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Looking for income property in today’s foreclosure-cluttered market sometimes requires myself and my clients to learn from Nancy Drew.
The scene of the crime is an abandoned and often neglected property. There are few, if any, witnesses, no paper trail of seller’s disclosures or signed leases, and absolutely no one to ask anything about the property.
So, like any good detectives, we use our heads.
This week, the building in question was a vintage triplex in a highly sought-after neighborhood, with tons of vintage charm and amenities. It sold for nearly twice what it will be on the market for just a few years ago, and now, represents a once-in-a-lifetime opportunity.
It’s been over a year since I saw it as a short sale. And of all the properties I see week after week, it was one of a handful that will always stand out in my mind.
As part of doingdue diligence on the property, I called to verify the gas, water and electric bills with the appropriate utility companies. I was surprised to learn the property only had two electric meters. (Hey, I can’t remember everything.)
This clue got me to thinking. While two of the units were clearly built as part of the building, the third was obviously an afterthought. It wasn’t long before it occurred to me the unit may not be legal. So I called the city.
The building zoned R2 (ok for two units), meaning the property would need to be rezoned to allow for the third. This can be a lengthy process, requiring, among other things, a specific percentage neighbors to sign off on their support on it.
Worse yet, the non-conforming unit wasn’t licensed or built with a permit. Having city inspectors approve the construction after the fact will likely require dismantling walls so they can verify it was wired, plumbed and framed correctly.
In other words, it may have to be rebuilt. From scratch.
OK, so while those are certainly obstacles, it’s still a great building. And in the end, overcoming those challenges will result in a big pay day, right?
Yes.
But there’s one more problem.
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To many Realtors and first time home buyers shopping for property it feels as if the market has begun to tighten.
Both entry-level homes and duplexes are selling in multiple offers. And in many cases, an offer that’s $10,000 or even $20,000 over list isn’t getting the job done.
In the duplex market, that may well be due to a lack of supply. For the week ending July 25, 2009, just 44 new multi-family listings came on the market. This represents a drop of 54.6 percent from the number of new listings for the same week just one year before.
Meanwhile, the percentage of lender-mediated properties new to the Twin Cities duplex market appears to have leveled off: up just one point from last year to 77.27 percent.
Duplex owners do seem to be making some inroads in the marketplace, accounting for almost one-fourth of the pended sales as opposed to last year’s 11.43 percent.
Better yet, the average off market price for the week was a whopping $171,841 (buoyed by the sale of a $999,900 duplex). The mark for the same stretch in 2008 was paltry by comparison at $103,464.
According to MAAR, the single family home market is changing as well. There are just 4.88 homes on the market for every buyer; a figure that is 34.8 percent below the amount of available inventory at this time last year.
Meanwhile, purchase agreements signed for the week were up 21.4 percent week over week, with the number of new listings down by 9 percent. Overall, there are 21.7 percent fewer listings in the marketplace this year.
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It’s not easy going green.
Oh, we all know there’s a push to do it. But let’s face it. It’s downright expensive. Where are you going to get the money?
Well, thanks to a salad bar full of recently passed and pending green legislation, it will soon be easier to finance these projects than ever.
Let’s start with the green opportunities already available to Minneapolis duplex owners:
- Energy Efficient Mortgage (EEM) -Already in place, this FHA-backed mortgage allows a buyer to purchase or refinance a principal residence of one to four units and incorporate the cost of energy efficient improvements into the mortgage. Best of all, the borrower does not have to qualify for or make a down payment on the additional funding.
The energy efficient improvements must be cost effective. In other words, you have to prove the cost of the improvement is less than the total value of the energy it will save you over its useful life.
As part of the American Clean Energy and Security Act now before Congress (more widely heralded for it’s cap-and-trade” carbon emmissions program), proposed additional incentives include:
- The FHA would directed to insure a mimimum of 50,000 new Energy Efficient Mortgages during the next three years, with the definition of an energy-efficient house being one where energy consumption is reduced by 20 percent after renovations.
