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Articles for ‘Investment Property’

Using FHA 203k Loans To Rehab Your Short Sale or Foreclosure

Monday, December 6th, 2010 by Randy Whiting

There are a few common ways that I have seen an FHA 203k loan used.  Predominantly the clients I’ve worked with use this type of loan to purchase a property that either needs some general rehabbing throughout or to finish a job that was left incomplete for one reason or the other.  As rehab loans of any other type have virtually disappeared the FHA 203k loan has been on the tip of many buyer’s tongues lately.  The only challenge is that the type of property that would motivate a buyer to seek this type of loan typically ends up in a multi-offer situation; speaking in terms of my local market.  If you had a chance to read my short article on TheChicago77.com entitled, “Short Sale and Foreclosure Multi-Offer Strategy” or you have had any experience as a buyer or buyer’s agent attempting to purchase distressed properties then you already know that in a multi-offer situation an FHA 203k loan gets the lowest priority of any offer on the table.   For an in-depth explanation of why please visit the article mentioned above.  The long and short of it is that the FHA 203k loan has a huge amount of contingencies, outs, or reasons to fail before close, and that is very unattractive to a bank.  As banks are the ultimate decision makers in many distressed property sales it is their opinion that counts, and they want nothing more than the quickest close possible.

Clearing The Air

I’m sure there will be some of you reading this who have used an FHA 203k loan to buy a distressed property, and I do not mean to say it is impossible.  Local market conditions significantly impact the possibility that this loan will be accepted for the purchase of a distressed property.  For example, with most suburbs of Chicago and a few of the fringe neighborhoods of the city proper the competition is virtually nonexistent.  A bank attempting to sell a property in areas with low demand are often so desperate for any type of offer that on the slight chance that one comes it matters not what type of loan it is; they’ll pounce on it like a starving cat.

Back To Business

The purpose of this article is to illustrate an example that worked out very well for a buyer that I have been working with for quite some time.  As with many savvy investors my client was very particular about what he wanted in a property.  His goal was to find a distressed building, preferably a multi-unit, and convert it into a beautiful modern single family home for himself.   As such it took us quite some time to locate the perfect property.  When we finally did it was a gutted two unit that had little more than the bricks, the studs and a pile of rubble lining the floors.  With an asking price of around 180K it was ripe for the plucking.  When he asked me to put an offer in on the place, protocol demanded a pre-approval or proof of funds and I asked him for such.  A few moments later he forwarded me a pre-approval letter from his lender for an FHA 203k loan.  Knowing what I know about this type of loan and also about the desirability of this type of property to other investors I correctly surmised that a multi-offer situation was at hand.  Given a very small number of days on the market, there was little chance the seller of this property would jump on a 203K loan.  Instead, they would graciously acknowledge our offer and hold out for something more attractive; cash or a conventional loan offer with a low number of contingencies.  Given this, I called a couple lenders who I know that have their fingers on the pulse of the lending market and we came up with a solution.

The Challenge

Our challenge was how to make our offer stand out on top versus the others that were sure to come.  Knowing my client had enough cash to buy this property with some to spare, I asked him why he chose an FHA 203K loan.  He gave me the answer I was expecting, “I want to save my cash for the rehab.”  Knowing what we now know about the low desirability of this type of loan it was only natural that I council him on the unlikeliness that his offer would be considered.  As the ball was in my court to find a superior alternative I shared my discovery with him.

FHA 203K Refinance

Let me cut to the chase.  If you buy a property with cash there is no title seasoning requirements to re-finance the property with a 203K loan.  As such the refinance can happen immediately after purchase.  Combine that with the huge desirability of cash in the eyes of the seller and this significantly increases the likelihood of a win-win situation.

What If I Don’t Have Cash?

