Archive for June, 2008
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There are many differences between the purchase or sale of an owner-occupied single family home and a multi-family property. One of the most important is the time of the month that you close the deal.
When you purchase your own home, it’s a good idea to try to schedule a closing date toward the end of the month. That way, you save on the amount of interest you pay.
However, when you buy an income property, you want to do just the opposite. Why?
Well, rent is collected at the first of the month. If the purchase agreement for the property is written properly, the seller is responsible for collecting the rent that month, then assigning the pro-rated balance to you at closing.
Example? If rent is $300 a month per unit, and there are four occupied units, he or she would collect $1200. If there are 30 days in the month, and you close on the fifth day, you would be entitled to 25 days of rent or $1000.
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We’ve all read the headlines about real estate scams in the recent boom years resulting in many of the foreclosures in the marketplace today.
And, we’ve all heard about mortgage fraud.
The extent of the problem has become so vast that, according to Bloomberg News, the FBI has ordered many field offices to stop investigating other financial crimes so agents can spend their energies on the sub prime mortgage crisis.
The FBI considers 12 markets rife with fraud: Arizona, California, Florida, Georgia, Illinois, Indiana, Michigan, Minnesota, Nevada, New York, and Ohio.
We’ve all heard the big stories about this; how the woman who earned $24,000 got a stated income loan where she qualified for a house she could never afford. How buyers and appraisers artificially inflated prices to receive kickbacks at closing, then never made a payment…
But I have to say, sometimes even something that seems like an innocent and logical solution to a problem is considered mortgage fraud.
What do I mean?
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One of the things I cannot emphasize enough about today’s foreclosure-laden real estate market is the inordinate amount of patience it requires. In fact, the only metaphor I can come up with is it’s like a really long day out on the lake in the rain, when the fish are playing with the bait, but you can’t seem to land one.
I recently had a first time home buyer submit an offer on a foreclosed property within three days of it going on the market. To the bank’s credit, they got back to my buyer with a counter two days later, which is roughly equivalent to the speed of light in foreclosure land. My client accepted every facet of their counter, except one.
At his agent’s insistence (ah-hem), he held out for the seller to purchase a home warranty for the property. After all, nobody really knew anything about this house. None of the bank’s employees had lived there and the homeowner who lost the property was long gone. A warranty was a great way for my buyer to be covered in the event of any surprises.
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The weekly MAAR activity report came out and there appears to be a bit of good news in the single family and multi-family home markets.
New listings of single family homes continued to drop, being 23 percent behind the same week in 2007. Meanwhile, pending sales increased 4.9 percent over last year; a number that represents the biggest year-over-year increase in 117 weeks (29.25 months!) This is only the third increase in that time. The second happened just two weeks ago.
Meanwhile, the multi-family market continued along at a healthy clip. Sales of 2-4 unit properties were up 182.4 percent over the same week last year. Of these sales, 84 percent were for properties in a short sale or foreclosure situation.
New listings in the multi-family category decreased by 22.2 percent, meaning, for now anyway, supply has begun to decrease.
It will be interesting to see whether Freddie Mac’s August lending restrictions impact this market.
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If you’re planning on loading up on 1-4 unit investment properties during the down market, you’d better do it now.
In May, Freddie Mac made changes in its lending guidelines. As of August 1, 2008, a borrower may no longer have more than four financed 1-4 unit properties, including the one being purchased. What’s more, in order to refinance, the borrower must have owned the property for at least six months prior to getting a new loan.
Present Freddie Mac guidelines allow an investor to have up to 10 financed properties.
Until now, neither Freddie Mac nor Fannie Mae required a loan to be seasoned. This change will likely have the greatest impact on rehabbers and others intent on purchasing the property with the intention of refinancing to pull cash out.
The announcement of this change may help explain the recent run on properties priced under $100,000.
This will also effect owners who hold title as an LLC. If you own your property as an LLC, but need to qualify for a loan as an individual, you’re going to need to hold title as an individual for at least six months prior to a refinance. I know, I know. That appears to contradict what I said yesterday. You’re going to have increased liability exposure during this time frame; which you may want to address via an umbrella insurance policy.
So just get a loan from a lender who doesn’t resell conforming loans to Freddie Mac or Fannie Mae, right? Ha ha. That requirement eliminates almost all of them. Freddie Mac and Fannie Mae are privately capitalized, government sponsored entities that purchase the majority of conforming loans. They then repackage these loans and sell them as mortgage-backed securities to investors. This helps replenish the money supply of available money for mortgages.
Commercial loans will not be effected by this.
As the money supply grows ever tighter, I see the rebirth of the contract for deed on the horizon…
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One of the concerns multi-family property investors often have is how to protect themselves in the event a tenant suffers an injury on one of their properties. Namely, how can he or she protect their real estate portfolio?
