Duplex Chick

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Not to be outdone by either the federal government’s $8000 first time home buyer tax credit, nor the state of California’s $10,000 new home buyer tax credit, later this month the cities of Minneapolis and St Paul will unveil a plan providing $8 million worth of federal tax credits to first time home buyers who purchase homes in either city. 

St Paul’s Housing and Redevelopment Authority went a step further on Wednesday, however, when they offered “heroes”, such as teachers, fire fighters, veterans, EMTs, paramedics, health care workers and certain public sector employees up to $15,000 in down-payment assistance, closing costs or reduced principal.

St Paul will spend $500,000 to provide loans to approximately 33 heroes.

Loans provided through the program would have a 0 percent interest rate, and no periodic payments. Rather, the loan would be paid back when the property is sold or the homeowner moves out.

It gets better yet. Loans would be completely forgiven if the buyer lives in the home as their main residence for more than 10 years.

Sounds like a nice way to say “thanks” to people who do so much for us.

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If you’re sitting on a fence somewhere, you may not have noticed it’s starting to rain. It’s just a drop here and there, but with any luck, we’ll get a good soaking soon.

I’m speaking metaphorically, of course. The rain I’m talking about is the sprinkling of positive headlines in the national media about the real estate market.

Amidst the doom and gloom in recent weeks, you may have also noticed, “Pending Home Sales Rise In February”, “Mortgage Rates Fall, Set Yet Another Record” and then, this morning, MSNBC posted a link to an article in Business Week announcing “Signs of Life Emerging in Housing Sector“.

The article details trends in several of the most depressed real estate markets in the nation, where due to bargain prices, historically low interest rates and the $8,000 first time home buyer tax credit, investors and first time home buyers are beginning to scoop up properties.

But then, if you’ve been paying attention to weekly reports from the Minneapolis Area Association of Realtors, you’ve already felt a drop or two of rain. And today’s weekly activity report from the organization is no exception.

For the week ending March 28, the number of new listings coming on the market continued to drop; down 12.2 percent from the same week in 2008. Meanwhile, pending sales were up a staggering 28.2 percent over last year.

The report goes on to explain that the average number of Days on Market Until Sale has dropped to 150 days, which is 9 percent lower than last year.

And get this: for the first time the market reported its first upward year-over-year move in the Percent of Original List Price Received at Sale, which was up by 0.6 percent.

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Are you upside down on your small multi-family property due to the decline in values in the real estate market?

Hang on. Some help was on the way. It seems there was some good news hidden in the guidelines issued last week for the upcoming refinancing campaigns from Fannie Mae and Freddie Mac.

When the program was first announced, it appeared that small multi-family investors and people with second homes wouldn’t be allowed to participate. The guidelines however, included you after all.

According to Kenneth Harney of the Washington Post, the new programs, which are being undertaken at the urging of President Obama’s administration, would allow you to refinance provided you have a solid payment record, the balance on your loan doesn’t exceed the value of your property by more than 5 percent and your loan is either owned by or contained in a mortgage bond guaranteed by either Fannie or Freddie.

It gets better.

Both companies plan to waive their usual minimum credit score requirements for most people who apply. Oh, they’ll still pull your credit. But there’s no specific minimum score necessary to refinance.

There’s also no mortgage insurance. If your loan originally required the insurance, you still have to have it. However, borrowers who never had mortgage insurance because they had 20 percent equity before the decline in market value will not be required to purchase new coverage.

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With the federal government offering first time home buyers up to $8000 to buy a home (including duplexes and multi-family homes) by December 1, it’s a great time to consider investing in real estate.

However, with most conventional investor loans now requiring a minimum of 20 percent down and points at closing to buy down interest rates, it’s an even better time to explore FHA financing.

An FHA loan requires the borrower to have a down payment of just 3.5 percent, and that she live in the duplex she’s buying.

Uh-oh.

What if you don’t want to live in a duplex forever? What if you were hoping to move out some time in the future to buy a single family home, while keeping the duplex as an investment?

Will the FHA Police come looking for you?

Relax. There’s no FHA Police. I made that up.

According to Dean Schiffler of Burnet Home Loans, there is an unwritten rule with FHA loans that the owner should live in the property for at least one year.  And if she doesn’t?

The lender may perceive her promise to live there to have been fraudulent. This could conceivably result in penalties and fines, jail time and foreclosure.

So is it possible to get an FHA loan for an additional property? Well, since it’s a requirment for FHA financing that you live in the duplex the loan is on, yes and no.

If the first property you bought has either appreciated in value or you’ve paid off enough of the mortgage to have at least 20 percent equity, you may qualify for a second FHA loan.

There are other exceptions.

If your family has suddenly heralded the arrival of octuplets, squeezing out of your two bedroom unit, or your job transfers you a distance that renders commuting to work unreasonable, the lender may grant a second FHA loan.

Of course, it’s always a case by case basis and not something to necessarily count on. A qualified loan officer should be able to guide you toward a reasonable solution.

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It seems all of the pieces are starting to fall into place to write a blockbuster script about an action-packed housing market recovery.

Interest rates remain low. Prices are down. The government will pay any first time home buyer $8000 to purchase a duplex and the amount of inventory in the Minneapolis/St Paul market is starting to tighten.

As they always do, MAAR released their weekly market activity report today. And for the week ending February 28, the market sunk its teeth into a meaty role.

