Your Home as An Investment

To reach financial independence you need to buy assets faster than you acculate liabilities. As the old adage goes: Assets feed you, liabilities eat you.

During the real estate boom many folks were lulled into believing that their own homes were assets. Due to the ever growing equity in homes, personal residences were considered sources for growing "wealth". In reality, whenever equity grew in a home, most people simply pulled that money out to spend on consumer goods. They splurged on the appearances of wealth while dramatically increasing their liabilities.

In reading the Wealth of Nations, Adam Smith comments on the role that housing should play:

The stock that is laid out in a house, if it is to be the dwelling-house of the proprietor, ceases from that moment to serve in the function of a capital, or to afford any revenue to its owner. A dwelling-house as such contributes nothing to the revenue of its inhabitant... (p356)

In this simplified sense we need to think of our personal residence as a liability and not an asset. It requires upkeep, maintenance, and though we enjoy living in it, it doesn't pay us monthly to live in it.

However, what if we purchase a home that is worth more than our purchase price. What if we buy a personal residence that is below market value? Could our home become a tool to help us grow our wealth? The answer to this question is absolutely yes!

Rather than squandering home equity on frivolous purchases, it can be used to acquire assets that do provide a monthly return to the owner. I followed this scenario twice. My first time was pulling out a $7,000 home equity loan on my $70K personal residence and using it to purchase an investment property worth $155K for just $120K. I used my equity to purchase more equity. This is a very effective means of acquiring more assets. Due to the low interest rates associated with loans on personal residences, the returns are greater on investments acquired with this tool. 

So, if you are thinking of investing in real estate and are starting out early in life, our first objective should be to find you a great value in the market for a personal residence. It will act as a springboard for you into other investments which will feed you and allow you purchase yet more assets in the future.

FOR SALE: Historic Victorian Mansion 4500 SQFT!

Amazing Victorian Mansion for sale.  Just $80,000!  Located in the heart of the Jefferson Ave. Historic District.  If you are interested in this property, please contact me for details about showing and what it takes to make this fantastic restoration project come together.  Here is the video tour...

JUST SOLD! Bank-Owned End-User Bargain

I recently closed a property with a client that I have been working with over the last year.  Initially, when we first wanted to start shopping, my clients financial condition needed to be fine-tuned in order to qualify for the type of home that they wanted.  They began saving and working to prepare to purchase a home. 

In November, the home buyer tax credit expiration created some incentive for us to go shopping.  We placed several offers on short sales.  As of this posting, those homes are still on the market and we have not heard back from the agents regarding our offers from over 6 months ago.  Typical short sale frustrations.

Finally, in last month we decided to give it another push and we found this property in Roy:

 
This home was a bank-owned property when we viewed it.  I always prefer REO transactions when working with buyers because they are much more straight forward than short sales.  Our experience with the previous offers was enough to deter us from continuing on that course. 

What I find interesting is watching the price points adjust to what the market will bear for specific properties.  Here is the price history of this home:

Notice the optimistic list price over 16 months ago at $165,000.  Ultimately, it became apparent to the owner and the agent that the home was worth less than what was owed on the property.  The pricing was adjusted to short sale price of $145,000.  Being unable to consummate a sale and the owner behind on payments, the home foreclosed.  With this home being on the market for so long, we offered $143,000 and asked that a healthy dose of closing costs be paid by the seller.  I expected a counteroffer.  They did and adjusted our closing cost concession down aby $1,800.  We accepted.  When we inspected and found some roof problems, the seller repaired the roof and agreed to pay an additional $1,800 in closing costs.

I always try to negotiate from a position of strength.  In this case, our strength came from my clients solid qualifications to buy.  When the listing agent found out that my clients were ready to close, he pushed for the asset manager at the bank to accept our requests for repair and concessions.   

BK: Tenants (Turnips) Having It Their Way

In a recent post, I talked about a tenant claiming a grievance and wanting to terminate their lease. I resolved their grievance and asked them to honor their lease by paying the lease break fee of 2.5 months rent. The amount was significant and so, in order to make it easier to fulfill their obligation, I suggested that we draw up a promissory note at 0% interest and payable over 10 months. He quickly accepted this offer and we signed the paperwork. He was eager because his new apartment manager needed to know that I was satisfied with the terms of the termination of our lease. With this promissory note, I was satisfied.

