Despite indications that both the local real estate market and the local economy are ever-so-slowly stabilizing and/or improving, the ridiculous and the sublime often still reign supreme!!  I see two major obstacles to the real estate recovery:  extremely over-reactive mortgage lending practices and our new, revised and “improved” appraisal guidelines!  Of course, I realize that this is the pendulum swinging completely the other direction, as a reaction to the “loosey-goosey” mortgage loan underwriting which helped propel us into this quagmire!!!

Common sense has never necessarily been an element of acquiring a mortgage (not in my 25+ years of real estate sales and service), however some underwriting and appraisal requirements still completely floor me!!

For instance, a very well qualified young couple who are buying their first home and were more than approved for the conservative mortgage they were pursuing, received word the day before signing that closing would be delayed until his next paystub was submitted due to a PAY RAISE!!??  Really???

On the appraisal front, a newer well-maintained home I had listed suffered from a few minor dry-rot repairs (we live in the drippy state of Oregon, by the way, and dry-rot is a “state of mind”).  We were forced to have two re-inspections to get the repairs completed perfectly.  And, even though we supplied a photo of the required CO detector hanging on the wall and the wrapper from which it came, the underwriter had to have a receipt.  Really?  Now compare this to a total fixer property (that had been a drug “grow house” unbeknownst to the out of state estate trustee) and was so filled with trash and discarded furniture that you had to turn sideways to walk through the house, and the appraiser calls nothing/nada/zip! Really???

A seasoned investor, willing to put 30% down (to get the best interest rates) is told that’s not enough. Despite the fact that the duplex appraised for more than the sales price, the appraiser could not verify the new buyer’s proposed rents (since when are appraisers up-to-date on rental prices?).  And, even though the buyer showed multiple examples of current comparable rents, the bank insisted on more $$$ as a down-payment.  Really??? (By the way, the investor did get the rents)!

Regarding inspections and required repairs, I’ve always suggested to my sellers that they not necessarily spend their money for a pre-inspection of the house they are about to put on the market (unless there were extenuating circumstances).  A majority of buyers are going to insist on having their own inspection, for obvious reasons.  However, I recently had a situation that has made me re-think this recommendation.  A very clean, well-maintained house was short a few roof vents and, thus, there was some harmless black mold growing in the attic space.  Mold has become the new “asbestos”, “radon”, “lead-based paint” or “LP siding” (pick your decade).  I know all of these CAN be serious issues, but are often the subject of inspection over-reactions.  What could have been remedied by a spray bottle of clorox, water and a little elbow grease, became a relatively costly repair (as the buyers would not hear of a self-remedy and insisted on a contracted remedy).  Really???

These (unfortunately) are just a few of my most recent experiences.  Note:  I had to “change the names to protect the innocent” and mostly had to wait until these homes all closed and recorded to post this story, so as not to jinx the outcome!!!  :-)

OCTOBER 2011 PORTLAND METRO REAL ESTATE UPDATE!

Happy Halloween!!  I realize I’m a little late with this October edition of my real estate update, but I’ve been on my excellent “Aussie-Kiwi” vacation visiting my sister in Australia/New Zealand for three weeks and I’m still digging out from the pile of paper, files and work as I try to catch up.  I’m not sure I can give much insight into the market for this month (as I missed most of it).  I can share a few statistics and items of interest.  I can generally assess that “volume is up and prices are down” for real estate sales!  That, of course, makes sense.  As prices drop, more buyers are willing to venture back into the real estate market.  Inventory has decreased but the market activity is also decreasing in the condo markets but overall inventory lightening and market action trending up in single family market.  However, we were up to 6.7 months of inventory for September (from 6.2 months in August).  But, that’s typical for the time of year.  Sales activity in the Portland Metro area showed improvement in closed and pending sales this September compared with September 2010 and the inventory level remained much lower than the same month in 2010 (10.5 months).

