Duplex Chick

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With today’s tightened lending standards, many investors are having a difficult time finding financing. As a result, the contract for deed has once again emerged as a viable option.

I have had two buyers ask me this week alone to find them property where the seller is willing to do the financing.

Believe it or not,  there are properties on the MLS right now where this is an option. Many sellers, for whatever reason, simply need to no longer have the managerial responsibilities of a property.

Of course, the seller also wants to make money on his duplex.

While most forms of seller financing carry a higher than market interest rate, they often also require less of a down payment. At the moment, most banks are requiring a down payment of 25 percent on a non owner-occupied investment property. Private sellers willing to carry financing will often ask for less.

How much less?

Let’s look at it from the seller’s perspective.

If his duplex is actively on the MLS, he has signed a contract with a real estate broker. In the event the property sells as a result of his Realtor’s efforts, he is legally bound to pay a commission based on a percentage of the sales price.

So, if he’s bound to pay six or seven percent in commission on say a $200,000 property, that’s $12,000-$14,000.

In that case, is he going to be ok with a buyer putting $5000 down?

Probably not. If he did, he would have to go into his own pocket to pay not only the rest of the commission, but closing fees as well.

What’s the likelihood of finding a seller willing to do this?

You tell me.

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One thing all duplex, investment property and single family home owners have in common is a hope for a speedy rebound in real estate prices.

This is especially true of those who want to or need to sell. The flood of short sale and foreclosure properties on the market have dramatically reduced property values; especially if the duplex was purchased in the last five to seven years.

As a result, many prospective sellers are sitting on the sidelines, waiting for a market recovery. Well, a new study from the Federal Housing Finance Agency, (which regulates Fannie Mae and Freddie Mac), suggests they may be there a while.

The FHFA study examines local and regional housing busts over the last several decades. It finds that it can take more than a decade for prices to return to their previous peaks after they fall, while the fall itself tends to be far swifter than the recovery.

The report looked at markets in the Southwest, Detroit, California and Texas. And while no Minnesota city appears in the 40 metro areas included in the study, it is, nonetheless, a worthy read.

FHFA’s Jesse Weiher, who prepared the report, did say, however. “The applicability of historical trends to the current U.S. price downturn may be limited.”

Previous housing slumps were often caused by steep drops in employment. At the onset of this market shift, employment was strong. Financing simply became more difficult to obtain, driving people out of the market.

This recovery may be different than the others as a result. Or it may not. Time will tell.

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The last few years we’ve heard countless reports about the down numbers in real estate: sales are down, prices are down and, perhaps most importantly, all of us have been reported to be a little bit down.

This week’s activity report from MAAR also had some down numbers to report. Believe it or not, however, these statistics are actually GOOD.

One of the pieces of data the association likes to follow is the “Months Supply of Inventory”. This number basically tracks the theory that if no new properties came on the market from this day forward, how many days, weeks, months or years would it take to sell all of those on the market now?

A year ago, the answer would have been 10.4 months.

Today, we have a 7.6 month supply; a figure which represents a drop of 26.9 percent from last year.

New listings of single family homes are also off significantly from 2008, with the 1,566 appearing on the market the week ending May 30 representing a week over week drop of 10.6 percent. However, pending sales for the week were up a full 14.9 percent over 2008.

In the duplex and small multi-family market there were some down figures that are good news as well.

New listings for the last week of May were down 31 percent from the same stretch last year.

Sales continued to out perform 2008 marks, with 14 percent more duplexes receiving purchase agreements than they had last year. While 2009’s average off market price continues to trail that of 2008, the weeks figure of $85,741 wasn’t down as significantly from the 2008’s May mark of $95,161 as it has been in previous reports.

And while 93.5 percent of those pended properties are lender mediated, this is only a modest uptick from last May’s 92.59 percent.

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What’s in the $8000 first time home buyer tax credit for seasoned investors?

Plenty.

Syndicated real estate columnist Kenneth Harney reports that the IRS has interpreted the tax credit rules to allow unmarried co-purchasers, including investors, to buy one to four unit buildings.

The tax credit is simply allocated to the buyer who qualifies for the credit and will live in one of the units while the others are rented out.

Of course, as we’ve discussed here, those same first time home buyers can now “monetize” the tax credit, using it as a cash advance to buy down interest rates, pay closing fees or add to their down payment.

It goes without saying that the buyer who qualifies for the credit is required to live in one of the units for at least three years.

As always, the amount of the tax credit is equal to 10 percent of the value of  the portion of the building she owns up to $8000.

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Which do you want first? The good news? Or the bad?

Chances are you’ve already heard the bad on CNN or MSNBC. The monthly Standard & Poor’s/Case-Shiller National Home Price Index reported national home prices dropped 19.1 percent in the first quarter. In all, home prices have now fallen 32.2 percent since 2006.

It gets worse. Between February and March, Minneapolis posted a drop of 6.1 percent; the biggest monthly drop on record for any of the 20 major metropolitan areas in the index.

But remember, all of this news was for the first quarter. It doesn’t take into account what we’ve seen here since April.

MAAR announced in its weekly activity report this morning that new listings for the week ending May 16 were down 10.2 percent from the same week last year. In all, there are 20.5 percent fewer listings on the market now than there were at this time last year.

Pending sales, meanwhile, eclipsed the 1200 mark for the first time in three years. In fact, the 1,235 sales are up 36.9 percent over the same stretch in 2008.

And the duplex market?

Pending sales continued their strong performance; up 32 percent over last year. Of those properties that received purchase agreements,  82.9 percent were lender owned or mediated. Seventy-seven percent of the transactions for the same week in 2008 involved a bank in the negotiations.

