Archive for June, 2010
Comments Off on Minneapolis Duplex Market Gets Skinny
If the Twin Cities housing market were on a diet, it would be featured in a Jenny Craig ad.
For the week ending June 19, 645 single family home purchase agreements were signed. That’s down 44.2 percent from the same week one year ago.
New listings kept eating fruits and vegetables too; down 8.4 percent.
Duplexes and the small multi family market also dropped a pant size, shrinking 23.5 percent year-over-year.
The good news is traditional sellers continued to hold their ground, contributing 42.3 percent of the week’s pended sales compared to just 20.68 percent for the week last year. This was true of new listings as well, with bank mediated properties weighing in at 51 percent this year, down from last year’s 63.8 percent.
The week’s off market price must have cheated with a couple of cookies, because it finished at $129,748. This is up from last year’s $114,580, but then again, we are comparing pended prices to closed transaction prices.
Let’s hope this week the market cheats with a Big Mac.
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Many duplex and single family home owners may be sitting on a ticking bomb and not even be aware of it.
The TNT beneath them is their financing.
An estimated 1.3 million borrowers took out $389 billion in mortgages between 2004 – 2005. Eighty-eight percent of all option ARMs originated between 2004-2007.
What’s an option ARM? It was a type of 30-year mortgage that initially gave borrowers four monthly payment options: a specificed minimum, an interest-only payment, one that was reflected a 15-year amortization or one that was in keeping with a 30-year payment amortization.
Whenever the buyer made the specified minimum payment, it was typically less than the amount of interest that was accruing. The difference between the minimum and the interest was tacked on to the end of the loan, meaning the loan grew in size as a result.
These payment options were typically available only for the first two, three or five years of the mortgage.
According to Credit Suisse, many of these loans are scheduled to reset between now and 2012.
In fact, in a single month in 2011, $18 billion in option arms and $27 billion in subprime mortgages will reset.
Read the rest of this entry »
Comments Off on 8 Reasons To Sell Your Duplex Short
Let’s face it, there were a lot of duplexes sold during the real estate boom.
Today, most of those properties aren’t worth anywhere near the prices they sold for.
And many of the owner occupants and investors who bought them have fallen behind on their payments, finding themselves facing foreclosure.
Some owners resign themselves to the inevitable, vowing to hang on to the duplex until the bank changes the locks.
Doing so will destroy their credit for years and, in some cases, may even endanger their careers.
And while a short sale can be a drawn out, exhausting process, it doesn’t have nearly the long term ramifications that a foreclosure does.
If you’re behind on your mortgage and haven’t been able to obtain a loan modification from your lender, here are 8 reasons a short sale may be a better decision for you than a foreclosure:
- Credit Score – A foreclosure may reduce your credit score as much as 250 to 300 points for over 3 years. In a short sale, only your late payments on a mortgage will appear on your credit report. Once the property is sold, it will be reported as “paid as agreed” or “settled”. This may impact your credit score as little as 50 points, and appear on your credit report for 18 months or less.
- Credit History- a foreclosure will remain on your credit report for 10 years or more. There isn’t a specific reporting item for “short sale”. In fact, in most cases, the loan is usually reported as “paid in full”.
- Future Primary Residence Loan – If you live in your duplex and lose it to foreclosure, you will not be able to get a Fannie Mae backed mortgage (which is most of them) for 5 years. If you successfully sell via a short sale, that waiting period is shortened to 2 years.
- Future Fannie Mae Loan for An Investment Property – an investor who loses a duplex to foreclosure will not be elligible to obtain a Fannie Mae backed investment mortgage for 7 years. An investor who successfully sells a duplex via a short sale may get a Fannie Mae backed loan after just 2 years.
- Future Loan With Mortgage Company – On any future loan application, a prospective borrower will have to answer “yes” to the question whether he or she has had a property foreclosed upon in the last 7 years. There are no questions on loan applications regarding short sales. If a owner occupant duplex owner is current before executing a short sale, she may apply for an FHA loan immediately. If she’s late with payments, she won’t be eligible for 3 years.
- Security Clearance – A foreclosure may result in security clearance revocation and, ultimately, loss of employment for members of the military, police officers, or any career that requires security clearance. A short sale, on the other hand, does not impact most security clearances, as they are not explicitly reported on a credit report.
- Current Employment – Many employers have the right to regularly check credit. A foreclosure may result in termination or reassignment. As short sales do not appear on a credit report, they do not impact employment in the same way.
- Future Employment – For the same reasons that affect current employment, future job opportunities may be lost as a result of foreclosure.
Comments Off on How A Duplex Short Sale Can Force You To Pay Taxes On Your Vacation
Remember when duplexes appreciated with such regularity that you could actually take out a Home Equity Line of Credit (HELOC) or refinance and pull out the extra equity?
For example, if you bought a duplex for $200,000 and it increased in value by $50,000, you could refinance into a loan in the $250,000 range.
For some, it was a great way to pay off credit card debt, buy additional property or finance a vacation.
Times have changed.
Now, property values have plunged. Many sellers are lucky to have equity at all. Some even discover they owe more on the duplex than it’s worth.