A week later, I received a bankruptcy notice in the mail. My brand new promissory note was now part of a chapter 13 bankruptcy. After consulting with an attorney, it appears that the value of my $1,200 promissory note now commands the princely sum of $40. Wonderful.

Since my tenants have a couple weeks left on the lease, I could call their new apartment manager and tell them that their new tenants just filed bankruptcy. This would likely void any approval they received from the new manager. The problem is that technically my tenants could stop paying rent to me and stay since they are in bankruptcy. I would then be forced to file a motion in federal court to "evict" them. Given the circumstances, I will just be glad to have them out so they can be somebody else's problem.

You can't bleed a turnip, so don't rent to turnips.

Living on the Edge: North Salt Lake Landslide

When will we stop building homes on obvious geologic hazards? 

Video Courtesy of KSL.com

If I ever build a home like those in a place like that, I will drive pylons into the ground before I pour my foundation. As it stands now, when we have an earthquake, these homes will just sluff off the mountain into a heap of debris.

Upping the Ante: New Landlording Rules from SB 45

For those of you thinking of becoming landlords, the Governor just signed into law new rules regarding maintenance, repairs, and noticed of such.  The law creates a legal expectation of minimum living standards for tenants and repair guidelines expected of landlords when those living standards are not met. These are important changes that you need to follow in order to not be sued by your tenants. For those of you interested in reading the entire law, you can find it HERE.

Here is the gist:

A landlord is expected to provide a rental that is "safe, sanitary, and fit for human occupancy; and shall maintain common areas of the residential rental unit in a sanitary and safe condition".  He is also expected to "maintain electrical systems, plumbing, heating, and hot and cold water."  Interestingly, he also has to maintain any air conditioning system on the premises.  He must also maintain appliances and follow the lease agreement regarding repairs of anything else.

This sounds reasonable.  I think slumlords will be unhappy but legitimate landlords shouldn't have problems keeping up the condition of their rental units.

The law also provides a method for notice AND punishment to landlords who don't comply:

The tenant must give WRITTEN notice to the landlord of a deficient condition in the property.  Once the notice is served, the landlord has 3 days to correct a habitability condition or 10 days to correct a repair required by the lease agreement.  If the landlord does nothing, the tenant has a right to be refunded rent for the 10 day corrective period or to make the repair themselves and bill the landlord for actual expenses incurred.  If the tenant chooses rent abatement and no repairs are made, the lease is terminated and the landlord owes the tenant back rent to the date of the repair notice, his deposit, and he must give the tenant 10 days rent free to move out.  If the tenant chooses to repair the problem themselves they can deduct the expense from future rents so long as the amount does not exceed two months of rent.   He must show documentation of the repair however.

The tenant has the right to sue for performance of these refunds if the landlord fails to do so at his own discretion.  However, the tenant must follow the law strictly to qualify for these remedies.  Any variance from the requirements will void their claim.

I recently had a situation occur with a tenant that this law now addresses.  A couple months ago, my tenant told me that their refrigerator wasn't working very well.  This particular tenant had a knack for pointing out very minute imperfections in the apartment so I didn't take his statement about the refrigerator too seriously.  Then, this month he tells me that he intends to move because he can't trust me as a landlord and his family is in danger due to my negligence.  He brings in a bag of rotten food from his fridge to prove his point.  Clearly, the situation was more serious than I originally estimated.  I compensated him for his food, purchased a new fridge, and agreed to sever his lease according to the terms our our lease agreement.

This new law would have helped in this situation with my tenant since I would have received a written notice from the tenant. That notice would have served as a test of validity for the repair.  I wouldn't have to guess whether a supposed problem is a legitimate concern or just my tenant ranting.  Had I received a notice, I would have made the repair two months earlier, maintained a level of trust, and kept my tenants in their unit.




 

Earthquake...

I was sitting at my dining room table this evening when the table started shaking.  Then my chair was wobbling and the trinkets on the shelves started making noise.  My first thought was that a large truck was driving by but there was no accompanying noise.  The shaking started softly and crescendoed for about 10 seconds.  I was just getting ready to bolt out of my chair and out of the house when it stopped.  No damage to the home.  The only visible signs remaining were the tilted paintings in our home.

It's little reminders like these that let you know we're not always the ones in charge.

