Archive for the 'Financing' Category

Comments Off on What If Everyone But The Bank Thinks The Duplex Price Is Right?

Loft View IIThis morning I had a client contact me about buying a duplex I’d shown him years ago, that never sold.

I immediately knew which property he was referencing. After all, it was one of those rare duplexes that broke the barriers of what a rental property could and should be, and entered the realm of something you’d see in Dwell magazine.

With historically low interest rates helping make the property more affordable, my client was suddenly willing to pay the amount the duplex owner had wanted to sell it at three years ago. Low interest rates mean lower payments, which suddenly means the property will now cash flow.

In the process of tracking down the seller, I realized there was one problem. There hasn’t been a single duplex in that area that sold for anywhere near what this property can and will sell for.

And without comparable sold properties, we’re going to have trouble getting an appraisal to value the property as highly as we do.

Without an appraisal substantiating the value of the duplex, the bank won’t give the buyer a loan.

So what can we do about that?

While an appraiser is hired by the lender to render an independent opinion of value, most are open to receiving information from the listing agent that substantiates the value of a property.

For example, I was able recently to tell an appraiser how a comp for a duplex I was selling had been decorated in early old lady, had a broken deck and no air conditioning. Meanwhile, the property he was providing a valuation of not only had central air, but was fully updated and even had granite counter tops.

The listing agent may also be able to justify price to an appraiser by comparing the gross annual rent of one income property to another. For example, if the duplex in question has much larger rent than most of the income properties in the neighborhood, it may warrant a higher price.

In the case of the exceptional duplex, the Realtor may also be able to talk with the appraiser about how truly unique it is; showing him or her interior pictures of comparable properties, and pointing out the differences in each.

Unfortunately, if the appraiser is unwilling to bend, there are only three options left: the seller can lower his price to match the appraisal, the buyer can come up with the cash to bridge the gap between appraised value and purchase price, or the seller may choose to sell the property on a contract for deed.

Unfortunately, until prices improve, those are our options.

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SocksI wish duplex loans were like socks.

Then there would be a “one size fits all” answer to the question, “How much money do I need to put down to buy a duplex?”

The trouble is, there isn’t a universal answer. There’s actually a different answer for almost every buyer- but before I delve too far into metaphorically custom sizes, let’s start with the basics.

Broadly speaking, if you have great credit, a good job, and some money saved, the minimum down payment for a duplex is:

  • 3.5 percent – If you are an owner occupant using FHA financing. You may only have one FHA loan at a time.
  • 20 percent – If you are an owner occupant or investor with good credit and very little debt.
  • 25 percent – If you are an investor. You must also have in reserves an amount equal to six months of payments, interest, taxes and insurance for the property. This does not have to be liquid, but can be in a retirement account.

Of course, these standards may change if you have higher debt burdens or a lower credit score. The way the bank sees it, the less perfect your credit, the higher risk you are. It isn’t that they won’t lend you money; they just want you to have a higher down payment.

Fair warning. There are many loan officers will tell you there are loans available if you are an owner occupant for as little as five percent down. If someone says this to you, be sure to make it clear to them that you are buying a multifamily property, not a single family home.

The only way to find out for certain what kind of down payment is right for you is to talk to a loan officer who has experience with duplexes, triplexes and four unit properties.

If you need a recommendation, please call. I have several qualified, reliable loan officers who would give you the answer that’s right for you.

Why Using Rental Income To Buy A Duplex Takes Experience

said on June 20th, 2012 categorized under: Financing

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resumeMany first time duplex investors believe that one of the best things about buying a duplex is their ability to use 75 percent of the income from the rental units as their own in order to qualify for the loan used to buy the property.

While this was certainly true during the real estate boom years, it hasn’t been the case for the last couple of years.

Fannie Mae and Freddie Mac, are two government sponsored entities that essentially buy loans from banks so they can then have money on hand to continue to lend.

And, when the market crashed, they decided they didn’t want to buy any loans where the borrower had used the rental income to qualify, unless that person already had two years of experience as a property manager.

Well, less experienced duplex buyers got a little good news this week, as Fannie Mae announced it was easing this restriction. Rather than requiring two years of experience, they will now only be asking for one.

While this doesn’t help first time duplex investors, it should free up some money for others.

Of course, local lenders may always decide whether or not they want to abide by Fannie and Freddie’s policies. By en large, many have favored more conservative approaches.

You’ll have to speak with your local loan officer to find out.

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minneapolis duplex sales go upWith the headlines increasingly filled with good news about an improving economy, it would be easy to prematurely celebrate the impending return of higher duplex values.