The number of  new listings was down 19.2 percent from the same week in 2008. Overall, there are now 5000 fewer homes on the market than there were at this time last year.

Buyers also seemed ready to audition for homeownership, with a 12.1 percent increase in pending home sales over last year. This activity has helped reduce the montly supply of inventory to 7.8 months, which is a 15.2 percent drop from the mark of 9.2 months at this time last year.

The Minneapolis duplex market, meanwhile, continued to shatter 2008 box office receipts. Sales were up 65.38 percent while the number of new listings dropped 16 percent.

Of the small multi-family units that sold the last week in February in 2008, 88 percent were lender-mediated.  While their was a slight uptick in this statistic this year, it was just 2 percent. 

The average off market price for the week last month, however, remained significantly below last year’s take, at $86,990. In 2008, that figure was $134,210.

Let’s hope next week we see a remake of Star Wars.

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There was a story in the Wall Street Journal yesterday that confirmed something I’ve known for a while. Renters have lost their edge on homeowners.

In other words, in many places, it suddenly is much more cost effective to own than rent.

The last few years, this hasn’t been the case. As prices of  Minneapolis and St Paul duplexes soared, the difference between average monthly mortgage and rent payments grew.  More and more potential buyers became priced out of the market, and increasing numbers of owners lost their homes to foreclosure, vacancy rates declined.

According to Newport Beach, Calif. based  real estate consultants Green Street Advisors, over the last 18 years, after-tax mortgage payments have averaged 26 percent more than rent payments. At the height of the housing market, this jumped in some places to 66 percent more.

By the end of last year, however, average monthly rent in the biggest 50 metropolitan areas in the nation was $1045.  After tax mortgage payments, meanwhile, were $1300, assuming interest rates of 5.5 percent on a 30-year fixed note.

Most of the first time buyers I’m working with today are in fact finding they can actually own a duplex for about what they’re paying in rent. 

I can think of one south Minneapolis property on the market right now that achieves exactly that. It’s in decent shape and a sought-after neighborhood.

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In all the excitement over the first time home buyer $8000 tax credit, I’d almost forgotten that really, there’s even more money available for first time Minneapolis duplex buyers.

How are you going to get paid $34,000?

Easy.

This year, of course, the government will pay you up to $8000 to buy your first home; regardless of how much you pay in taxes.

However, there are four other major financial benefits to owning multi-family income property: rental income, principal reduction, tax savings and appreciation.

What does this mean?

Well, for illustrative purposes, let’s say you buy a $200,000 Minneapolis duplex and finance 96.5 percent of it on an FHA loan at 5 percent interest. This means your monthly payment, without taxes and insurance will be $1036.

Of course, you live in one half.  And let’s say the other side is rented for $1000.

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I don’t know about you, but I’m starting to get dizzy. 

The Atlanta Journal-Constitution  is reporting that the $15,000 home buyer tax credit, which was replaced with a reduced first time buyer tax credit in the economic stimulus package may not be dead yet.

Our hero, Georgia Senator Johnny Isakson, who sponsored the $15,000 tax credit amendment in the Senate’s version of the package told the Atlanta Journal-Constitution he will continue to push for it in a standalone bill. 

Isakson said, “Quite frankly, there is so much outward support for what we did…that I wouldn’t at all be surprised if you didn’t see it come back in some form with a Democrat’s name on it.”

According to a survey taken by the National Association of Home Builders of 1200 registered voters, two thirds of Americans support the $15,000 tax credit for all home buyers. What’s more, one-third of those polled and 61 percent of renters said they’d be more likely to buy a house if the credit were passed.

A coalition of housing industry companies called Fix Housing First is continuing to urge Congress to consider the credit, believing it would have created thousands of jobs and pumped much-needed money into the economy.

I’m inclined to agree. When the proposal was under consideration, my phone rang like crazy. Potential Minneapolis duplex buyers just aren’t as excited about the amended $8000 first time home buyer tax credit.

Perhaps that’s because there are a lot of people out there who would like to buy or sell; they simply don’t qualify for the credit because they’ve owned a home in the last three years.

Congressional arguments against the credit largely centered on the fact that it would have added $35.5 billion to the cost of the economic stimulus package.

What can we do? Keep writing and calling our Representatives and Senators.  Given enough pressure from constituents, anything’s possible.

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According to the Los Angeles Times, yesterday’s compromise between the House and Senate versions of the stimulus package now features a $8000 first time home buyer tax credit.

While details have yet to emerge, and this has yet to be signed into law, this credit is significantly lower than the proposed $15,000 credit featured in the Senate’s version of the bill. What’s more, only first time home buyers are eligible for the break.

Unlike last year’s $7500 first time home buyer tax credit however, the $8000 does not have to be repaid. Properties purchased between January 1 and August 31, 2009 are eligible for the break.

As always, owner occupied single family homes, duplexes, triplexes and four-plexes are eligible for the credit.

Fair warning first time duplex buyers:  you have to close on the property by August 31.  It sometimes takes as long as 45 days to get a loan through final underwriting, a period which may be longer still if there is a rush of people trying to qualify for the tax break. 

It would be wise to think of your deadline to have a completed purchase agreement as being no later than July 15, preferably July 1.

You have 4.5 months. The longer you wait, the more competition you’re likely to face from other buyers.

I can think of four duplexes right now that could be a terrific buys. Get in touch with me. I’d be happy to show you where they are.