Purchasing an investment property in the Grand Valley

Dear Dave,

My wife and I are considering our first residential investment property. We would like your take on what is a good investment opportunity on the Western slope of Colorado? We have looked at small houses, a couple of duplexes and a small multi-family unit. We just want to make sure we are moving in the right direction and don’t do something where we get in over our head. 

We wanted to get your input on what is happening in the market right now and where we might have the best outcome for our investment.

Thanks and take care,

Jon and Kristyn - Grand Junction, CO

---

Jon & Kristyn,

I believe you are wise to be considering a real estate investment property! It is great diversification of your portfolio, whether just getting started or if you have a lengthy financial resume. In my opinion our market is a very good market for income producing properties. We have a high number of renters in our community and the continued growth of Colorado Mesa University means we have a consistent influx of students who need a place to live. We have a very low vacancy rate in Mesa County, somewhere between 1-2% which helps create a great environment for dipping your toes into the rental market. As you can see that we have a good market for finding tenants and also might foresee some rising rent prices because of lower availability.   

“It is also important to consider what type of property you are comfortable with.  Different properties bring different challenges. ”

It is also important to consider what type of property you are comfortable with.  Different properties bring different challenges. The older they are the more maintenance you can expect, but that may be great if you are retired, handy and looking for something to keep you busy. It will also likely cost less to procure.  The newer it is, obviously, the less maintenance it will likely require, but the acquisition costs will be higher. Multi-family presents its own challenges, as you must consider they are typically larger, cost more to maintain (as there are multiple units and more things to go wrong), however having multiple tenants spreads out your risk. If you own a 4 plex and 3 of the 4 are rented, you should still be able to make your payment. If you have a single family home and it is not rented, then you better have a slush fund to make the payment if you don’t own it outright. Having multiple tenants gives you some insulation, but also can increase the headache and work. The bottom line is to narrow down what kind of property you want and what kind of renter that property will attract.

If you get a home just off North Avenue and 19th, you are likely to have students as your prime renter candidates. If you have a single family home in the North area you are more likely to attract families… etc. You also need to consider if you will manage this yourself or hire a property manager? Different strokes for different folks. I would never manage my own properties, however I have friends who would never hire someone to do it for them. I personally favor the hands off approach and see far less nightmare scenarios when a “good” property manager is involved.

This is such a complex decision with many facets to consider, but I would encourage you to start simple, a single unit, to get your feet wet and find out if being a landlord is right for you. If you find you like it, then broaden your horizons on the type of properties you look at in the future and achieve even more diversification in your growing portfolio. Hope all goes well.

Dave Kimbrough
The Kimbrough Team

MORE RESOURCES

Article: The Top 5 Mistakes First-Time Real Estate Investors Make

What happens when a home appraises for below the contract price?

Dave,

We sold our home last year and during the process our appraisal went by without a hitch, actually everything went as well as we could have hoped for. However, recently it was brought up in a discussion between my wife and I—what happens if the appraisal on a home comes back less than what the buyer offered? Are the buyers able to change their offer accordingly or are they contractually obligated to continue through and purchase the home with their original offer? Like I said, the appraisal on our house was smooth as silk, but it just got us curious about what the options would have been if things had not gone so smoothly.

Thank you for taking the time to answer our question!

Sarah and John, Grand Junction

---

Sarah and John,

Congratulations on your smooth transaction last year! It’s always a blessing when all aspects of a sale go smooth and without any significant speed bumps. As I am sure you are aware, speed bumps are just part of the process and a low appraisal can be one of the most significant speed bumps one can encounter on the road to closing!

Low appraisals become more common when a market gets very active and rapidly appreciating prices are hard to substantiate with past sales. It can also be an issue, like it was here in 2011 & 2012 when the large number of foreclosures cloud the data and keep an artificial lid on potentially rising market values. Luckily on the Western Slope we have been seeing very sustainable and verifiable appreciation levels and although we occasionally see low appraisals, it is the exception not the rule. When an appraisal does come in low, there are several options, but all the options generally lead to give and take from both parties involved in the sale.

Unless the buyer waives their right to an appraisal, there is an appraisal provision in every Colorado Contract to buy and sell that provides the buyer an escape clause if the home they have under contract does not appraise at the contracted price. There is no contractual obligation to purchase any property that does not appraise. In fact, Colorado real estate contracts are designed with the intent to protect the consumer. Remember, if the appraisal comes back low, you still have options.

“The first most logical option would be to get a second appraisal, if both parties agree that the first one was, for one reason or another, not as accurate as it could have been.”

The first most logical option would be to get a second appraisal, if both parties agree that the first one was, for one reason or another, not as accurate as it could have been. If the lender will allow a second appraisal, then this is a reasonable choice and both parties can hope that the value comes in at the contracted price.

The next option is to amend the purchase price down to the appraised value. This is not a very popular option for sellers, however very popular with buyers! Funny how it works out that way.  On the flip side, the next option is to keep the agreed upon purchase price and have the buyer make up the difference between the appraised price and purchase price in cash at the time of closing. Funny how this is a very popular option for the seller, however not very popular with buyers. Another option, and by far the most popular, is they meet in the middle. Say the appraisal comes in $6K low, the seller lowers the price $3K and the buyer brings an extra $3K to the closing table to bridge the gap and get the deal to the closing table.

Ultimately a low appraisal generally comes down to how bad the buyer wants to buy and how bad the seller wants to sell and thus the reason that the “meet in the middle” option is the most popular! There are far too many scenarios to go over here, as a low appraisal can have other, more far reaching impacts. More often than not it just takes everyone coming to the conclusion that a win/win is better than a loss! Count your blessings and I hope this gives some simple insight into a complicated and very unwanted situation! 

