Credit Crisis brings opportunities for Seniors

Three important events have occurred that bring rise to opportunities for seniors to increase their retirement income. The drying up of much of the conventional credit market, the limitation of conventional loans for individuals, and the collapse of housing prices. Why does this bring new opportunities for seniors?

At this point everyone knows how hard it is to get a loan after the Fannie Mae and Freddie Mac failures that culminated in disaster last month. It's hard for even people with good credit to get loans at the moment, and underwriters and looking very closely at all aspects of loans they are approving. New laws to prevent real estate speculation have limited the number of mortgages and individual can have to four conventional loans. Because of these conditions, combined, with housing prices that have dropped and opportunities in the REO market, seniors have the opportunity to hold mortgage notes to increase their retirement income.

A senior I know just told me she's making three percent (3%) on her CD and she's looking for ways to increase her retirement income, as SS only pays $700 per month. She owns her home free and clear, but has repairs to do to the house, especially in the kitchen, where the sink leaks, but she doesn't want to deplete her meager savings to fix problems that are a health hazard and are damaging her house.

Seniors have the opportunity (especially in California) to take reverse mortgages out on their homes and reinvest the money or loan it out at hard money rates. By buying investment properties or mortgage notes, seniors can increase their passive income and avoid endangering Social Security income. The senior above could take a reverse mortgage line of credit to do the repairs she needs, paying 7.5% or less in most cases, then draw from her LOC to loan out at hard money rates (15-24%) secured by 1st mortgages or rehab loans, or buy rental property for cash
and rent the out.

I have 6 conventional mortgages out, on 10 properties, and 2 hard money loans, and 2 properties are paid off--I own them free and clear. I bought smartly and all of these properties have positive cash flow when rented at 80% occupancy rates. Due to the new limitations on the allowable number of conventional loans, I can not get a conventional loan on the 2 properties that are paid off. I had to go to a hard money lender to get funding. I am getting a loan for less that 50% loan to value (ltv) at 11.5% but I am paying 8 points, so my apr is basically over 17%. I am happy to get the loan because it is going to allow me to earn a return higher than what I am paying. I've even seen websites out there that say they'll loan 40%LTV at 19%.

So, the above mentioned senior could conceivably borrow $100,000 at 7.5%, fix her house for $20,000, then lend the remaining $80,000 out (I recommend smaller loans to spread out the risk) at 15% with 7 points, and she would bring in an additional $1000.00/month and as the loans mature or are paid off early she would bring in the $5600 in points, which may increase her net return, because the investors don't want to pay the 15% rate for a long time. Or, a senior could invest the $80,000 remainder in a rental or several rentals and collect rents of $750 to $1600 depending on how they did it, but that would entail more management time, and I think the return on investment in the hard money market would be better and entail less risk now that housing prices are down.

I happen to know that there are several investors out there looking for the money to make their deals happen, and wouldn't mind paying the high percentage rates to get it done.

September was busy!

I was extremely busy last month due to several new business ventures that I was trying to organize. I found out a lot about SBA loans, and the credit crisis, read about Bloward-Piven Theory, and have been (of course) following a bit of the political scene.

The increasing value of arable land

As you look at current events and trends, you can't help but notice the increasing costs of fuel, and the trends toward composting, organic foods and alternative energy. I think these trends will increase the value of larger parcels while depressing the value of condominiums, and perhaps act as a force that will counterbalance the economic forces moving the populace near the population centers (fuel costs).

There are increasing amounts of labeling in the stores that indicate "hormone free", "organic", "not treated with pesticides", that show a consumer demand for foods that are not laden with chemicals. There are articles online and in newsprint that warn us that water treatment plants cannot remove many chemicals put into via runoff (chemical fertilizers and pesticides) and through our effluent (hormones and medicines that pass through our bodies). Now home water treatment companies are starting to take off, and you can hardly walk into a home depot without being pitched on one.

With all the above factors I see an increased demand for lots big enough for people to grow, at least some, their own food. There should, at least, be enough space for a greenhouse. The food grown could help offset some of the costs of the land, and I was in a farmer's market where "organic pesticide free" plums were being sold for $5/lb., so there might even be potential to make some money as well.

Useful Information--Credit Bureau Contact Info

You're entitled to one free credit report per year from each credit bureau. Your credit score will determine the kind of loan you can get, and heavily influence the interest rate you pay. The higher the score the better. Hope this is helpful.

