This blog was started 6 years ago today! Wow.. Times flies!
I was planning on posting an update about the apartment complex and a few other odds and ends today, but I've gotten swamped with other things, so I'll just say "Thanks for reading!",
Breaking The Bank-Appraiser Cabal
I got a call the other day from the bank that holds the mortgage on my house. They wanted me to come in and talk with them about refinancing. They thought I could get a better rate. So on Saturday, I went in and spoke with a lady in the refi department. I could have gotten a real sweet rate – if I didn’t have my home equity line of credit. I got the HELOC near the peak of the housing bubble, so the combined value of my HELOC and my mortgage is well over what my house is worth today. That meant I had to go into a different loan program with a higher rate and I wouldn’t be saving very much.
But while I was talking to the woman, I found out an interesting fact. Now, back when I was rehabbing and renting properties, I did refis and loans all the time. I’ve probably been through the mortgage process as a borrower 15 times or more. I’ve got a fair idea of how the game is played. Or, I thought I did. I haven’t gone through the process since the housing bubble collapsed. Turns out a couple of things have changed. The biggest change is that the bank no longer can have any contact with the appraiser. The bank just orders an appraisal and the order goes to the appraisal company, who then doles it out to one of their employees. The appraiser contacts the borrow or home owner to schedule a time to look at the property. I think this is a positive step. I remember thinking how convenient it was that the appraisal would always come back right at or slightly above the sales price of the house. There seemed to be an obvious game going on where the bank would hint to the appraiser what figure they were hoping to get. And since the bank paid the appraiser, there was a strong incentive for the appraiser to meet that number. I’m sure this was a big factor in the housing bubble.
Of course, the new prohibition does not fully stop this practice. The appraiser still must talk to the borrower (assuming this is a refi and the borrower is living in the property), so the borrower can still tell his target value to the appraiser. I don’t think there will ever be a way around this. But I have heard from appraisers that they are also limited in the adjustments they can make. They have strict limitations on what improvements they can include. I had one appraiser tell a friend of mine that short sales and foreclosures now really hurt property values because appraisers are pretty much stuck using their sales price as comps and are very limited in the adjustments they can make. I would imagine one foreclosure or short sale in a neighborhood wouldn’t be too bad, but a neighborhood with several could see the property values really plummet.
In other news, it looks like the former owners and occupants in the hard money #15 property are being jerks. If you recall, he originally wanted $6,000 and one and a half months to move out. My partner offered $1,500 and four weeks. Now he is asking for $3,000. In the words of my partner, “fat chance.” The occupant has threatened to take the windows if he is not paid that much. Our lawyer advises to call the police if he does. (And yes, we do have insurance on the property.) Looks like this will be going to court to get the people out. And there are lots of people – 8 adults, 2 kids, and 3 dogs. Yeah, there will probably be a bit of remodeling that needs to be done when they leave. Such is a life of a foreclosure investor.
My others loans are doing well and paying on time.
But while I was talking to the woman, I found out an interesting fact. Now, back when I was rehabbing and renting properties, I did refis and loans all the time. I’ve probably been through the mortgage process as a borrower 15 times or more. I’ve got a fair idea of how the game is played. Or, I thought I did. I haven’t gone through the process since the housing bubble collapsed. Turns out a couple of things have changed. The biggest change is that the bank no longer can have any contact with the appraiser. The bank just orders an appraisal and the order goes to the appraisal company, who then doles it out to one of their employees. The appraiser contacts the borrow or home owner to schedule a time to look at the property. I think this is a positive step. I remember thinking how convenient it was that the appraisal would always come back right at or slightly above the sales price of the house. There seemed to be an obvious game going on where the bank would hint to the appraiser what figure they were hoping to get. And since the bank paid the appraiser, there was a strong incentive for the appraiser to meet that number. I’m sure this was a big factor in the housing bubble.
