The L.A. Times reports that a study shows borrowers with good credit are actually more likely to default on their mortgages than borrowers with lower credit scores. These "strategic defaults" appear to be done based on a simple business analysis and with full knowledge of the consequences: if the property is seriously underwater, just give it up.
When I first read this, my thought was the defaulters were mainly people who bought investment properties during the bubble and were now giving up This does not appear to be the case, however. "Two-thirds of strategic defaulters have only one mortgage -- the one they're walking away from on their primary homes." And, not surprisingly, the study found "Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006."
One site I was reading opined that this would make loan modifications harder to obtain. But I'm not sure that is a bad thing. A report published in April showed "Fewer than half of loan modifications made at the end of last year actually reduced borrowers' payments by more than 10 percent... [while] nearly one in four loan modifications in the fourth quarter [of 2008] actually resulted in increased monthly payments."
The Next Mortage Crisis: Option ARMS
Now that the subprime loan debacle is pretty much behind us, the next threat on the horizon for the mortgage industry are Option-ARMs and Alt-A loans. Alt-A loans are loans made to people just above the sub-prime cutoff. Option-ARMs are loans that allow the borrow to choose from a variety of different payments each months, including payments that are less than the interest that has accrued during the previous month. As the graph here shows, a large wave of these loans are getting ready to reset (have their interest rate adjusted) in the next two years.
Reuters has a story about the Option-ARMs here.
Reuters has a story about the Option-ARMs here.
The Hard Money Blog?
It appears this blog is turning into a blog about hard money lending. This was not a conscious decision on my part, but just an evolution caused by the real estate market collapse and my relative lack of free time. When the real estate bubble burst, flipping houses because financially more dangerous. With prices dropping steadily, it was difficult to find a house at a low enough price that could be rehabbed quickly and sold at a profit some time later. It is the nature of the rehab business that delays occur. Large delays coupled with rapidly dropping prices made estimating the eventual sale price of the property difficult. An unforeseen delay could end up costing tens of thousands of dollars in lost value, thus rendering the rehab project a financial loss. So, I got out of that business until the markets stabilized.In my area, prices were dropping too rapidly and properties could not be bought cheap enough for deals to make sense. I also had some additional commitments on my time, so I was no longer able to devote as much time as I had in the past to finding deals and, should one be found, to the rehab project itself.
However, other parts of the country are seeing some stabilization. Other people have the time to find and work the deals. So I delved a bit deeper into hard money lending, and that’s the direction the blog has taken. Having the experience of rehabbing houses myself, I feel I have some additional insights into the hard money deals that come my way. Although my deals are primarily in another part of the country, I still have a general idea of the costs and effort involved. This allows me to make more informed decisions on whether or not to invest in a hard money opportunity. It also helps to have partners you trust and who have more experience than you, as I do. As I look back over the last several months of my real estate investments, I find myself moving more and more into the passive income arena. The various hard money loans I have made are passive, as is my investment in the Houston apartment complex. While the returns may not be as great as doing deals completely myself, I am getting good returns and still have my time available for other things. I recently turned 41 years old. I have a 5 year old daughter. At this point in my life, the passive investment route suits me fine.
Which is a long way of saying I received more passive income checks yesterday. I got my monthly payments for hard money loans #8 and #9, right on schedule.
However, other parts of the country are seeing some stabilization. Other people have the time to find and work the deals. So I delved a bit deeper into hard money lending, and that’s the direction the blog has taken. Having the experience of rehabbing houses myself, I feel I have some additional insights into the hard money deals that come my way. Although my deals are primarily in another part of the country, I still have a general idea of the costs and effort involved. This allows me to make more informed decisions on whether or not to invest in a hard money opportunity. It also helps to have partners you trust and who have more experience than you, as I do. As I look back over the last several months of my real estate investments, I find myself moving more and more into the passive income arena. The various hard money loans I have made are passive, as is my investment in the Houston apartment complex. While the returns may not be as great as doing deals completely myself, I am getting good returns and still have my time available for other things. I recently turned 41 years old. I have a 5 year old daughter. At this point in my life, the passive investment route suits me fine.
Which is a long way of saying I received more passive income checks yesterday. I got my monthly payments for hard money loans #8 and #9, right on schedule.
Hard Money Loan #9
Just got into a new hard money loan today. The borrower is the same person who was the borrower for hard money loan #7. That loan only lasted two months, but this one should be a bit longer - we're guessing 6 months. (The legal document says the loan is for a maximum of 1 year.)
The property was another one bought at a foreclosure auction in the northern California area. We have a first mortgage in the amount of $160,500. Investors are getting 10% interest-only payments paid monthly. The house is a 3/2 SFH that is about 1,250 square feet. It comps in AS-IS condition at $250,000 conservatively or $275,000 non-conservatively. After it is fixed up it, it should be worth somewhere in the $330,000 to $350,000 range. The property does back up to some train tracks, but the comps were used did as well. One comp actually was only on the market for 8 days! The borrower has $90,000 of his own money in it. Using the conservative valuation, our LTV is 64%.
The old owners, who were foreclosed on, are still occupying the property, so the borrower will need to go through the eviction process to get them out. (This is one reason why we're pretty sure this loan will last longer than 2 months.)
The property was another one bought at a foreclosure auction in the northern California area. We have a first mortgage in the amount of $160,500. Investors are getting 10% interest-only payments paid monthly. The house is a 3/2 SFH that is about 1,250 square feet. It comps in AS-IS condition at $250,000 conservatively or $275,000 non-conservatively. After it is fixed up it, it should be worth somewhere in the $330,000 to $350,000 range. The property does back up to some train tracks, but the comps were used did as well. One comp actually was only on the market for 8 days! The borrower has $90,000 of his own money in it. Using the conservative valuation, our LTV is 64%.