Equifax Corporation

PO Box 7402741

Atlanta GA 30374-0241

1800-685-1111

Trans Union Corporation

2 Baldwin Place

PO Box 1000

Chester, PA 19022

1 800 888 4213

Experian Corporation

PO Box 2002

Allen TX 75013-0036

1-888-397-3742

During Escrow

This is basic to anyone who is in escrow for a house and is getting a loan (which is the majority of home buyers). Don't buy any more things on credit. You could negatively affect your credit score and disqualify yourself for the loan you're working on, and have to start over...if you can.
The reason not to charge anything is that lenders typically run your credit before closing escrow to make sure you can still make all of your payment obligations. If you make large purchases during this time(the time from the acceptance of your offer to the funding of the loan), you will change your debt to income ratio and change the loan program you're eligible for. If you have marginal credit you may disqualify yourself completely, especially in today's more stringent credit market.

There are always opportunities

My Real Estate Prognosis

People have been asking my opinion on what's happening in the real estate market with all the foreclosures and banking (mortgage derivatives) problems and the rising unemployment rate.
One of the maxims of real estate investment is to buy the worst house in the best neighborhood. A lot of investors are picking up houses in good neighborhoods at prices we haven't seen for 4 years. I saw $300,000 condos in Oxnard, less than a mile from the beach going for less than $160,000 needing minor cosmetic work; some of these were bought and resold for $190,000 in a couple months. There are still bargains like this out there if you know where to look. If you have the capital and credit rating now would be a good time to buy.
In the early and mid 90's, outlying areas like the High Desert (Palmdale, Lancaster, Victorville, Hesperia, Apple Valley) essentially dried up with lots of vacant homes left empty on the market. In these areas, and areas like them (Hemet & Banning in Riverside, Santa Paula in Ventura) qualified buyers will be able to pick up really homes even more cheaply in the next six months to a year. However, those who wait too long will find that the homes in the better neighborhoods and near large employers will be bought up by many first time buyers who are now able to afford California real estate, and investors who are buying for long term appreciation and rental income, or just to "flip" after doing cosmetic repairs. One of my clients whittled his list of 50 potential properties down to 6 and found that 3 of those were already in escrow or contingent on inspections. This goes back to people buying up the homes in nicer areas or getting bargain basement prices on other homes.
In the Victor Valley, a lot will depend on how soon the rail spur into Southern California Logistics Airbase (SCLA--the former George Air Base). This will generate many new jobs in the area, and will increase property values around the base. Much of the older housing west of the base, and east of 395 will need to be updated or redeveloped or it will remain a blighted low income area. The newer tracts within Adelanto will see a resurgence in value and they present a lot of potential for profit.
For those readers who are renting, it's definitely time to start looking at buying. For those who are looking for rental properties, there are a lot of opportunities to buy housing in many places for less than it would cost to buy the land, pull the permits and pay the new higher fees ($35,000+ for a 2000 sq. ft house in Hesperia), and build the house ($70-135 sq. ft with $100 being average). What this means, of course, is construction of new homes has slowed down. On the up side of that, is now might be the perfect time to find a good deal on remodelling your home or constructing an addition to your home.
Unlike two years ago, when contractors were hiring just about anyone who could breathe, and you were lucky to be able to get a contractor to call you back, and they were backlogged for 2 weeks to 3 months, it is fairly easy to find people who are eager to work on your project. This is good for investors and homeowners as the surplus of construction workers and limited demand for them makes for lower prices in most cases.
Be careful to hire only qualified professionals. Get several references from anyone that you get a bid from. While it might be cheaper to hire an unlicensed builder, if he or she does bad work, there is no bond to go after, and nothing to win in court, so you could not only be out the original cost for labor and materials, but you'd have to pay to have it fixed and buy new materials. An unlicensed contractor without worker's compensation insurance could also sue you or your homeowner's insurance if they are hurt on your property while doing work under your instruction.
My prognosis boils down to this: Near job centers and in better neighborhoods, the homes are going to be bought up quickly as young professionals who couldn't buy in the last couple of years, either improve their neighborhood, or shorten their commute, and as investors compete with them in the same areas. Many very cheap houses will be bought up by investors who will use them as lower cost housing. Many of the mid range houses will sit on the market for a while as bargain hunters compete in the better neighborhoods (gated communities, near the beach), the rental neighborhoods (these are easier to rent out as there is always a demand for low priced housing), and areas near major employment centers. Many mediocre REO houses will sit until the banks either sell them cheaply, because no bank wants to sit on inventory.