And for those who have to sell, this results in a short sale. The property may now sell for less than the owner even paid for it.
Worse yet, that money that came out of the equity when it was worth more? Taxable. Because it was a gain.
Odds are, the duplex owner didn’t pay taxes on it at the time they used it. So, if the owner took $50,000 out of the equity line in the above scenario, that money represented a gain over the original purchase price. And the seller would owe capital gains tax on it; even if the duplex only sold for $180.000.
See equity and taxable gain don’t have anything in common.
Is there a solution? Possibly.
While many sellers help defer capital gains tax by using a 1031 Exchange, or find relief if she was an owner occupant of the duplex, it would seem there wouldn’t be a solution for an investor.
Enter the Zero Equity 1031 Exchange. Basically, you exchange the gain; even though there’s no cash on hand.
I imagine it would take some talent to find a property to exchange into. However, this does at least give investors a potential tax deferrment.
Comments Off on Minneapolis/St Paul Duplex Markets Open To Interpretation
Sometimes the Minneapolis and St Paul duplex market looks like a Jackson Pollock painting; all-over the place.
In the small multi-family property market for the week ending June 12, 40 percent fewer duplex owners received and accepted purchase agreements than they did last year.
Of this group, 52.38 percent of the sellers did not need to involve their lender in the decision to sell their property. This is up significantly from the 20 percent traditional sellers whose properties pended during the same week last year.
The average price a duplex left the market at during the second week of June was $165,152; representing a significant gain over last year’s $126,088.
Traditional sellers also made a strong showing in the week’s inventory that was new to the market; contributing a whopping 61.4 percent of the listings. Last year, this figure was a mere 41.8 percent.
There was all-over news in the single family home market as well. The 674 signed purchase agreements were up from the 527 during the week before. This is great news unless it’s compared with the 1,210 listings that pended during the same week in 2009.
While trailing last year’s number by 12.2 percent, the number of newly listed single family homes has begun to swell. To date, there are 1.1 percent more listings actively on the market than there were one year ago.
Comments Off on Underwater Minneapolis Duplex May Be Taxing
A recent study by the research firm CoreLogic found the number of underwater homeowners (those whose homes are worth less than they owe on the mortgage) now stands at 11.3 million.
That’s about one-fourth of all homeowners with mortgages.
Another 2.3 million have less than 5 percent equity in their properties.
In other words, combine the two and 29 percent of all homeowners with mortgages are underwater.
The report said nothing about duplex and small multi-family property owners.
So what does a single family homeowner, or, for that matter, a duplex owner, do if she absolutely has to sell the property anyway?
A short sale.
For a homeowner, this involves listing the property and getting the mortgage holder(s) to agree to take less than they’re owed.
For example, if the bank is owed $100,000 on the mortage, and proceeds of the sale only net $75,000, they would have to agree to forgive the difference.
Thanks to The Mortage Forgiveness Debt Relief Act, homeowners who short sell or are foreclosed upon may not be taxed for the amount of indebtedness that was forgiven. If the mortgage was a recourse loan, the lender may come after the owner to collect the difference. If it was a non-recourse loan, which is attached only to the property used as collateral, they may not.
A duplex owner, however, may face different challenges.
If the duplex was not the seller’s principle residence, she will have to pay taxes on the short sale deficiency that was forgiven.
See, the debt relief act doesn’t cover rental or business properties, car loans, vacation homes or credit card debts.
Before you struggle to the surface for air, know that there are exceptions. The sale may not be a taxable event if one of the following is true:
- The duplex was your principal residence.
- Bankruptcy. Debts cancelled during bankruptcy are not considered taxable.
- Insolvency. If your total liabilities are greater than the value of all of your assets, you are considered insolvent. In this case, the debt may or may not be cancelled.
If you are underwater on your duplex, don’t lose hope. There are solutions, and you may find through a conversation with a tax professional and qualified Realtor, that things aren’t as grim as they seem.
And even if you end up owing the IRS money, there’s always the possibility of a Zero Equity 1031 Exchange, which I’ll talk about on Thursday.
Comments Off on Why Selling A Duplex Is Like Owning A Truck
I have a high mileage Ford F-250 pickup that’s in the shop for the third time this year. And I have to confess: I have a love/hate relationship with it.
On the one hand, when it’s running well, it helps me move heavy things, haul lumber home from Home Depot or pull lesser cars out of snow banks in the winter.
On the other, due to the 300,000 plus miles on the odometer, it breaks down a lot. Especially as of late.
So I’ve been thinking about selling it. Kelly’s Blue Book says it’s worth about $11-12,000 in it’s present condition. But I was thinking if I advertised it enough, I could get $30,000 for it.
After all, I’ve got at least that much into it.
Are you laughing?
You should be.
Believe it or not, as flawed as my truck logic may be, I hear it all the time from duplex sellers.
They tell me all about the repairs and improvements they’ve made to the property. They tell me about all its wonderful qualities. And then, inevitably, they tell me why they’re selling it.
