Atlanta REI

Update - "Its been a month"

2006-08-09T06:17:00.000-07:00

I know I have seriously lacked in my responsibilities updating this blog, but I do have a good excuse. As some of you may know I work for a very large multifamily management company. I have recently shifted gears with them and have assumed responsibility of over 2000 units. Naturally, this has consumed a majority of my time and has left little spare time. I LOVE what I do very much and it comes very easy to me, so I am not complaining. I just have a passion for this stuff and leading people. Nonetheless, any spare time I have had has been spent looking at houses (Saturday mornings) and spending time with my family.

I continue to make offers, although not as many as I used to. I don't write about each and every offer since almost all are not accepted. The reason I am not making as many offers as I used to is because the market here is shifting into a buyers market and I really feel like there are going to be some great deals down the road. If you think I was picky before, well then you have not seen anything yet. Sure, there are a lot of houses out there and yes, I could make money on them. But, if it is going to be worth my time I have to stick to my rules.

DeKalb County House a "No Go"

2006-07-10T07:54:00.000-07:00

Don't you just love banks. After submitting our short sale paperwork, having the rep tell us that they were taking it directly to the supervisor due to the short time frame, they came back and said, "All short sale paperwork must be submitted at least 30 days before the schedule foreclosure auction date." Huh? Well thanks a lot for telling us that when we started all this, you could have saved us the time. I really think that was just their way of politely saying no, but since when did banks become polite. Anyway, that's the way it goes and I am off chasing more deals. Of course I am going to follow up on this house to see if it sold at the steps and make an offer it didn't. I don't go away to easily.

Happy 4th of July

2006-07-04T19:32:00.000-07:00

I just wanted to wish everyone a happy 4th of July and say thank you to everyone who is currently serving, has served (myself included), and has sacraficed for this wonderful country.
GOD BLESS AMERICA!

Good News for the Rental Market

2006-06-23T12:54:00.000-07:00

Yesterday Witten Advisors published their 1Q report for their clients regarding the national apartment market and I have to say the news is good. Rental demand is up and 2006 - 2009 is expected to be the best ever for the apartment industry. One point of note is the rent vs. buy spread, which I have written about before. This is the spread between median apartment rent and a median house payment (P&I). Today that spread is almost double. Which means a payment on a median price house is almost double what it would cost you to rent an apartment. Thus, driving more people to rent vs. buy. The last time in history this occurred was back the 80's when we saw double digit mortgage rates. Furthermore, the share of all consumer's income to afford a house payment has grown to 28%, while a rental payment only requires 15% of their income. Nonetheless, the homeownership rate is declining and is in negative territory. Again, the last time this happened was in the 80's.

Employment numbers are strong, but expected to weaken slightly through 2008 then rebound in 2009. Largest numbers of people are moving to Florida, Georgia, Texas and Arizona. Home price appreciation is slowing, but still appreciating and Seattle, Dallas & Houston are among some metros that realized an increase from 4Q 2005 to 1Q 2006.

What does this mean? Along with an expected 4% rent growth, I am glad I am in this for the longterm. If I continue to buy the house right and provide a good quality place to live, I should not have any difficulty in maintaining 100% occupancy and getting a little cashflow.

"See a lot of houses, make a lot of offers."

2006-06-19T14:42:00.000-07:00

The great John Adams (not the former president) taught me this one. He is what I consider the father of real estate investing here in Atlanta. He said, "In order to be successful in this business you have to do two things. See a lot of houses and make a lot of offers." Although I do not write about it every week, I do see a lot of houses and make a lot of offers. I usually spend the week identifying properties that fit my criteria and every Saturday morning I am out looking at property. Then, on Monday, I am making offers (if I haven't done so already).

This weekend wasn't any different. I loaded up my 2 year old son and off we went. He loves looking at houses. This week I had limited my search results to only two properties. The first house we saw was an in-town property that had already been rehabbed. This house will be going into foreclosure in August and accoding ONLY to the listing price had considerable equity. Unfortunately, when I pulled up I didn't even want to get out of the truck. I knew from the outside that this house was not going to be worth what they wanted, but I had already set an appointment to see it. The problem? They had taken too many short cuts and did not pay attention to detail. Unfortunately, if I were to buy this house, I would have to tear out all of their improvements and start over. I really feel sorry for these investors because they already owe more than they are asking for it and are going to take a bath on this one.

The second house was a home run. It is located in DeKalb County and like the first one, needs very little rehab. This one only needs the grass cut, new carpet, and appliances (plus damages outlined below). Although, I will probably put on a new roof just to be safe. (A new roof is really not that expensive considering the long term benefit and the great curb appeal it will add to the property) This is scheduled for auction on July 5th. We will attempt a short sale with the bank, so cross your fingers. The sad part is kids have already broke into the property. Half the back door was missing and the window frame around the side window had been torn off. It is a nice neighborhood (less the vandalism to this house) and is right across the street from an elementary school.