A relatively easy way to do this is to form a Limited Liability Company or LLC, and either take title or, via a quit claim deed, change the ownership of the property to the LLC.
An LLC is often suitable for single owner or smaller companies. It is a hybrid between a partnership and a corporation, except that it is often more flexible. One of the advantages of an LLC, is the owners have limited liability for the actions and debts of the company.
The process of establishing an LLC is relatively easy and inexpensive. It is created by filing the Articles of Organization with the Secretary of State, for which the state charges a filing fee. This is something you can do yourself, or if you’d rather, you can enlist the help of a real estate attorney.
If you create a unique LLC for each property in your portfolio, then each is owned by a separate company. Each should have its own checking account and bookkeeping. This helps establish a record of it truly being a separate entity.
That way, in the event someone is injured on one property, and they are successful in litigation, the only property in play is the one owned by that LLC.
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I had a unique experience the other day while showing properties in one of my favorite “secret” neighborhoods. Well, I don’t know if it’s a secret exactly, but I do think it’s under-appreciated: the Riverview/Cherokee area of St Paul.
The neighborhood is a quiet little strip across the river from downtown. It has many of the amenities people look for in other, more well-known areas, including walking/biking trails along the river, parks, big old trees and most relevant to this blog, a beautiful and diverse selection of early 20th century architecture (woodwork!) . The prices, however, tend to be comparatively reasonable.
I was first introduced to this area years ago by a client. Since then, I have helped move a lot of first time home and duplex buyers to the area.
My client and I looked at two properties, exactly next door to one other. From the outside, one appeared to have been built late in the Victorian era. The other looked more like a Craftsman. Both had very good cash flows and long-term tenants with solid rents.
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People always ask me to call if I find a good deal on a property.
During the peak of the market (which was the valley for investors who stopped to a the numbers), they’d hear from me once every 4-6 months. And, that property was usually gone within a day.
Now it seems I get to contact people once every couple of weeks. And the property I call about is usually gone in a day or, every now and then, a week.
I found one this morning, with a huge positive cash flow. And I sent it to the people working with me.
Contrary to popular belief, Realtors don’t always save the “best deals” for themselves. Especially now. I do, however, save them for the people who have commited to working only with me by signing a buyer’s exclusive representation agreement.
What’s that? Well, in the simplest terms, an exclusive representation agreement states that you’ll work only with me in the process of locating and purchasing a property. It runs a specific length of time and can be cancelled, in writing.
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The Minneapolis Area Association of Realtors (MAAR) just released it’s weekly activity report for the week ending May 24. For the second straight week, pending sales are relatively flat; down just 1.4 percent from the same week last year. Over the same time period, new listings declined 6.4%. The total listing supply declined too, which is an oddity for the spring housing market. In other words, it kind of looks like things might be stabilizing.
Of course, MAAR doesn’t keep track of the same kind of data for duplexes. So, we’re left with me and my abacus.
In the week ending May 24,68 new duplex listings came on the market in the Twin Cities metro area. This represents an increase of 179% over the same period last year. That would be disastrous were it not for the fact that duplex sales for that same week are up 46% over last years mark. Of those, a full 87% were short sale or foreclosed properties.
I know, Realtors saxy the market is picking up all the time. I don’t compile the statistics, but I do know that in the last week I’ve had clients who wanted to write offers on two different properties. Both were either selling in multiple offers or already had accepted purchase agreements on them. These were foreclosed buildings in great locations that required a little bit of cosmetic repair. However, both also had positive cash flows of several thousand dollars a year. That’s something investors haven’t seen in this market for years.
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You may have heard of a 1031 Exchange. Sometimes it’s called a Starker or a Like Kind Exchange. And, you may also have heard a lot of things about it that aren’t true.
Let me explain what it is as simply as I can. Pretend you purchased an income property in 2000 for $100,000. Even in today’s market, it’s now worth $175,000, and you have a full price offer. After the expenses of selling it and the cost of improving it over the last eight years, you are set to realize a profit of $50,000. If you choose to pocket this money at closing, you will pay capital gains taxes on it.
But wait, there’s more. Remember all of that wonderful depreciation that helped so much on your taxes? If you’re going to cash out, the government would like it back (called depreciation recapture). Unless…instead of pocketing the money, you choose to reinvest. This can help you avoid not only the capital gains tax, but the depreciation recapture as well.
A 1031 Exchange allows you, at closing, to assign the proceeds of the sale to someone called a qualified intermediary. For a small fee, this company or entity holds the money until you pick out a replacement property. When you close on that property, you tell the intermediary to send your $50,000 to the closing as your down payment.
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