Sunday, August 9, 2020

Evictions On Hold – For the Moment

President Trump has signed an executive order putting a hold on evictions. He is doing this to help ease the burden on working folks who have seen their income evaporate as businesses were shut down in a vain attempt to stop the spread of the Chinese virus. His heart is in the right place but this is a band-aid on only half the problem.

The Deeper Problem

While it is helpful for people not to be thrown out of their homes when their income stops, this does little to help the property owners who still have ongoing expenses like taxes and insurance as well as mortgage payments in many cases. This pushes the burden on other innocent parties hurt by the economic shutdown. The anti-capitalists in our midst may think this is the way it should be, that the wealthy landowning class take care of the so-called working class – as if the landowner sit around all-day drinking scotch and eating bonbons..

But this thinking comes from a lack of understanding of what is involved in providing housing in the community. Unless the property has been held for many years, there is probably a mortgage payment due every month, If rent checks stop coming in, it is difficult to keep payments going out.

This is not an argument for the government to write checks to the landlords. By the way, landlord is not a dirty word, no matter what some people try to make it sound. It is just a recognition of the economic truth: Their ain't no such thing as a free lunch. Somebody has to pay the check. In this case, the people providing the housing are asked to foot the bill. To Bernie Sanders followers this is entirely appropriate, but most property owners do not have an infinite supply of funds to support those that can't, or won't, pay the rent.

Eviction is not the Best Answer

In normal times, when people stop paying the rent (or mortgage payments) sooner or later the sheriff comes knocking on their door and out they go. When this happens the property owner is looking at several months (at least) of lost rent, along with legal expenses, and a rental unit in need of some work. This is even if the people being tossed out don't trash the place. Even if it is just paint and, possibly some carpet, it still costs money and another month of lost rent.

The Ticking Time Bomb

Unless the rent payments (and mortgage payments) are forgiven – that is written off, never to be paid – debt is piling up month after month. For the tenant who had been paying $700 to $1000 a month, if they haven't paid rent in six months, how will they pay back the $4,200 to $6,000 back rent when this madness ends? They may still be out on the street and the property owner will still be out the back rent, etc., etc.

A Sliver of Light

Fortunately, not everyone was put out of work or business. Many people kept on working and paying their rent and/or mortgage. As with every economic problem, some people thrived while others headed toward the bottom. Many online retailers saw their profits soar while small brick and mortar shop shut their doors – sometimes forever. While those deemed non-essential by the powers that be sat at home watching their bank accounts drain, those deemed to be “essential” kept chugging along, sometimes even enjoying a financial windfall.

Property owners with a variety of rental units many have a had a couple of tenants with issues even while most of the revenue continued. Smaller owners with few units saw their income remain or fall based on the fortunes of their renters. Even for those with sufficient cash flow to cover the missed revenue, we still have the moral issue that begs the question: should someone be forced to support another person who is not part of their family who cannot pay their bills?

Helping another person in trouble should be voluntary, not imposed from above by those with nothing at risk. This is a question many seek to avoid, and I will not go into all the ramifications of the various answers, but it is one that deserves consideration when we look at people deprived of the ability to earn their way in life.

Working Together

If the property owners and the renters work together in good faith, there may be some sort of reduced rent and partial payment deal to be had that benefits all concerned. Sometimes banksters work with property owners, but whichever side of the table one finds him or her self, talking about what is possible can help ease the burden on both. In fact, it is the only way to come out of this without either side being too badly damaged.

Neither side is the enemy. The property owner is simply supplying a place to live and the renter is paying for the value he is receiving. However, until we get back to the point where we recognize that all jobs are essential, except possibly that of some bureaucrats, and people can bet back to work without hearing the “OMG, we're all gonna get killed” mantra from the media, we will have to figure things out to get by.

Sunday, August 2, 2020

Homestarts Are Up, Not Everyone Is Happy

I read recently where home starts in June were up 17.3%. This was after the terrible months of March and April with a small improvement in May. Existing home sales were down, but pending contracts were way up.

This seems like good news, but not everyone was happy about it. Aside from the political implications, there are some who see this as a problem. An appeals court recently dismissed a suit by the Edison Board of Education (NJ) against the Edison Zoning Board of Adjustment and a developer. This was over just an eight-unit project.

