Is this Bailout proposal the only way out of this?

Stop the bailout

I just can’t say that I support the bailout. The notion that we have to get this passed really quick and we need absolute power sounds like the biggest fraud pulled on the US Taxpayer since the build up to the war. I have so little trust for the government at this point.

There are a few ideas out there that seem to make a little more sense then King Henry’s plan.

Dave Ramsey has what he calls a common sense fix to the financial crisis:

Dave Ramseys Common sense fix.

Dave Makes sense – until he gets to the part about lowering capital gains to zero. I understand that higher return on investment attracts investment into this market. Long term capital gains are only 15% . That is less than half our ordinary income tax rate.
To say that it will not cost taxpayers — is just NOT ACCURATE. It will cost the taxpayer future revenues that we are expecting to receive for programs we have already committed to.
Dave sounds like our tenants that ask us to upgraded property. (an automatic garage door opening system, for instance) When we tell them that we won’t pay for the improvement — their next question goes like this:

What if I pay for it and we can take it out of the rent? The answer is the same —No I am counting on that revenue to pay my obligations associated with this property. (For instance the mortgage)

Another gentleman had an interesting take on this issue. Karl Denninger is the gentleman in the video..

You can check Karl’s daily updates– I find them facinating. at Fed Up USA

What do you think?

Mandatory Sales Price Disclosure in Texas

HB 2257 is a new bill to be enacted that requires the mandatory sales price disclosures of certain real estate transactions.  Texas has been a privacy state where the price paid for a piece of real estate is not of public record.

HB 2257 will require the report of the sales price to the following real estate transactions:

• Commercial Property ( property used for a business purpose)
• Multi Family Property( property with two or more residential units under one single ownership)
• vacant land

There is a civil penalty for anyone who violates this act.    This only applies to instruments recorded after September 1, 2009.

HB 2257

What does this mean for Austin Investment Property Owners?

It means that the taxes will definitely be going up.  Commercial properties are difficult to appraise on the mass appraisal method. This new law will make it easier for the tax appraisal district to make assumptions regarding similar properties.   Even if you purchased your property Before September 1, 2009 you can expect your appraised value to go up.  There is no 10% cap on the value of a property without a homestead exemption.

If you don’t know a good property tax consultant, it’s high time we all establish a relationship with one.  We are going to need them in the very near future.

Austin Investors:Fannie Mae or Freddie Mac may be rethinking loan limits for investors

In Austin, there  are real estate bargains to be had by bargain hunters but the mid sized investor has been side lined do to the 4 property limit imposed by Freddie Mae and Fannie Mac.

Freddie Mac Fannie Mae rethinking investor loan limits

The previous limit was 10 homes.  And most mid sized investors will easily reach the 4 home limit.  Your primary residence is counted in the 4 home limit.    This new limit pushed many small investors out of the game because they have to seek higher cost financing from non Freddie Mac/Fannie Mae sources.

At this point, we dont know which agency is rethinking the policy as we have not had any official communication from Fannie Mae and Freddie Mac.   I picked up on this rumor by respected Realty Times Contributor Kenneth Harney in his article  Investor Report:  Rethinking Controversial Limits .

Lets hope this is really going to happen.  PMI insurance wont underwrite investor properties — so investors have to put  down a 20% downpayment or find an expensive, elusive 2nd mortgage.  So the deals have to be really good to motivate an investor to take action.  If we can participate in favorable financing , that will sweeten the pot.

US Auto industry bailout: The size and scope of the auto industry.

Whether or not you agree with the very notion of a bailout; one thing is for certain, most people don’t understand how large the US auto industry is.

This is a real estate website and not a political website, but I believe this video puts the facts of the real impact that will happen if we lose the “Big 3” domestic automakers.  Losing another 3 million jobs will undoubtedly affect the real estate market.  It will have consequences in every town and city in this nation.

I just found this interesting and wanted to share it.

How the Housing and Economic Recovery Act of 2008 will impact the market

The good news is that under the Housing and Economic Recovery Act of 2008 will create a tax credit for first time buyers of $7,500.  This tax credit is repayable over 15 years.  ( thus making it an interest free loan) A first time buyer is defined as someone who has not bought a home in the last 3 years.  This is good.