However, before we all start thinking happy days are here again, we need to keep two things in mind…

Interest rates impact value.

When the economy improves, interest rates tend to rise; just as they did this week.

And for every 1 percent increase in rates, a prospective duplex buyer can generally qualify for $10,000 less of a loan.

Yes, rents will increase as more people start living on their own once again.  And when rents get too high, people with good credit start looking for homes.

But the real estate boom of 2003-2006 happened when people with bad credit were able to qualify for loans.

I’m no economist, but I can’t imagine the banks are going to be willing to lend to those folks any time soon. And demand and supply for anything is what determines its value.

When it comes to supply,  there’s the small matter of all that shadow inventory

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hamp-logoUntil now, it’s been difficult for upside down duplex investors to get the government-backed loan modifications available to owned-occupied duplexes and single family homes.

In late January, however, the Obama administration announced an expansion of the HAMP program to allow investors to qualify.

According to a report in Bloomberg News, Timothy Massad, the Treasury’s assistant secretary for financial security said starting in May, landlords can use the Home Affordable Modification Program (HAMP)  for up to four loan workouts, as long as they rent out each property or have plans to fill them.

The federally-subsidized program pays banks to cut interest rates, lengthen the terms or forgive some of the mortgage principal.

The theory behind the change in policy is keeping current owners in place prevents tenants from being evicted. Massad said, “Vacant properties are a problem no matter how they became vacant.”

Almost one in every four home purchases in January were investment or vacation properties.

It is estimated that about 700,000 landlords will be eligible to modify their mortgages.

Why A Bad FHA Duplex Appraisal Is Like Being Dumped

said on January 5th, 2012 categorized under: Financing

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prince duplex buyerIf you’ve ever been broken up with by someone you love, you know the heartache afterward can last a long time; sometimes, it even long after you think you’re healed.

A bad FHA appraisal is kind of like that. Now, when I saw “bad”, I don’t mean the appraiser was abusive, or cheated on you, or anything like that.

What I mean is he didn’t think your duplex was worth what you and the buyer thought it was.

Let’s say, for example, you agreed to sell it for $225,000, but the appraiser said it was only worth $200,000. And the buyer, who intended to live in your duplex, doesn’t want to part with her cash

So the bank won’t lend the buyer any more than $200,000, less whatever down payment she needs for the loan.

This leaves duplex buyers with three options: coming up with the difference out of their own pockets, asking you for a price reduction to match the value determined by the appraiser, or walking away altogether.

Now, in my experience, most buyers aren’t willing to pay more than the place is worth.

So what if you truly believe your duplex is worth what you’re asking for it and refuse to alter your price?

Odds are, the buyer is going to fall out of love and break up with your duplex; leaving you to find another buyer.

Perhaps you’re thinking, “Well, I can do better anyway.”

And, well, maybe you can.

But here’s the deal. Even if Prince Buyer rides up two months later on his perfect white horse and says he loves your duplex so much he’s willing to pay you twice what you’re asking (provided he can get an FHA loan for it, of course), the bank won’t let him.

Because sooner or later, his lender is going to find out about your broken hearted bad appraisal.

FHA appraisals stick with a duplex for six months, regardless of who buys the property. So, the minute the new buyer goes to his bank for the money, his banker will refuse to give him a loan.

It’s a dead giveaway.  Kind of like crying over your ex on a first date.

And unfortunately, the only way to fix either a bad FHA duplex appraisal or a broken heart is time.

Comments Off on The Pros And Cons of Buying A Duplex On A Contract For Deed

duplex contract for deedLet’s face it. Many of us would love to buy a duplex.

That is, if we could get a loan for one.

Tightened lending standards, however, mean a lot of us can’t qualify for a bank loan.

And that’s why we’ve begun to see the re-emergence of the contract-for-deed.

A contract for deed or CD, which is also known as a land contract, carrying a note, or owner financing, is a duplex sale where the present duplex owner acts like the bank for the buyer.

While I wrote about this a while back, it certainly is worth revisiting.

So what are the advantages of buying a duplex using seller financing?

  1. There are no loan origination fees.
  2. The sale can close quickly.
  3. There are no limits to the number of duplexes you can buy this way.
  4. Owner financing doesn’t show up on your credit report.
  5. The seller may be willing to accept an offer from a buyer with less than perfect credit.
  6. The seller may accept a higher down payment.

Of course, there are disadvantages to buying using owner financing as well, including: Read the rest of this entry »

How Do You Sell A Duplex At 18 Percent?

said on December 1st, 2011 categorized under: Financing

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Duplex Mortgage RatesIf you’ve been paying attention at all to duplex mortgage interest rates, you know that they are historically low.