Why Would a School Board Sue the Zoning Board?

For those who haven't been involved in county-level politics, there are always various forces at work when growth is involved. Building new homes helps the area grow, however building new homes also puts more burden on local facilities such as schools, hospitals, and emergency services. Hence the actions of the school board who was put in a position of providing education for the children living in the new homes. There may have been other issues unique to Thomas Edison's home town.

Some will argue that the incremental costs of adding several students to the system are covered by the additional taxes (along with federal and state money). Up to a point this is correct – until they add up to the need for new schools, buses and teachers.

A Brief Explanation

I was involved in this for a number of years in the suburban Richmond VA area. It was an era when some in the county government felt it was their job to help the developers bring their plans to fruition, sometimes over the objections and welfare of residents negatively impacted by a hundred and twenty unit subdivision next to their rural home.

Emergency services could not guarantee expected response times if the development was beyond the planned growth zones. Schools hauled in classroom trailers to handle overflow, and a host of other situations came about by the influx of people. There was always this sense of conflict between the desire for expansion and those tasked with providing services.

One Solution

Because real estate development has an impact on the local government operations, the solution that was applied at this time was to implement something logically called an Impact Fee. The purpose of this was to help fund some of the additional services required by the increased population. This contributed to school and emergency service construction as well as road improvements.

This was somewhat helpful to the county but did not help the new home buyers. Between impact fees of something in the neighborhood of $20,000 to $25,000 per unit and various regulations, the builder had about $100,000 into a lot with nothing more than a hole in the ground. This wasn't the way to build affordable housing. The result was either townhouse construction to keep prices down or high-end homes near and over the million-dollar price tag.

The latter found several developments put on hold when the housing market tanked. Very nice homes were left by themselves with partially completed roads and partially completed neighbors. Builders took a financial beating.

The Other Solution

Others without the resources and connections, or opposed by powerful neighbors approaching the planning commission were simply turned down. Perhaps they were the fortunate ones. Occasionally one would slip through and the taxpayers funded the additional services.

The Big Question

What is the right thing to do with regard to development? There are two conflicting rights that need to be considered.

The first is the rights of the property owner to use their property as they see fit. This is a basic right in America. For some in this situation, their farmland was to be their retirement fund. The plans were to sell it to a developer and live happily ever after. For the county to prevent them from converting their property from farmland to residential was a financial hit that put them in an unexpected bind.

Counter to that right was the necessity of the county government to create viable comprehensive plans for growth and provision of service. What this means is that there are growth zones where services like police and EMT are within acceptable response times. Schools are available within a reasonable distance and growth in these areas is not a problem.

However, placing major developments beyond these areas meant excessive response times for emergency personnel and inadequate educational facilities. Thus the desire for impact fees that had such a negative effect on the whole process.

So the question: does the individual property owner's rights outweigh the cost and inconvenience of everyone else around them? I am loath to put the welfare of the government over the individual rights, but it doesn't seem that the individual, whether the farmer or developer can expect everyone else to contribute to their welfare and receive a negative benefit.

The Answer

This is where we see school boards and others creating obstacles to growth and development and it's not all about politics. Sometimes there are reasonable factors to keep in mind when bringing growth and progress to an area. Then again, sometimes the NIMBY people just don't want to see changes. There is no universal answer. Sometimes participation in local government can be a profitable pastime.

Sunday, July 26, 2020

Can't Qualify for a Mortgage? Now What?

There are many reasons more than half of Americans can't qualify for a mortgage. It could be insufficient credit history, low credit score, self-employment where income is difficult to document, or it could be that you had good credit and used it and now have too many outstanding accounts. It could be that all these things are fine but you just don't have a down payment.

Over time, most of these things can be cleared up. However, today we are not looking at credit repair and saving plans. These are fine and I'm not going to discourage anyone from working through these situations or following the Dave Ramsey plan to pay off debt.

What Are Your Options Today?

Instead of looking at what you can't do, we are going to look at some of the things you can do. I like to consider what Winston Churchill told us, “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.“ Right now, if you are reading this the difficulty may be the low credit score, or down payment cash. Whatever it is, it is an opportunity to go down a path other than the one that runs through your friendly local bankster and the financial colonoscopy the underwriter will put you through. You may be reading this because have been down that road already.