The act prohibits sellers or anyone with a financial stake in the transaction from participating in buyer down payment assistance programs.  I understand why.  It was routine practice that when a buyer needed down payment assistance the seller would inflate the price by 3% so that they could pay the down payment assistance for the buyer.  This artificially inflated the price.  The buyers had no skin in the game.  And the lenders were left holding the bag when buyers skipped out on mortgages like bad tenants skip out on rent.

FHA foreclosure rescue– this provides for the development of a refinance program for homebuyers with subprime loans.  Lenders would write down up to 85% of current appraised value and qualified buyers would get a new mortgage of 90% of appraised value.  The buyers would then have to share with the FHA 50% of all future appreciation.    At least they are requiring some sort of payback.  This is estimated to help over 400,000 home owners.

For a full list of HR 3221 provisions go to

http://www.realtor.org/gapublic.nsf/pages/hr_3221_key_provisions?OpenDocument

The issue here is that power players in Washington are very anti- regulation.  As an entrepreneur, I don’t want to be overly regulated.  A government is supposed to provide safeguards for the people.  The heads of the lending institutions were making money hand over fist by making these loans.  They were making money off the bundling of these loans and the securitization of mortgage instruments.  They were left unchecked by appropriate regulation. We need regulation.  The problem is that this is a little too little and a little too late.

Should you buy an Austin 4-plex?

Should I buy an Austin 4-plex?

I often get calls from investors excited enter the Austin real estate market. Without fail, the first thing they want our team to show them is a fourplex (4-plex).

Why?

<place photo of typical fourplex here>

Their reasons are:

• To benefit from Economy of Scale ( 1 roof, yet 4 streams of income)
• To minimize the financial impact of vacancies, which would be defrayed by having other occupied units.
• To save on the front end of the transaction—By purchasing 4 units at one time, they avoid paying the fees associated with several loans and several closings.
• Buyers can feel like they’re moving up in the investment world. (Bigger is better, right?) They get the sense that they’re just a step away from owning a small apartment complex while still obtaining a standard 1-4 family residential loan. (True apartment loans require large down payments and are often more difficult to obtain.)
• The own a fourplex someplace else in the country which has performed well for them.

I am absolutely aware of the appeal of these properties, particularly to outsiders unfamiliar with the Austin market. The above points appear to make a well-reasoned argument—certainly it is one that might apply in other parts of the country. But, as a seasoned investor and an advisor to my own clients, I AM ABSOLUTELY NOT a fan of Austin 4-plexes.

There are many reasons for this.

A 4-plex is like an apartment complex with no amenities. It is at the bottom of the rental food-chain for tenants. In a house, tenants have the benefits of homeownership without the maintenance and insurance expenses. In an apartment, they have the security of a community and amenities like pools and gyms. Duplexes represent a step up from apartments for many tenants, providing a yard and fewer noisy neighbors.

But who wants to live in a fourplex? And why?

They are generally arranged in a 2 unit over 2 unit arrangement, like two shoeboxes on top of two other, identical shoeboxes. The bottom 2 units typically lease up fairly easily, but the top units can be difficult to move.

The first warning sign for buyers should be rents: The rents in fourplexes are lower than standard Austin rents for units of the same size. Fourplex rents average between 500.00 and 600.00 per month whereas the average rent in Austin for 1st Quarter 2008 was $907 a month. The tenants in a 500.00 to 600.00 range are very, very low income. They struggle financially and when the going gets tough the rent won’t be paid. Or the property might be abandoned altogether. I’ve seen this countless times.

A prominent local property manger gave a presentation at our office last week, reviewing statistics of different classes of property. He analyzed them by property type, area of town, and rent range. The statistic that knocked me off my chair was that the properties with rents of less than 600.00 a month had a 21% rate of uncollectable rent—meaning the rent is due and it cannot be collected. Yes, that is not a misprint: 21% uncollectable. This is due to evictions and “skip outs.”

This second graph compares this year’s prices with last year’s prices. As you can see, values have dropped in this area of the market. As the buyers become more educated about the Austin market, this trend, in my opinion, is not likely to improve.