We’ve all seen and heard the ads for rates well below 5 percent interest for so long now it seems preposterous to think there ever could be such a thing as double digit, let alone 18, 19 or even 20 percent interest.

And yet, it’s happened.

If you’re considering buying a duplex, you might think, “Big deal, I’ll already have a low interest rate”, right?

But what if you want to sell?

After all, the higher the interest rate, the less someone can afford to pay for a duplex.

Well, if you happen to have financed your duplex using an FHA loan, you might actually find yourself in a good position. All FHA loans are assumable.

In other words, even though the going interest rate might be 18 percent, you could allow your duplex buyer to assume yours at the interest rate you’re at now.

Of course, there are some hurdles the buyer will have to jump first, starting with being able to qualify for a loan.

And, if you have the good fortune of selling a duplex for more than you paid for it, the buyer will have to have a big enough down payment to cover the difference between what you owe on the property and the purchase price.

Nonetheless, if ten years from now interest rates are at 18 percent, an FHA loan might make all the difference in selling your duplex!

FHA Says Minneapolis Duplex Buyers Can Spend More

said on November 28th, 2011 categorized under: Financing

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fha duplex limits increaseYou may recall that back in October, the limits for the amount of money you could finance using an FHA loan to buy a Minneapolis duplex were reduced.

The temporary increases were meant as an incentive for prospective duplex buyers to jump into the market, using FHA’s low down payment requirement of 3.5 percent as an opportunity they wouldn’t otherwise have.

In October, that loan limit dropped for a Minneapolis duplex from $467,250 to $407,800.

What this meant was if you purchased a duplex for more than $422,073 in Hennepin, Ramsey, Dakota, Washington, Anoka, Carver or Scott counties, and planned on using FHA to finance that purchase, you would have to come up with a down payment big enough to cover the difference between a loan amount of $407,800 and the purchase price.

Last week, however, Congress changed their mind, reinstating the higher temporary loan limits. Now, if you purchase a duplex, say, in southwest Minneapolis for more than $483,604, using FHA financing, then you would have to come up with the difference for a down payment.

Otherwise, you can just put 3.5 percent down.

For a triplex, that limit is $564,800, and a four unit loan is limited to $701,900.

It’s important to note that these limits vary by county and state. For example, Goodhue County’s FHA duplex loan limit is $347,000, while many counties in southern California, for example, have a duplex loan limit of $934,200.

These changes happened so recently that HUD has yet to update its web site. However, once they do, you can find FHA loan limits for your area by clicking here.

5 Factors That Impact Your Ability To Buy A Duplex

said on October 5th, 2011 categorized under: Financing

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Good vs Bad Credit - how to buy a duplexWe’ve all heard how important your credit score is when buying a duplex.

After all, the way the bank sees it, the higher your score, the more likely you are to pay off the loan.

In other words, you’re low risk. And that, to them, is worth rewarding with a lower interest rate.

So how do they come up with your credit score anyway?

According to Waterstone Mortgage, the credit bureaus consider five factors. In order of importance they are:

  1. Payment History – 35% Impact. Late payments, delinquencies and charge offs indicate that you’re a risk to a lender. Especially if they’ve occurred in the last two years.
  2. Outstanding Credit Card Balances – 30% Impact. The important component here is the ratio between your outstanding balance and the amount of credit you have available on your account. While the ideal scenario includes credit balances at or near zero, you should at least owe less than 30 percent of the available credit; especially if you’re planning on buying a duplex in the next few months.
  3. Credit History – 15% Impact. This component considers the length of time you’ve had a credit line. The longer its been open, the more likely you are to be a strong borrower.
  4. Type of Credit – 10% Impact. It’s not only the amount of money you owe, but it’s also the kinds of payments you make. For example, if you have a mixture of car loans, mortgages and credit cards, you’re viewed more favorably than if you just have credit card debt. Waterstone also suggests you should always have one or two major credit card accounts.
  5. Inquiries – 10% Impact. Did you know if you go around having people pull your credit, each time they do so it can cost you between 2 and 25 points on your credit score? Credit bureaus can ding you up to 10 times in a year for doing this. A better strategy might be to pull your credit yourself, which will have no impact in your credit score.

You must have, at minimum, a credit score of 620 before any lender will consider giving you a loan.

Again, the higher your credit score, the lower the interest rate you’re likely to be charged, which may save you hundreds of dollars a month on your payments, not to mention thousands over the life of your duplex loan.