The offer is at 64% of the ARV. Therefore, I should be able to buy the house, fix it up, 80% refinance, cash out my original investment plus about $5k, leaving $30k in equity and cashflow $200 a month in rent. Not too bad :))

Stick that in your pipe and smoke it!!!!!!

2006-06-16T14:16:00.000-07:00

Climbing interest rates and cooling speculative demand is putting pressure on the housing boom, but as long as jobs continue to be created and builders curb production, the sector will experience a soft landing, according to Harvard's Joint Center for Housing Studies.

"Strong household growth, combined with record incomes and wealth, will lift housing investments to new highs next decade," Eric Belsky, executive director of the center, said in the news release.

Two quotes from an article published on the RealEstateJournal.com http://www.realestatejournal.com/buysell/markettrends/20060615-hoak.html

I love the nay sayers who have posted comments on other real estate investor's blogs. You can hear the jealousy in their comments. They are mad at the world or disgruntled because life just isn't fair. I ask why would someone find it compelling to post a negative comment to someone's blog slamming their success? These are probably the same people who expect the government to take care of them.

The way I see it is if you are investing in real estate for the long term you will do just fine. Any person who bought a property just in the hopes that it is going up 20% next year and thought they were going to sell it aren't investors. I call those people speculators. I know investors who have been buying and selling houses since the seventies. They survived unheard of interest rates, gas shortage, and three economy collapses. Today they are very wealthy and doing just fine. Why? Well I guess all you nay sayers will just have to sit back and watch to find out as I continue to buy houses below market value, fix them up, and hang on to them for LONG TERM appreciation. Oh, and I only assume an average appreciation of 5% per year in my models.

YUP! HUD Foreclosure

2006-06-09T18:44:00.000-07:00

Well, it seems as though I was correct. My agent has confirmed that the house had been foreclosed on in April. It is a HUD foreclosure, which explains why it hasn't been locked up yet. It usually takes them about two months before someone makes it out to winterize the house. I'm not sure what they are going to list it for, but I can tell you that it will be too expensive for me.

Since my agent feels real real bad and very embarrassed, she is giving me first peak at the next few deals to make up for her mistake. I am going to look at a house that she is going to list this weekend. It is supposed to be foreclosed on in August. I have until Saturday afternoon before it hits the MLS.

Note to self: Check the tax record before I look at the house. LOL

House #3 - REO?

2006-06-05T14:34:00.000-07:00

On Friday I was digging in a little more on house #3. I had pulled the tax records to see how much the owner had paid for the property. According to the tax records the bank actually owns the property. To my surprise I discovered that the bank had already foreclosed on the property. Immediately I called my agent to see if this was true. She said she had no idea. She said that the seller lives in New York and she had instructed the seller to make sure that she had changed the mailing address, so maybe the seller isn't even aware that the property has been foreclosed on.

Unfortunately, the foreclosure auction in Georgia is this Tuesday, so my agent usually goes underground the weekend before the auction trying to get last minute deals done with the banks. (If you remember, my Duluth deal went through the weekend before the auction.) Therefore, she would not be able to focus on my deal until Tuesday.

That's not a problem because her and I were under the understanding that this deal was not due to be foreclosed on for at least another month or so. If it has already been foreclosed, then we will make an offer to the bank (which we sort of already did, but the contract is between the seller and I not the bank). Interestingly enough, I did ride by the property on Sunday and my agent's sign is still in the front yard. So, if it did foreclose in April (like the tax record says) and they listed it with an agent, I wonder why they have not secured the property yet? They also have yet to put their sign in the front yard. Something does not make sense here. The good news is that the owner paid $88K back in 2000 for the property. With strong comps selling in the $110's and an average 5% appreciation a year added to the purchase price of $88k I feel real good about my ARV.

If I were a betting man, (and I am) I would say this house is LONG GONE!!!!

Ohhhhhhhhh....on second thought, what if this is one of those scams. Where a person has found a house to be foreclosed, is pretending to be the owner, and is hoping some newbie investor who does not do their due diligence, shows up with cash and buys the property.

Scenario:

Seller: My house is in foreclosure please help me!!!!!

Investor: Ok I'll help. Let's do a subject - to deal. How much cash do you need?

Seller: I need $5,000.

Investor: Ok I'm too cheap to hire an attorney to do a title search and handle the closing for me. Just sign this quit claim deed to me and I will give you $5,000 and start making your payments.

Seller: Ok thanks for the $5,000

Investor: Sure!

Hmmmmmmmmmm

House #3 Under Contract

2006-06-01T12:28:00.000-07:00

It has been awhile since my last post. I have taken some time off since the birth of my son. I'm glad to report he and mom are doing just fine.

Now on to real estate.

The house that I looked at in the neighborhood near my in-laws (Hampton), is now under contract. Like the Duluth house it is a short-sale. The lady who owns it has already moved out and it will eventually head into foreclosure. Although it is not that far along yet. I am not sure how far behind she is, but my miracle agent says she thinks the bank (Countrywide) will accept our offer of $70,000. It is a four side brick three-bedroom two-bath house with a covered carport built in 1965. It needs landscaping, soffit repair, new roof and a leak needs to be fixed in the master bath. It has hardwood floors underneath carpet, so we will just pull the carpet out and refinish the wood floors. The kitchen cabinets can be resurfaced and we will replace the countertops. Short-sales move pretty slow, so I don't expect closing on this deal until sometime in July.

