Status Update

Time for a status update. All my active hard money loans are current and have been paying on time. Hard money #14, which was just made mid-June, might be paid off soon. The property has been fixed up and is on the market. This guy works fast! Here's a shot of the place when my borrower purchased it:

And here it is now:

Looks much nicer. He took down the fence, which is something I probably wouldn't have thought to do. Also fixed up the landscaping. He are some pictures of the inside. He's got the place staged nicely!

And he did all this in two months. Very fast! It's listed for $499,000. Our mortgage is for $198,000.

On the Houston apartment front, we had the semi-annual investor conference call last week. Things are starting to turn around there, although the property is still in a negative cashflow situation. First, an update on the Houston economy: times are still tough there. Class B and C apartment complexes have been hit hard. (We are a class B complex in a class A location, so I'd say we are a slightly higher end class B.) Sixty-seven percent of apartment complexes in Houston are offering concessions. Rents have declined 4.1% in the months of January through April. Job losses are slowing, although employment in Houston is very erratic - the number of jobs has fluctuated +/- 30,000 over the last 1 year.

Now for the good news: Occupancy is trending up in 2010. We are currently at 92%, up from a low of 87% in January. Move outs and move ins, a sign of tenant turnover, are trending down - only about 4 in the last month from a high of 27 in June. Cashflow is negative about $4,000 a month, but this is also trending up, from around negative $15,000 a month a couple months ago. The negative cashflow is mainly due to insurance and taxes. We did have a successful appeal of the property valuation for tax purposes, so that will result in a lower tax bill. Insurance has also been renegotiated and will be lower in the future. Unfortunately, both of these items are required to be collected in an escrow account by our lender, so the reductions will not be seen immediately, as we will have to wait until the next yearly escrow analysis for the decrease to be seen.

Comparing the actual numbers with the pro forma numbers that were figured going into the deal shows we are actually fairly close. Total operating expenses on a per unit basis are $4,645 and the pro forma number was $4,470. The increase is due to higher utilities, taxes, insurance, and security. Management fees are slightly lower than the pro forma numbers.

Management is taking steps to bring down our per unit operating expenses. Besides the taxes and insurance, the biggest expense was security. We had inherited a security contract when we bought the property that was fairly expensive. That contract has since expired and we have switched to a new security company, which reduces the cost to about 20% of what it was, resulting in a savings of over $190,000 per year.  Altogether, the changes should bring our per unit operating expenses down to around $4,150 - even better than our pro forma number.

Management is also taking some unique steps to attract and keep tenants. They are contacting large employers in the area and trying to get contracts for 10% of the units. They are offering tenants a job loss addendum on their leases. This says if they lose their job within 6 months of moving in, they can resign for a new 1 year lease and get one month free rent - which they must pay back at the end of the year. So it basically delays the income for us, but could possibly keep the tenant from moving out, while also extending their lease. They are also offering a 20% discount to current or retired police officers who live on site, with an additional $25 discount if they park a marked car on site. The property is already a Blue Star certified complex, a designation bestowed by the Houston Police Department for properties that have taken significant steps to deter crime and provide a safe environment.

The loan on the property switches from interest only to amortizing in July of next year, so that will cause our loan payments to rise. However, since we are repaying principle, this is really equal to a return of our principle to us, only we won't get it until we sell the property. Management is looking to resume quarterly distributions to investors early next year. That will give them time to return to a positive cash flow and also build up a small contingency fund.

Time Is Of The Essence

Saw this article today about a couple in California that bought a house at a foreclosure auction. They thought they had a great deal, but it turns out they actually bought the worthless second mortgage, not the first. A few months after the auction, they received another foreclosure notice, this time for the first mortgage. As you know, the first mortgage has seniority, so the couple was pretty much screwed. At the auction for the first mortgage, no one placed any bids, so the property went back to the lender and the couple was able to work out a deal to keep their house. Unfortunately, their daughter and her fiancée, whom the house the purchase for, have decided to move out of state, so they won’t be living in the house after all.

There are a couple of interesting points in this story. This took place in California, where there are some peculiar laws. Apparently, it is easier for a second mortgage to foreclose than a first, which is why the bank proceeded the way it did. It sounds like the buying couple did do some basic research – they saw the recorded docs for the two loans, but since they were recorded on the same day, they thought they were the same loan. That’s where they made their mistake. There are a couple warning signs they should have seen. First, check out the loan amounts as stated in the recorded documents. They should have seen they were different. They should have also seen that the loan that was doing the foreclosing was the lesser amount, which should have tipped them off that it was a second mortgage, not a first. Second, they should have looked further than the date. I know, at least in Arizona, documents are recorded not only with a date, but also a time. I would imagine California does the same. If two documents are recorded on the same day, check the time to see which was recorded first. Personally, a friend of mine encountered a similar situation here in Arizona. He was buying a foreclosed property and someone else was trying to save it from foreclosure. It came down to the time each party recorded their document. My friend’s document was recorded about 15 minutes sooner, so he got the property.