More often than not, it’s due to a desire to change their lifestyle. That change may involve simplifying or streamlining their lives. Or, it may involve moving up to a bigger property.
No matter their motives, the fact is this: no buyer is going to pay a price for a property that’s based on what the seller “has into it”.
Just like my truck’s value, a buyer and her agent have determined value based on all the other properties they’ve seen on the market and those that have sold recently.
That’s also how the listing agent arrives at a suggested price.
In other words, I could spend a half a million dollars advertising my truck. And at the end of an elaborate ad campaign, a buyer and Kelly’s would still say the truck is worth $11,000. No one would be willing to pay more for it than the truck next door simply because it had its own web site.
True, advertising and marketing help drive buyers to properties.
But at the end of the day, it’s the market that tells you what it’s truly worth.
Just like my truck.
Comments Off on Why I’m Falling For Trulia
I fell in love today.
While I’m generally not a fan of web sites like Zillow and Trulia, largely because much of inaccuracies in property valuations, I may be coming around on the latter.
All because of the addition of a cool little Rent vs. Buy widget in the sidebar of their recently added Rental section.
To make the decision whether it’s smarter to buy a specific property or rent, the calculator asks for the property price, the size of the down payment, the amount of monthly rent you’re paying, and the number of years you’re planning on comparing.
Let’s say we found a $280,000 duplex near one of the lakes with two bedrooms in each unit. Renting one of the units costs $1100/month.
Over 30 years, Trulia estimates simply being a tenant in the place would cost you $396,000.
On the other hand, buying it would cost $586,217 in mortgage payments. However, Trulia also takes into account things like tax savings, opportunity cost and home appreciation.
When their widget calculates all these factors, it estimates buying that duplex would actually save you approximately $18,625 over 30 years.
Of course, their widget was structured for a single family home.
It doesn’t factor all the rent you would collect. Even if it was just $1100/month over 30 years, with a 5 percent vacancy rate, that would equal an additional $376,200 in income/savings. (Inflation would make that figure greater still.)
It also doesn’t consider that if you rent, that money is your landlord’s. Meanwhile, if you buy, you can eventually sell the property and walk away with the equity.
I wonder if anyone’s ever written a love song for a Widget…
Comments Off on Minneapolis Duplex Sales A Fable
Remember the Aesop’s fable about the tortoise and the hare?
You know the one; where the rabbit challenges all the other animals in the forest to a race, and the only one to take him up on it is the tortoise.
Of course the hare finds this laughable and gets so far ahead he decides to stop and take a nap. The tortoise, meanwhile, just keeps plodding along and ends up winning the race.
Well, let’s hope the Minneapolis and St Paul duplex market is like the tortoise because the numbers for the week ending June 5 (which include much of Memorial Day weekend) sure are slow.
According to MAAR, pending single family home sales wer 57 percent behind that seen one year ago. Of course, Memorial Day fell a week earlier in 2009, so that may have had some effect.
Perhaps a more accurate commentary is the total number of purchase agreements signed for the week dropped for the fifth week in a row.
The single family home market has also seen a gradual year-over-year market share increase of lender-mediated inventory. This year, that market comprises 43.3 percent of the inventory on the MLS, compared to 37.8 percent last year.
The week saw equal lumbering along in the duplex and small multi-family market. Pended sales were down week-over-week by what we hope is a holiday-influenced 52.9 percent. The average off market price for these duplexes was $115,200; a number that significantly trails the $129,456 seen for the same week in 2009.
Of the inventory that pended for the week, just 12.5 percent was being sold by a traditional seller. This is up slightly from the 11.76 percent mark a year earlier.
Traditional sellers, did, however, continue to hold their own in new inventory offerings; with 50 percent of the listings. They contributed 47.44 percent one year ago.
If Aesop was right and slow and steady do win the race, then we’ve got some hope. After all, we’ve got the slow part of the equation down. Let’s hope next week brings steady.
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When vacancy rates are up, as they have been in the Twin Cities in recent months, it’s sometimes difficult to remember the impact lowering rent in order to stay occuppied can have.
While I have always believed it’s better to have a unit full at a slightly lower rent than it is to hold out for top market value, waiting for months on end for that tenant to appear, I was reminded over the weekend that this practice can be taken to an extreme.
A client was interested in a property just two blocks from Lake Harriet. The duplex had all the vintage charm and curb appeal necessary to rent quickly and easily, even in the most difficult of markets.
And yet, the tenant-occupied unit was leased at a rate nearly 26 percent, or $350 below what the going market rent is for the area, even in a depressed rental market.
What’s the big deal? Well, $350 x 12 months a year = $4200 in lost revenue a year. In a neighborhood where recently sold properties averaged an off market gross rent multiplier that was 12-13 times the amount of rental revenue, this “discount” devalued the seller’s property by more than $50,000.
To my FHA-approved buyers, who can use 75 percent of the rental income to help them qualify to buy the property, it also meant $3100 in lost qualifying income.
I’m sure the sellers were well-intentioned in offering their tenants a terrific deal. And, their building is occupied. In this instance, however, a little bit of kindness may cost them a lot.