HML #15 Closed And Apartment January Financials.

Escrow closed on this property on Monday, so hard money loan #15 was paid off. Looking for another place to invest now.

The January financials for the apartment have arrived and, as we expected, things continue to improve. Occupancy increased to 93%, up from 88% in December. Revenue increased by $5,000 and management expects the same increase for February. Our property tax impound amount will drop by about $8,000 per month with the March payment following our successful property tax valuation appeal last August. The property still lost money in January, but occupancy is heading up and expenses are heading down, so we are moving in the right direction. For January, our budget called for an $8,500 loss and our actual loss was closer to $11,500, so we are $3,000 off of our budget. If trends continue, we should be looking good for February.

House Now On The Market

Last time, I mentioned the property behind hard money loan #15 was about two weeks away from going on the market. I'm pleased to say it is now on the market! Below are some photos.

This is a bit interesting. The house isn't fully staged, just a few pieces of artwork on the walls and some plants. But I still think it makes the property show better than being completely empty.

The property is listed for $400,000. My partner's wife is the owner of this one and she bought it for around $299,000. When it was bought, our estimates of comps ranged from $375,000 (computer generated) to $400,000 (opinions of two real estate professionals who have lived in the area most of their lives). Our mortgage is for $220,000 or 74% LTV based on the purchase price. With the holidays approaching, I don't expect any movement on this until after the first of the year, but who knows.

Rolling Along

Nothing much new has been happening on the investment property front. My hard money loans are being paid on time. Operations at the Houston apartment complex were essentially unchanged for September (the last month I have data for) from August. As I mentioned after the last investor conference call, the property is currently losing money, but things are slowly turning around. Management expects a return to profitability in early 2011 and a resumption of investor payments at that time. I think some of the other investors are getting impatient for distributions to start again - management sent out a notice today reiterating what they said in the yearly conference call. I guess many of the investors were not on that call so didn't know the situation.

The property behind hard money loan #15 will be ready to be listed in about 2 weeks. Back when our borrower first got the property at a foreclosure auction, it was still inhabited by the prior owners and their brood - a total of 8 adults, 2 kids, and 3 dogs. The prior owner wanted $6,000 and 1.5 months to move out. We offered $1,500 and 4 weeks. He came back and asked for $3,000. We told him no way. He threatened to take all the windows when he left. I've now found out that we did have to hire an attorney to file a suit to get him out, but as soon as he was served, he moved out without damaging the property. It cost $900 for the attorney, so we saved $600 over what we had offered him and he got nothing from us.

The property for hard money loan #14 is still on the market. It went up for sale in mid-August for $499,000. Our borrower has dropped the price now to $475,000. If I was the seller, I'd drop the price more to sell it quickly, but as long as the borrower keeps paying, let him list it for whatever he wants :-) Even with the price reduction, he's got close to a $100,000 profit waiting for him when it sells.

I don't know the current status of the property behind hard money loan #13, but I received another payment on the loan yesterday, so it's current.

Breaking The Bank-Appraiser Cabal

I got a call the other day from the bank that holds the mortgage on my house. They wanted me to come in and talk with them about refinancing. They thought I could get a better rate. So on Saturday, I went in and spoke with a lady in the refi department. I could have gotten a real sweet rate – if I didn’t have my home equity line of credit. I got the HELOC near the peak of the housing bubble, so the combined value of my HELOC and my mortgage is well over what my house is worth today. That meant I had to go into a different loan program with a higher rate and I wouldn’t be saving very much.

But while I was talking to the woman, I found out an interesting fact. Now, back when I was rehabbing and renting properties, I did refis and loans all the time. I’ve probably been through the mortgage process as a borrower 15 times or more. I’ve got a fair idea of how the game is played. Or, I thought I did. I haven’t gone through the process since the housing bubble collapsed. Turns out a couple of things have changed. The biggest change is that the bank no longer can have any contact with the appraiser. The bank just orders an appraisal and the order goes to the appraisal company, who then doles it out to one of their employees. The appraiser contacts the borrow or home owner to schedule a time to look at the property. I think this is a positive step. I remember thinking how convenient it was that the appraisal would always come back right at or slightly above the sales price of the house. There seemed to be an obvious game going on where the bank would hint to the appraiser what figure they were hoping to get. And since the bank paid the appraiser, there was a strong incentive for the appraiser to meet that number. I’m sure this was a big factor in the housing bubble.

Of course, the new prohibition does not fully stop this practice. The appraiser still must talk to the borrower (assuming this is a refi and the borrower is living in the property), so the borrower can still tell his target value to the appraiser. I don’t think there will ever be a way around this. But I have heard from appraisers that they are also limited in the adjustments they can make. They have strict limitations on what improvements they can include. I had one appraiser tell a friend of mine that short sales and foreclosures now really hurt property values because appraisers are pretty much stuck using their sales price as comps and are very limited in the adjustments they can make. I would imagine one foreclosure or short sale in a neighborhood wouldn’t be too bad, but a neighborhood with several could see the property values really plummet.



In other news, it looks like the former owners and occupants in the hard money #15 property are being jerks. If you recall, he originally wanted $6,000 and one and a half months to move out. My partner offered $1,500 and four weeks. Now he is asking for $3,000. In the words of my partner, “fat chance.” The occupant has threatened to take the windows if he is not paid that much. Our lawyer advises to call the police if he does. (And yes, we do have insurance on the property.) Looks like this will be going to court to get the people out. And there are lots of people – 8 adults, 2 kids, and 3 dogs. Yeah, there will probably be a bit of remodeling that needs to be done when they leave. Such is a life of a foreclosure investor.

My others loans are doing well and paying on time.

Another New Loan Made

Just a day after starting a new hard money loan, my partner contacted me with another opportunity. This is another single family home, 1,900 square feet, 4 bedrooms, 2 baths. The outside looks nice:

But the inside needs about $30,000 of work. The previous owner / occupants included 7 adults, 2 kids, and 3 dogs. And no stove. You can imagine what it looks like inside. The previous owner tried to sell the property themselves, but, given the poor interior condition, was unable to find a buyer.

The borrower for this loan is, once again, my partner's wife. The property was purchased for $300K, and we are writing a mortgage for $220K, giving a 74% LTV. (I've rounded the numbers for simplicity, so if you do the math, you'll get a 73.3% LTV.) Fixed up, the property should sell for $390K. My partner used to live in the city this house is in, so he's got a better than usual knowledge of the area. He figures it'll take 3 months to get the place ready for sale.

The old owner is still occupying the property. He offered to leave in one and a half months and wants $6,000. My partner countered with four weeks and $1,500. No response from the guy yet. Technically, he doesn't own the house anymore, so we shouldn't have to pay him anything to get him out. But it would probably cost about $1,500 to hire an attorney to get him out and that process would take one to two months anyway. Might as well try the honey before the vinegar.

Labeling this one hard money loan #15. This one will take another third of the funds that got freed up over the past two weeks. I'm still looking for one more loan for the final third of my funds.