Here’s the good news for investors out there who want to take advantage of this scenario but don’t have enough capital to purchase with cash.  The FHA 203k refinance has the same title seasoning requirement (zero days) if you purchase with a conventional mortgage.  In other words, if you buy a property with a conventional loan, right after you close you can turn around and re-finance it with a FHA 203k loan allowing you to obtain extra money to do some rehabbing on the property.  So why not make the initial offer with an FHA 203k loan and why did I not recommend a conventional loan to my client and encourage him to save the cash for the rehab?  To get that answer I suggest you read my article on Multi-Offer Strategy.

Ciao for now!

French Country Estate, Yours for the Bid!- Riverside, IL Auction

Saturday, July 17th, 2010 by Sari Levy

122 Nuttall Rd, Riverside, IL 60546

Always on the lookout for opportunity, I spotted a beautiful home coming to the auction block on July 27, 2010.  Grand Estates is selling this home at an ” Absolute Auction”  with “No Minimum or Reserve – Regardless of Price”; that is,  free and clear of all liens.  Basically, you can name your own price to get this home.   If you think you are interested in bidding on this home, below are a few things you need to know/do.

  • Schedule an appointment to look at the home during the preview period which starts July 23rd. 
  • Review the extensive Property Purchase Package™ (PPP™) booklet that has been prepared to assist the buyers in evaluating and bidding on this property. The PPP™ is available for $75. 
  • Register for the auction.  To register to bid, one must submit a $50k certified check made payable to the bidder or personal check along with bank letter of guarantee.
  • 10% down payment will be due immediately after being declared the buyer.  (The registration fee is applied against the ten percent down payment)
  • The balance is due in cash at closing within 30 days 
  • A “Buyer’s Premium” is added to your bid.  How much?  7.5% will be added to the winning bid price. So basically, in this case, the BUYER and not the seller is paying the real estate commission, marketing costs, etc.  in this transaction.  The auction house is kind enough to offer a  cooperating commission of 3%.  Of course, if you work with us on the purchase we would rebate you over $25K from our commission!

More about the house…..

Built in 2003 and originally listed on the MLS in 2007 at $3.85mm, this Orren Pickell designed and built home offers a breathtaking mixture of imported stone,wrought-iron works and  one-of-a kind architectural detailing.  Six bedroom suites, great room, media room, family workshop, dual utility rooms and wine cellar are coupled with state-of-the-art media and electrical components. Despite all that it brags, the home sat on the market for over four years.   

Property Features

  • 6 Bedrooms
  • 7  full and 2 half Bathrooms
  • Heated Freeform Pool with Waterfall Spa
  • Gourmet Kitchen with Viking & Sub-Zero Appliances
  • SmartHome System w/8 Programmable LCD – Displays Control: Lighting, HVAC, Security, Audio/Video, Pool/Spa
  • Home Theater
  • Library
  • Wine Cellar w/ Tasting Area
  • Gameroom w/ Kitchenette
  • Home Gym
  • Oversized, Heated 3.5 Car Garage

The most expensive listing on the MLS in the town of Riverside is a $1.35mm – 13 room home with 5 bedrooms and 4.5 baths.  The most expensive sale in Riverside is 1.725mm in September of 2006 and that home has 11 rooms  with 5 bedrooms and 4.5 baths. 

It will be interesting to see how much this home fetches.  My guess is that someone will be happy to snap it up at $1.5mm.  Before jumping in to purchase, be aware that the current tax bill is $56k per year.

Evaluating Chicago Real Estate Investment Property

Thursday, April 17th, 2008 by Gary Lucido

With interest rates down and the real estate and stock markets declining everyone is trying to figure out how to invest their money to increase their returns. I’ve been scouring the planet looking for opportunities in tax exempt municipals, CDs, and even my life insurance policies. Naturally, some people are looking at income producing properties as a possible alternative – especially since prices are believed to be down.

But how do you evaluate income producing properties? As you might expect there are numerous techniques that might be used. Some people might just look at them in terms of their belief of the underlying value of the building. Does it appear to be fairly valued, given the location, amenities, and condition of the building? However, as someone who has been a stock market investor for decades I tend to look at investment properties in terms of the return I can earn on them and how that compares to other alternatives available to me.