BUYERS:  As a buyer, you are often seeking the lowest interest rate.  And current rates are excellent, hovering at around 4%, give or take!!  However, interest rates are not your only concern.  You must also consider and compare the “annual percentage rate” (APR).  APR is a federal calculation to help consumers determine which loan is best.  It adds all the costs of getting the loan to determine your true overall charges.  If your APR is more than 2/10 of a percentage point more than the comparables that equals measurably higher closing costs!  Ask for a “Good Faith Summary of Costs” from the lenders you are interviewing so you can compare “apples to apples”!  Also, start thinking ahead as a purchaser to when you might be a seller.  There are some benefits to the future assume-ability of FHA financing. Read more!  And, get pre-approved!  Here’s why….

SELLERS:  You may have heard rumblings in the news about the “new and improved” HARP (Home Affordable Refinance Program)!  The old program did not really work.  This one could be a little different as the key is getting the banks to bite!!  The new version will allow certain homeowners (underwater, yet current on their payments) to refinance up to 125% LTV (loan-to-value) if their mortgage originated prior to June 1^st, 2009.  The benefit for banks is that the banks will not have to re-purchase bad loans.  The new HARP would eliminate LTV, eliminate appraisals and reduce documentation.  This is a very simplified explanation and I’m sure more information will surface.  As far as selling property, it’s still pricing, pricing, pricing!!!

INVESTORS:  What a time to be a real estate investor!!  I know…I know coming up with the down-payment and getting the financing is a challenge!!!  I had to beg, borrow and (almost) steal to close my last purchase.  There are investor loans out there for 10% down, although the best interest rates are with 20+% down.  But, you will never know unless you visit a mortgage broker and “test the waters”.  There are cash-flowing properties out there!  It’s just something to consider to add to your overall financial strategy.  And, I’ve definitely learned some lessons managing my investment properties that I would like to share!

The dust quietly settles at the new duplex project in Irvington and only some re-shaping of the landscaping and exterior projects remain.  Both new residents have moved in and one side is settled in, the other is quickly organizing since the movers finished up last night!!

exterior of the Irvington duplex project BEFORE

exterior of the Irvington duplex project

It’s been a lot of work but rewarding!  The simple addition of some board & batten shutters enhanced the street appeal.  I still think I need to paint the entry alcove???  Since the doors face each other, it would give some definition to the entryway.  We really need to trim the front bushes!  Today my daughter and I laid down some bark-o-mulch and trimmed & cleared the front beds.

There were not too many “unexpected” costs on this remodel, but you always need to factor in a few!

We had a large, ominous, dead tree in the backyard…overhanging the garage and neighbors yard.  It looked like a “middle-of-the-night-phone call” during a windy, winter storm to me!  We got multiple bids and Tree Masters gave us an awesome bid plus were very efficient and did a great job of clean-up.  We gave the wood to friends and neighbors!!

Tree Masters did an excellent job removing the dead tree

What's left of our dead tree

Somebody's warm fireplace this winter

Waiting for pick-up

The bathroom was finished as the new resident’s moving truck pulled up….nothing like a little “last-minute-stress”.  But, I love the color:  Sherwin-Williams Historic Renwick Rose Beige in the HGTV paint line.

Newly painted bathroom

We replicated our efforts at the Webster/N Mississippi duplex and replaced the working wood fireplaces with electric fireplaces for ambiance and a little added heat for those cold winter nights!

drilling from basement to connect new electric FP

Due to the fact that bamboo from our neighbors yard (we like to lovingly call it the “haunted house”) has grown under the concrete driveway and into basement crawlspace of this side of the duplex, it was a little more difficult for my partner to find access to the fireplace, but it finally got done!  Just to warn you about how prolific bamboo is…no wonder it’s the new “green” replacement for flooring, furniture and more…you simply can’t get rid of it!!!

