outdoors while staying with my grandparents during summers.

After they passed away, my folks decided it was too difficult to manage a home several hours away and sold my the home they inherited, which was located on the East Shore of Lake Almanor. At the time I didn’t think about it much.

Still young and able to camp and fish in the Almanor area, I didn’t need a house to slow me down. Later on marriage came along and the needs of my wife entered into the picture. She was and is not a camper and needed a house when we visited Almanor – we rented.

Renting is OK, but it’s different from owning and I’ve always preferred to be an owner. The problem? Owning a second home doesn’t create the same return as other real estate investments. Hence, we put off purchasing while investing in other real estate.

On the other hand, a good real estate investment is a good way to retain capital. That conclusion can reasonably be reached with the assumption that you are not forced to sell.

About five years ago Linda and I began to seriously search for a solution. We looked at many homes, but nothing really seemed to fit – until we checked out a house on the Lake Almanor West golf course.

It was a nice home with a good exposure, big trees and a nice view of the open space of the golf course. We made an offer. The asking price was $560,000. We thought the right price was $425,000 based upon our understanding of the market. The offer didn’t fly so we raised our offer to $450,000. Still no interest from the seller.

We let go of it and moved on. We began to remodel our home in Livermore and that ate up our money and energy. We didn’t get serious again until this spring. Ironically the same house came on the market. It had not sold.

We tried again, this time offering $475,000. The seller was still stuck on $560,000, but indications were that $535,000 might work. We passed.

We recently took a week’s vacation and revisited the entire program. This time we had saved up additional funds and had more options. After a few days we found a home I really liked and Linda could live with. It’s in escrow.

We concluded that nothing short of a lake-front home would motivate us to purchase. I had money in the bank that I’d been planning to invest in stocks, but I was having a hard time making that decision. As a real estate guy, stocks were not working for me.

So, our money market funds will be used to purchase a home at Lake Almanor West. It will cost just under a million dollars. The property will rent out for about $3,500 per week during the height of the summer season. Taxes will be about $11,000 per year. Insurance and HOA dues will be about $3,000 per year. Looks like we’ll need to rent it out for about five or six weeks each summer to break even.

We’ll come up with a management plan that, at least in theory, allows us to pay the major expenses and still have use of the property. The home will not require major work and it will probably meet our needs as is.

I’m fired up. Here’s a photo from the street. Not very good, but all I have for now.

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View from the street. The house is about 200 feet from the front property line. Nice setback.

There will be more later. I’ll also post some info  related to escrow. We’re lining up septic, home and termite inspections. Most of the deferred maintenance is related to sun damage. At Almanor’s  4,500 foot elevation, the sun really beats wood up. There will be more later.

I’ll also post some info  related to escrow as things move along. It may be helpful.

 

Today – Buyer’s Remorse

Yesterday’s win is today’s remorse. I awoke at 3:30 AM with a serious case of buyer’s remorse as I began re-thinking everything bad about purchasing a lot in Modoc County.

The biggest issue is the $195 per year payment to the county on behalf of the Last Frontier Healthcare District (LFHD). I’ve read all about it and there is nothing one can do to escape this annual “Special Tax.”

On the other hand, I’m bound and determined to figure out Modoc County Real Estate and there’s only one way to do it – join in. The LFHD may single-handedly be the demise of the current recreational property fiasco in Modoc County. And, that would be a good thing. I think it’s a clear case of unintended consequences.

While laying in bed, I couldn’t stop wondering if there were a reasonable way out of this financial conundrum. The more I thought about it the more I realized my sleep was over.

Out of bed by 5:00 AM, I felt a knot in my stomach. I hate being stupid, but that’s how I felt – and still feel as I write this. However, this is an educational experience and that includes a full understanding of buyer’s remorse.

At least I didn’t pay more. The value of Modoc real estate is taking it in the shorts, not that it was ever a good deal.

 

Tangled Web

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For about two years I’ve been evaluating real estate in Northeastern California. But before I get into that, I need to preface the conversation by saying that I was a real estate agent/broker for 37 years.

During that time I thought I learned a lot about real estate sales. In fact, I did. However, there is an entirely different world of real estate out there. The real estate world in which I operated was legal, ethical and conscientious.

Real estate transactions in Northeastern California are mostly different. The genetic makeup of real estate in Northeastern California, and particularly Modoc County, is infected with corrupt motives. Much of the county is owned by Southern California corporations that operate on a basis not normally seen in California’s real estate industry. And, one of the most prominent owners and sellers of real estate in Modoc County is the county itself.

It appears to me that Modoc County is in the middle of a major conflict of interest.

The properties of which I speak are generally “recreational properties.” Lots range from an acre to a few acres. They were created in mass at a time when land was cheap, laws were lax and oversite was non-existent.

The worst offenders were and still are sub-dividers whose corporations exist only by a continuous chain of “fishing” activities. Lots are mostly void of value because Modoc County has a very limited economic base. The corporations “fish” for inexperienced buyers, who think big brother is watching out for them.

The very worst case scenario is one where the landowner (often Modoc County) offers lots, but not title. This is very common.

The ongoing tax sale in Modoc County is a testimony to the case I am making. Hundreds of lots are for sale and the Modoc County tax collector is offering them at prices three or four times their economic value.

Notice to bidders. If you purchase one of these lots, you may be contributing to the tax sale of 2025.

The lots of which I’m speaking would be more valuable to society if they were all recombined and resold in economically viable units.

What’s going on here? I’m watching.

And, I’m going to purchase a lot. Call it education.

 

 

Tax Sales – Buyer Be Ware

Looking at the possibility of purchasing property at a tax auction. Pretty scary as it doesn’t have the safety net of most real estate purchases. But I’ll probably purchase something at a tax auction this year, just so I can say I’ve done it.