Most people in this situation fall into one of two categories. Either you have no down payment or no proof of financial responsibility. If you have neither, it could be a little more difficult.

Got No Money

If the down payment is an issue there a few choices. If you are someone who has helped defend our country, the VA has a zero-down option that can get you into a home of your own. If your tastes aren't too extravagant, an FHA insured loan will let you come in with 3% down.

If you qualify as a low-income buyer, particularly with children, your state, county or municipality may be able to help. These programs vary with locality and terms change from time to time. Among the features of some of these programs is after you stay in the property a certain length of time, five years, for instance, the amount you owe begins to go away. Some programs have a certain amount of funds allocated and when they are used up, the funding stops until more is available. Your real estate agent should be able to point you in the direction to apply for these programs. If they give you a blank stare when you ask about these things, find another agent.

Have Some Cash But Can't Get Past the Credit Check

Loans are approved by the bank's underwriters. These are the trolls that work in the basement of the palatial edifice called the home office. They may not really be trolls, but I can't say for sure as I have never met one face to face, but have seen the result of their work. Underwriters are usually not very imaginative people. They have their lending criteria and are loathe to deviate from it. They are looking to protect the lenders' interest and if you can't prove that there is a good chance they will get their money back, they will scream, “Nyet!” (if they are Russian).

Large Down Payment Plan

You may find the underwriter more agreeable if you can put down a larger than average amount of money – like 30, 40, or even 50 percent. By giving a larger down payment, the loan-to-value (LTV) drops significantly and there is a greater chance of the bank recovering their investment should you fail to pay and they have to give you the boot.

Not So Large Down Payment Plan

Here is where we usually get off the beaten path that runs through you friendly local bankster. So you can't put 50% down? Most people can't. If you have some down payment, you may still be able to work out a deal for your own home.

Many investors are willing to let you in their houses with a lease option agreement. Some investors are actively seeking out people looking for this kind of buyer. With this arrangement, you usually give a non-refundable down payment. Keywords are non-refundable, so don't be surprised when you see that in the agreement and don't be surprised if you don't get your money back if you bail on the agreement. There may or may not be a portion of each month's rent applied to the final purchase. The term is usually a couple of years to give you time to get your credit score high enough to satisfy a persnickety underwriter.

Some homeowners who don't need the funds from selling their property to buy the new home may be open to this type of arrangement, particularly if they are going to put the money in an underperforming CD or savings account. Most only want to see cash, but sometimes the smart ones will entertain such an offer. You generally won't see this done through an agent as there usually isn't room for a commission and it just doesn't align with their thought processes. You will probably have better luck working with For Sale By Owners (FSBO). You just have to keep asking..

Some owners will actually take back the mortgage so you don't have to make your plea to the friendly neighborhood bankster. They may not go for a full thirty years, One thing to be careful of is sometimes you will be offered a short term with a balloon payment at the end of something like five years. This has been made illegal for owner-occupied housing some years ago by Messrs. Dodd & Frank.

For the Investor

A balloon mortgage is perfectly legitimate for an investment property. You may use it if you don't intend to hold the place long term, or if you are fixing it up and can refinance when you increase the value. This will put you in the world of the private lender.

Private lenders are much easier to deal with than banks. They don't look at every detail of your last three years' tax returns. They look at your track record and the security for the loan. Often you can get the money in a week. Just show that you can get the job done.

There are average people who have money in their IRA and are happy with six to eight percent. Twelve is not unreasonable in a pinch. Money is usually loaned for twelve months, often with short extensions available, so this is primarily a construction loan for a rehab. There are also sharks in the business as well. At an investor's breakfast I sat across the table from a guy who offered money at fifteen percent with five points. I said I would keep that in mind – and promptly forgot about that offer.

Many Options

If you thought you could only get money from a bank to buy a house, there are several alternatives if you put forth the effort to pursue them. We've shown there are various ways to buy real estate. Sometimes you just have to look around a little, be flexible, and persistent. The money and deals are out there.

Sunday, July 19, 2020

When is a Bargain Not Such a Good Deal?

