My Answer to Ben

Recently, Ben asked a question on Trulia. I tried to answer it there, but the guidelines against spam prevented me from linking a couple relevant articles, so I'm reposting it here.

From Ben:
I have a 10 year interest only loan with 7 years left and no equity. I am current on my payments but the home is about $150,000 up side down.

I make 3 figures a year and have a 7 plus fico. I was recently denied a loan for a second home because of the status of my current home, and they think I will " Buy & Bail " The bank also countered and said I need to sell my current home to qualify. I also contacted my bank for assistence/guidence but there was'nt one thing they can do or advise. We need a bigger home, Should I sell my home short sale status?
 
Ben,


This answer is going to go against the grain, but I'm in the area and know exactly what you're struggling with. I could rent a house that is new and twice the square footage for what my mortgage payment is in the High Desert.

The first thing to remember is that CA is a non-recourse state. The only thing the bank can do is hurt your credit and foreclose. They can not go against your other assets. If the loan on the house was not used to take money/equity out of the house, and is the purchase money loan, there is a form to fill out so that you do not pay taxes on the banks loss on the loan.

As you have not paid any principal down, I would advise you to think of all the money spent as rent (that has been an interest deduction--call it a rebate on the rent). I don't believe prices are going up in the next 3 years. In fact, the there are a lot of reasons to believe the government is propping up the housing market, and the Association of Realtors spent a lot of money keeping the tax credit going.

If you need a bigger house, and the above applies to you as far as your loan goes, WALK AWAY FROM YOUR HOUSE. Possibly ask your lend for a "cash for keys" deal, where you give them a "deed-in-lieu" of foreclosure and they pay you a small amount to move. It will help you get your credit back faster.

Read these two articles( refer to my blog, Trulia won't allow me to post the links here--The articles are HERE & HERE), and portions of my blog that refer to reasons why the housing market is going to be stale. Don't worry about your credit score. A credit score is good for acquiring debt.

There are a lot of larger houses in our area that you can rent for $1500/month. You also won't have to deal with maintenance. There are even some rent-to-owns, but most RTO's and lease-options require you to assume all duties of an owner.

In two or three years, you'll qualify for a loan again. And prices are likely to be at or near the same levels UNLESS our country's economic policies end up in currency devaluation ala Venezuela or Zimbabwe in which case we all have bigger problems than home ownership.

Ben, If you've come here, do some research on "recourse vs. non-recourse states" and talk to your accountant to see where your mortgage falls as far as tax liability.

How to use a power sewer snake.

I figure you're reading this because you want to know how to use a rooter. If you're afraid of things that typically go down the toilet or have a sensitive sense of smell, don't read anymore.
One of the things you might find yourself doing as a landlord (and maybe as a homeowner) is snaking out your sewer drain. It might be because of roots, papertowels, kid's toys, tennis balls, rags, feminine hygiene products--ok you get the picture. I've found all of the preceding items. Pity me.
Both Home Depot, Lowe's, and Harbor Freight Tools carry plumbing snakes. I bought the one by Ridgid for around $400. Harbor Freight's runs around $250-300, but doesn't look as sturdy or as safe, as it has an open cage design as opposed to the plastic shell that surrounds both the Ridgid at HD or the model that Lowe's carries. Also, buy the PVC gloves that are nearby.
In any case, it generally costs around $200+ for a drain cleaning service to come out and snake the main line. I've heard that Mike Diamond charges $99 for any drain, so that would be a good deal, depending on when his guys are available. Most inexpensive rooter services take at least 8 hours to get to your job, in my experience. So if you've ever had a rooter guy out 2-4 times, you could've bought the tool.
Now that I've blabbed your ears off (eyes off as you're probably reading this) I guess I should stick with the HOW TO in the title:
1. Take off the cap to the cleanout (you might want to be wearing those gloves, eye protection, and shoes you don't care about--I wore my Tevas today, but I knew I could just wash off my feet.)
2. Let water flow out while you go plug in your snake and determine where the best place to put the machine is--that's why you take off the cap BEFORE you bring your snake over.
3. If you haven't put on the PVC gloves yet, now's the time.
4. Place the snake 2-3 feet from the cleanout.
5. Put one of the attachments on the tip--I use the root cutter for most jobs. It's U-shaped. The spade bit is also good, but as this is on a rental I want to see if my tenant is to blame, because then I charge them for my time. There is also a corkscrew/spring attachment, but I don't like this one.
6. Start feeding the metal spring down the clean out by hand. Don't use the motor yet. When you have pushed the spring as far as you can by hand, stop pushing.
7. Adjust the spring so that there's a little slack, but not too much as the spring can form a loop and catch your hands, fingers, or just smack you. The spring can also catch skin, cloth, or your gloves in the grooves, so treat the machine with respect. Then step on the foot switch and hold the spring loosely while the motor turns the snake. Do this for about 15 seconds to one minute. After some practice you'll be able to notice differences in the sound of the motor.
****Safety Warning**** If the snake loops up, you take your foot off the switch. Then put the machine in reverse. Tap the foot switch to unwind the snake.
8. Repeat steps 6 and 7 until the water has drained out of the pipe or you've reach the end of the snake.
9. Put the snake in reverse, but don't push the switch unless you need to.
10. Start pulling the snake back and load it back into the drum.
****Warning**** The snake is a spring that can fling the effluent on you and the end has a tend to whip if you pull it out too quickly. Anything stuck on the end of your snake might get flung at you. Use your imagination.
11. I like to run a hose down the drain AFTER it's been unblocked.

If you're on a septic system and the clog won't come out, your septic tank may be full.
Hope this helps. If you're afraid to do this yourself, my buddy or I will do it for a couple hundred dollars if you're in the High Desert. :-)

Some thoughts on housing, both buying and renting

Two articles from RISMedia this week have highlighted the fact that prices are at some of the lowest prices in nearly 20 years, and that the affordability index is 67%. This comes as no surprise. Here in the High Desert, in California, it is still possible to buy a house for less than the construction costs.

The good news, is there is continuing commercial and industrial development here, despite some problems caused by local government overextending themselves financially (like most levels of government during the tech and real estate bubbles). The City of Hesperia has just been named an enterprise zone.

Due to Governor Schwarzenneggar's moratorium on foreclosures, I've seen a slight upward trend in the prices in the Victor Valley, as supply of houses on the market is causing an increase in bidding on the houses. I think prices are likely to drop again as there is another wave of foreclosures on the horizon in California. This is going to be exacerbated by small business people deciding to leave this highly regulated and taxed state, even if they have to walk away from their homes.

The affordability of houses has caused quite a bit of competition. First time buyers are competing for houses, with small and large investors. My wife and I had a small house in escrow, but the house wouldn't appraise, so I'm sure an investor with cash will buy it. I could go look up the sales price at the county recorder or online, but I don't want to aggravate myself.

I have seen a trend toward lower rents. Many rental owners are advertising move-in specials. I see family members moving in with each other. I have seen people leaving the area, some to be nearer the larger metropolitan areas, some to leave the state, a few to leave the country.

There is a push for more government subsidized, low-income housing (projects), which will lower rents as landlords compete with the government subsidized landlords.

Some of these landlords are likely to find the competition too fierce and add more units to the market place through sale or foreclosure, which will reduce rents further. It is a question of where the market will bottom out on the government induced spiral. Look to the subsidized unit costs, and the features to set your prices. It may be more important to keep a good renter than make a profit. This is a typical of what happens when the government starts competing in the private sector.

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.