I have yet to come to a final decision on the exit strategy. I expect the ARV of the house to be somewhere around $100,000. Everyone knows I am a big buy and hold guy, but I think I may just want to sell this one or do a lease purchase. My big reason for not wanting to hold on to the property longterm is because I don't think this sub-market will be moving in the right direction in the next two to three years. Therefore, it will become more management intensive as the quality of tenant goes down and my appreciation will slow, too. However, I am a big buy and hold guy. LOL.

Work and Family

2006-05-08T07:49:00.000-07:00

I know I have not been posting much lately, but I have been so busy with work and our second child will be here any day.

At work, several of our clients are in the process of purchasing more apartment communities, so I have been extremely busy completing the underwriting and due diligence on three different properties in three different parts of town.

At home I have been working on the nursery for our second child. He is scheduled to be here on Wednesday (c-section), so as you might expect I will be a little occupied for a while. Our first is only two, so it will be my job to entertain him for the next few weeks while my wife recovers.

Also, since the baby is so close, I have been trying to take it easy and not get involved in a deal unless I see one that is just to good to let pass by. Although, I can't help it. On Saturday I went and looked at a house in a neighborhood near my in-law's house. It will be another short sale, so if it were to pan out, it probably would not close until late June. Therefore, I would have plenty of time to spend with my family.

100% Occupied and Other Updates

2006-04-28T07:38:00.000-07:00

Well today was move in day for our Duluth property and it went off without a hitch. I had previously signed the lease and collected the earnest money check from the new residents three weeks ago. All there was left to do today was to complete the move-in inspection.

Due to my business partner's busy schedule, there are four things left to do to the property that are outstanding; fix the ice maker, add a door sweep to the door leading to the garage, install the closet doors in one of the guest bedrooms, and per the resident's request, we are going to install a fence across the rear portion of the property (This was 50/50 for us when we were doing the rehab. We thought if someone requested it to be done, then we would go ahead and do it. Otherwise, we would just leave it.)

In other news, I met with my friend last weekend who wanted to sell his house "subject to". He is not quite motivated enough to sell his house that way just yet. As soon as they call him up (June/July) then he will be motivated. He lives in a huge master planned community, which is eight different communities in one, with a performing arts theatre, pools, tennis courts, etc. He has had his house listed with two different realtors for almost a year and can't figure out why his house has not sold.

So, we are sitting there discussing what a subject-to deal is and going through his closing paperwork and all of a sudden I hear (CHOOOO-CHOOOOOO) TRAIN???????
I said, "Uh, where in the hell did that train come from?" He shrugs it off and says, "Oh, I don't even hear it anymore." It really wasn't THAT loud, but a half hour later I hear it and I said, "There goes your train." Then, as we keep talking, a half hour later I hear it again and I said, "There it goes again." Hmmmmmmm, I wonder why this house has not sold. I asked him, "Do you know the schedule." Of coarse he didn't. You think it might be a good idea not to show the house when the train is going by? He lives on a "T" shaped street. His house is three houses down from the top of the "T" and the train runs behind the top of the "T" left to right, but you can't see it due to the houses and trees.

I really think it is just a Saturday afternoon train otherwise I'm sure people would not be living there. The problem is, "When do most people have time to shop for houses?" UHHHHHHH....SATURDAY and SUNDAY? So, I tell him that the train is his problem and unless he figures out the schedule and works around it, he will not sell his house for his asking price of $179k. I think he will get very motivated, very soon. Oh, and FIRE your agent!!

Recent Deals

2006-04-19T08:06:00.000-07:00

I looked at the house south of town and after sleeping on it I decided to pass. The bank's price was a little too high for what it needed to really do it right. I never got out to see the subject to deal, but I have set up an appointment to see it on Saturday.

At the last GAREIA meeting I met a mortgage broker that said he gets deals every day that are 60-65% LTV, so I asked him to send me a few, so I could take a look. Over the weekend I went out and looked at a few. I only liked one. The problem was that the wholeseller had not closed on the deal yet, so I could not see inside because he asked that I not disturb the homeowner. It is in a hot area of town and houses are selling for $300k -$500k all day long there. These homes are arts and crafts homes built in the early 1900's. After driving buy I contacted one of the many agents I work with to get my arms around the comps. He is an expert in this neighborhood since he and his wife used to live there. On Monday I had my numbers and called to make the offer only to discover it was already under contract. Oh well, you snooze you loose.