- Freddie Mac and Fannie Mae would be required to increase the qualifying incomes of mortgage applicants by at least one dollar for every dollar of projected energy savings from efficient design, green construction or renovations. (Think of this as somewhat like being able to use 75 percent of a property’s rental income to help you qualify for a loan to buy it; except this is dollar for dollar).
- Loan applicants who live close to mass-transit lines or employment centers would receive similar concessions on their qualifying incomes.
- Appraisers would be required to consider energy improvements as part of a duplex’s appraised value.
- State governments would ensure property owners who go “off grid” by no longer using utility companies to provide power are not denied property hazard insurance.
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Anyone know if they make a version of Rosetta Stone for Truth In Sale of Housing Reports?
Because one of the most commonly overlooked and misunderstood documents by first time duplex buyers and sellers is the pre-sale inspection report.
These reports were originated by municipalities as a way to make sure the city’s housing met a certain set of minimum health and safety standards.
Prior to putting a property on the market, sellers in 14 metro cities are required to have an independent inspector come evaluate the single family home, condo, townhouse or duplex and determine the properties overall condition and level of code compliance.
The inspector will then rate each item in accordance with city guidelines.
In Minneapolis, the items both the seller and a potential buyer should be concerned about are those described as “Required Repairs”. While this sounds ominous, the “to do’s” on this list can be as simple and inexpensive as putting a backflow preventer (a brass attachment available at any hardware store for just a few dollars) on a laundry tub faucet to repairing or replacing plumbing.
These “RRs” may be repaired by the seller prior to the property going on the MLS, thereby earning her a new and clean Truth In Sale of Housing report or, as is the case in many foreclosures or estates, the seller may ask the buyer to assume the responsibility for making these repairs within 30 days of closing.
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If you’re considering taking advantage of the $8000 first time home buyer tax credit to buy a duplex, you’d better hustle. Not only is time running out, but so is the inventory.
Wait? A housing shortage? Well…
According to MAAR, there are 21.4 percent fewer homes for sale in the Twin Cities market than there were at this time last year. In just the week ending July 18, there were 12.1 percent fewer new listings than there were for the comparable week in 2008.
Meanwhile, pending sales the week ending July 18 jumped 18.2 percent. Of course, most of these transactions involve homes in the first time home buyer price range.
As a result of shrinking first time home buyer single family inventory, frustrated buyers may be opting for duplexes. Pending sales for the week were up five percent from last year, with 15 percent of those properties did not involve a lender in the negotiations.
Sadly, the 2009 average off market price of the pended properties was just $104,927, as 16 percent drop from the same week in July in 2008.
There were, however, 18.9 percent fewer new listings year over year. While 70 percent of these continue to involve a short sale or foreclosure property, 67.57 percent of the 2008 properties did. In other words, we haven’t seen a dramatic leap in the percentage of foreclosures hitting the market.
A word of caution. In late 2008 and early 2009, there was a moratorium placed on foreclosures by the government. Word is those properties where the seller was not able to successfully renegotiate the terms of their loans will begin hitting the market August 1.
What’s more, numerous real estate reporters like Diana Olick of CNBC are talking about a ”shadow inventory” of bank foreclosures; properties the lenders have already seized, but are holding on to in order to not flood the market, causing further declines in home values.
While I have no statistical data to support this assertion, I do personally know of several properties that were foreclosed on as much as a year ago that have yet to hit the market.
Comment
Working with a Realtor is a lot like dating.
But with a contract.
And without those perks.
Once you’ve reached a certain point in your relationship with your agent, she may ask you to sign what’s known as a Buyer Representation agreement. There are many types of representation, but most often, she’ll ask you to sign a document that gives her the exclusive right to represent you.
If you think about it, this document makes sense. Agents work long and hard to find the right properties for our buyers. And once we do, we want to have the legal assurance we’ll be paid for our efforts. After all, we don’t get paid a thing; not a salary, not mileage, not base pay…nothing, until you buy your duplex.
So it makes sense that you should be committed to your agent. And, your monogamous relationship with that agent is considered so sacred you may even walk into an open house and have other Realtors ask whether you’ve signed a buyer representation agreement.