Dave Kimbrough
The Kimbrough Team

For Sale by Owner: Advice for working with a buyer's agent

Dave,

I’m am going to sell my home by owner this spring and I am willing to cooperate with agents who want to show it to their buyers. One of my friends told me that agents would not show it without offering “agent protection” and I am not exactly sure how that will work or what it means. If I sell my home to a buyer with a realtor, do I still have to pay the typical agent commission? I know I am asking a real estate agent for advice on selling on my own, however I am confident you will shoot me straight. Thanks for your advice.

Jody, Grand Junction

---

Jody,

There is one thing I can guarantee, I will always shoot you straight! I think it is great that you are going to try to sell your home by owner! Selling by owner is not for everyone, however it is an option for many and some are successful. According to the National Association of Realtors, 8% of all home sales were by owner and the success rate for by owner properties is 20%. So the success rate is not high, however you never know till you give it a whirl. So you have decided to go by owner, how can you incorporate real estate agents to increase your success rate?

I am confident what your friend meant by “agent protection” was simply referring to your willingness or lack thereof to cooperate with real estate agents in paying a commission. Let's face it, real estate agents are in the business of selling houses and they generally try to sell the homes that offer to pay them a commission if their buyer ends up purchasing the property. You need to decide what commission you are willing to pay and then let the agents know what that is and agree to offer them some kind of assurance that if their buyer purchases, you will cooperate with an agreed upon commission. If you are willing to cooperate, then offer to sign a commission agreement or proactively provide them with an agent commission form that identifies what percentage or flat fee you are willing to pay and allow them to sign it for their buyer. This will protect the agent and probably substantially increase your chances of getting Realtor cooperation! One way I have seen this successfully done is to deliver fliers to the real estate offices and have curbside fliers that openly advertise your willingness to cooperate with paying a real estate commission.

As far as the amount of commission to be paid, you can negotiate this with each agent individually or just figure what amount you are willing to pay and advertise that rate. More often than not the real estate commission is at or close to 3%, but there is nothing set in stone and it is completely up to you!

Remember, the more you embrace the Realtors, the more cooperation you will get from them.  Trust me, word travels quickly about those for sale by owners that are not cooperative or who are abrasive in their dealings with local agents. Bottom line, remember you generally get back what you give! Best of luck on selling your home by owner and If you are not successful, I know a good agent that would be happy to help you out!

Dave Kimbrough
The Kimbrough Team

Is Radon common in Grand Valley homes?

Dave,

Our question is not as much a question as it is to get your opinion. We recently purchased a new home and during our inspection process we asked our agent about getting a Radon Test and she told us there really was not any radon in the valley and we did not need one. Well, we are from the Midwest where there is Radon, so we insisted. We got a Radon test done and much to ours and our agents surprise there was radon that registered above acceptable levels and thus had a radon remediation system installed prior to closing. Was this a “one in a million” finding or is Radon something you see in Grand Junction.  Really more curious about your thoughts, than anything. 

Thanks for your time,
Ralph & Cheryl, Grand Junction

---

Ralph and Cheryl,

Great question. First let me say that I am not a Radon expert, but I will say from my experience your finding of Radon was not “one in a million” and the presence of Radon in the Valley is more prevalent than most people realize, but by no means does it exist in unsafe levels in every home tested. It is my experience that the majority of homes are safe and do not have an elevated radon level and need no remediation done at all, but overall state and local numbers say there is statistically a 50/50 chance a home will have unsafe levels of Radon. Of course, if you are concerned about Radon, it is still a great idea to have it checked so you can be confident you are not living in an unsafe environment.

“For those who are not familiar with Radon or know what risks it poses, Radon is an odorless, colorless and tasteless gas. Underground Uranium decays into radium and radium’s decay product is radon that escapes from the ground in the form of gas.”

For those who are not familiar with Radon or know what risks it poses, Radon is an odorless, colorless and tasteless gas. Underground Uranium decays into radium and radium’s decay product is radon that escapes from the ground in the form of gas. Radon enters a home through the lowest level in the home that is in contact with open ground, which are typically cracks in foundations, cracks in walls, gaps in suspended floors etc. Once radon has entered into your home it is easily inhaled into the lungs and has been shown to increase the risk of lung cancer. According to the United States EPA, radon is the second most frequent cause of lung cancer and is completely preventable, if remediated properly.

According to a local Radon expert Cory Lindbo at Western Slope Home Inspectors and Radon Service, radonreserve.com, the good news is a radon problem can be completely and permanently resolved for as little as $1500-$2500 and most mitigation jobs can be completed in as little as 1 – 2 days. A radon test generally takes 2 days, but the home needs to be closed down with as little outside air transfer as possible.  This means that you need to close all windows and doors and keep traffic inside and outside to a minimum during the test period. This will allow for a proper reading where you do not get a lot of air transfer from outside. If you cool your home by evaporative cooler a test can be very difficult to do during the summer months. National Radon month is January, as the winter is the easiest time to do a radon test, because most homes have very little air exchange during the winter months.

Radon is no doubt something to be aware of and in most instances you should test for it, but feel confident that if there is an unsafe presence of radon in your home there is no need to panic, the fix is not a bank buster and can be solved quickly and professionally. In this case the solution to radon is as easy as knowing it is there and hiring a professional to again make your home environment safe.

Dave Kimbrough
The Kimbrough Team