These 3 renovation projects over the last 3 years have been exhausting, rewarding and a good investment.  Each of the three projects have a positive cash flow monthly (rents cover principal, interest, taxes and insurance PLUS).  With interest rates so low and lower prices on local real estate, I feel it’s an opportunity to add to an existing financial plan that would include emergency savings (always first and foremost), IRA’s and/or 401K’s, stocks and bonds!  Diversification is always the name of the game!  I think wherever you are in your life plan, you’ve witnessed the recent wild ride of the stock market and the necessity of  keeping loose and exploring options!

I never liked roller coaster rides, even as a child! So, I find the current stock market VERY unsettling! The market is down xxx amount (I can’t keep up with it) in the last few days. I could take my savings out of the stock market and mutual funds and stick it in a sock drawer but I’m not sure that’s the answer either??? I’d probably inadvertently put my socks through the wash…and then what?

Preservation of capital is probably today’s most important investment consideration (especially for boomers nearing retirement) and making a profit would definitely be a bonus. Of all the conventional investment alternatives like stocks, bonds, mutual funds, gold, commodities, CDs and annuities, housing is an asset class to consider, in my humble opinion.

Real Estate has had a 30% to 40% price correction in the past four years, making the affordability factor very attractive. Mortgage rates are at near all-time low with 30 year loans available for investors. Rents have increased significantly over the past two years while vacancy rates have decreased. People will always need a place to live.

Five year certificates of deposits earn a little over 2% but rental properties are yielding much more than that. Income properties are tangible assets that have benefitted dramatically in inflationary times. Cash assets can be devastated by inflation and diversifying into income properties could provide some protection.

Investment properties offer investors the opportunity to borrow large loan-to-value mortgages at fixed rates for long terms on (hopefully/eventually) appreciating assets with tax advantages and reasonable control. Your tenants pay off the mortgage (principal, interest, taxes and insurance) while you enjoy whatever immediate cash flow is available.  Thus, even without appreciation you are gaining equity through principal reduction!

Financing investment properties is a bit more of a “song & dance” these days, but it can be done!  You can read some of my “tales of woe” from recent personal experience or fume with me on recent “highway robbery“!

I have a program developed by Hector Ariceago of First American Title that I have permission to share with interested investors, please e-mail me at jj@janeesejackson.com and I would be happy to send it to you.  It helps determine yield on potential investment properties.  I would be happy to sit down and brainstorm with you on a plan/strategy for including some investment real estate in your overall financial plan!

I continually write (or is it whine) about the constant changes and new restraints regarding real estate mortgages.  It seems that banks don’t REALLY want to lend money?  I know this is whiplash from the years of unrestrained lending practices, but they are often punishing the wrong people.  I also constantly mention that real estate can be a great addition to any financial portfolio!  It’s all about diversification!!

There are new rules and guidelines from Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) for financing investment real estate.  If you feel you are ready or want to prepare to add real estate to your overall financial strategy, it’s worth brainstorming with a real estate, mortgage and tax professional to get your “ducks in a row”!  Some of the new guidelines include:

• minimum 20% down (better interest rate with 25% down)
• No gift funds can be used
• the seller can pay up to 2% towards closing costs
• the borrower can have no more than 4 mortgages total (including your primary residence).  5-10 investment properties have additional rules)
• must have 6 months PITI (principal, interest, taxes, insurance) for the subject property plus 2 months PITI reserves on all other properties
• if the buyer has no history of property management covering two years, must qualify for full PITI regardless of expected rental income
• there is NO loan program for investment property purchases under FHA and VA (though you can do an FHA streamline refinance on a rental with a current FHA loan)

If this is your first rental purchase, there are certain special requirements.  Be sure and document all cash for the down payment and reserves.  You must qualify for the purchase with no allowed rental income.  Rent loss insurance is required.  One of the hottest programs is homepath.com where you can put 10% down with no mortgage insurance and no appraisal required.  Lenders offer the loan and Fannie Mae backs the terms.