Sounds expensive, right? But, wait, it gets even more expensive. That 21% loss does not account for court costs, vacancy, damages, and re-leasing expenses.

As a former owner of a property management company which managed 300 small residential units, I always recognized those units as problematic, but I never crunched the numbers like my associate. Seeing them in that format confirmed all of our worst suspicions about these properties.

FOUR REASONS NOT TO BUY AN AUSTIN FOURPLEX:

1. Purchasing an Austin fourplex means investing in a property which appeals only to tenants living very close to the poverty line. This tenant base has almost no financial security, a factor which (in our small sample, anyway) results in a 21% rate of uncollectable rent.

2. The upstairs units will be difficult to rent and will likely have extended rates of vacancy. Vacancy rates of 20% are not uncommon.

3. Many property managers refuse to manage fourplexes, so by purchasing one, you limit your options for finding a property manager you like.

4. Streets with multiple 4-plex units (and they are typically grouped) tend to look trashy and neglected. It’s not unusual to see garbage cans left out on the street all week, litter-covered lawns, and parking lots and yards filled with junk cars. These factors also work as deterrent to better-quality tenants, making it very difficult to ever elevate the status of a fourplex.

5. Constant turnover makes it difficult to keep units in top shape, which means added expenses for fix-up between occupants and increased maintenance calls from tenants during their occupancy.

Of course, there are a few Exceptions to the rule:

1. Fourplexes located in high-demand areas like in the immediate vicinity of the University of Texas or in established downtown neighborhoods can often be easily leased.

2. It can be much easier to lease fourplexes built townhouse-style—in a row with all front doors on the same level, as opposed to being stacked one on top of the other. Again, even fourplexes of this type should be located in a higher-demand area to attract quality tenants

3. Fourplexes which, for whatever reason, have established track records of attracting (and keeping) higher-quality, long term tenants while bringing in higher-than-standard rental income should be given a second look.

<Insert photo of a better fourplex>

What do you do if you currently own a problem 4-plex?

As with any bad investment, you have to cut your losses. My advice is to sell it. In my experience, that’s the only way to reduce your exposure and avoid throwing good money after bad. The investors in this market are not paying retail for this product. The entire market is only moving three 4-plex units a month. Currently there are 30 4-plex properties for sale in the Austin Metro Area. It would take the Austin Market 10 months to absorb the current inventory.

The Velocity of Money and What it means to the Economy

This is a big topic for an Austin investment real estate agent to take on. So…… I won’t. But I do find the topic fascinating. Most of us get our economic news from Cable News.

During the build up to the Iraq war– I lost all faith in our “cheer leading” media. I believe that with economic news — the media has their “talking points”.

I found this article By John Mauldin — it is a cohesive argument that is written in terms we can all understand. John put this article together with input from Dr. Lacy Hunt of Hoisington Investment Management in Austin, Texas. It is an overview of the risks that we face in the US Economy. I am covering it here because investors always want to be able to predict how their investments will fare with the upcoming economic woes.

What does this article mean to the Austin Real Estate Investor:

1. Sellers– if you really want to sell a property, be reasonable now. You don’t need to sell good properties but if you are trying to dump a “dog” –– dump it now or prepare to hold it for another 2 or 3 years.

2. Buyers: — Austin is one of the best real estate markets in the country. There will be plenty of bargains out there. Spend your investment dollars here.  The following photo shows the areas of the country with the highest loan default rate.  As you can see, Texas is faring well compared to most of the country.  The Texas market is stronger than the markets making headlines.

http://www.tradingurus.com/the-velocity-of-money-john-mauldins-weekly-e-letter.html

It’s something to ponder.

 

Travis County Tax Appraisals for 2008 have gone up 12.5%

That is good news for investors worried about the potential of declining values but bad news for taxpayers. 

 Austin real estate is appraised by the Travis County Aprraisal district by a flawed method of appraisal called the “mass appraisal method”.  This has a lot of twists and turns.  I once read a 30 paige pdf on it– It really put me to sleep.  I say a flawed method because texas is a privacy state.  The price that you paid for a property is not a matter of public record. 