Ogden City Tackles Blight Head-On

Tuesday the Ogden City Council, acting in the capacity of the Redevelopment Agency, voted 5-2 to declare a blighted part of Ogden city as just that...blighted. 

This declaration opens the door for Ogden City to create incentives for new development and also re-investment into existing buildings. 

The City's focus for now is on commercial structures on the east side of Washington Blvd.  In the coming years, I am sure residential development will come. 

Here is a map of the new RDA zone:

Although declaring blight in an area is controversial, this legal step opens the door for redevelopment to occur.  Although there are pockets of nice housing and commercial in this area, the majority of the area has exhausted its useful life and now flounders in economic obsolescence. 

The next step is for developers and city planners to make a proposal for the next project in the area.  The one that has already been discussed is a new parking terrace on the 23rd block of Washington.  Parking is sorely needed there. I bank at Zions Bank on the corner and there are 4 good parking spaces and 10 really bad ones.  Parking will also help ease growing demand for parking near The Junction. 

Most of the commercial on the 20th and 21st blocks of Washington are a detriment to the community due to vacancy, abandonment, or unsavory use.  I anticipate most of it will be demolished and new structures will be built to suit current economic models.  I wouldn't be surprised to see mixed use retail/residential go there.  There is also a pocket of squalid housing on Oak Dr. and Warren Ct. that will likely be demolished in the future as well.

In all, this is a good move for cleaning up Ogden and it will be exciting to see the projects that are proposed. 

Analysis of a Bargain: 1146 21st St.

Last week a client closed on a property that we had identified as a good bargain. As an estate sale, we were the first offer on the table when the home was listed.  We offered $60,000 financed.  Our inspections determined that the entire plumbing and electrical systems needed to be replaced so we asked for an additional $5,000 concession in the price.  The sellers accepted and we closed.

The post fix-up value on this property will be around $120k-$125K.  My client will be restoring the main level and making better sense of the use of space in the basement.  Total budget for rehab is about $35K-$40K.

This house also has the only ductless gravity fed heater I have ever seen:

Hot air rises out of the center circle and cold air returns around the edges.  Amazing!

Car vs. Home

A viewer on Youtube posted a comment a few days ago about a home that I rehabbed being hit by a car.  A cruise by the home today reveals the truth...treadmarks and all.

Here is the before and after video of the rehab:



And a before and after of the car crash:

BEFORE

AFTER

POP! Weber County Sales Up 22% Year Over Year

In running the numbers for March I found myself quite surprised.  Sales in Weber County for March in 2009 were 205.  This year we recorded 250.  That is a 21.9% increase over the year! 

Before you pop open your Martinelli's bottle and toast to better days, let's take a look at how the Fed's First Time Home-Buyer Tax Credit is affecting things:

The tax credit was originally due to expire in December 2009.  You can see that in October and November the market had 27% and 57% (Whoa!) YoY increases. Both are likely due to this program.  In the first expiration, you had to close your deal before December 31st.  However, in November, they announced the extension of the deadline thus sucking the motivation out of the market place and sales fell to levels below the previous year.

This effect can be likened to a sugar high.  We are now on our second dose of sugar with the expiration for the tax credit looming.  The more meaningful deadline is the end of this month.  You must be "under contract" to purchase a home by that time.  However, in our chart, these contracts won't show up as sales until they close.  It takes four to six weeks to close a transaction so contracts written now will close in May.  We are seeing a pop in March's sale, how will April and May pan out.  More importantly, what will sales be like when the sugar high is over.  Sales for June, July and August should be revealing as we adjust to normal blood-sugar levels.    

Scenes from the Land of Short Sales: OCWEN

I am working on negotiating a short sale right now. We are just getting started with the process. This particular property has a first and second mortgage that were originated as an 80/20 purchase loan. Both of the mortgages were sold to separate secondary market investors after the loan closed. The second mortgage is now with OCWEN.

Second mortgages will often lose everything if the home goes to foreclosure auction as an action of the 1st mortgage. Another interesting fact is that typically 2nd mortgages are recourse, meaning that the lender can go after the borrower for a deficiency in paying off the balance, if the mortgage was not part of the purchase of the home.  You see this alot with HELOCs and debt consolidation 2nds. However, in our 80/20 case, the second mortgage was definitely a part of the purchase and is therefore non-recourse.