What if you already have 4 mortgages or more?  Fannie Mae has a program for financing up to 10 mortgages but few lenders participate and their individual terms can vary and those lenders may add their own restrictions.  You could consider refinancing your primary home or other investment properties to pull cash out to purchase new properties.  I attended a class where the mortgage broker then “apportioned” a percentage of the loan amount used for the rental on the schedule E and the remainder on your primary home.  You would definitely want to discuss with your tax professional to confirm.  Obviously, any refinancing would be for the seasoned investor who had meticulously “run the numbers” for their personal financial situation!

The absolute beauty of holding real estate as part of a financial strategy is that you purchase the property leveraged with other people’s money, the tenant makes the PITI payment, you pocket the cash flow, you enjoy the tax incentives.  As time goes by, your equity has increased through the tenants paying down the principal, rents generally increase thus increasing your passive income.  Then you either allow the rental income to supplement your regular or retirement income OR you sell with your initial investment increased both by increased equity and whatever natural appreciation may have happened in your marketplace!

It’s 2011 and in almost every state in the United States, buyers have the option of being represented by their real estate agent.  This relationship creates responsibilities that require the agent put their client’s interests above their own.  This could lead to a discussion regarding whether that is possible for humans, but we’ll leave that for “Philosophy 101″!  Prior to 1996, the fiduciary responsibility of a real estate agent, whether they were listing and marketing a home for a seller OR driving buyers around to identify their next home or investment, was to the seller.  YES, even if you were working with the buyers, you actually “represented” the sellers!  Like a lot of antiquated ideas, it sounds ludicrous now!

In 1996, thankfully everything changed to reflect the reality of real estate relationships!  Now when a seller hires an agent to help with pricing, staging, marketing, negotiation, implementing repairs and more,  they have an agent working for them!  When a buyer enlists the services of a real estate agent to help them get pre-approved, determine their housing needs, brainstorm values, negotiate and more, they have an agent working for them!  And, there is the occasional example of the agent who is truly “win-win” and can handle both sides of the transaction, but you see it less and less because of the increased liability.

The duties a buyer or seller can expect to received (among others) are honesty, accountability, full disclosure, representation and reasonable skill and care.  In a nutshell, the agent who represents you is working in your best interest!  It’s a special relationship that doesn’t exist with most of the other professionals involved in a real estate transaction.  Mortgage and title officers are limited to their duties of honesty, accountability and specific requirements under the Real Estate Settlement and Procedures Act.

This special relationship with your real estate agent makes it advantageous to have them help coordinate your efforts with the other professionals in the home buying process.  Since most buyers’ and sellers’ transactions are infrequent, a trusted agent can bring valuable experiences to the transaction!

I’ve got this obsession!!!  It’s called “Real Estate”!  It’s not just a purpose, it’s a drive!  It might be referred to as “OCD” (obsessive-compulsive disorder) without the “C”.  I’m definitely NOT compulsive.

I am starting my 3rd duplex/investment property/renovation and if you read any of my former blogs/rants-n-raves about my experiences with those projects you might appreciate some of these ramblings more.  (see the Blogroll on the right hand side of my home page and go to August-September 2009 or July-August-September 2010).

So, every real estate investor has their own strategy and their own list of “wants & needs” as they look for property.  As I always say “there’s no wrong or right in real estate as long as you have a plan”!  You cannot project every scenario in life (as our last couple of years have highlighted), but I do think you have to have a general blueprint for time-lines, financial strategies and goals!!  That coupled with the ability to be flexible and resilient as opportunities, situations and obstacles arise can be a recipe for success!

Let’s start with getting the mortgage for this property.  YIKES!! I have really good credit (why it’s not better, I’ll never understand, as I never miss payments:  PERIOD, END OF STORY).  However, that’s a system better left to the people from “Outer Space” that make and manage those formulas.  I do understand that I’m a challenge to approve for a mortgage on paper.  I’m self-employed (not W-2′ed by an employer) and my income fluctuates BECAUSE I’m self-employed.  However, I have a good track record of investment properties that cash-flow.  I live below my means (i.e:  I save $$$).  I also own multiple properties (it’s an issue with lenders when you own more than four). My mortgage broker went through multiple lending venues to get me qualified.  I always love when they ask me to write a letter explaining why my income was less last year.  The sarcastic side of me wants to reply (in bold):  ”do you have a newspaper?”.