I recently found another house in the neighborhood next to the one I live in. I periodically drive through neighborhoods around mine looking for obvious don't wanters. I ran across a house that was completely overgrown. Upon a closer look someone had put a phone number on the mailbox. I called the number and it was an agent who is listing (if that is what you want to call it) the house for the seller. However, this house is not on any of the multiple listing services. He asked who I was and I explained that I was an investor. He said that the seller was a "greedy old man" and other investors had offered $80k, but the old man wanted $120k. He said the house had been rented for the last 10 years and the old man was in poor health now and just wanted to get rid of it. He also said the old man owns the house free and clear of any debt, was willing to hold paper, and was willing to give good terms. I said I would like to look at it and he said he would need to get the key.

I will be glad to give him his price if the terms are good. No money down, 5% interest amortized over thirty years, balloon in 10. I could fix it up for about 10k, and I would have a $500 mortgage payment to make. I could easily rent the house out for $995 ALL DAY LONG! That's $445 positive cashflow. If he wants money down or a higher interest rate, then my price drops. That will work to because I would just refi the house in the next thirty days and pay him off, unless he is smart enough to try to negotiate a prepay penalty, then I would have to think about that.

All that said, the house would be worth $160,000 fixed up. You can't find a house in good condition in my neighborhood for less than that.

100% Leased

2006-04-07T07:06:00.000-07:00

After showing the house to several would be residents I have finally rented the house. Everyone, wanted to break their lease to move in to the house. However, I couldn't bear to tell them how much it was going to cost for them to break the lease. Being that I work in the apartment industry I know the penalties all to well. So, they soon called back and said it was too much to break their current lease, but the good thing is I have some great contacts for people who might be interested on the next house.

I am meeting a couple today to sign the lease for a move in at the end of the month. It would have been nice to have someone who was ready to move now since my first payment is not due until May, but I am not complaining.

I also have a lead on the next 2 houses. The first house is another short sale south of town. Its a 5b/3b on a basement listed for $119,900. The lady purchased the house two years ago for $146,000. I plan to go check it out this weekend. The second house is a guy that I know who used to be a courtesy officer on one of my properties that I used to manage (Apartments/Day Job). He owes $167,000 and has the house on the market for $179,900. He has just been accepted to be a Federal Air Marshall and is being transferred to D.C. This would be a subject to deal. The house was built in '96 and is in good condition. I plan to check it out this weekend too.

Final Numbers

2006-03-24T05:58:00.000-08:00

The appraisal has been approved and we close on Wednesday March 29th. The rental sign will go in the front yard this weekend and I have until May 15th to get it rented, which shouldn't be a problem. Just to sum the whole process up here is a timeline.

11/22/05 - Made offer
11/23/05 - Offer was accepted by seller
12/05/05 - Bank stopped the scheduled 12/06/05 foreclosure
1/31/06 - Bank accepts offer
2/16/06 - We closed on the property
2/24/06 - Begin repairs
3/1/06 - Kick off refi
3/12/06 - Repairs complete
3/16/06 - Appraisal
3/23/06 - Appraisal approved by lender
3/29/06 - Closing scheduled - "PAY DAY"

And now the numbers:

Rehab Is Complete...PICTURES!

2006-03-16T10:49:00.000-08:00

3....2....1....Thirty days on the nose! Wow, what a job! In exactly thirty days we have taken this dumpy old shack and turned it into a beautiful home that anyone would be glad to live in. I'll go into lessons learned in another post. I just left the house a few hours ago after meeting with the appraiser and he said he should be able to get us our number and maybe even a few dollars more. That is good news, since I know the underwriters are going to cut it back anyway. You will see that we are 99% there just a few things to touch up and clean. Oh and the house is not pink on the inside, although the camera seems to think it is. So, without further ado......

Remember the old shower....We just resurfaced it, thats it.

Rising Rates and Cooling Prices Spell Disaster...

2006-03-15T13:19:00.000-08:00

Or opportunity for investors.

Source: RealEstateJournal.com

Millions of borrowers can expect a 10% to 50% increase in monthly mortgage payments over the next few years according to RealEstateJournal.com. Over the last several years many homeowners bought or refinanced their homes with “ultra exotic” mortgages that offered the lowest rates in this country’s history (since they have been keeping track). However, many of these rates and terms were locked for only a short period of time. Furthermore, these ultra low rates and terms allowed many people, who really had no business buying a home in the first place, to purchase bigger homes than they could otherwise afford. Now reality is upon them.

Some had extremely high credit card debt and used their home as an ATM to pay off their credit cards. The only problem was that they did not go through the pain of paying them off. Thus, many are back in the same position that they were in before the refi. Not only did they use the equity in their home to pay off debt, but they also used the equity to pay closing costs. Furthermore, there are even a few lenders out there who would allow the borrower to borrow up to 125% against the value of their house.

