Friday, May 29, 2009

New Rules on Appraisals

In order to achieve the independence and accuracy of the appraisal process, effective May 1st, 2009, Fannie Mae and Freddie Mac have adopted the new regulations governing appraisals. The new rules, known as Home Valuation Code of Conduct (HVCC):

• Prohibits lenders from accepting appraisal report where the mortgage broker (or real estate agents) had a role in selecting, retaining, or compensating the appraiser
• Require absolute independence between in-house appraisers and loan production within lender’s organization
• Only applicable to 1-4 unit single family residential
• Government-insured loans are exempt

HVCC is not even a month old, but many people are unhappy with the execution. Yes, the purpose is good, which is to stop unethical mortgage brokers’ influence on inflating the price. Property values were over inflated during the boom, and that is one of the reasons of today’s mortgage meltdown. The new policies should give us more reliable appraisals and less fraud. In reality these are some of the unintended consequences:

• Even though ordering from Appraisal Management Company (AMC) is not required, and a lender may order appraisals directly from an individual appraiser, what most happen is, a mortgage broker orders appraisal, directed by a lender to a specifically authorized AMC.
• The existence of AMC means, consumers pay more for appraisals, while appraisers make less, because AMC retains percentage of the fees.
• The relationship long established between the ethical appraisers and brokers are gone, and inexperience appraisers from AMC may be assigned instead. This cause delay and longer escrow time, and the quality of the appraisal report may suffer.

Further detail on HVCC, can be found here.

Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved

Tuesday, May 26, 2009

Foreclosures are Coming to Affluent Neighborhoods

Foreclosures are coming to affluent neighborhoods. Obviously, the riches are not immune to recession. Few of the foreclosed properties are listed below:

75 Tobin Clark Drive, Hillsborough, CA 94010
450 Middlefield Road, Atherton, CA 94027
996 Laurel Glen Drive, Palo Alto, CA 94304
151 Giffin Rd, Los Altos, CA 94022
12051 Stonebrook Drive, Los Altos Hills, CA 94022
15070 Montebello Road, Cupertino, CA 95014

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Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved

Monday, May 25, 2009

What Happens in Vegas Doesn't Stay in Vegas Anymore

Interesting video documentary from Vanguard Journalism:

Remember, there are always two sides to a coin. One side is crisis, the other side is opportunity.

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Thursday, May 21, 2009

When Renting is a Smart Financial Decision

The current edition of Forbes magazine has an intriguing story. It is a wakeup call that the path of homeownership is not always financially wise. The house was purchased for $922,500 in 2004 and now, it is pending at $849,000 price. It is likely that the offer maybe less than the listing price. After 5 years of homeownership, the seller is losing money, not only the equity, but also the $60K every year that she spent for mortgage payment, taxes and insurance. Had she chosen to rent similar house, she would only pay $36K each year. True, that mortgage interest and property taxes can be deducted from your taxable income, but remember, the higher the salary, those deduction will phase out.

As everyone tried to be homeowner, in the past few years, I heard this all the time: “Why do you want to make your landlord rich?” Now imagine if Ms. Seaman was renting the house at 1233 S Curson Ave, Los Angeles, CA 90019, instead of owning it. I would not ask her, the renter, “Why do you want to make your landlord rich?”, but I would ask her landlord instead, “Why do you want to fund your tenant’s lifestyle?” Yes in this story, it is smarter to be renter in West Hollywood neighborhood.

Of course, our lives are not based on financial alone. There are things in life that can’t be measured by money. So, it is OK to own a home in affluent neighborhood as long as you can afford it. What I mean by that, for the super wealthy people, it doesn't matter to spend a lot money every year for the house they like, or these people may buy the house in cash, since they have excessive cash anyway.

You may have wondered, why would I bring up that renting can be a smart financial decision, considering I am in the real estate investment business? There are two reasons. First, I am blatantly honest here and I like to speak out my mind. Second, if you live in expensive neighborhood like Ms. Seaman does, you’d be better off by renting there. Instead of using the money for down payment, mortgage, property tax, and maintenance of a house in West Hollywood area, you can invest that money to buy residential rental in different area, or maybe out of state, and pocket cash 6%-10% every year. Especially right now, you can find many houses that are 70% off from the peak and houses that cost less than their construction cost (you get the land for free). This way, you fund your retirement portfolio. This is not for people who have nothing, and have no choice other than renting, rather for people who have choices on what to do with their money and choose to rent because by renting, they will be better off financially.

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Monday, May 18, 2009

Houses for $26,900 with $450 cash flow per month

That is the promotion! Houses for $26,900 with $450 cash flow per month. That is equal to annual cash-on-cash return of 20%! Sounds too good to be true?

