Buying and Selling: November 2021 Archives

My aunt is going to move to a new condo and wants to sell her old one. I would like to buy her old condo as an investment and rent it out (as I am already a home-owner). This whole investment/rental buying is all new to me.
She has lived there about 5 years and the value has increased more than double. Obviously I would love to be able to keep her tax base. I am thinking about getting an interest only loan to help me get into this. Can I get a loan for 100% of value? My aunt will need the entire amount to purchase her new place. What suggestions do you have to make the loan process easier and pay the least amount in fees?

It is worth between 360,000 to 390,000 (we haven't yet got an appraisal, this is from comps in area). My wife and I currently have a house in (City) with a value of 650,000 and a mortgage of 400,000. We both work and have some extra income, maybe 400 a month that we could supplement against a renter. I think we could qualify for the loan, but then we would have to refinance our house to cover a down payment and closing costs. We don't have any savings to pull from. My wife hopes to retire in 2 years and I will in about 8 years.

Investment property is a different item from a personal residence, in several particulars. First off, even if it's residential, the loan is a riskier one to the lender. A loan on investment property is going to carry a surcharge of 1.5 to 2 discount points (one discount point is one percent of the final loan amount), over and above any other charges for the rate you choose. Most people in wanting a loan on investment property end up choosing a somewhat higher rate to keep the initial costs down a bit. When I originally wrote this and the general atmosphere was that 100% financing was widely available, I had to continually explain why it wasn't available to investment property. As far as I can tell, there was never any lender that would do a loan on investment property for more than 95 percent of the value, and most of them at this update want the investor to have minimum 20 percent down payment plus closing costs, while I still have a couple financing 95% programs and lots of 90% programs for people buying themselves a place to live.

The good news is that whereas you do not have savings to pay it, you do have a considerable amount of home equity. Depending upon your exact situation, either a "cash out" refinance or just taking out a HELOC (Home Equity Line Of Credit) might be in your best interest. It depends upon your current mortgage and your credit, and I cannot make a recommendation one way or another without looking at the market you're in for current comparables, running your credit, and seeing what can be done. If you've got good credit and income, and have had the good credit and income for some time, it's more likely to be in your best interest to simply take out the HELOC. HELOCs are comparatively low cost, and I have a couple that allow cash out to 80% of value even in this market. Depending upon market changes, If your credit or income has improved of late, it may be in your best interest to refinance, or if you've got an ARM that's about to adjust anyway. Assuming you're "A" paper, you may now be a conforming loan where you would not have been when you took it out.

Cash flow is also an issue with investment properties. If you don't have a tenant, you get zero credit for the rent at initial purchase from A paper. If you do have a potential tenant, with a signed lease for at least one year, the lender will give you a credit of seventy-five percent of the proposed rent towards your cost of owning the home (principal, interest, taxes and insurance). Some subprime lenders used to credit you with ninety percent, but their rates are typically higher in compensation. With the vacancy rate in urban California being about four percent, even ninety percent is a bit low, but the standards are what they are. I know many people who are making money hand over fist on rentals where the bank thinks they are paupers.

Now there is no such thing as an easy documentation investment property. There never was even in the Era of Make Believe Loans. Indeed, for any loan, for all real property you have to show the full breakdown for each property you own. You used to be able state your overall income in most cases (and indeed, most folks with investment property had to do stated income due to the cash flow computations being so restrictive.)

When I originally wrote this, prices in urban California had gotten so high that it was just about impossible to find a single family residence being purchased for rental purposes that "penciled out" with a positive cash flow. As I said in my article Cold Hard Numbers, this was one of the things that convinced me California real estate was overvalued. Well, now investment property often does "pencil out" with a positive cash flow, even by lender standards, even single family residences. Condos have become cash machines again.

But you need to be very certain that you do have that cash flow. When I originally wrote this, you'd have been looking at $360,000 purchase price with a first loan at about 6.75 percent on $288,000, which gives a payment of $1868. Additionally, there's going to be Homeowner's Association dues of probably about $200, and taxes (assuming no Mello Roos) are about $375 per month, or about $200 if you can keep your aunt's tax basis. That sums to $2443 or $2268 if you can keep her tax basis. Now ask yourself how much similar units are renting for? If it's less than $2050 (or $1875 if you can keep the tax basis), your $400 per month isn't going to make up the difference. You might have formerly considered a negative amortization loan in this circumstance, but be advised that you're eating up your investment every month, the real interest rate is actually higher than the 6.75 percent, and prices may go down and not recover for several years, leaving you holding the bag for a big loss. It's a risk some folks are willing to take, others are not. I was always a big non-fan of these loans, but was willing to do them for people in this situation after I explain all the pitfalls (Option ARM and Pick a Pay - Negative Amortization Loansand Negative Amortization Loans - More Unfortunate Details cover most of them). Usually people who have been informed of the pitfalls decide that these loans are not for them, which is one of the reasons why I have always questioned whether the risks have been adequately explained to the forty percent of all local purchases that were at one point being financed by these. At this update, they don't exist any more, but they could come back.

Indeed, given the fact that you're going to have to make payments on the Home Equity Line of Credit as well, I don't see how your $400 per month of extra cash flow is going to stretch to cover. If your credit is decent, I can get you into the property, but that's not exactly doing you a favor if you find it impossible to make the payments. I would advise against this particular property.

Caveat Emptor

Original here

I have been asked by more than one person how to measure desirability of real estate objectively. Fortunately, the Phoenicians did all the hard work for me three thousand years ago when they invented money. Precisely what that measurement unit is varies from country to country, but here in the United States that measurement unit is dollars.

A more desirable property will sell for a higher number of dollars. It's as simple as that.