Lender Requirements

REO’s Shortsales and Prequalification requirements

With the number of REO's (Real Estate Owned by the bank) and short sale houses on the market today, it streamlines the purchasing process if buyers have a prequalification letter from their lender. Most banks are demanding that the prequalification letter be sent in with the offer, and some require that potential buyers cross-prequalify with specific lenders (at times demanding FICO scores and proof of funds) before they'll accept an offer. With this in mind I give you a list of the 11 most common things you'll need to take to your loan officer/mortgage broker:
1. Current pay check stubs covering the past 30 (or 60) days.
2. Name address and phone number for your employers covering the last 2 years.
3. Copy of the last 2 months bank statements for all open accounts.
4. Copy of driver's license an dsocial security cards--all borrowers
5. W-2's and Federal tax return for last 2 years.
6. Mortgage statements and/or rental agreements.
7. Complete copies of divorces and final judgement.
8. Self-employment records
9. Complete copies of bankruptcy and discharge.
10. Initial award letter for social security, pension, or other income.
11. Name, address and phone number for landlord for last 2 years.

Southern California Logistics Airport

Southern California Logistics Airport
Current mood: excited

For those of you looking at investing in the Victor Valley area of the High Desert you have to go to http://www.victorvillecity.com/ I have been reminding friends and readers as well as my clients that Victorville, Adelanto, and Apple Valley are on the verge of exploding in the next year.

The page references the Dr. Pepper Snapple Distribution plant (http://208.112.75.1/News___Library/News.html?op=view&id=73) that is about to have construction begin in the very near future. That will mean construction jobs in addition to the 200 people being employed at the plant. A waste water reprocessing plant will also be built that will offer more jobs, and the be use of the intermodal rail yard will also be a boon to the local economy.

These people will need housing. While many of the people will (hopefully) be hired from the local area and have places to live, the jobs allow a wider choice of housing, meaning an influx of buyers to the market, which will stabilize and raise the prices of houses and rental housing in the market, because the influx of capital will definitely stimulate surrounding businesses as well.

Victorville's business friendly environment has also led to the development of branches for ConAgra Foods, Pratt & Whitney, General Electric Aircraft Engines and more--see http://208.112.75.1/Business_Climate/index.html.

While many people are out there sitting on the fence, there are a lot of opportunities for buying houses at prices that are close to or below the cost of building, as either a rental or as your own home. If you have any questions or want to be on my "cheaper than building it myself" list, drop me a line at jamesfoy@allcitiesrealty.com

Robin Hood

Something had been bothering me for quite some time now so I need to get it off my chest, so to speak. That something is the interpretation we have been fed regarding the Robin Hood legend.

As we have heard over and over again Robin Hood, a disaffected noble, stole from the rich and gave to the poor. I don't disagree with that, but the premise needs expounding upon and further explanation.

Who did Robin Hood steal from? He stole from the Sheriff of Nottingham and Prince John. What are these figures responsible for? They were the tax collector and the government. Robin Hood was actually looting the coffers of an oppressive government. So the modern day equivalents of the Sheriff and the Prince would be the IRS and Congress (as they control the purse strings) who hands out the "voluntary" tax contributions of Americans to its pet projects.

Who did Robin Hood give to? He gave it back to the peasants. Remembering that in that agrigarian era, the peasants were the backbone of the working class. It was from their labor on the land that allowed the government to thrive. They would be from any of the specialized jobs that exist today to produce anything of value--whether it be tangible or intangible.

Sadly we don't have many disaffected members of our government returning our earnings to us, and the looting of the working classes just continues to fund the whims of the governing class.

Size Matters

Now that I've got your attention, I refer you to the following link, which came out today (Aug. 27, 08):
http://www.realtor.org/rmonews_and_commentary/opinion/0809commentarysquarefootage
This article was extremely well timed for me as I just put an offer in for a client on a home which originally was built with 1705 sq. ft. While looking at the property in the MLS (Multiple Listing Service) I noticed that the property's listed square footage had increased 330 sq. ft. in 2005, which comported to an addition off the garage to the rear of the property. The initial issue I had with the "room addition" was that it didn't have any heating or air conditioning, so I decided to investigate the matter further (something called "due diligence" in investor's jargon). Please keep in mind, this property is an REO, and the bank is selling it AS-IS, so my client is "stuck" with what he buys, but might be able to sue me, my broker, the listing agent and his broker, or a property inspector in the future, if we miss these things.

I went to the local building and safety office and was not able to find ANY information on the property in question (PIQ), and then called the local assessor's office. I was helped by a very informative clerk, who let me know that permits had been pulled for the rear patio, the additional single car garage, a pole barn (since recycled by local bandits for the sheet metal), and a 330 sq. ft patio enclosure.

