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Why That Foreclosed House May Not Be A Good Investment

October 26th, 2009 categories: Multi-Family Property Investing

With the bargain basement prices on single family home foreclosures in the marketplace, I’ve been getting calls from homeowners who, seeing the cheap house down the street, are thinking about becoming first time real estate investors.

I like that they’re thinking like that. Real estate offers investors growth in equity, an annual passive income stream that grows with the cost of living, appreciation, leverage, and the opportunity to use depreciation as a tax shield from other income.

However, most of these novice investors are thinking of single family home ownership as a path to wealth. What they don’t realize is more often than not, single family homes as rental properties do not cash flow.

In other words, the investor will have to reach into her pocket every month for money to pay the bills the rent doesn’t cover.

A duplex, on the other hand, will pull its own weight.

Surprised?

For the first time in decades, small multi-unit properties like duplexes are actually breaking even or producing positive, spendable cash flows.

To illustrate this point, this morning I pulled two properties from the Nokomis neighborhood from the MLS. The first is the least expensive home listed in the area of 42nd and Cedar.  It’s a short sale, built in 1949 with two bedrooms and two bathrooms, listed at $149,900.

Just a couple of blocks away is a 1947 built duplex, priced at $145,000. It has two bedrooms on each side, appears to be in reasonable condition,  and is a bank owned property.

Both require similar down payments, and will have mortgages at the same amortization and interest rates.

Assuming rent of $950 per month on the single family home, with the tenants paying all utilites, and the investor responsible for insurance and property taxes, this home actually has a negative cash flow of $1149.54 per year. In other words, every month, the owner has to reach into her pocket for cash in order to make up a shortfall of $95.80.

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Spoken by Kari Lundin | Discussion: 1 Comment »

Minneapolis Duplex Markets Like Night And Day

September 3rd, 2009 categories: Buying A Duplex, Twin Cities Real Est

One of the most difficult concepts for Minneapolis buyers to understand is that right now, there are really two duplex markets. And seeing the differences in them is like looking at property in the moonlight vs sunlight.

The first duplex market the one we’ve all heard about, consisting of foreclosures and short sales. The second, on the other hand, is comprised of traditional sellers trying to market their properties without the involvement of a bank in the negotiations.

Believe it or not, who’s selling the properties makes a radical difference as to their value.

A chart recently released by the Minneapolis Area Association of Realtors of Foreclosures and Short Sales in the Twin Cities Housing Market illustrates exactly this point.

Let’s start with one of the neighborhoods I’m often asked about; Calhoun/Isles. Close to the lakes and within walking distance of countless restaurants and activities downtown, many people find it a desirable place to live. And in today’s market, the perception is, a foreclosure in the neighborhood can be a tremendous deal.

Statistics provided by MAR seem to support this. The average sales price for a foreclosure in the Calhoun/Isles neighborhood in the second quarter of 2009 was $129,250. Compare this to an average sales price of $287,000 for properties sold by traditional sellers. That’s a difference of $157,750!

So who would want to buy anything but a foreclosure? Or at least, so the thinking goes.

You’d be surprised.

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Spoken by Kari Lundin | Discussion: No Comments »

How Cheap Are Minneapolis Duplexes?

April 24th, 2009 categories: Buying A Duplex

I read a fascinating article earlier in the week.

CNBC reporter Diana Olick shared a report compiled by John Burns Real Estate Consulting that measured the affordability of housing in major metropolitan markets in layman’s terms.

Since the peak of the market, the cost of home ownership nationally has fallen 43 percent. This is due to both falling prices and interest rates.

So what?

Well, we all hear abstract numbers called the “affordability index”.  This study, however, took the median home price in each market and compared it to the average income to determine what percentage of a home owner’s pay would be allocated for housing each month.

In Los Angeles, it was 45 percent of a buyer’s monthly income. Hey, in August of 2007 it took 102 percent of an average person’s income to pay the mortgage.

How about the Twin Cities? Get this. Just 20 percent of the average salary is required to pay for a median-priced $160,000 home.

If that home happened to be a duplex, I can imagine many scenarios where it could require a still lower percentage of your montly pay.

Need I say once again it’s a great time to buy real estate?

Spoken by Kari Lundin | Discussion: No Comments »

Bank Foreclosures and Short Sales: The Best Thing to Ever Happen to Minneapolis Duplex Owners

September 10th, 2008 categories: Buying A Duplex

It’s not news that there are a rash of foreclosures and short sales in the real estate market. Some of this is due to fraud. Some due to spikes in interest rates in adjustable mortgages forcing monthly payments into the stratosphere.

But what might be news is that many foreclosures and short sales are the result of normally responsible people either going to refinance or sell their homes and discovering due to the plethora of foreclosures on the market, their home can no longer appraise for what they bought it for.

If you’re a homeowner and have to move, what do you do? Odds are you opt for a short sale. Or, if things are really dire, a foreclosure.

But here’s what the national media isn’t saying. Once you have a short sale on your credit report, you can’t buy another home for anywhere from three to five years. Foreclosure? Try seven years minimum. Not pretty either way.

What does this have to do with the Minneapolis and St Paul duplex markets?

Well, where are those short sale and foreclosure folks going to live? They’re going to need to rent. As many of them as there are, demand for rentals should soar, which due to that old supply and demand law, will force metro rents to increase. Of course, that means more money in landlords’ pockets.

