Stepping on Appraisal Landmines

I had an interesting experience last week with a listing that is scheduled to close today.  I got a call from the buyer's agent indicating that our FHA appraisal had been sent to appraisal review.  Its been well over 2 years since I have had an underwriter at the lender's office question the validity of an appraisers work.

The property was listed for $97,900 originally.  We received an offer where the seller asked for significant seller paid closing costs.  To compensate we increased the purchase price to $99,000.  The home was in superior condition and when the appraiser came to evaluate the home his opinion was that the home was worth $99,000.

The underwriter at the lender's office had concerns about this valuation and sent the file to appraisal review.  The review concluded, after throwing out some comparables, that the home was only worth $98,000.

This posed a problem for a couple reasons:

1.  My clients were expecting a sale of $99,000 and by all reasonable conclusions deserved to sell the home for that agreed upon price.
2.  Regardless of getting a second opinion from another appraiser, the FHA appraisal review process "tags" the property for 6 months so if we chose to toss this buyer and start over with a new FHA loan the property would still show as only being worth $98,000 in the FHA system. 
3.  Since FHA buyers are, by nature, light on financial resources, the buyer could not cough up another $1000 to close the deal at $99,000.

So how did we resolve this problem?  FHA forced our hand and we were compelled to reduce our sales price to $98,000. 

In another story, I was recently made aware of an appraisal on a home contracted at $100,000 that appraised for $76,000.  The appraiser used HUD homes and distressed property as comparables!

When it comes to the marketplace, you never know when you are going step on an appraisal landmine.  Hopefully, the damage isn't so severe that it kills your transaction.

Happy Transacting!

America in Wonderland: Mortgages Through the Lookingglass

As if the mortgage industry could not be manhandled by Uncle Sam any more, here comes this story from the Washington Post - Obama readies steps to fight foreclosures, particularly for unemployed:

The Obama administration plans to overhaul how it is tackling the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed, senior officials said Thursday. 

My Comments:  What!?  What a great way to create an incentive to lose your job.

Banks and other lenders would have to reduce the payments to no more than 31 percent of a borrower's income, which would typically be the amount of unemployment insurance, for three to six months. In some cases, administration officials said, a lender could allow a borrower to skip payments altogether. 

My Comments:  A lender "could allow" payments to be skipped?  What a privileged!  Thank you Uncle Sam for giving lenders "permission" to allow borrowers to skip payments.  I know lenders have really been wanting to let borrowers freeload and skip payments anyway.  Lenders can finally breathe easy and stop receiving all those annoying interest payments from borrowers. Thanks goodness! 

The administration has been facing increasing pressure from lawmakers and housing advocates to overhaul its foreclosure prevention efforts. So far, fewer than 200,000 borrowers have received permanent loan modifications under its $75 billion marquee program, known as Making Home Affordable. In the meantime, there is a growing backlog of distressed borrowers awaiting help from their lenders, which threatens to undercut efforts to stabilize the housing market. 

My Comments:  House prices are based on affordability.  If people can't afford a home, then house prices need to go down until they can.  That's supply and demand at work.  These government programs just delay the inevitable and convolute the market.  The answers are short sale, foreclosure, and deeds-in-lieu of foreclosure.  People can always rent their neighbors house who foreclosed and is now priced affordably for today's market conditions.

Photo of the Day: Victorian Beauty

Typically in The Photo of The Day posts I post something ridiculous or outrageous that I find around town.  Well today I wanted to share this photo of "The Irish Castle" at the intersection of 25th Street and Orchard Ave.  I thought it looked great before but with its new paint job it looks amazing.  I posted it as an extra large file so you can make it your desktop background like I did.  Just click to enlarge.  Enjoy!

Obama's 4% Rental Tax: Begin the Bloodletting

The U.S. congress passed and President Obama signed the national Health Care Reform bill this week.  Landlords will be intrigued to see their tax bill in 2010 with what this new law does to income property owners.  Bloomberg enlightens us:

Democratic congressional leaders would raise to 3.8 percent the Obama administration’s proposed new Medicare tax on investment income to generate an estimated $210 billion to help fund a health-care overhaul plan.

snip

The new tax would apply to income from interest, dividends, annuities, royalties, capital gains and rents for individuals who earn more than $200,000 annually and joint filers reporting more than $250,000, according to the legislation.