Result? Many of these homeowners are in a worse position today than they were in a few years ago. Lets look at the facts. The personal savings rate (the difference left over between after tax income and expenses) was negative for all of 2005 and as of January 2006 it was a negative 0.7% (that's less than 0%). The last time the savings rate was that bad for that period of time was during the Great Depression. Comparatively the savings rate used to be 10% in the period between 1974 and 1984. The savings rate does include 401k’s and Roth IRA’s, but some argue it does not include home equity. Home equity? What home equity? According to the National Association of Realtors the national median home price at the end of the fourth quarter 2005 was $213,000. At the end of 2002 it was $161,600. If someone borrowed up to 125% interest only in 2002 then they would owe $201,000 today. Thus, leaving only $11,000 to pay for the new closing costs. Could they really afford the new payment, even after a refi? I don’t think so. The only reason they would refi would be to stop the bleeding, but their payment would still be considerably higher than before. Would they even qualify today? If you run the numbers for someone who recently did this in 2003, 2004, or even 2005 then the possibilities are even worse.

Personally I think they have five options:

Refinance
I believe this is almost impossible. Even so, I think a refi would only be borrowed time just prolonging the inevitable.

Sell
If they sell, the question becomes, can they afford to. Again, in this scenario (assuming a 6% realtor commission on $213,000) the cost to sell would be $12,780. Therefore, they would have to come out of pocket $1, 780.

Second Job to Pay Off Debt (Thanks Dave Ramsey)
The only real logical option, but this would require sacrifice and a huge habit change. History shows us that only a small percentage would succeed.

Foreclosure
The majority would fall into this category

Bankruptcy
Again only borrowed time. I have not done any research as to the new bankruptcy laws. My rough understanding is the higher their income the more difficult it is to file.

When you combine all this with the fact that the housing market is beginning to cool off (just take a look at time on the market in different cities. Thanks Empty Spaces Inc. ) the idea that equity is going to bail you out in the short term is unrealistic. However, as for investors if you wait and are savvy enough this could be a win/win opportunity.

Foreclosures

2006-03-10T07:19:00.000-08:00

Eric's blog inspired me to write about this particular topic:

(Be forwarned....looks like I ended up writing a book this time, so go get a cup of coffee or a snack, you might need it.)

In February, foreclosures in the 13 metro Atlanta counties hit an all time high at 3,876 homes being advertised as going into foreclosure just for March. Georgia is a non-judicial foreclosure state. Therefore, once a homeowner stops making payments the only requirement of the lender is they MUST advertise the foreclosure four weeks prior to the day of the auction (always the first Tuesday of the month) in the legal newspaper for that county. This usually does not happen until the loan is at least two or three months delinquent.

An investor has three opportunities to purchase a house once the house has been advertised as going into foreclosure:

1. Pre-Foreclosure
2. Foreclosure Auction
3. REO (real estate owned).

Obviously, when you buy a house in pre-foreclosure it is easier because you can do it without any credit and with little or none of your own cash.You can purchase the property subject to or get your own loan. If there is any equity (which there usually isn't) you might even be able to get the homeowner some of their equity back.

At the steps you need all cash, no exceptions. Furthermore, you might be bidding against other investors, both seasoned and newbies, or there might not be anyone there at all. If you are the highest bidder you must turn over a cashier's check to the attorney at that time. However, in Georgia they have up to 30 days to give you possession. This law was created about two years ago to make sure that the homeowner did not punch the bankruptcy clock at 11:55 a.m and you bought the house at 11:57 a.m. The attorney would have no way of knowing that until after the auction. The only problem I have is, "IF" the homeowner filed bankruptcy at the last second, then the attorney just gives you your money back with NO interest. Therefore, your CASH is tied up for that period of time, which could be as long as 30 days.

The biggest benefit to buying at the steps is ALL junior liens are wiped out at the auction with the exception of tax liens. The IRS has a 120-day right to redemption. The attorney handling the foreclosure is to notify the IRS of the impending auction. After the auction the IRS has 120 days to claim the property. If, for any reason, they do so (they usually do not) then the IRS must reimburse you any money you had spent for the property. Thus, no need to worry about IRS liens. As far as city or county tax liens are concerned, all you need to do is contact the city and county before the auction to find out how much the back taxes are. You can then choose to pay them once you have purchased the property or you can choose to not bid on this property.

The last and final opportunity is REO. If the property does not sell at auction the bank takes ownership of the property and will list it through a local broker. You used to be able to buy these homes with deep discounts. Unfortunately, I have found it EXTREMELY difficult, because I am competing with either newbie investors who don't understand all the costs or I'm competing with money from other areas of the country. I work closely with several real estate agents and they are all telling me that investors from as far as California are buying some of these properties, site unseen. One reason is because Atlanta's real estate is so cheap compared to other areas of the country. I have made hundreds of offers on these properties only to be told by the selling agent that they are negotiating with someone close to their asking price. WHAT? There is no way. First, many of these properties are in need of a lot of work. Second, their asking price is usually close to the ARV (After Repair Value). I used to think they were lying just to get me to up my offer, but I have followed many of these houses and sure enough someone bought them at that price.