Why do they ask? Because the state of Minnesota says if you have, they’re not allowed to talk with you in any way that could be perceived as a violation of that pact. This law is so thorough that even if you’ve successfully negotiated a purchase agreement, but have yet to close, you aren’t allowed to speak with the agent representing the seller unless it’s through your Realtor.
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I stumbled into a story on MSHNBC the other day that reminded me why there has never been a better time to become the owner-occupant of a Minneapolis duplex.
The story chronicled the struggles of a pair of first time home buyers in Phoenix, Ariz. who had written no less than 15 offers on single family homes only to be outbid in multiple offers every time. In several cases they hadn’t even lost to other potential home owners. Instead, they’d lost out to investors; with cash, no need for appraisals and fast closing dates.
Needless to say, they were getting pretty down about it.
While Minneapolis isn’t Phoenix, it’s happening here too. The most affordable homes in desirable neighborhoods are being scooped up either as potential rehab and sell properties, or to be held as rental units.
But aren’t investors buying duplexes as income properties?
Yes and no.
With tightened lending practices now requiring duplex investors to have a minimum o Read the rest of this entry »
said on July 23rd, 2009 categorized under: Tenants
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The Minnesota Multi-Housing Association should hire Belinda Jensen.
I don’t think she knows a thing about renting or owning duplexes. But I think a storm’s a comin’, and somebody needs to forecast it.
So I will.
There’s a tornado on the horizon for Minneapolis/St Paul duplex owners and landlords.
It’s a great big, dark, ominous-looking vacancy rate resulting from the $8000 first time home buyer tax credit.
I can’t even tell you how many people I’ve spoken with in open houses and general conversations who a) are planning on taking advantage of the tax credit and b) are on month-to-month leases.
As the tax credit expires November 30, 2009, how many move-out notices do you think landlords will receive on October 30?
I’m guessing about 17 inches worth.
While it’s always wise to keep your tenant’s leases current, it is especially important to make sure you have them under contract now.
If you don’t, I’m predicting a long, cold winter.
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I keep wondering when people will notice summer’s almost over.
OK, so it’s not exactly over. But we’re a week a week and change away from the first day of August. Summer might as well be over then, as it’s when we all start thinking “time to get ready to go back to…”.
Summer’s end promises the onset of fall. And fall means the end of the $8000 first time home buyer tax credit.
Yes, the credit expires on November 30, 2009. But that doesn’t mean you have to have picked out a duplex by then. It means you actually have to have closed on it. In other words, the key and the mortgage need to be yours.
Sounds easy enough, right?
Well, there’s the fact that it usually takes anywhere from two weeks to a month for the bank to give you the mortgage you applied for to buy the place.
No worries. That means you have to have found your first home by November 1, right?
Guess again.
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said on July 16th, 2009 categorized under: Financing
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It sounds presposterous, but a client actually had a computer glitch significantly delay his purchase of a duplex the other day.
As he was using FHA financing, the glitch involved a software problem in the computer system of the federal government. Basically, he had written an offer earlier in the year on a different property, which we were unable to successfully close on. And somehow, the “case number” assigned to the loan he never got remained in the system.
When he went to get a loan for a different property, the government’s software prevented it. After all, you can only have one FHA loan at a time. And the computer said he was applying for a second one. The computer is always right (sarcasm intended).
So I went about looking for alternatives. After all, there are no limits to the number of conventional loans a buyer can have at one time. And I hoped there was a loan product out there with perhaps a down payment of just a little more than FHA’s mandatory 3.5 percent. Perhaps we could find him a conventional loan that required just 5 percent down.
And then I learned something.
While conventional loans on single family homes presently require the buyer to have a minimum of 10 percent down, duplexes are another matter entirely.
We all know investors are required to put 20 – 25 percent down in today’s market. So it should be something less if you’re buying the duplex to live in, right?
Nope. Owner occupants who use conventional financing for their multi-family properties are required to have a 20 percent down payment.
Sadly for my client, it looks like FHA is still the best game in town.