Of course, the new prohibition does not fully stop this practice. The appraiser still must talk to the borrower (assuming this is a refi and the borrower is living in the property), so the borrower can still tell his target value to the appraiser. I don’t think there will ever be a way around this. But I have heard from appraisers that they are also limited in the adjustments they can make. They have strict limitations on what improvements they can include. I had one appraiser tell a friend of mine that short sales and foreclosures now really hurt property values because appraisers are pretty much stuck using their sales price as comps and are very limited in the adjustments they can make. I would imagine one foreclosure or short sale in a neighborhood wouldn’t be too bad, but a neighborhood with several could see the property values really plummet.
In other news, it looks like the former owners and occupants in the hard money #15 property are being jerks. If you recall, he originally wanted $6,000 and one and a half months to move out. My partner offered $1,500 and four weeks. Now he is asking for $3,000. In the words of my partner, “fat chance.” The occupant has threatened to take the windows if he is not paid that much. Our lawyer advises to call the police if he does. (And yes, we do have insurance on the property.) Looks like this will be going to court to get the people out. And there are lots of people – 8 adults, 2 kids, and 3 dogs. Yeah, there will probably be a bit of remodeling that needs to be done when they leave. Such is a life of a foreclosure investor.
My others loans are doing well and paying on time.
Another New Loan Made
Just a day after starting a new hard money loan, my partner contacted me with another opportunity. This is another single family home, 1,900 square feet, 4 bedrooms, 2 baths. The outside looks nice:
But the inside needs about $30,000 of work. The previous owner / occupants included 7 adults, 2 kids, and 3 dogs. And no stove. You can imagine what it looks like inside. The previous owner tried to sell the property themselves, but, given the poor interior condition, was unable to find a buyer.
The borrower for this loan is, once again, my partner's wife. The property was purchased for $300K, and we are writing a mortgage for $220K, giving a 74% LTV. (I've rounded the numbers for simplicity, so if you do the math, you'll get a 73.3% LTV.) Fixed up, the property should sell for $390K. My partner used to live in the city this house is in, so he's got a better than usual knowledge of the area. He figures it'll take 3 months to get the place ready for sale.
The old owner is still occupying the property. He offered to leave in one and a half months and wants $6,000. My partner countered with four weeks and $1,500. No response from the guy yet. Technically, he doesn't own the house anymore, so we shouldn't have to pay him anything to get him out. But it would probably cost about $1,500 to hire an attorney to get him out and that process would take one to two months anyway. Might as well try the honey before the vinegar.
Labeling this one hard money loan #15. This one will take another third of the funds that got freed up over the past two weeks. I'm still looking for one more loan for the final third of my funds.
But the inside needs about $30,000 of work. The previous owner / occupants included 7 adults, 2 kids, and 3 dogs. And no stove. You can imagine what it looks like inside. The previous owner tried to sell the property themselves, but, given the poor interior condition, was unable to find a buyer.
The borrower for this loan is, once again, my partner's wife. The property was purchased for $300K, and we are writing a mortgage for $220K, giving a 74% LTV. (I've rounded the numbers for simplicity, so if you do the math, you'll get a 73.3% LTV.) Fixed up, the property should sell for $390K. My partner used to live in the city this house is in, so he's got a better than usual knowledge of the area. He figures it'll take 3 months to get the place ready for sale.
The old owner is still occupying the property. He offered to leave in one and a half months and wants $6,000. My partner countered with four weeks and $1,500. No response from the guy yet. Technically, he doesn't own the house anymore, so we shouldn't have to pay him anything to get him out. But it would probably cost about $1,500 to hire an attorney to get him out and that process would take one to two months anyway. Might as well try the honey before the vinegar.
Labeling this one hard money loan #15. This one will take another third of the funds that got freed up over the past two weeks. I'm still looking for one more loan for the final third of my funds.
New Loan and A Sign Of The Times
As I mentioned last week, I had two loans get paid off recently. A third loan, hard money loan #8, was just paid off yesterday. This loan was somewhat unusual in that it was actually carried to the full 1 year term. I don't have any information on if the property sold or if the borrower just refinanced to pay us off and he still is working on or trying to sell the place.