Eric made a good point in his blog that he expects to see these houses come back and he is exactly right. I have seen way to many of them come back in the form of foreclosure. I have walked through hundreds of houses where it was obvious that someone had begun to fix them up. These houses didn't even make it back to the market. One in particular stands out. This house was built in 1955 and was in complete rehab job. It was obvious what the investor was good at. The investor had installed a very high end designer kitchen with floor to ceiling cabinets, granite countertops and tile floors. It had the "Taj Mahal" for a bathroom. Floor to ceiling tile, garden tub, separate stand up shower and a levitating bowl, where water shoots out of the wall into a bowl sink. However, when you looked up there was a giant whole in the roof about 4ft. x 4ft. HELLO!!!!!! Uh, I think you should fix the roof FIRST? Furthermore, the rest of the house still needed to be gutted. This house was again foreclosed on and the bank had it listed for $150,000. There was not one single comp in the neighborhood that had sold for more than $140,000. Oh and I was actually looking at one a few doors down that had been completely rehabbed for about $115,000. That is the only reason I saw this one.

With all that being said, (If you are still reading this book...), there is little or no equity in 90% of these properties that are in pre- foreclosure or are being sold at the steps. Thus, I have learned a way to solve this problem, which is how I bought the Duluth house. It's called a "short sale". Basically, you are asking the bank to sell it to you before it goes into foreclosure for less than what the current owner owes. You must be able to PROVE to the bank that you can close by either an "Approval Letter" (not "pre"-approval letter) from another lender or broker, or prove you have the cash to buy the property. Also, you need to be very patient. I put an offer on the Duluth house back in November and we didn't get an answer back until the end of January. However, the house was scheduled to foreclose on December 6th, which they didn't. So, I felt pretty good about the offer.

Finally, Georgia is #1 (wohooo, just kidding) in the country for mortgage fraud (<--see recent article). It was so bad in fact that the Georgia Legislature passed the "Georgia Residential Mortgage Fraud Act" last year. These houses are coming back into the pipeline that the bank loaned more money than the property was actually worth. Thus, over inflated beginning bid amounts and over inflated listing prices. Again, you must be patient and be at the right place at the right time. Don't get me wrong, I put an offer on EVERY single house that I look at. You never know, one day the phone will ring and they might be ready to deal.

(deep breath)......THE END! .......(exhale):))

Doors, Cabinets, and Floors..Oh, My!!!

2006-03-06T08:06:00.000-08:00

WOW!!! What a weekend. My business partner (Salle, that's not his real name. Just a nick name we have given him) and I worked a combined 58 hours in the Duluth house over the weekend.

The plan:
1. Tear out sliding glass door and replace with french door
2. Assemble and install new cabinets and counter tops
3. Install laminate hardwood floor in the living room, kitchen, dining room, and hallway
4. Install carpet in the three bedrooms
5. Paint exterior trim on front of house
6. Burn yard debris that I ripped out last week

First of all, let me make something very clear. Salle is the construction expert. He works for himself and can handle anything from a minor repair in your house, to designing and constructing an addition to your multi-million dollar home. Pretty good guy to have around.
I, on the other hand, am only good for general labor.

I arrived on site around 9 a.m. and he arrived around 12 p.m. on Saturday and we worked in the house until about 3 a.m. Sunday morning. That was when I had to throw in the towel and retire to my sleeping quarters for the night/morning. It was wonderful accommodations (wink wink), a sleeping bag on top of carpet padding that I had installed a few hours before. Salle, on the other hand, just kept on trucking.

About 8 a.m. I awoke and found Salle still working in the kitchen. This guy is a machine! By that time we had completed the following:

Installation of the french doors.
Assembly and installation of the cabinets
Laminate floor in living room was installed
Carpet pad in the three bedrooms were installed
Counters were on the cabinets, but not cut yet

We both worked for the rest of the day until 7 p.m. Sunday night. By that time, all the floors were complete with the exception of the hall way and bathrooms. Cabinets were complete with the exception of the sink installation (oh and we decided to rip out some walls in the kitchen, so that took some of our time), one coat of paint on the exterior trim of the front of the house and most of the yard debris had been burned. Needless to say we were spent. However, the house looks great. One last push and I will be able to kick off the lender to begin the work necessary for the refinance.

Long Term Strategy

2006-03-03T15:22:00.000-08:00

I will probably never sell a house. If I do, it will definitely be via 1031 (just ask Trisha). The following is a very simple chart of why I believe in holding onto real estate long term. While there are down sides, I am an optimist. I think you are almost required to be an optimist if you plan to be a real estate investor. The chart above assumes the following:
Purchase Price: $150,000
90% I/O Debt: $135,000
Annual Appreciation: 5% (very conservative)

This chart is if you only bought two houses in year one and stopped after that. It also assumes the debt on the property is interest only, so your balance in year 10 is the same as in year one. Obviously if you are amortizing, then the cash out in year 10 would be greater. You have to keep the houses rented and have increased the rent to stay in line with the current rents in the market place. In other words when you refinance the property in year 10 the rent should be able to cover the debt, assuming interest are not out of control, but since you will be receiving a large amount of cash, it might not matter. I think you might be able to handle some negative cash flow. LOL!!!