So total rental revenue (not just profit) is now fair game for additional taxation for those earning $200,000 per year.  So when will that $200,000 limit lower to $100,000 or $50,000?  Keep your eyes peeled.

It looks like rents will be going up or property values will be going down to offset this new tax.

How can we thank Uncle Sam for this? You decide.

Analysis of a Bargain: 715 20th Street

I closed yesterday on an investment property with a client.  I am excited for this client since we have been looking for several months and finally landed a bargain that should turn into a nice finished product.  The property sat on the market for a while before the price soften enough for us to pounce on it.  Here is a chart showing the price point over time. 

 
My client purchased the home for $48,000 cash.  Post fixup value is estimated around $105K.  The home needs some love but will shine nicely when complete.  Here is a tour of the property:



Stay tuned for a great Before and After Video for this one!

Agent Butterfingers

I received an offer from another agent on one of my listings last week. It was a clean and respectable offer. My clients agreed to accept the terms and place the home under contract. Two days later I get a call from the buyer's agent.

Buyers Agent: "Hey, did you ever receive an FHA addendum for our offer?"

Me: "Uh, what now? FHA addendum? No I did not."

Buyers Agent: "Oh, I must have forgotten to send that to you, I will get it over to you to have your clients sign, we just need $2500 in closing costs."

Me: "Oh, well that is a game changer. You know, my clients aren't expecting that since you didn't send it with your original offer."

Buyers Agent: "Well I meant to I must have just overlooked it."

So the moral of the story: DON'T FORGET TO SEND ALL YOUR PAPERWORK IN THE FIRST VOLLEY OF THE OFFER. Otherwise, you will have some disappointed parties on your hands especially if you send the paperwork AFTER you put the property under contract.  Remember, in this business the devil is in the details.

FOR SALE: Hip Downtown Ogden Loft

For those of you looking or an excellent urban location to live in, here is your rare opportunity. 



If you want to tour this property in person, let me know.

Builder Blues

I wanted to share a chart from one of my favorite economics blogs.  One of the issues facing the national housing market is a turn away from new construction and a recycling of existing home inventory.  Unemployment rates have diminished demand for housing and tighter bank lending has created an adverse environment for borrowing to build. 

Queue today's chart please:

If you have been wondering how bad things are for builders, well now you know.  It's as bad as it has been since before 1968.  The red line is single family houses and the blue line represents single family homes, condos, multi-units and other residential structures.  As you can see, we have fallen off a cliff and are now scraping at the bottom of the ravine.  Most economists predict our current level of activity for several years into the future.  

So what does this mean?  The bottom line is that the money in the market is in existing housing supply, not new construction.  Don't build a spec home right now.  You will loose your shirt.  Rehabbing existing homes is where money is to be made.

Call to Duty: Utah's House District 9

Although this is not a political blog, I wanted to make you aware that I will be seeking State office this year.  

Many people have asked: "Why in the world would you do that?! Do they pay you a lot of money?"

The answer to the second question is no.  The answer to the first is that I feel a personal compulsion to run.  I feel that I have been blessed with a unique set of talents and that putting those to work for the public an appropriate way for me to give back for the gifts I have been given.

If you are interested in hearing my political views, you can visit Mr. Peterson's Perspectives.  If you feel like you want to volunteer or contribute to support my campaign you can contact me directly at 801-390-1480 or email me at jpeterson@xmission.com.

Otherwise, keep enjoying this blog and lets talk about Real Estate!  

Thanks for allowing this brief digression. 

     

The Case for Smoke Free Rentals

Many folks have asked me about my rental policies and how I manage my rental business.  One of the issues that I always bring up is my push to rent to smoke-free tenants.  Not only are my units non-smoking units.  I believe the tenants themselves should be non-smokers.  With several years of experience under my belt, there are a few reasons I have opted to move in this direction:

1.  Tenants that smoke pose a threat to the condition of a rental unit.  Carpet, paint, and de-odorizing are very expensive.  Many tenants promise (per the lease agreement) not to smoke inside.  However, when it's Zero Degrees outside, that promise is sometimes hard to keep.