Last week’s euphoria proved short-lived, with the average off market price for 2009 being just $118,156. This figure was far below the average sale price of $145,311 set during the week in 2008.

New listings were down 5.7 percent, however, which should ultimately bode well for future price increases.

Once again, it’s wait and see.

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Is a duplex a bad investment if it doesn’t appraise for the price listed on a purchase agreement?

It depends on whether you’re the buyer or the seller.

With a flood of foreclosure properties dragging down property values overall, it isn’t altogether uncommon for a property not to appraise.

Even if many of these duplexes are selling for comparable prices to the one you’re buying, they may not be able to be used as comps; simply because they don’t have a recent rental history for an appraiser to use in an Income Approach to valuation.

So what happens when the property doesn’t appraise?

There are several possibilities.

First, the seller could reduce his price to reflect the value determined by the appraiser. Of course, this would benefit the buyer greatly.

The buyer or seller could also order another appraisal to disprove the first.

However, if the buyer intended to use FHA financing, there’s a problem. FHA appraisals now essentially follow a property for six months. So, even if another buyer comes along to purchase the property, there  is a record of the previous appraisal, which will prevent her from agreeing to a higher price.

On the other hand, if the buyer was using conventional financing with a 20-25 percent or more down payment, the low appraisal does not “follow” the property. In many cases, the lender, loan officer and Realtors involved may attempt to work with the appraiser to re-examine the value by providing additional comps.

If the value doesn’t change, the original lender may be unwilling to finance the purchase.

This does not prevent the buyer from ordering another appraisal, using a different lender, which may result in a more favorable outcome.

Of course, both the buyer and seller also have the option of simply walking away from the transaction.

Does the low appraisal mean the duplex is a bad investment?

As always, if the numbers work, and are in keeping with the buyer or seller’s financial goals, no.

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Spring has finally arrived in the upper Midwest. Everywhere you look, lawns have turned greeen, tulips are in bloom and “sold” signs are hanging on properties.

For the seven days ending April 25, single family home sales posted another consecutive week of more than 1000 sales. Again, we are experiencing more than a month of this sort of volume;  atypical of  the market since 2006.

What’s more encouraging, however, is the 1,078 sales represented a 34.1 percent increase over the same time a year before.

While there seems to be countless new listings taking root everywhere, the perception of countless colored for sale signs in yards is something of an illusion. New listings are still lagging 16.4 percent behind their mark one year ago, with the total supply of available homes down 19 percent over last year.

Of course, the multi-family home market seemed to grow roses in the snow this year; a trend which has continued into spring. Pending sales of Twin Cities duplexes and small investment properties were up 69 percent over their mark last year at this time.

While 85 percent of last year’s duplex sales for the week were bank owned or mediated, the mark for the same stretch this year was comprised of 93 percent lender-involved properties.

The average off market price for the week of $84,800 also trailed considerably behind last year’s $157,988. Look for this trend to continue until all the dandelions of foreclosure have been weeded out.

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If you seem to be seeing a lot of sold signs hanging on properties in your neighborhood, it isn’t your imagination.

The real estate market is picking up.

And while I like to stick to the data from MAAR, sometimes I think it’s also important to share a personal perspective.

I’ve written five offers for clients in the last two weeks. In all but one case, we were competing against other offers. In fact, in one instance, my clients’ offer was one of 45.

My clients wrote their offer $50,000 over the list price, and still didn’t get the property. Clearly, they are not the only folks out there shopping.

There were 1,083 pending single family home sales for the week ending April 18. This was the third consecutive week of 1000 plus sales; a phenomenon that hasn’t happened since the peak of the market in 2006.

In fact, pending sales activity for the week were more than 20 percent higher than they were for the same period in 2008.  This was the fourth consecutive week that happened.

Single family inventory continues to shirnk as well; down 18.4 percent from last year.

In the multi-family sector, inventory is also down. The number of new listings for the week was roughly half that of last year.

Minneapolis duplex pending sales edged just slightly ahead of their pace for the week last year, up just three percent. Of those properties receiving purchase agreements, 89 percent were bank owned or mediated. This too was a small increase over last year’s 86 percent lender-involved properties.

While the average off-market price of multi-family investment properties jumped to $117,566 for the week, it still lagged behind last year’s figure of $124,956.

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If you’re planning on loading up on 1-4 unit investment properties during the down market, you’d better do it now.

In May, Freddie Mac made changes in its lending guidelines. As of August 1, 2008, a borrower may no longer have more than four financed 1-4 unit properties, including the one being purchased. What’s more, in order to refinance, the borrower must have owned the property for at least six months prior to getting a new loan.

Present Freddie Mac guidelines allow an investor to have up to 10 financed properties.

Until now, neither Freddie Mac nor Fannie Mae required a loan to be seasoned. This change will likely have the greatest impact on rehabbers and others intent on purchasing the property with the intention of refinancing to pull cash out.

The announcement of this change may help explain the recent run on properties priced under $100,000.

This will also effect owners who hold title as an LLC. If you own your property as an LLC, but need to qualify for a loan as an individual, you’re going to need to hold title as an individual for at least six months prior to a refinance. I know, I know. That appears to contradict what I said yesterday. You’re going to have increased liability exposure during this time frame; which you may want to address via an umbrella insurance policy.

So just get a loan from a lender who doesn’t resell conforming loans to Freddie Mac or Fannie Mae, right? Ha ha. That requirement eliminates almost all of them. Freddie Mac and Fannie Mae are privately capitalized, government sponsored entities that purchase the majority of conforming loans. They then repackage these loans and sell them as mortgage-backed securities to investors. This helps replenish the money supply of available money for mortgages.

Commercial loans will not be effected by this.

As the money supply grows ever tighter, I see the rebirth of the contract for deed on the horizon…