If you bought two houses in year one and each house was at least worth $150,000 assuming a 5% appreciation, those houses would be worth a combined $465,398. In year 10 you could borrow 80% of the value, thus getting a new loan for $372,319. Then, you would payoff the two existing loans (a combined $270,000) leaving $102,319 cash in your pocket. Ok, ok I know you have to subtract closing costs @ 4% (which is high) rounded up to $15,000. You still have $87,309 in your pocket. Oh yeah, and did I mention that it is 100% TAX FREE?

As you can see I don't like to pay taxes. Question for you, how much income (in one year) would you have to earn today (before taxes) to put $87,309 in your pocket after taxes?

Now, ask yourself with your current lifestyle, could you live off of that money for one year? Try this yourself, just plug in what a typical deal is worth in your area and run the numbers.

The real power here is if you continued to buy just two houses a year for 10 years, then you would have 20 little houses. After that, you could refinance in year 11 the houses you bought in year two, and so on and so on. Yes, you would be a busy little landlord, but you could then retire (a.ka. quite your day job) comfortably on an annual income equivalent to a six figure income. Oh, and that is not including any monthly cash flow from rent. I LOVE THIS STUFF!!!!!!!

Flip vs. Hold

2006-03-02T12:06:00.000-08:00

While we are all eagerly awaiting the results of my rehab I thought I would fill in the time with some examples of why I am such a big believer in the buy and hold strategy. I guess I should have named it Hold vs. Flip, oh well. First, let me be very clear that I am not at all against flipping houses. I would flip house if the numbers made sense.

However, I just wanted to point out the advantages of holding real estate long term. The numbers above are real world numbers. These are the actual numbers for my current project. I am in the process of refinance the house and we should close on March 17th. Since I bought this house on February 16th my first mortgage payment is not due until April 1st, so there are no holding costs with regards to debt in those numbers. If I keep the house and refinance it I put $11k in my pocket tax free. That is equivalent to an earned income of almost $21k. Taxes - 28% Federal, 6% State, and 15% Social Security. Furthermore, you would still have $15,000 in equity in the property. (Maybe tomorrow I will post my longterm appreciation chart to show what happens in the later years.)

If you sold the property within one year (and did not do a 1031 tax exchange) you are subject to capital gains tax. Same scenario, but as you can see after taxes you only walk away with $5,601 vs. $11,201. That's a difference of $5600 (double your money). Now some may say well, "Sell it F.S.B.O. to save the $9,000 in commission." Sure you can do that, but as you can see I did not include any holding costs. I tried to give best case scenario. If you borrowed $95,000 when you bought the house the monthly payment including taxes and insurance would be $865 a month. Assuming you sold it in four (4) months it would cost $3,460. You would save $5,540. So, you are at $11,041 four months from now (almost the same as the refi example). Furthermore, your cash is tied up for four months, so to be realistic you should be charging yourself interest for four months. Also, you are limited to the number of deals you can do unless you have a tremendous amount of cash or access to large credit lines. So if you sell, you get hit with a large tax bill, you are limited to doing any more deals that require YOUR cash, you have no house, no equity and no long term appreciation. You also don't have the headache of being a landlord...LOL!!! :))

Last, but not least, the house of which you buy and hold, needs to be at a price or the debt needs to be at a price where you can cover the monthly mortgage payment, taxes, insurance and maintenance with the monthly rent. Any questions?

Rent vs. Buy Spread

2006-03-01T06:26:00.000-08:00

In Atlanta, due to the low affordability of housing, the spread between rent and P&I (principal and interest) share of all household income has historically been very narrow at only 3%. Due to rising interest rates and a stabilizing rental market the premium to buy is forecast to increase from 18% today to 35% by the year 2008. Unless there is an unforseen price reduction, it will be less affordable for individuals to buy a home vs. renting one. This is good news for those of us who own good, clean, affordable rental housing with long-term debt in place. It is bad news for those who have short-term debt or some sort of adjustable instrument.

Weekend Update

2006-02-27T13:57:00.000-08:00

We made a lot of progress this weekend. The new roof is complete and Moday they will begin work on the siding. I spent the weekend at the house doing general labor stuff. On Saturday, I prepped the house for paint by removing all of the wallpaper, wood paneling (which was nailed over sheetrock), electrical outlet covers, and fixtures. On Sunday, I spent the entire day cutting down bushes and small trees that covered the front of the house. It was a good thing too. On two sides of the house the bushes/trees had grown up against the house and it would have been impossible to replace the siding unless these bushes/trees were removed.

After spending the weekend in the house I learned a lot more about my new investment. First, in the back yard, in the very back of the back yard, there has to be at least a days worth of junk removal, which is hidden by overgrown bushes and trees. The deck that once was attached to an above ground pool has power (yeah…I hate electrical). The master bathroom showerhead has a outdoor spicket(<-- southern word) attached to it (see the pic below). So, I guess the hot and cold shower valves do not work or now that I think about it, maybe they do work, but just will not turn off. Hmmmmm.