Aha! Now I had found the square footage. Unfortunately for the seller, and fortunately for my client there quite a difference between a "room addition" and a "patio enclosure." As a former building inspector and son of a general contractor working on my on GC license, I know the difference. A room addition is considered "livable space" due to the nature of it's construction, a patio enclosure is not, and is roughly worth half of what a room addition is worth on a per square foot basis for a number of reasons.

Starting from the ground up, here are the differences between the two, and hence the reason a room addition is more valuable then a patio enclosure.
1. A room addition is required to be structurally tied into the footings of the building and a patio enclosure only requires footings under the patio posts. Generally, a footing is a trench 12" deep by 12" wide with two 1/2" pieces of rebar placed near the center of the trench--1 about 3" from the bottom and 1 about 3" from the top. The rebar is generally dowelled into the existing footing of the house and this gives a continuous base to the house. In many areas a footing of this size will allow for a 2nd story, whereas a pad footing under a patio post would not.
2. Within the framing of a patio enclosure, there is no requirement for insulation in the walls or the ceiling. A room addition must comply with the standards for the house, and in the state of California, for additions larger than 100 sq. ft. must have a Title 24 document submitted with the plans for the addition for energy efficiency requirements. The PIQ is in climate zone 14, in the high desert, which is one of the harshest zones in the state, because the temperature range is over 100 degrees fahrenheit (8 in winter to nearly 120 in summer). As this was done as a patio enclosure, my client and I can't know what the R-value of the insulation is, if any, without opening the walls, and if I my client wants to upgrade to a room addition, he will have to open the walls, and probably upgrade any insulation that was originally installed in 1991 (probably R-7 or R-11) with whatever is required by his new Title 24 document (R-13 minimum possibly R-15), and then, of course, replace the drywall, re-texture, and repaint.
3. Speaking of drywall, most jurisdictions in California require 5/8" fiberglass reinforced drywall (type x) between the garage and "living spaces". As this was originally built as a patio, that was probably not done, and the insulation is not likely installed between the garage and the patio enclosure as it would not be required, like it would have been for a room addition.
4. Electrical is not required on a patio enclosure. The National Electrical Code requirement for livable spaces is "no place on a wall that is further than 6' from an outlet...excepting closet interiors" (so basically a receptacle every 12' along the walls) and a requirement for a light or a switched receptacle, that a light can then be plugged into. This patio had the light, but I don't believe it met the receptacle spacing requirements, though, to be honest, I didn't measure them, I was just "eyeballing" it.
5. Livable space must have thermostatically controlled heating, whereas, a patio has no such requirement. Strangely, as of this writing, there is no requirement for air conditioning in the desert. However, if my client tied into the existing central air, that would need to be addressed in the Title 24 of his plans or he could add a heater to the room, but that would leave him without air conditioning. The size of the room might require a larger hvac system as the old system may not be able to handle the extra volume (330 sq. ft with 8' ceilings is 2640 cubic ft.--roughly 20% additional load). California has additional requirements for heating and air systems (including duct leakage testing) that I won't go into here, but add to the cost of installing them.
6. Depending on the jurisdiction, some of the above requirements might be waived, but with the current slowdown in new home building, the building inspectors have more time to catch the defects, and my client would still need to pay to have plans drawn, submit the plans and energy compliance documents (Title 24), install the footing, add any necessary electrical and hvac, and ensure proper insulation and drywall installation, then texture and paint, and finally add flooring, if he wants to be able to legitimately claim the additional 330 sq. ft. when he goes to resell the home.

It could run from $6000 (if my client is willing and can do the repairs and doesn't extend the central heating/air--which would be silly in the desert) to $24000 if he has to hire a contractor to complete the work. I feel $15000 is a reasonable figure and reduced the offer on the listing sales price by a little more than that for a couple of other deficiencies in the property--like exterior paint, dilapidated fence, missing gate, and broken tiles in the kitchen and hallway.

So, if you're buying an REO or any other property AS-IS, size matters, especially as it helps determine price per sq. ft. (ppsf in future posts), but you need to know if the square footage indicated is truly livable space, or you could be paying more for a property than you should.

If you are in need of a house, for yourself or as an investment, please email me. I have over 11 years of real estate investing experience (mostly rehabs) and up to date experience with California energy requirements, as I was a city building inspector from 2006-2008. I would be happy to assist you in buying or selling your home. If you have questions on how to upgrade your home for the best return on your investment, I can help with that too.