So far I’ve learned a few things. It appears to me that some counties rely heavily on tax auctions to generate revenue and that county administrators take advantage of people who own vacant land in their county and reside elsewhere.

For example, we own a parcel in the boondocks of Alameda county. It’s an almost useless 20-acre parcel with access issues. The Livermore school district passed a parcel tax and now we pay more money to the Livermore schools than we pay in property tax on the parcel. There is no way to avoid the school bond assessment and this parcel will never contribute to any school use.

I have discovered hospital bonds in one county where parcel owners are charged an assessment of about $100 each year. This is an assessment for services from which out of area owners receive no benefit. Parcels I’ve checked out have little or no value. It appears that some people will purchase these lots on pure speculation for about $1,000 on the open market.

In these cases, since the land is vacant and many of the owners live outside the county, the practice of allowing a government agency to recirculate these lots at auction is at  least unethical and designed to trap unwitting buyers. If it’s not illegal, it should be.

Many of the parcels similar to the one above, were created by massive subdivisions that took place during the middle of the 20th Century when speculators divided up large ranches in a real estate frenzy. This took place when subdivision laws like the California Subdivision Map Act were being implemented.

Many of the resulting parcels are useless, but unknowing people continue to purchase them speculating that a market will some day develop.

I’ve found other things going on that I’ve never seen before and so far I’ve not figured them out, but I probably will.

Title insurance is not available to buyers in tax auctions, but one can obtain helpful information from a title insurance company. Or, one can search the records at the county recorders office. Neither of these options is fool proof.

It is amazing to me that county governments are tolerating or facilitating this behavior in the modern world. Buyer be ware.

A Horse Story

Once upon a time in the East Bay, a post-depression, pre-war family lived on five acres east of Livermore.

The son and grandmother lived with the gainfully employed mother and father. On the side the family tended almonds, bee hives and chickens.

A benefit for their teenage son was the ability to own a horse which he rode to Coral Hollow with his buddy whose family owned a ranch at the end of Tesla Road.

When the war came, the son enlisted and grandma passed away. The mother and father decided that they could no longer handle the chores that produced the income that made the small ranch worthwhile.

One issue became a problem. What should they do with the horse? They decided to purchase a 20-acre parcel close to town for $450. There the horse lived out his years, but after he died, the 20–acre parcel was retained.

When the mother and father reached retirement age, they spent summers camping in Plumas County where they set up camp from May to September.

As the years went by, they became cramped in a 19 ft trailer. To solve the problem, they sold the 20-acre parcel. In 1963 they received enough money from the sale proceeds to allow them to afford a lake-front summer home at Lake Almanor.

This was something they never dreamed they would be able to do.

Thank you Mr. horse.

What’s a Duck Club Worth?

The value of a duck club is as subjective as any real estate evaluation on earth.

You never own the ducks.

An appraiser would look at duck club sales and compare the price, annual operating costs, taxes and acreage to come up with a value.

A few days ago I got a call from a duck hunter who was evaluating a duck club offering in the delta. He’d checked out my blog and decided that it would be worth his time to give me a call.

He gave me the salient facts. 1,000 acre club, ten partners, $2,500 per acre price for land under a wetlands reserve easement. 100 acre closed area, 7 days per week shooting, $40 per acre per year reclamation fees and a club house that he didn’t intend to use.

He then asked if I thought it would be a good purchase.

This is where things get dicey. Was he a hard-core duck hunter who appreciated quality time in the marsh? Or, was he a trophy duck-club owner who mainly wanted to impress acquaintances with his duck club address?

I assumed he was the former, not the later and told him that the price sounded OK if he could afford it. He said he could and sounded as if he was ready to move on it.

For sake of discussion, my clarity and your benefit, let me review the purchase. It may be helpful down the road to take a closer look at his purchase.

The price was straight forward – $250,000 for 1/10th share of 1,000 acres.

The fixed annual fees are pretty easy to estimate. Reclamation – $4000. Taxes – $2,500. If he’s borrowing the money, he should figure an annual interest cost of about $5,000 – $7,500 per $100,000 borrowed depending upon his borrowing rate. Most duck club buyers either pay cash for this type of property, or the seller provides financing.

Let’s assume he pays cash. That means he’s out at least $6,500 per year. But that’s not the end of the story. Duck clubs have other costs associated with operations. Insurance for one and that can vary depending upon the owners and the type of ownership entity.

A duck club should have an operating entity that creates an annual budget, pays bills and takes care of business. Somebody will be in charge and that person will probably want to be paid. Usually these fees are not large, but in this case I would estimate that the individual managing this club will want at least $200 per month. The insurance will probably be $1,000 per year. That adds up to another $340 per partner. Add in electricity and we can call it $400 per partner.

Duck clubs need to be maintained. That means they must be mowed, plowed and or sprayed. To plow the club one time around may cost $10 per acre – just a guess. Therefore I would estimate that the annual cost of maintaining the ponds would be about double that or $2,000 per share – including irrigation management, water control maintenance etc.

That puts the annual cost at about $9,000 for each owner. You can add to that a few other costs personal in nature.

The good news is the only time a buyer evaluates the cost of a duck club is when he’s making the decision to purchase. Once you own a club, you will just blindly pay until you either die, go broke, quit hunting or decide to purchase a new club.

It’s easy to divide up the cost of ownership. The tricky part of a duck club purchase is dividing up the hunting. That depends upon the individual member’s allowance of time, flexibility and desire.

A scenario that includes hunting every day tends to create a problem that’s hard to resolve –  competition between owners.

Having a system to give each owner a fair chance to enjoy the benefits of ownership is as critical to the success of a duck club as the availability of water.