2.  Smokers in general have suppressed immune systems that allow them to be more susceptible to illness.  This translates into lost work hours and less income.  If a tenant is not highly qualified income-wise, those lost hours can mean late or deferred rent.  That is never a good situation to be in as a landlord.

3.  Also, due to the suppressed immune system, many of my smoker tenants have not been tidy in cleaning up their messes.  I have noticed this behavior in about 75% of my smoker tenants while in only about 10% of my non-smoker tenants.  I believe that they have lower energy levels much of the time due to their smoking habit.

4.  I find the smell of cigarette smoke personally repulsive as do most non-smoker tenants.  That makes rental of a smoker unit difficult to anyone other than another smoker.

These are the main reasons I only rent to non-smokers now. Some time ago,  I did have some tenants move in claiming to be non-smokers and then start smoking outside afterward.  By doing so, per our lease, they have made themselves liable for any and all smoke related damages to the property (if they occur).

Thursday's Standard Examiner has this to say about landlords making the change in smoke policy:

More and more landlords are choosing to either convert apartments into smoke-free units or go smoke-free from the start, Yugel said.      

Many make the transition to smoke-free after surveying their tenants and finding out most are in favor, Yugel said. Others are persuaded by the costs in cleaning an apartment after a smoker leaves. She said nicotine stains leave streaks on walls and windows. Carpets usually have to be replaced and walls repainted with several coats.

 There is a niche market for smokers that needs to be served.  However, be aware of the risks involved.  As smoking becomes more and more taboo in today's society, that niche is getting smaller.  Make sure you compensate for the risk with increased rent, higher deposit, or credit and income factors. 
 

You Decide: Championship of the Chromatically Challenged

Well today it's all about you and your opinion.  In this clash of these Ogden titans, you decide which  deserves to be crowned the Chromatically Challenged Champion.  Let's take a look at today's contestants:

Contestant #1

Lovable Lavender

 
Lovable Lavender is a Craftsman Bungalow from the 1920's that is sporting a far-out coat of colors from a child's doll house.  The chimney is the only teasing hint we have of what's under Lovable Lavender's oil-based mask.

Contestant #2
Bodacious Bungalow

This ecclectic contestant from the nether regions of Ogden boasts a two-tone dichotomy like none other seen in the city.  Drawing from random parts of the color wheel, Bodacious Bungalow is a tough competitor. But will it be enough to win, you decide.

Contestant #3

Quixotic Queen Ann

Quixotic Queen Ann is a Victorian Lady for sure.  Today though she brings a secret weapon to today's challenge: phosphorescent blue paint!  Will this tip the scales in her favor.  We shall see as our audience decides.  

VOTE NOW! 

Restoring Craftsman Homes: A Helping Guide

Restoring craftsman homes is rewarding and fun.  However, getting started and producing a quality finished product can be difficult without a proper background in architectural history and understanding of architectural design elements.  Fortunately, you don't have to have a degree in art history to become competent in how craftsman homes work and are put together. I wanted to present some resources that I have useful in navigating the restoration of some of our city's classic craftsman homes. 

The first book I have found immensely useful is Robert Schweitzer's Bungalow Colors.

This book give some excellent examples of color use in Craftsman Era homes built from 1905-1930.  Don't trust the clerk at Home Depot on paint choices.  Consult this book and your finished home will look a lot better than if you had not.     

The second book that is incredibly educational is Gustav Stickley's Crafsman Homes.

This books has original floorplans, architectural elements, and even furnishings from the Craftsman Era.  I strongly encourage you to purchase this book as a resource.  You will get a feel for what truly IS craftsman and what is not.  Gustav is the father of the genre.    

One of the tricks of restoring many homes is undoing all the lousy remodels that occurred over the decades.  1970's faux wood paneling and chintzy MDF casings were not part of the original design of these homes. You will need to know what to put in the place of what you tear out.  This book will help you know what to do.  Learn what an original floorplan would have looked like, what kind of wood was used in the casings and other exciting facts.

