I hope I am “preaching to the choir” when I remind everyone that in Minnesota, you must pay your tenant interest on the security deposit they have on file with you, when they move out. As a landlord, you must return a tenant’s security deposit plus interest or give a written explanation why the deposit (or any portion of it) is not being returned, within 21 days after the tenant moves out and gives the landlord a forwarding address.

Below are the interest rates that apply depending upon when the tenant moved in:

• From August 1, 2003 through present, interest is figured at 1% per year.
• From March 22, 1996 through July 31, 2003, interest is figured at 3% per year.
• From April 28, 1992 through March 21, 1996, interest is figured at 4% per year.
• From October 1, 1984 through April 27, 1992, interest is figured at 5.5% per year.

If a tenant’s residency spans more than one interest rate change, you will need to figure the interest for that period until the change (round to the month) and then calculate the total. For example, if your tenant has lived in your investment property since August 2002 and moved out on July 31, 2007, they are entitled to 3% interest for 12 months and 1% for 48 months.

Using the above table will help you easily comply with state law when calculating the interest on your Minnesota investment property security deposits.

Single Family houses make great additions to your Minnesota investment real estate portfolios. They are stable, good income producing properties. The tenants tend to be longer term and the buildings tend to have less management requirements. Unfortunately, they can also leave very little opportunity to improve your cash flow. Here are 7 ways that I can suggest to make a few more dollars each month from your single family investment properties:

1. Work hard to lower your water bill by replacing all the toilets with low consumption models. Replace all the shower heads with low flow units. Check for any dripping or leaking faucets. Remove the outside faucets on the house (there is no need to water the grass at your investment property). Even though I never put the water bill in the tenants name, consider putting a stipulation in your lease that any water bills higher than $xx will be paid by the tenant.
2. If the house has a garage, charge extra for it. Even $25 extra each month is worth it. Most Minnesota tenants, expect to pay extra for it.
3. Eliminate “paying” the tenant or someone else to cut the grass and shovel the snow at your investment property. Charge market rent for the house and set those duties as just part of their responsibility.
4. You have (or should have) a late fee; USE it! I make about $120-300 extra per month because I charge my tenants late fees when they don’t pay rent by the 5th. In fact, I have tenants that have paid late fees every month for years because they can’t get their life together. Also, I charge late fees on past due amounts.
5. I don’t personally do this in Minnesota, but I know landlords in other states that actually rent some appliances to the tenants. Although not the norm, you could maybe rent some window AC units to them.
6. Improve the property and then raise then rent. Work to put your investment property on the upper end of the rent curve and get “premium rent” because it is nicer.
7. Change the property to “rent to own”. Typically a tenant that wants to own the property will pay $200-300 more per month that will be credited toward their down payment to buy the property in 2-4 years. Unfortunately, only about 50% of these tenants ever decided or qualify to buy your investment property, thereby forfeiting the additional rent they were paying. Do not set this up to prey on innocent people, but this is just reality and an option.

Implementing even a couple of these options may allow you to generate enough extra income from your single family investment properties. Try them out and enjoy the extra cash flow!

If you are a real estate investor in this market, it is almost certain that you will be looking at houses that are “short sales” and properties that have been foreclosed on (also called REO or bank-owned properties). When working with customers, I often get the question: “Do you get a better deal with a short sale or with a foreclosure.” Before I give you my answer, let’s review the foreclosure time line and terminology (I will speak to Minnesota Real Estate specifically, but other states are very similar):

Pre-Foreclosure

Mr. and Mrs. Homeowner are happy in their house and paying their mortgage on time. Unfortunately, a life change (loss of job, illness, divorce, etc), forces them to miss a payment. The bank that holds their mortgage (or the mortgage servicing company), calls the homeowner with a gentle reminder that they missed a payment and to feel out the situation. Maybe Mr. and Mrs. Homeowner pay the past due payment and life goes on, but maybe they don’t. Maybe they tell the bank they are sending the payment, but they never do.

Bank Processes Foreclosure

When the bank finally believes that Mr. and Mrs. Homeowner are not going to pay the past due payments, they contact their Minnesota real estate attorney. Mr. Attorney starts the foreclosure process by filing paperwork at the county court and is given a date for the sheriff’s sale. In the state of Minnesota, 95% of the foreclosures are done by advertisment foreclosure. The foreclosing bank must advertise in the paper (Finance and Commerce in Minneapolis) for 6 weeks prior to the sheriff’s sale. During this time, the bank will continue to try and get Mr. and Mrs. Homeowner to pay their past due amounts, including offering to add the missed payments onto the end of the loan.

At the Sheriff’s Sale

Unlike the information that the late-night infomercials give you, the sheriff sales in Minnesota are non-events. At 8:00 am, the sheriff “sells” the house to the highest bidder, which there is usually only one (the mortgage holding bank). At this point, the bank does not own the property, they simply have a legal right (called a “certificate of redemption”) to redeem the property at the end of the redemption period. The homeowner and/or tenants do not have to move on that date. It is just a legal proceeding.