I recently read an article touting several large cities as great places for housing bargain hunters. While fewer homes are on the market in each of these areas, the ones that are left are going at reduced prices below pre-pandemic levels. The reasoning was that those who didn't really need to sell at the moment had pulled their properties from the market to wait for the economy to open up more and yield a higher price. Those houses left on the market had prices lowered and owners willing to bargain – up to a point.

Still another article claimed now was a great time for millennials to get a place in pretty much the same cities for much the same reasons. I guess the reasoning was many millennials like city life with everything within a few blocks walking distance. They may be right and millennials may be the ones to bail out current city dwellers looking to leave the urban environment.

Not Just the Health Scare

On the surface this seems to be a logical assumption. However, when you look more closely at cities like Los Angeles, Chicago, New York, and many others, there has been a steady outflow of residents looking to escape rising taxes, crime rates, and a host of other problems associated with modern high-density urban living. The truth is yes, you can buy for a lower price, but – and it's a big but – it is quite probable that you will not see as much appreciation of your investment as you get with other properties unless these cities can resolve the issues that led to lower prices and urban flight in the first place.

When you buy a house, you buy more than a house. You buy a neighborhood. You buy a local and state government. You buy a culture. Some of this is easily forgotten when you are dazzled by granite countertops and shiny chrome and glass bathrooms. The whole picture needs to be considered.

Not Just the Big Cities

Just because you find a “bargain” in a more hospitable municipality, it doesn't mean you don't have to look at the whole package. Not far from me there is a neighborhood that was built up with small two-bedroom bungalows sometime in the late '40s into the '50s. About fifteen years ago a builder found some vacant lots in the area. I don't know if they had been vacant all along or if he bought some decrepit houses and knocked them down.

They built about half a dozen homes in the then-current style with features no one in the neighborhood even thought of, like garages, more bedrooms, multiple bathrooms, nicer kitchens, and the like. I'm sure they sold for much more than the neighboring properties did at the time and the buyers still thought they were getting a good deal. However, today, if one were to be sold, it's doubtful they could get a price anywhere near the price when the house was new and they are living in a house that is in roughly the same condition of the less-than-perfect neighborhood.

Had the original buyers purchased a similar home something like ten blocks to the east, they would have paid a little more at the time, but today would have a property worth eighty to one hundred thousand dollars more. Did they really get a bargain?

Watch the Other End As Well

Just as you can get burned by just looking at a low price, you can over improve a house beyond what you could even think of selling it for. This doesn't mean you don't make things nice, but you do it for yourself and shouldn't expect a financial reward.

I ran into an example of this when remodeling our current home. We were looking for tile for the master bath shower surround. My wife saw this really nice imported tile that cost around three times as much as the stuff from American Olean. When we sell the place, it is doubtful that we will get one penny more because of the fancy tile – but it was for us and made her happy and kept me from sleeping in the living room..

The same thing happened when we picked out the range for the kitchen. Most double oven stoves have one unit large for things like turkeys and a smaller one for things like cookies and pies. She wanted the one where both units were the same size and you could put a turkey in either one. The thing cost twice as much as the normally configure ranges, but we have used it often and appreciate the capability, even though it is also doubtful any potential buyer would know or care about the difference. So, do we roast two turkeys at a time? No, we don't make two turkeys at once – but it's good to know we can in case the situation arises.

Why Do You Buy a House?

The question comes down to why you buy the house in the first place. If it is an investment, then you have to be particularly careful about the long term valuation. If it is a place you really want to live in, then some of the financial considerations are secondary beyond the question of can you afford the home.

If you are planning to be there for a long time, the short term fluctuations are not a major consideration. If you consider yourself an upwardly mobile young executive with a major corporation you may not have much time in any one place so buying a house where you could lose your Luigi Borrelli shirt may not be a good idea. I have a friend who worked for IBM – and he told me that contrary to common perception, those letters stood for I Been Moved.

The Choice is Yours

What you buy, or the decision to buy rather than rent is not a simple one. You know what you want and can afford, but don't let price be the sole factor. Look at the big picture around the property. Then, you might want to think about what Will Rogers once said, “Don’t wait to buy real estate. Buy real estate and wait.” Just put yourself in the best position to benefit from the choice.