The houses were REO properties, which were purchased in bulk, rehabbed and sold to investor. What kind of houses will you get? I checked three of them:

House #1
Location: Indiana
Below Poverty Line: 41.26%
Vacancy rate: 15.14%
Ratio of renter-occupied to owner-occupied: 125.17%

House #2
Location: Georgia
Below Poverty Line: 43.42%
Vacancy rate: 22.73%
Ratio of renter-occupied to owner-occupied: 158.03%

House #3
Location: Florida
Below Poverty Line: 35.31%
Vacancy rate: 13.97%
Ratio of renter-occupied to owner-occupied: 74.20%

What do those numbers mean?

1) They are located in slum neighborhood. In my previous article, I mentioned, I personally will not invest in a slum, and will advise the same to my clients. You can rehab any properties, but you can’t change the location. Choosing the right location is one aspect of successful real estate investment.
2) High vacancy rate means, you have to wait longer to get tenants. As a result, your cash-on-cash return may be lower than the one advertised.
3) High poverty rate means, most people are low income resident or welfare-dependent. Low income neighborhood tends to have higher crime rate. It may take you or your property manager extra effort to screen qualified tenants and collect rent. Few months of uncollected rents lower your cash-on-cash return. And sometimes bullet proof vest is needed to collect rents!
4) High renter-occupied to owner-occupied rate. Tenants usually do not take care the properties as good as owners. There is no pride of ownership. Deteriorating neighborhood lowers property values.

Bottom line, you get what you pay for, and know what you are getting into.

Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved

Wednesday, May 13, 2009

Trustee Sales at San Mateo County and Santa Clara County

Buying at foreclosure auction can be rewarding if you have two things, cash and time. Before you are allowed to bid at trustee sale, you have to show the auctioneer that you have sufficient cash, usually in the form of cashier checks or money orders. Second, it is very time consuming, especially if you have demanding full time job. Let’s say, you have done your rigorous due diligence on the property you plan to buy and finally manage to take time off from your work, but at the auction, you find out the property you are interested, is being postponed or cancelled. For example this past week, hundreds of properties scheduled for auction in San Mateo County and Santa Clara County were postponed or cancelled.

Sold properties are listed below:

AddressCityZIP CodeStarting BidSold for
1135 SAGE STREETEAST PALO ALTO94303$225,250$225,250.01
750 6TH AVEREDWOOD CITY94063$216,750$233,000
232 GARDENIA WAYEAST PALO ALTO94303$178,500$183,000
1616 HEMLOCK AVESAN MATEO94401$401,272$401,272.01
1319 MONTE DIABLO AVENUESAN MATEO94401$348,500$370,100
2020 SPYGLASS DRIVESAN BRUNO94066$539,750$539,750.01
547 GROTH PLSAN JOSE95111$112,500$127,400
929 E. EL CAMINO REAL C211SUNNYVALE94087$236,800$236,800.01
488 AMARGOSA COURTSAN JOSE95111$111,234.6$111,234.61
1345 HALF ROADMORGAN HILL95037$312,035.43$312,035.44
2061 EAST SAN ANTONIO STREETSAN JOSE95116$127,000$132,300
5179 ALUM ROCK AVENUESAN JOSE95127$196,421.98$250,300
564 COYOTE ROADSAN JOSE95111$157,026.32$180,000
953 DEER MEADOW COURTSAN JOSE95122$175,000$175,000.01
14411 HIGHGROVE COURTSAN JOSE95127$157,026.32$175,000
3017 LUCAS COURTSAN JOSE95148$525,300$561,500
2470 ALFRED WAYSAN JOSE95122$195,500$195,600
941 DRY CREEK ROADSAN JOSE95124$578,000$701,000

Even if you have cash and time, be sure you are mentally ready. Why? Please read this article.

Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved

Monday, May 11, 2009

Due Diligence on Apartment Building – Part 4

A group of people who bought lands at New Mexico tax auction, later discovered there were demolition and weed cutting liens on the properties, in the amount which was more than the property values. One buyer paid $800 for a property, only to find out a lien of $20,000 (Source: Clovis News Journal).

A condominium in Colma, California, was foreclosed by the HOA for $7,000. I was told that a young couple bought it. I don't know whether they realized that there was a mortgage lien in the amount of $600K, much more than the condo market value of around $300K. So the young couple got property worth of $300K for $607K. Great deal? Yeah, right!

Title and ownership information is a critical consideration when buying any kind of real properties, whether it is land, or single family or even apartment building. There are a lot of things which can encumber the title of a property. The simplest example is a mortgage. When you take a mortgage, the lender places a lien in the property as collateral. Let’s say one property has multiple liens at any one time. The priority of the liens is normally based on the time it gets recorded. The lien which is recorded earlier, takes higher priority over the lien which is recorded later. There are exceptions to this rule. Property tax takes the highest priority over all other liens. IRS lien has 120 days of redemption right, no matter when it is recorded.