Makes it seem like a pretty good time to buy rental property; whether a duplex, house or apartment building, doesn’t it?

Spoken by Kari Lundin | Discussion: No Comments »

Does REO Mean That Twin Cities Duplex Comes With A Time/Life Music Collection?

August 28th, 2008 categories: What Does That Mean?

Sometimes talking with a Realtor can be like a conversation with your doctor. The shift in the housing market has resulted in a new language; one that leaves many people either saying, “Huh?” or scrambling for a dictionary.

For example, REO is a term we’re starting to hear more of. And no, it has nothing to do with REO Speedwagon.

So what is it? Well, REO is an acronym for “Real Estate Owned”. This a label for a property that has gone through a sheriff’s sale without receiving a bid for more than the loan amount. Most of these properties do not sell because there is more owed on them than their fair market value. The previous owner was unable to redeem, or pay off, the loan in the six month period that following the auction, and the bank has taken title and control of the property.

We often hear these properties referred to as foreclosures. In actuality, foreclosure is the legal proceeding during which the lender gets a court ordered termination of the property owner’s (mortgagor’s) legal right of redemption.

Semantics, I know. But if you hear the term REO, it’s safe to assume the bank is in control.

Spoken by Kari Lundin | Discussion: No Comments »

How To Get A Great Deal

May 21st, 2008 categories: Buying A Duplex, Multi-Family Property Investing, Twin Cities Real Est

A recent scan of the pending and closed duplex transactions in the Twin Cities since the start of the year stunned me. Now, nothing scientific here, just some observations.

I haven’t done the math, but the majority of the pending small multi-family sales right now have an average number of days on market (DOM) in the double digits. Less than 100 days. Less than three months! Granted, there’s no way to know which of these were cancelled and re-listed at a lower price, but nonetheless, it’s encouraging.

In the last month, several unique duplexes have come on the market in the “waterhoods”; those by the lakes or along the river. They’ve been listed at pretty big prices, and their status has changed to pending in just a month.

I intended to get over to see a unique foreclosure duplex on the bluff in the Cherokee neighborhood of St Paul. It had a beautiful banister, a widow’s walk, and was built years before most of the properties I get to see. At $409,000, I was sure I had plenty of time to get there. Wrong! Market time of a month. Another, a gorgeous home in the Kenwood area which had been converted to a fourplex lasted just 44 days. At a price of $674,000 no less.

As I dug through the records of the properties that have sold and closed already this year, I noticed something interesting about the foreclosures. To illustrate, let me give you an example. There was a unique Queen Anne duplex in the Wedge neighborhood that lingered on the market all winter. When the bank first listed it in September, they did so at a price of $339,000. When that listing expired, they relisted it at $259,000.

Now, a lot of people watch these foreclosures, waiting for the bank to reduce the price to ridiculous. I noted several properties where this had happened, and learned that almost without exception, they ended up selling for well above their asking price. I guess the bank’s agent had the forethought to put the property on the MLS at a price so low it could do nothing but start a bidding war. In those cases, the properties sold at prices $50,000 – $70,000 above list.

In the case of the Queen Anne, however, a buyer wrote and had an offer accepted at $183,000, which is nearly half what the property originally came on the market for. That buyer got a deal because he or she had the courage to write an offer while others lingered, stalking the property until it couldn’t help but sell in a bidding war.

Lessons? If it’s a unique property in good shape and a great location, write the offer today. Even in this market, it might not be there tomorrow. And, as I’ve said before, the only person who “gets a deal” is the one who wrote the offer.

Spoken by Kari Lundin | Discussion: No Comments »

Why Isn’t Anyone Talking About Duplex Foreclosures?

May 8th, 2008 categories: Multi-Family Property Investing

We’ve all heard the reasons for the rash of foreclosures on the real estate market; bad loans, fraud, unethical loan officers– on and on. But I never hear anyone in the media mention the fact that some people just made really bad real estate investments.

Nowhere is this more true than in the small multi-family market (duplexes, triplexes and fourplexes). In the halcyon days of 2005-2006, I ran into countless buyers who wanted to leverage some of the equity in their homes to buy an investment property. After all, we all had been told real estate was a great investment, right?

I don’t know the statistics, but I’m sure hundreds of thousands of people across the country simply went out and bought an investment property. They used the same Realtor who sold them their house, and waited for the cash to simply pour into their pockets.

The people who ran into me didn’t do that. See, it’s absolutely imperative when you buy a property for an investment that it pay its own way (unless, of course, you’re looking for a tax write off or have some other goal). And it’s critical that you make that determination before you buy the property.

We’ve all read ads touting that a property “cash flows”. What most of those advertisers don’t say is that yes, it does cash flow — if you a) put enough down; b) own it free and clear or c) are 100% occupied all the time.

In the heyday of the Twin Cities real estate market, very few small multi-family properties sold at a price where they could cash flow. And those who bought then are losing those properties now.

I just showed a duplex in the Nokomis neighborhood that sold two years ago for just over $400,000. It came on the market yesterday for just under $200,000. It’s dated, with a lot of deferred maintenance, and even though it has two bedroom units and all the utilities are separate, it will still barely cash flow. No wonder it was foreclosed on!

The good news is I am now seeing properties on the market in highly desirable locations that do cash flow, or at least break even.

If you can, now’s the time to buy that investment duplex.

Spoken by Kari Lundin | Discussion: 1 Comment »