This should get you started and give you a considerable advantage.  If you have any other questions, give me a call and I can point you in the right direction. 

Foundation Folly

I recently emailed my investor pool a video of the exterior of a property for sale on Kershaw St. in Ogden.  I was able to finally get inside the property today.

Today's lesson is on foundation problems and what to look for.

Our first clue to problems with this home was a slightly noticable patch on the exterior stucco.  Interestingly, there was a patch on the exact opposite side of the house as well.  The exterior looked quite nice with a new coat of historic colored paint.

A closer inspection though reveals a lot of settling in the foundation.  You can see in the photo above how the foundation peaks in the middle of the home and sags at each end.  A walk inside reveals more.

 

No this isn't trick photography, the window is sagging extensively to the left.  You can even notice the cracked pane of glass (lower left pane) that has been caused by the movement.  An inspection of the crawl space is even more revealing.

 

I don't know about you, but to me that looks like a pretty big crack.  Its hard to have level floors when sitting on that.
Be careful what you buy.  This home was in the middle of being repaired and the owner abandoned it.  Likely, I believe, due to the foundation issues plaguing it.  The bank owns it now.  Given its problems, this home will be sitting on the market for a while.

In my opinion, the problems with the foundation were likely created from poor water management.  This home sits on a hill of silty soil and the water from neighboring homes spills into its lot. 

Anyway, when shopping for homes, keep a lookout for foundation problems.  The are expensive to fix and can undermine an entire project. 

FAILED: Centennial Bank

After a year of rumors and speculation, the FDIC descended on Centennial Bank last Friday.

Underwater With A Snorkel

A client referred me to a friend this week. The referral called me to discuss the possibility of selling their home. I set up an appointment to preview their home and discuss some ideas.

At the end of my inspection of the property we sat down to talk more about some ideas. I gave her my opinion on value and market timing. We also discussed the possibility of renting their home if they could not sell it by the time they needed to move. At the end of my presentation the referral says "Well, it looks like we are upside down. We owe $10,000 more than what you are telling us the market value of our home is."

For a moment that was a showstopper.  At this point prepared to discuss the negative implications that being upside down meant to their future financial situation. Then they explained to me that they had purchased the home with seller financing. This was great news. With that in mind, I explained that we three options:

1. We could rent their home out for market rate and have them subsidize the difference between rent and the motgage. They would lose approximately $200-250/mo. Hopefully in 5-10 years the appreciation and amortization would catch up to make them liquid and they could sell the home.

2. We could return the keys of the property to the private lender and thank him for letting the them live there for 2 years. 

3. We could "short sale" the property with permission of the private lender. The home would sell at market value.  The client would experience no credit problems because the private lender likely did not report the mortgage to a credit agency.  There would be virtually no negative credit consequences.

Of the three options, I believe option three would be the most logical. On paper, the lender has $60,000 profit coming to him if the referral sells at the note value plus commissions and title fees. The market simply won't bear that right now. The funny thing is that if the referral just walked away, the private lender would have the exact same problem trying to sell the property. Changing sellers doesn't change the value of the property.

So the question is: Would the private lender prefer to take about $30,000 cash at closing through a short sale or take the property back? We will find out as we get closer to preparing to sell the property. I am betting the lender would prefer the cash. I will let you know how it turns out.

FOR SALE: Updated Craftsman Bungalow

I listed this home back in November.  It was a rental at the time.  The tenants moved out and my clients decided to get to work sprucing the place up.  New tile countertops, carpet, paint, ect.  Great looking place now.   Here is the new video tour:



Call me if you would like to view this cute and affordable property.

FOR SALE: Craftsman Foursquare Mansion 4800 SQFT

An excellent specimen of a historic mansion near the Jefferson Historic District.  Priced at $179,900.  Home is 4800 Square Feet with four original working fireplaces.  Original hardwood floors, hardware, doors, woodwork, stained glass windows, updated kitchen and bath, 2 new furnaces, new 30 year roof and more!



If you would like to view this property, please give me a call.