Even though I have looked at 100s of houses in my career, I still get excited about finding an Investment Property that could be beautiful after a rehab. Maybe I am still stuck in 2002 when you could flip houses and sell them as fast as you could buy them. I suppose some would say it is because I am passionate about MN Investment Properties.

About 5 days ago, I was out with a customer looking at bank-owned properties in Minneapolis. We looked at about 15 houses and found 3 properties that looked like good candidates to “flip and hold” (rehab and rent). Our contractor was with us reviewing the houses and preparing estimates. Most of these investment properties required $30-40k worth of work, including bathrooms, kitchens, plumbing, windows, and general repairs. The three finalist REO properties were priced under $50k.

Both my customer and I were excited about Investment Property #1. It was a large 4 bedroom house (in Minneapolis) with beautiful hardwood floors throughout, large pictures windows on each side of the house, original dark woodwork, and the leaded glass windows were intact. After discussing the type of flip we wanted to do on each property, I was crushed when our contractor told us Investment Property #1 was the worst rehab deal of the three.

As we went through his estimate, I agreed with all his numbers and rehab suggestions. Despite being almost move-in ready cosmetically, the house needed 20 windows @ $400 each, all new plumbing @ $8000, the heating system reconnected @ $2500, new kitchen @ $4000, etc.

I forgot all my school of hard knocks training, my years of experience with flips and rehabs, and all my preaching to my customers to analyze the property’s financial numbers. I tried to argue with him about the value of the neighborhood, the number of bedrooms, the size of the backyard, the fact that it was a 1/2 block from the school, etc. Despite my best efforts, he whipped me back into reality like a freshman on the school yard with the following comment: “I don’t get emotional about properties, its all about the numbers”. Ouch! I was hearing my own words coming back to haunt me.

So here I sit licking my [ego] wounds. He is right, though. You must stay unemotional when analyzing investment properties. You can get excited about them when the numbers check out and you put in the offer. Analyze the numbers, use conservative estimates, get good quality bids from trusted contractors, and if necessary, bounce the deal off a trusted advisor. When you fall in love with a house, it make it difficult to stop thinking about it (even when it is wrong for you)! Staying emotionally detached will allow you to walk away from a property or deal when it doesn’t make sense.

Melinda Fulmer from MSN Money gives all landlords and investment property owners good news. Apartment (asking) rents jumped 4.2% in the 3rd quarter alone. Vacancy rates, although, are hovering at the same rate as last year at this time. I believe we will continue to see good news in these areas as foreclosures the tightened credit market push more people to renting instead of owning. Check out the full article here.

I am often asked “When is the housing market going to turn around?” I have heard every variation of the future by “experts” over the last 12 months. BawldGuy Talking is a very intelligent and insightful blog about investment property and the housing market. He recently wrote a fantastic post not giving his opinion as much as telling us why we can’t really listen to any of the experts. Read his great post about the housing market correction here. I especially like his “Bonus Point”-look for it.

You may have heard about homeowners losing their homes to foreclosure or selling them in a short sale, only to be hit with a tax bill afterwards. The IRS saw the forgiven mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure as taxable income. Therefore, the IRS was adding insult to injury and taxing the forgiven amount. This could amount to tens of thousands of dollars for an already financially strapped family.

Thankfully, President Bush signed bill H.R. 3648 into law, on December 20, 2007, that will eliminate the tax up to $2 million on primary residences only. The new law waives any taxes on these forgiven debts (up to 35%) from now until the end of 2009.

During the signing, President Bush made the following statement:

“When you’re worried about making your payments, higher taxes are the last thing you need to worry about. So this bill will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. And it’s a really good piece of legislation. The provision will increase the incentive for borrowers and lenders to work together to refinance loans – and it will allow American families to secure lower mortgage payments without facing higher taxes.”

Unfortunately, this exemption only applies to primary residence and does not apply to investment properties.  There are no plans to add that waiver at this time.