Calculating the Rate of Return

In order to calculate the return on income producing properties one has to first determine their Net Operating Income, which is basically the sum of all sources of income minus the sum of all expenses. For example:

Revenue Items

Expenses

Rent

Vending Machines

Laundry

Reserves for major repairs

Property taxes

Maintenance

Management

Utilities

Legal and accounting fees

Insurance

Miscellaneous

Notice that depreciation and mortgage payments are not included as expenses for this analysis. The reason for this is that depreciation is a non-cash expense and mortgage payments are part of the financing decision, not part of the property valuation decision (this is actually the same way you value businesses).

Once you have your Net Operating Income (NOI) you can divide it by your purchase price to begin to get an idea on the return you can expect on your investment. This is known as the Cap Rate, which is short for capitalization rate. If you pay $500,000 for a rental property and your annual NOI is $25,000 then your cap rate is 5%. However, that’s still not the return on your investment. Why not? Because over time you can expect to be able to raise rents and the value of your property should appreciate. For instance, if you can raise rents by 3% per year and if the property can still be sold in the future at the same cap rate at which you bought it then your return will be boosted by 3%. In other words, with a 5% cap rate and a 3% average annual rent increase your total return is now 8%. You can trust me on this or you can contact me to get the mathematical proof, which I would be more than happy to provide.

At this point it’s a good idea to start thinking about how you would finance the deal. If you are going to get a mortgage then you need to compare your mortgage rate to the cap rate on the property. If the cap rate is lower than your mortgage rate then that means that your investment is going to provide a lower return on the money you are borrowing than that money is costing you – in the short run. In other words, you are probably going to end up running negative cash flow in the early years before you can raise the rents sufficiently.

I assume you would probably like to know what cap rates look like in Chicago right now. As I periodically check on cap rates in different Chicago neighborhoods, I’ve decided to share the results I recently came up with for rental properties currently on the market in Bucktown. The chart below shows the distribution of cap rates for 22 rental properties currently on the market in Bucktown:

bucktown-cap-rates.jpg

These rates are estimated based upon very incomplete information from the MLS system so please take them with a large chunk of salt. When determining the cap rates on any property you might be considering you should insist on complete documentation of all sources of revenue and expenses.

At any rate (no pun intended) the cap rates vary between 2.8% and 7.1%. In evaluating possible purchases you would have to ask yourself why the available properties have such differences in cap rates. Perhaps the properties with lower cap rates also have below market rents and you will have the opportunity to raise those rents. Or maybe those properties are just overpriced. Once you have determined the cap rate of a property you can add to it your own assumption regarding annual rent increases.

Tax Benefits

But wait, there’s more! There are also tax benefits in owning rental properties. You can depreciate the portion of the purchase price attributable to the building on your tax return each year so this provides you with annual tax benefits that you need to consider. However, this starts to get complicated and this is where you really need to talk to an accountant because:

  • There is this thing called recapture of depreciation when you sell a property that has been depreciated and you will end up giving back some, if not all or more than all, of the tax benefits you took over time. However, there is value in the fact that you had use of the tax savings, interest free, in the meantime.
  • There are limits to how much depreciation you can take in any given year if you are not a “real estate professional“.

Do You Want to be a Landlord?

There is just one more thing to consider before investing in income producing property. You need to ask yourself if you really want to be a landlord. When the hot water heater ruptures at 2 AM who are your tenants going to call? Who is going to fix the broken shower head?

And how much is your time worth? Take another look above at the components of your operating expense in the chart above. There is a line for management expense because either you are going to hire someone to do it or you need to consider the value of your time – unless of course you work for free, in which case you should contact me.

Note: If you are thinking about investing in real estate give us a call and we can provide you with information that is more targeted to your particular situation. Also, please keep in mind that all of the above information is not guaranteed to be accurate and before investing in rental properties you should seek the expert advice of an experienced accountant and maybe even an attorney. This post is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. It should not be regarded as an offer to sell or as a solicitation of an offer to buy property.



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