The old owners, who were foreclosed on, are still occupying the property, so the borrower will need to go through the eviction process to get them out. (This is one reason why we're pretty sure this loan will last longer than 2 months.)
Houton Apartment 6 Month Update
The second semiannual conference call for investors in the Houston apartment complex was last night. We have now owned the property for just over one year.
First, the management gave an overview of the situation in the Houston market in general, and then in our district, and then, finally, our specific property. The Houston job market actually gained 54,000 jobs in 2008. So far in 2009, it has lost about 31,000 jobs. This is in line with the top 100 major metropolitan areas all over the country, which have all seen job losses this year. Even so, Houston still ranks as the fourth best metro economy in the country.
There are some additional apartment units coming online in the area, however, they won't really affect us, as they are all more expensive units. Also, all the new units opening up within a 3 mile radius of our complex are all more expensive than ours. The "shadow market", meaning single family homes for rent, are not really an issue for us either. These properties tend to compete with the nicer A-class apartment complexes. We are a B-class.
In Houston overall, the average apartment complex occupancy rate is from 86.5% to 88%. Class B complexes overall have a rate of 88% to 89.6%. Predicted drops in rent prices have not really materialized and for the Class B market, rents have actually gone up by about 1.9% In our local submarket, occupancy rates average 89.8% to 90.7% and units have seen a tiny 0.5% decline in average rent. Our particular complex has had an average occupancy of 93% in 2008 and the first 7 months of 2009 have seen an average rate of 96%. Our rents have also seen a modest 2.9% increase. So we are doing much better than not only the overall Houston market, but also our own submarket.
There are no further capital improvements planned for the complex, although management has made some inexpensive improvements - new umbrellas and cushions for the patio furniture, for example, as well as added some additional lighting. The improved lighting has enabled the property to qualify as a Blue Star property, which is recognition from the local police department that property management has taken significant steps to reduce crime. This is obviously a good selling point for potential tenants.
There is no deferred maintenance at the property and management intends to continue to operate the property in that manner.
For the last fiscal year, the property had a $236,000 net cash flow, representing a 8.6% Cash On Cash Return (COCR). These figures include the repair costs associated with Hurricane Ike. Excluding those costs, the net cash flow was $286,000, representing a 10.4% COCR. While they have increased rents somewhat, the economy is limiting their ability to raise rents as they would like.
Investor quarterly payments will continue to be the guarranteed 9%, but management will likely be making two additional payments six months and nine months into the fiscal year to distribute additional profits. They are doing this rather than raising the standard payout because they do not want to get into a position where they raise the payout, then have to lower it again should another disaster strike. They realized their estimates for repairs costs from Hurricane Ike were about $15,000 lower than their actual costs, so they want to be a bit more conservative going forward.
All in all, I'm still very pleased with the performance of this property and the management team. I think the results are astounding, especially when you consider the economic climate they have been operating in!
First, the management gave an overview of the situation in the Houston market in general, and then in our district, and then, finally, our specific property. The Houston job market actually gained 54,000 jobs in 2008. So far in 2009, it has lost about 31,000 jobs. This is in line with the top 100 major metropolitan areas all over the country, which have all seen job losses this year. Even so, Houston still ranks as the fourth best metro economy in the country.
There are some additional apartment units coming online in the area, however, they won't really affect us, as they are all more expensive units. Also, all the new units opening up within a 3 mile radius of our complex are all more expensive than ours. The "shadow market", meaning single family homes for rent, are not really an issue for us either. These properties tend to compete with the nicer A-class apartment complexes. We are a B-class.
In Houston overall, the average apartment complex occupancy rate is from 86.5% to 88%. Class B complexes overall have a rate of 88% to 89.6%. Predicted drops in rent prices have not really materialized and for the Class B market, rents have actually gone up by about 1.9% In our local submarket, occupancy rates average 89.8% to 90.7% and units have seen a tiny 0.5% decline in average rent. Our particular complex has had an average occupancy of 93% in 2008 and the first 7 months of 2009 have seen an average rate of 96%. Our rents have also seen a modest 2.9% increase. So we are doing much better than not only the overall Houston market, but also our own submarket.
There are no further capital improvements planned for the complex, although management has made some inexpensive improvements - new umbrellas and cushions for the patio furniture, for example, as well as added some additional lighting. The improved lighting has enabled the property to qualify as a Blue Star property, which is recognition from the local police department that property management has taken significant steps to reduce crime. This is obviously a good selling point for potential tenants.
There is no deferred maintenance at the property and management intends to continue to operate the property in that manner.
For the last fiscal year, the property had a $236,000 net cash flow, representing a 8.6% Cash On Cash Return (COCR). These figures include the repair costs associated with Hurricane Ike. Excluding those costs, the net cash flow was $286,000, representing a 10.4% COCR. While they have increased rents somewhat, the economy is limiting their ability to raise rents as they would like.
Investor quarterly payments will continue to be the guarranteed 9%, but management will likely be making two additional payments six months and nine months into the fiscal year to distribute additional profits. They are doing this rather than raising the standard payout because they do not want to get into a position where they raise the payout, then have to lower it again should another disaster strike. They realized their estimates for repairs costs from Hurricane Ike were about $15,000 lower than their actual costs, so they want to be a bit more conservative going forward.
All in all, I'm still very pleased with the performance of this property and the management team. I think the results are astounding, especially when you consider the economic climate they have been operating in!