Also, I took some before pictures for you to enjoy…

Front Elevation

Front Entry

Living Room (post wallpaper)

Kitchen (post wood panel)

Guest Bath

Master Bedroom

Master Bath

View out the back door (anyone want any fitness equipment?)

Ready, Set, GO!

2006-02-24T08:14:00.000-08:00

It is Friday morning and the orginal contractor that I was going to use has yet to fax me his bid, which he gave me verbally on Monday. If I had waited on this guy we would never get this job done. Wednesday I met another contractor who owns his own roofing and siding company and does a lot of work through Home Depot. He quoted me $8600 for an architectural roof, 3 free deck boards, ridge vent, copper flashing, soffits, lead pipe covers with a 30 year warranty. Install Napco Siding, replace rotten wood, Life Time warranty not prorated. This guy was hillarious. He actually got me into his truck and drove me all over the city for about an hour showing me previous jobs that he had completed. Furthermore, there were a few home owners that were home and he would knock on their door to get refrences. It was very entertaining to say the least. Oh and I was very impressed with his work. We looked at one siding job that he did 10 years ago according to the home owner and I have to admit it looks like he did it yesterday. I wonder how much he paid them to say it was done 10 years ago...LOL.

I tried to get a dumpster, but since we are in the city limits we can only use one company and they want $450 (OUCH!!). The contractor said not to get the dumpster and he will rent a Uhaul on Friday and remove all of our and his debris to one of his dumpsters (he has several at other job sites). No charge to us (its probably already priced into his bid)

Gutters - he will do the gutters for us at cost $2.50 a foot.

Shutters - we can get these and he will put them up or he said he will get them at cost for us.

My painter will be out Monday morning to start the paint. Oh yeah, the whole interior he will do for $650. He will paint the trim white semi-gloss, walls an off white ( I am going to call him today with a color) and eggshell for the kitchen and baths. He will repair the leak over the fireplace. I also am going to have him resurface the shower in the master bath for $150. It will look GREAT! We have them doing this out at an apartment community that the company I work for manages and it is amazing.

I will be out there Saturday and Sunday removing all of the bushes from the front of the house and if I have time I will begin tearing the carpet out.

Our to do list:
Remove old cabinets
Price out cabinets
Install new cabinets
Price out floors (hardwood, carpet and vinyl for master bath and laundry)
Install hardwood, carpet and vinyl
Replace sliding door with french doors
Replace hardware on front door
Replace ceiling fan in living room
Replace light fixture in dining room
Sheet rock garage
When it rains water comes in under the garage door ( I think the gutters, since there are none today, might solve that problem)
Check security light at garage exterior
Landscaping

Obviously the seller finally left, but not until Tuesday afternoon. On a sad note however, he did leave quite a few thing in the garage. I was organizing everything to throw away and found a box full of photo albums with pictures of his ex-wife, kids, softball games, trips to the beach, etc. from looks like the early 80's. I am going to try to reach him to see if he meant to leave these things behind.

Seller Will Not Leave

2006-02-20T08:00:00.000-08:00

According to the contract, the seller had three (3) days to vacate the premises. Therefore, he should have been out by no later than 5PM on Sunday. Well, around 4PM on Saturday the seller calls to tell me, “due to weather” and some other issues with people helping him etc. etc. blah, blah, blah, he will not be able to completely be out of there until sometime on Monday.

Monday I planned to have my business partner there to meet contractors, so that we can finalize our budget and get this party started. I told the seller that we would still be there on Monday and I would call him to figure all of this out. Unfortunately for me I was in Daytona Beach on Saturday and I really did not have time to talk. Furthermore, my business partner leaves Tuesday morning to Costa Rica for two weeks. Therefore, this is our only chance to finalize this budget and get things moving.

2006-02-17T11:41:00.000-08:00

I am officially a private real estate investor!!WOOOOHOOOOOO!!!!!!As of yesterday I closed on my first non-owner occupied deal. I will call it the Duluth House. I have another rental property, which was a previous house that I owned in Woodstock.

The Duluth house was in pre-foreclosure, which was brought to me through an agent that specializes in these types of transactions. We were able to get the bank to stop the foreclosure one day before it went to the steps. After that they reviewed my offer which they took over four months to do. Then they came back to me on January 31st and asked, "How fast can you close?". I said, "Two weeks". On February 1st they agreed as long as I could close by February 15th. Oh, and they also agreed to pay $3,000 in closing costs. YES! :) I know what you are thinking...but yesterday was the 16th. I was selected for jury duty on Monday and the trial finally ended yesterday. I will probably tell you more about that in another post.

The house is a three-bedroom, two-bath ranch, with a one car garage. I bought it for $105k. The house is in pretty decent shape, other than it needs a new roof, siding, paint and carpet on the inside. There are several good comps in the neighborhood, where this exact house has sold for $150k.

The goal is to fix it up, refinance it 90% LTV, pay myself back my original investment and place the property into rental service. Yes, I know that to some of you $150k is not alot of money, but the median sales price for a single-family house in the Atlatna MSA, according to the National Association of Realtors, is $167k. I promise to include before and after pictures once the house is complete.