Okay, so getting the mortgage was a challenge; more money had to be included in the down-payment and the interest rate was higher.  Washington Federal was willing to do an asset-based loan.  I ran the numbers (in my sleep sometimes) to conclude that what I perceived to be a really good investment…was still (even with the new set of monetary parameters)! However…get this:  the property appraised for MORE than I was paying.  But, the appraiser only included one side of the duplexes rental income (they’ve been there for 10 years and the rent is WAY under market)  and the other side is VACANT.  Hello, does anyone really think we will leave that side vacant?  So, because of that rental valuation, the only way to could get the loan was to put a lot more money down and a higher interest rate.  I provided my research on market rents for the area but the loan underwriters had their own ideas!!  I understand lending institutions being “gun-shy” but this was “highway robbery” and we wonder why more people don’t get into the investment real estate market!!!

It did close!!  Now what does or what would this do to someone who wasn’t in the business or who had not already had successes with investment property???  You tell me??!!  That buyer would have “run for the hills” (and there were “middle of the night” sessions where I would have been right behind him/her).  I really rely on my gut!  So, I “stayed the course”.   Now I just hope I was right  :-)
PS: thanks for letting me vent. I (sorta) feel better now!

June 2011 Portland Metro Real Estate Update!

So, do you want to hear the “good news” or the “bad news” first???  Despite the recent bout of less-than-stellar economic news, the momentum in real estate sales in the Portland Metro area continues.  Short-sales and foreclosures continue to put pressure on pricing and there is no denying that those prices are determining market value!  As always, every neighborhood is affected differently.  But, I am still seeing well-priced investment properties and aggressively priced homes/condos in good condition sell quickly and even experience multiple offer situations!  Pricing correctly is still the challenge.  No one wants to leave $$$ on the table, but over-pricing will stall the sales process.  Year over year, closed sales were down, but inventory hit the lowest level since October 2009!  However, year-over-year, the average sales price fell 7.3%, but we are now down to 6.8 months of inventory!! I believe this market is fueled by a “crisis of confidence”  for the consumer and the lending institutions.

BUYERS: What does this mean for buyers?  Mortgage rates have leveled off at 2011 lows to date!  Low mortgage interest rates definitely benefit the first-time buyer, investors and repeat buyers (if they can sell their home).  If something is priced right, “priced-to-sell” or under-market, you may be forced to quickly view the property and make your very best offer!  That could even mean an over-sales-price offer.  I have this theory that “winning” in real estate is getting what you want (within reason, of course).  I always tell everyone (that will listen) that I have paid full price or OVER asking price (due to multiple offers) on every piece of real estate I’ve ever purchased!  When you know what you want and why you want it (and you know you can afford it), you don’t quibble over minutia!  Just one gal’s theory…..

SELLERS: What does this mean for sellers?  Buyers are in the market and they want to buy.  Cosmetically and structurally challenged properties have a narrower market, especially in some areas.  But, you still have to be careful not to over-do renovations for marketing, as you may or may not recoup the money.  So, it’s a fine line.  Pricing is tough!  Real Estate Brokers are experiencing issues with appraisals NOT coming in at value on properties under contract and/or demanding more $$$ down or higher interest rates on investment properties.  This makes competitive pricing not only necessary to attract buyers, but indispensable when it comes to getting the mortgage approved!  Perhaps offering incentives such as seller paid closing costs (very typical in the first-time buyer market) or interest rate buy-downs could entice a buyer to make a move?

INVESTORS: What does this mean for investors?  Again, decent properties that offer cash-flow (or the potential for getting the rents up to market), location and appeal are being “snapped up” by investors with the means to get financing.  Again, mortgage requirements for investors are getting more and more stringent, especially if you own more than four total properties.  Perseverance is key, be ready to make a larger down-payment and/or higher interest rate and steady yourself for rejection with the resiliency to keep trying!  I love that you use a smaller amount of your money + a larger sum of someone else’s money to purchase an investment and, then, the tenant pays the borrowed amount.  Remember “leverage” is not a dirty word!