Consider: The same property, moved to a more desirable neighborhood, will sell for more. This difference is nothing more or less than the premium for living in the more desirable neighborhood than the less desirable one.

A four bedroom property with X square feet will sell for more than a three bedroom property with the exact same number of square feet right next door. This difference is the premium for that fourth bedroom, so that one or two more people in that family now have a private place to retreat to - a private place they don't have to share.

A newer property will sell for a higher price than an older one, a well-maintained property for more than one with significant deferred maintenance, a well laid out property will sell for more than a poorly laid out one. I can go on and on, but the difference in all of these cases is precisely the desirability premium for the good thing as opposed to the not so good one. This difference is - you got it - measured in dollars. If it's worth more money to have the laundry area upstairs, the selling price between two otherwise equivalent properties will reflect that difference. If it's not, then the selling price won't be any different.

(In this case, you can figure the difference is a couple thousand bucks in the case of most two story properties around here.)

The obvious question that occurs to most people right about now is, "Do I get a package deal by holding out for a property with everything I like?" The answer is "not usually." Every desirability factor you add on pulls that much more interest to the property. Large lot? Downstairs bedroom? Great view? One of these or many other factors seen as desirable pulls in a decent amount of interest. Put two together, the interest level more than adds, because you're dealing with people who have to have both as well as those who would be happy with one or the other and the fact that the combined features attract the desire of everyone who can afford them - including those who can more than afford them. Have three or more common desirability factors like "gourmet kitchen" and now everybody who even has a chance at affording it is making a bid, especially in a hot market. This is how Flippers and Fixers make lots of money. A good agent with enough time and who knows how to negotiate can and will play them off against each other. They're going to get a hefty premium for that property, leaving the seller very happy indeed. The usual fight in my mind when I'm listing such a property and evaluating offers is "how much over appraised value is this person willing and able to pay?", because the appraisal can only go, at the very most, 25% higher than recent sales in the area. Especially given the conservative nature of appraisals done under the new HVCC appraisal standards, the offer I'm going to recommend my client accept probably be from the buyer with the most room on the loan to value ratio and a willingness to do without an appraisal contingency. Sure those people over there may have a higher offer, but with just enough cash for the down payment if the appraisal comes in are not going to be able to consummate it. Because the appraisal is not going to come in for the full purchase price in such circumstances - bet on it. You might be pleasantly surprised, but if you plan for it, you won't be scrambling to contact people who made other offers four weeks out when the buyer comes back and says "We can't qualify unless you cut the price." The buyer's ability to add to the down payment (or finance a larger loan if their loan to value ratio is still good enough) is what gets the transaction done in such instances.

How do you use this as a buyer? It's very simple actually - keep your "must have" list firmly in your mind; don't get distracted by beautiful presentation or bells and whistles you don't have to have. Such properties are ripe for bidding wars. If you must get involved in such a bidding war, keep your maximum purchase price in mind and don't offer a penny more. If you haven't got a maximum purchase price engraved upon your soul before you go looking at property, check yourself into an insane asylum immediately.

You can always make the property better once you own it. There won't be a bidding war then - except maybe between contractors who want the job (the low bid isn't necessarily the best there, anymore than the highest offer is necessarily to one to take for sellers). You own the property, and it's difficult to force you to sell against your will. Doesn't matter how much they like it, they can't have it unless you decide the offer is worth taking even though you weren't planning to move again. But if sellers have twenty, forty, eighty offers there has to be a reason to pick your offer - and the reason is that they figure they'll net the most cash out of it. Your offer really has to stand out. If sellers only have one offer, though, there's a lot more room for meaningful negotiation. If there are even two offers, you can expect to get played against the other offer, at least to some degree. I'll admit this has become a lot less common of late - but the good agents still do it, and we've gotten better at it.

Look for solid instead of beautiful. Look for improvable over perfect. Look for clear and reasonable upgrade paths rather than properties that are already highly upgraded. Your pocketbook will thank you. Yes, it's a bit of hassle to upgrade, but the dense, highly desirable areas like San Diego are headed for another period very soon like the one a few years ago, where it didn't matter what faults the property had, the buyers were glad to get into anything. Only unlike before, without unsustainable loans over-heating the market and setting things up for a crash when there's a subsequent reality check, the prices are going to stay that high this time. We're still going to have cycles, but the low point of this one is not something I would expect to ever see again (especially with the way the government has been sabotaging the economy). It took an awful lot of loans that were complete garbage to make this happen. The loan type that was the chief culprit has been essentially regulated out of existence, most of the companies that provided other garbage loans are gone as well, and Wall Street and the global capital markets have learned a lesson about real estate loans that it'll take them a generation to forget. It wasn't that long ago I heard with my own ears buyers express gratitude that they had an accepted purchase contract on crummy little places where their family would be shoehorned into a fraction of the room they needed to be comfortable. Those days are coming back, and they're going to get worse over time.

Things that you're willing to put up with that bother most other folks are good wedges for a deal. Popcorn ceilings, power lines, and too many others to enumerate. You may think popcorn looks tacky, but it's pretty easy to remove in most cases. Many utility companies are in the process of burying their lines. If you bought before and it happens while you own, that's a price boost. Don't take the listing agent's word - do your own research, especially if someone tells you, "That airport's going to close." (there's an Act of Congress that makes it extremely costly to close down most airports. The city or county has to pay the federal government back every dime in revenue they've ever gotten through that land, plus interest). But if the property's situation is likely to improve, or if it's something you can live with regardless of whether it improves, that may be the property for you. Let the other buyers fight to outbid each other over one "absolutely perfect!" property. While they're distracted fighting over that "absolutely perfect" property over there, bidding the price up to something unjustifiable, it's time to grab a real bargain somewhere else.

Caveat Emptor

Original article here