Example of other type of liens:

• Home equity line of credit
• Mechanic’s lien: Lien placed by contractors for nonpayment of labors and/or material at the property
• Municipal services lien: Lien placed by the municipal for unpaid utilities and school assessment
• State income tax lien: Lien placed by the state for unpaid state income tax
• Judgment lien: Lien as a result of financial judgment
• Child support lien: Lien for past due child support

Other things that can impact the property’s title:

• Recorded lease option
• Property restrictions (eg: BMR property can only be sold at an approved price)
• Partial interest

Remember, something that sounds too good to be true, it probably is! Do your necessary due diligence.

Copyright © 2009 Wealth Aspiration, Inc. - All Rights Reserved

Thursday, May 7, 2009

Due Diligence on Apartment Building – Part 3

Jim Sullivan, a real estate broker from New Jersey, bought tax lien from Gloucester County in 1999. The defaulted owner was Accutherm, a thermometer factory. Sullivan foreclosed the property, hired contractor to make building modification, and leased it to Kiddie Kollege Day Care Center in 2004.

Apparently, the building was contaminated with mercury and the parents of 94 babies and children sued him. Mr. Sullivan asked Superior Court Judge to void the foreclosure and then he sued the previous building owner, Accutherm. Unfortunately, Sullivan is still liable to clean up the mercury. The state Department of Environmental Protection ordered Sullivan to demolish the building and clean up the site, an estimated $1 million project. OUCH!

Source: Gloucester County Times, The Philadelphia Inquirer

The story is a perfect example of investor’s failure to conduct due diligence on environmental issue. There are firms that specialize and are experienced in environmental analysis and engineering. They can do proper research to determine the potential presence of hazardous materials. Examples of hazardous materials are asbestos, lead-based paint, mold, radon, gas leaks from underground storage tanks and … mercury. Get familiar and review environmental regulations at federal, state and local jurisdiction.

You may want to consider phase 1 environmental assessment. This assessment will examine the history of the building and determine if potential contamination exists. It doesn't involve physical analysis and testing of the soil, water, air or building material. If it is identified that further investigation should be performed, then phase 2 environmental assessment has to be done. In phase 2 assessment, actual sampling of soil or water will be collected and tested in laboratory.

Contaminated sites are often referred to as brownfields. In one of his articles, Joel W. Reese, an environmental litigation attorney from Dallas, suggested that buyer should add a transfer of claims for environmental injury in the deed. In general the right to seek compensation for environmental injury is a personal right that accrues to the owner at the time injury happens. Without transfer of claims in the deed, this right is left with previous owner, and successor buyer may not be able to recover environmental injury damages without first incurring the cost of cleaning up the property. Consult attorney for this matter.

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Wednesday, May 6, 2009

Due Diligence on Apartment Building – Part 2

Compliance to accessibility laws is often overlooked by many people. Apartment buildings that are not accessible to people with disabilities easily invite discrimination lawsuit. Ignorance can lead you to penalty for fair housing laws violation and the cost of correction can be hefty.

Some items you have to check during your due diligence period:
• Clear floor space to allow wheelchair access and turning
• Doors with proper width
• The steepness of the slopes and curb ramps
• Minimum number of disabled designated parking spaces and passenger loading zones
• Reinforced walls for grab bars in the toilet, bathtub and shower stall
• Accessible locations for light switches, electrical outlets and thermostat.
• Any protruding objects that reduce the headroom clearance which are hazardous for the blinds

Beside compliance to federal laws such as Americans with Disabilities Act (ADA) and Fair Housing Act, you have to comply to the regulation of state and local jurisdiction as well.

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Monday, May 4, 2009

Due Diligence on Apartment Building – Part 1

This article is to fulfill what I have promised on March 16th, 2009. When you start to play with 5+ unit apartment building, there are various subjects that you have to consider, which don't exist when you are in the 1-4 unit game. Since it is impossible to cover everything in a blog, I will only touch few important subjects.

Today, we will talk about valuation method. Unlike 1-4 unit single family houses, in which sales comparison method is normally used with the most emphasis, income method is used for apartment building valuation. There are three factors here, the capitalization rate or commonly referred to as “cap rate”, net operating income (NOI) and building value.

                        Net Operating Income (NOI)
Building value = ----------------------------------------
                                    Cap Rate

The capitalization rate is determined based on the capitalization rate of apartment buildings sold recently within that particular area/neighborhood.

Net operating income is gross operating income minus operating expenses. Note that operating expenses don't include debt service, depreciation and income taxes.

What do you have to account when analyzing net operating income?

• At least the last one year of monthly P&L statements
• Three to five years of annual P & L statements and income tax returns
• Rent rolls and payment history
• Copy of all lease agreements and any addendums
• Security deposit records
• Other source of income such as income from vending machine and laundry

• The last three years of property tax bills
• Insurance policy: term, exclusion, all riders
• Property management agreement
• Utility bills: gas, electric, water & sewer, trash
• Any assumable service contracts such as landscaping and wireless internet services
• Any assumable warranty from vendors

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