FEBRUARY 2011 PORTLAND METRO REAL ESTATE UPDATE!

The “uptick” in market activity that began (oddly enough) in November and December of 2010 has continued into the New Year!  After the expiration of the various Home-Buyer credits that were available until the end of May 2010, we experienced a rather dismal summer real estate season that drifted into the autumn months.  Suddenly, when everyone should be preparing for the holidays, an unseasonal surge in real estate activity???  So, closed sales began the year at a higher level than January 2009 and 2010.  Inventory also saw a lower level than the first month of ’09 and ’10, dropping 1.3 months compared to January 2010 and closed sales were up 5% in January 2011.  But, the average sale price declined 11.9% this last year.  Clackamas County saw the year-over-year average sale price drop 7.6%, Multnomah County was down 0.1% and Washington County lost 2.3%.  Today when making appointments to show property, I found two already had offers.  A recent competitively priced, well-positioned, well-staged listing went sale pending in under a week.  To me this indicates some “pent-up buying energy” in our marketplace coupled with the fact that interest rates have gone up slightly in the last few months. If this trend continues with home sales exceeding inventory (and, ultimately absorbing excess inventory), you could expect pricing to level off soon and potentially resume the climb.

Sellers:  What does this mean for sellers?  It means that there are buyers willing to buy and they are “sticking their toe in the water”.  It’s still very competitive and I’m definitely not complacent about getting my listings staged to highlight their best features, priced to lure the reluctant buyer and positioned through superior marketing!  We still have a slew of foreclosure and short-sale inventory that we cannot ignore.  There’s nothing “magic” about getting your home sold.  As always, it’s  location, condition, price!!!

Buyers:  What does this mean for buyers?  It means that with mortgage interest rates slowly creeping upward (in the last 3 months interest rates have increased by an average of 1%:  *see chart below to determine what that means to you as a buyer*), if you have a down-payment, good credit and a little faith, you might want to at least consider getting into the housing market (remember, there are creative ways to secure that downpayment).  Housing affordability is over 180, an all-time high when 100 is considered good and you’re still renting?  It remains a buyer’s market and you might want to have a discussion with a trusted mortgage broker and a seasoned real estate professional about options and compile a financial profile of rent-vs-buy!!

Investors:  What does this mean for investors?  Well, the Census Bureau’s 4rth Quarter survey of Residential Vacancies and Homeownership has been released and the numbers indicate the possibility of rent inflation as demand for rental units grow.  Starting or increasing a rental portfolio could capitalize on this demand! Click here for some new regulations for homeowners and rental property owners.

Okay, you may (or may not) remember (or care) about my last year’s article on “Death and Taxes“.  Well, since they are both seemingly inevitable,  I though I’d revisit.  If you’ve heard the term “1031 Tax Deferred Exchange” it could be because you’ve considered investing in income property!  Aside from giving the investor a tremendous increase in purchasing power and a chance to defer taxes on capital gains from the sale of real estate, a 1031 exchange provides the benefits of leverage, consolidation/diversification and increased case flow/income!

Investors can take advantage of the 1031 Tax Deferred Exchange to acquire a more valuable investment property.  If the investor utilizes the money they would have paid to the IRS in taxes, they can increase their down payment and acquire a more expensive replacement property.

An investor may also exchange one property for several others, consolidate multiple properties into one and acquire property anywhere within the US.  For example, an investor could exchange two duplexes for a retail strip mall or take advantage of a new growth area by exchanging one property in California for three in Oregon, etc.

Investors that have enjoyed the long-term benefits of several rental properties may have accrued considerable equity and want to exchange to one large property.  You could also increase cash flow if you are holding a vacant piece of land with no cash flow or depreciation benefits by exchanging it for a commercial building or a duplex/multiplex that cash flows. 

Also, check out last year’s list of tax publications.