When your deed is recorded the appraisal district will  politely send out a notice asking what you paid for the property.  When you recieve it— THROW IT AWAY.  Sometimes new proud homeowners report values to the appraisal district — that then get applied to all the properties within the same section code.  This is far different from a Comparitave Market Analysis  (CMA) that an Austin Realtor will give you.  A CMA takes into consideration the condition of the property, upgrades and other factors. 

If you do not agree with the appraised value– before you protest– call a realtor ( namely Dena Davis) and let me take a quick look at the value.  I will let you know if you have an adequate chance of winning a protest.  You will have to bring in comparables– that support your claim of value. 

One other thing to know.  Some if not all  appraisals that work for the district have real estate licenses.  One time– during a protest– I brought my comps pointing to the lower value and Karlton Sneed, an appraiser for the district sat on his computer and pulled comps that he saw from a higher value. 

So this privacy issue only goes so far.  I dont know if they are supposed to be doing that.  — I doubt it.  But it happens. 

We are always here to serve the Austin investment real estate community in any way we can.  If you are wondering whether or not a property is really worth the appraised value.  Call me 512-473-2444 ext. 2. 

 To read the entire statesman article http://www.statesman.com/business/content/business/stories/realestate/04/16/0416appraisals.html

 

 

 

 

 

Homeless RV Park planned for East Austin

Some of you may have read my letter to the editor in the  Austin American Stateman.  It was a condensed version of this letter I posted on the statesman blog.

http://denadavis.statesmanblogs.com

Let me just be clear– the city council passed this thing quicker than a “Bear Sterns Bailout”.  This was practically done under the cover of nightfall.  The only difference was that the council meeting was unexpectantly changed to a daytime meeting– where the  majority working  residents could not take off work to protest. 

At issue here is the complete lack of transparency by the Austin City Council.   Austin is a progressive city.  I applaud that.  I also applaud the fact that the city council is attempting to do something progressive about the homeless in Austin. 

What bothers me is that they are relocating them away from the newly minted wealthy downtown condo buyers and transfering them to the backyard of lower income working families that live close to Harold Court in East Austin.  All with very little notice.    Try doing that in Travis Heights.  Or close to Circle C.  Or Shady Hollow.

I am not against the homeless.  I am not against Mobile Loaves and Fishes.  The homeless is a community that needs to be served.  Mobile Loves and Fishes is a fine organization who did what they needed to do serve the homeless.  I take issue with the City Council and thier lack of regard for the input of a disadvantaged citizenry.

http://www.mlfnow.org/site/DocServer/Land_Design_Partners_Preliminary_Site_Plan_March_2008.pdf?docID=1841 

 

 

 

$7,000 Tax credit to encourage buyers to buy foreclosures

Apparently, there is a bill before the senate (substitute amendment to H.R. 3221)    that would issue a $7,000 tax credit to those who purchase a home in foreclosure.  This is a $15 to $20 Billion Dollar package is more or less a down payment on what would become a housing bill costing hundreds of billions of dollars. 

The theory here is that the volume of foreclosure homes on the market is hurting the overall market.  As I mentioned in another post, it is estimated that for every foreclosure home in a neighborhood, neighborhood property values decline by 1.5%.

This is an effort to spur on the citizenry to take risks and absorb those units.  This sounds like a prime opportunity for investors. In a market like Austin, where there are relatively few foreclosures — one can hardly claim this is for the public good.  I can see where the tax credit could create an unfair advantage for the foreclosure home vs. the homeowner down the street just trying to sell his home. 

This bill also includes a bailout to builders to allow them to write off their 2008 and 2009 losses against the more profitable past 4 years.  How this helps the general public, I am not sure.  It sounds more like government taking care of big business.  Then of course, Cesar is going to throw the 600.00 tax rebate down to the peasants. That should keep them quiet.

I am wondering how this bill helps homeowners facing foreclosure at all. To read more about the bill http://www.opencongress.org/bill/upcoming/2-Housing-Stimulus-Package 

The purpose of this blog is to report on opportunities for investors interested in the Austin Market.  So whether or not this bail out is fair or not really isn’t the point.  There is clearly an opportunity for the Austin real estate investor to benefit from this bill — if it passes.