So, with the exception of one loan through my self-directed IRA, my money is all just sitting around and not earning any interest right now. Or I should say, was just sitting around. Just got details of a new offer yesterday that I will invest roughly a third of my funds in. The borrower is a referral to my partner from a mutual friend. The guy knows what he is doing and rehabs houses for a living. He is also a member of CCIM, an institute of commercial and investment real estate professionals. The property is a single family home in Oakland, California that was purchased at a foreclosure auction. The property was purchased for about $265,000 and our mortgage will be for $198,000, giving us a LTV of 75%, based on the purchase price. The current value is approximately $323,000, so the LTV with that figure is about 61%. Loan is standard terms, with a slightly lower interest rate: 9%, interest only, 1 year term. I'll call this one hard money loan #14.Here's a picture of the property:
Not too pretty, but that's what foreclosure investing is all about.
I'm starting to see many indications that the real estate market is turning around. First, obviously, are the three loans I had close in two weeks. Those were sales in California. But even closer to my home here in the Phoenix area, I am seeing signs of a turnaround - literally. I passed this sign on the way home yesterday:
Note the "We're back!" line. This particular tract has been sitting vacant for two years. This sign was taken down two years ago and has just now been put back up. (The "immediate move-in" is something of a lie as there are no houses built yet.) On other empty lots around town, I am starting to see signs advertising new stores that will be built and should be open in a year or less. Perhaps the worst of the real estate mess is behind us now.
So, with the exception of one loan through my self-directed IRA, my money is all just sitting around and not earning any interest right now. Or I should say, was just sitting around. Just got details of a new offer yesterday that I will invest roughly a third of my funds in. The borrower is a referral to my partner from a mutual friend. The guy knows what he is doing and rehabs houses for a living. He is also a member of CCIM, an institute of commercial and investment real estate professionals. The property is a single family home in Oakland, California that was purchased at a foreclosure auction. The property was purchased for about $265,000 and our mortgage will be for $198,000, giving us a LTV of 75%, based on the purchase price. The current value is approximately $323,000, so the LTV with that figure is about 61%. Loan is standard terms, with a slightly lower interest rate: 9%, interest only, 1 year term. I'll call this one hard money loan #14.Here's a picture of the property:
Not too pretty, but that's what foreclosure investing is all about.
I'm starting to see many indications that the real estate market is turning around. First, obviously, are the three loans I had close in two weeks. Those were sales in California. But even closer to my home here in the Phoenix area, I am seeing signs of a turnaround - literally. I passed this sign on the way home yesterday:
Note the "We're back!" line. This particular tract has been sitting vacant for two years. This sign was taken down two years ago and has just now been put back up. (The "immediate move-in" is something of a lie as there are no houses built yet.) On other empty lots around town, I am starting to see signs advertising new stores that will be built and should be open in a year or less. Perhaps the worst of the real estate mess is behind us now.
Two Loans Closing This Week
Hard money loan #12 is closing today. This one only lasted two months. That’s the shortest loan I’ve made in a while, possibly ever. The borrower almost got a discount for paying it off so quickly. The standard loan note my partner uses generally provides incentives for early payoff if made within 30 days of funding or 60 days of funding. The 60 day cutoff was June 5, so the borrower missed getting a $3,560 discount by 3 days.
Hard money loan #11 is still scheduled to close on Friday.
Got my first check from hard money loan #13 today. This is the one that I’m using my self-directed IRA for. I must say, I’m pretty happy. That one payment is already more than my traditional IRA that is invested in the stock market has made this year. Of course, I still need to recoup the costs of setting up the self-directed IRA, so technically, I’m still in the hole on this one. But getting a check each month feels a lot better than helplessly watching the stock market gyrate.
Hard money loan #11 is still scheduled to close on Friday.
Got my first check from hard money loan #13 today. This is the one that I’m using my self-directed IRA for. I must say, I’m pretty happy. That one payment is already more than my traditional IRA that is invested in the stock market has made this year. Of course, I still need to recoup the costs of setting up the self-directed IRA, so technically, I’m still in the hole on this one. But getting a check each month feels a lot better than helplessly watching the stock market gyrate.