I give you this background information because OCWEN sent me a short sale packet to fill out for my clients. One of the forms caught my attention:

Notice that there is not a check box for not signing a promissory note.  It's kind of like the options I give my kids at dinner:  You can have mash potatoes or you can have mash pototoes...its your choice. 

Getting into the short sale with OCWEN should be interesting.  Hopefully they will realize the loan is a purchase loan and waive the promissory note requirement. If they demand one, it may scuttle our success in accomplishing this particular short sale. 

Short Sale: 4 Bed 1.5 Bath Washington Terrace

I just listed this short sale fixer upper:



If you are interested in the property, let me know. Initial list price $104,900. Offers considered on a first come first serve basis. Early offers will be given first right of refusal over later offers on final bank approval.

Made In China: American Drywall Disaster

 
Remember the construction boom in 2005-2006?  Remember hurricane Katrina and Ike?

With so many homes being built or rebuilt, there simply wasn't enough sheetrock in the United States to go around.  To make up for the short supply, Chinese companies were contracted to produce drywall.

Apparently that was a HUGE mistake.  The Associated Press reports in Feds: Homes with Chinese Drywall Must Be Gutted:

Thousands of U.S. homes tainted by Chinese drywall should be completely gutted, according to new guidelines released Friday by the Consumer Product Safety Commission. The guidelines say electrical wiring, outlets, circuit breakers, fire alarm systems, carbon monoxide alarms, fire sprinklers, gas pipes and drywall need to be removed.
"We want families to tear it all out and rebuild the interior of their homes, and they need to start this to get their lives started all over again," said Inez Tenenbaum, chairwoman of the commission, the federal agency charged with making sure consumer products are safe.

 The drywall has been linked to corrosion of wiring, air conditioning units, computers, doorknobs and jewelry, along with possible health effects. Tenenbaum said some samples of the Chinese-made product emit 100 times as much hydrogen sulfide as drywall made elsewhere.

The article is very interesting.  The people who are affected by this would have been better off never finishing their homes with these shoddy materials.  It's a shame they were hoodwinked.     

Selling While Renting: Balancing the Scales

Many of my clients are investors.  Their business models includes renting properties for cashflow and flipping properties for profit.  Sometimes though, an investor will find it necessary to sell a property that was originally purchased for cashflow.  When the property is a single family dwelling, this situation produces a unique set of dynamics that I would like to address in this post.

First, let's talk about what sells a home.  Curb appeal and interior condition are by far the majority part of getting a home sold if its priced comparable to other homes like it.  Also, furnished homes tend to sell faster than their non-furnished counterparts. Hence the rise of a cottage industry of "staging" vacant property.

So how do these factors work when a home for sale is inhabited by a tenant? Depending on what the lease says about yard work, the owner may be at the mercy of the tenant when it comes to keeping the front yard looking good.  The same goes for interior housekeeping.  Tenants do furnish their own homes but the quality and style of the furnishings are typically less desirable than what a "staging" company would put in the home.  Also, the owner is at the mercy of the tenants housekeeping habits.  Do they leave their white laundry on the kitchen table?  Is there a bag of dog food sitting in the living room?  You never know what quirky habits your tenant might have until they move in.

Another interesting dynamic that goes on in rentals is the trauma created by selling.  When a tenant knows that their home is for sale they immediately go into survival mode.  This turns into a fight-or-flight scenario.  Many tenants will simply abandon the home at the end of their lease and leave it vacant.  However, other, typically less-qualified tenants who have nowhere else to go, will dig in their heels and become adversarial toward agents and perspective buyers.  I have seen this on many occasions where the tenants outright refused to let us in or simply allowed their big dogs to answer the door.  This scenario put the owner of the property in a stalemate position.  The real estate agent and the tenant, both of whom benefit the owner, become adversaries due to conflicting agendas.

For this reason, I encourage landlords with less-qualified tenants to vacate their property prior to putting it on the market.  This allows for the home to be prepared properly for the market and gives it the best chance of selling.  Of course, the seller must be in a stable financial position to be able to make house payments while the house sits on the market.  If they are not in such a position, keeping the home rented and off the market while they create such a position is likely the best thing to do.

There is no such thing as miracles in the real estate market.  Trying to sell a dumpy home with mean tenants is a quick road to nowhere.  The markets are ruthless.  They demand quality.  Strive to provide the best product possible and you will be rewarded.