“Where can I get leases for tenants” is a question that I get from new investors often. There are many sources from which to get your landlord documents and forms. Many investors will create their own by just downloading the files from the web and modifying them to their needs. While this works in many situations, I prefer the efficiency of pre-printed forms and especially ones that are carbon-duplicates.

Although I am not a member, I buy all of my Minnesota investment property forms from Minnesota Multi Housing Association. I do spend about $20 each quarter, but I feel it is one less thing that I need to develop myself. Also, all of the forms are carbon-duplicates so I simply fill it out, have the tenant sign it, tear off the carbon and give it to the tenant and I am done. In the past, I would have to take the form or lease to my office, copy it and put it in the mail back to the tenant. The small cost of those documents is worth it for me to save time.

Additionally, a pre-printed form will often have been tested in court. The leases that I use are preferred by Section 8 and have been approved by the Minnesota Attorney General. This should reduce your exposure to questions about the validity of your leases.

Do you remember the Minnesota housing market in 2000-2005, when a seller would receive multiple offers (many above list price) the first day a house went on the market? As a buyer, I remember being ready to drop everything at work and drive immediately to any house that appeared on the MLS in our price range and neighborhood (with checkbook in hand)!

Multiple offers and offers above list price are actually making a come back. This time it is in regards to bank-owned properties, also known as REO properties. Despite the large number of foreclosed and bank-owned properties on the market in Minnesota, it is becoming more common to be competing with other buyers for the same house.

Recently, I spoke to a MN Real Estate broker, that has about 100 bank-owned listings, about the REO business and foreclosures in general. He explained the time-line on how banks deal with their REO properties. At the time we were not talking about multiple offers, but as I remember that conversation, it all makes sense:

• A homeowner falls behind on their mortgage payment. Eventually, the house is sold at the sheriff sale, typically back to the bank that holds the first mortgage. Maybe they simply ride out the foreclosure process and leave the day before the sheriff evicts them. Alternatively, maybe the homeowner finds a real estate agent to do a short-sale and unfortunately they set the price too high and can’t sell it prior to the sheriff arriving.
• At the end of the redemption period, the bank gets the foreclosed house back. Standard procedure for the bank is to get at least 2 BPOs (or broker price opinions). These are essentially mini-appraisals done by licensed real estate agents to help the bank set the price of the home.
• Eventually, the bank contracts with a MN real estate broker to list the foreclosed house. Typically the initial price is too high for the location/condition/size/etc. The property has a few showings, but no offers.
• After a predetermined amount of time (known only to the bank), the bank authorizes the listing broker to lower the price. The bank may receive some low-ball offers, but will not accept any outside of their strict pricing guidelines (again only known to the bank, but generally 2-5% below list price).
• This cycle of lowering the price continues until it hits what my real estate broker friend called the “sweet spot”. This is the price at which anyone that was interested in the property finally decides that it is priced correctly. Immediately, multiple offers will flood in.
• If the listing broker is doing a good job, he should/will tell all interested parties that offers have already been submitted so you should put your best offer forward first. Most banks will take 3-10 days to consider an offer on a REO property and will continue to accept new offers and negotiate with all parties until they accept one.

Consequently, if you find yourself watching and waiting to buy the foreclosure when the price comes down, be ready to submit an offer immediately as you can be assured you are not the only one wanting that property. Also, put in a reasonable offer. Banks will often not even respond to low-ball offers. Your real estate agent should understand this process and help you with this.

I understand that most home buyers think they must negotiate a price reduction on a house or they will feel like they overpaid. If you are walking into a multiple offer situation, you need to consider making a full-price offer. In fact, slightly above the current list price may help insure your position. A 30 year fixed mortgage at 6.5% will cost you about $6.29 per $1000. Therefore, even if you offer $5,000 more than you planned, it will cost you only $31.43 more per month to own that house you really wanted!