The Redemption Period

The mortgage is now gone. Mr. and Mrs. Homeowner can not simply pay the past due amounts and make everything better. They must secure a new mortgage or find other sources of money to buy the certificate of redemption from the bank to stop the foreclosure process. This period is called the “Redemption Period” and lasts exactly 6 months, starting on the date of the sheriff’s sale. Again, the homeowner and/or tenants do not have to move out. Plus because the mortgage is now void, the bank will not accept any payments from Mr. and Mrs. Homeowner. They are living for free.

End of the Redemption Period

On the last day of the redemption period, the home legally becomes the property of the bank. They will typically have a company go over to the property and see if it is vacant. If the homeowner and/or tenants do not move out, they now have the same rights as a standard tenant that stays past the end of their lease. They must be evicted! The eviction process typically takes about 3 weeks in most Minnesota counties. Sometimes the bank will offer “cash for keys” which is where the bank will give the homeowner or tenant $200-$400 to leave the premises cooperatively.

The House is now a REO

As soon as the property is confirmed vacant, the bank will change the locks. Depending upon time of year, condition of the house, and the bank’s backlog of properties, it can take 2-6 weeks for it to be listed with a Minnesota real estate broker. The list price is set by the bank after they obtain BPOs (broker price opinions) from 2-3 real estate agents. These are basically a mini-appraisals to help the bank determine a list price.

The Short Sale?

A short sale is simply selling the house for less than is owed to the bank anytime prior to the end of the redemption period. This process is complex and typically can not be done by Mr. and Mrs. Homeowner. The short sale has some requirements:

• Banks most often will only talk with a licensed real estate agent about doing a short sale.
• Mr. and Mrs. Homeowner must show that they can no longer pay the mortgage at the current amount. This will include submitting financial records and a “hardship letter” explaining how they arrived in this situation.
• A bank will typically not discuss a short sale unless the homeowner has missed at least one mortgage payment.
• Before the house is ever listed for sale, the real estate agent should be in contact with the bank to see if they will even allow a short sale.

• The bank does not set the price of the house in the short sale. The real estate agent lists the house on the market and when an offer is received, the offer, the hardship letter, and Mr. and Mrs. Homeowners financial records are submitted to the bank for approval.

Short Sale vs Foreclosure

Unfortunately, I believe there is not a clear cut answer to this question of: “Do you get a better deal with a short sale or with a foreclosure”. Here is what I have seen:

Short Sale:

• Because Mr. and Mrs. Homeowner are motivated to sell the property during a short sale, it is typically in better shape than a bank-owned property. Often they are still living in the house or the tenants will still be in place.
• The banks appear to give their short sale negotiators more latitude to move on the price so often low-ball offers will be accepted.
• Including a letter with your offer can help explain how you arrived at the price you are submitting in a short sale. These same letters will never be read with a REO property.
• A good short-sale real estate agent will include comps to support your offer price, thereby helping your offer.

Bank-owned Property:

• In neighborhoods where there are a significant amount of foreclosures, banks will simply continue to lower the price until the property sells. (This is why there are $30,000 houses in North Minneapolis).
• A REO property will often be in worse shape (than a short-sale property) as it has often been neglected or vandalized while vacant.
• A bank may have 1000s of REO properties on their books and they have no emotional attachment to this one property. They have company guidelines that allow them to only accept offers within a pre-determined percentage below the current list price. If you are outside those boundaries, they will not accept the offer.

Your Criteria

Additionally, I believe the answer, depends upon the neighborhood, the type of property you are buying, and your investment strategy.

Neighborhood

Particular neighborhoods may have short sales, but you may rarely see foreclosures. These are typically strong performing neighborhoods like South Minneapolis (around the lakes), Edina, Mac/Groveland in St. Paul. Other neighborhoods like North Minneapolis will have primarily foreclosures.

Type of Property and Investment Strategy

If your goal is to buy an investment property that is ready to go, a short sale will typically be your best solution as it will often still have tenants occupying the property. If you want to maximize your long-term capital appreciation in property, buying a foreclosure that needs rehab is your solution. If you goal is to buy a single family house and move in, the answer depends upon if you want move-in ready or you want to do some work prior to move in (most foreclosures require some work prior to move in).

The Experts Answer

OK. OK. I know you are thinking: “why doesn’t he finally get to the end of this and tell me what I want to know!”…I spoke to a couple agents that work both short-sales and REOs as they will often list the property before and after the redemption period. Most say that the bank will put the REO property on the market at the same price as it was recently listed at during the short sale. Other banks will actually start the property higher to give them room to “season” the price, lowering it gradually until sold.

The answer is: “Buy the property when the price works for you according to your investment strategy. You may not see the price drop any further once it becomes a foreclosure and you may lose it to another buyer waiting for that price drop.”

I am excited that we will be hosting a Real Estate Investing 101 Seminar on Wednesday, March 26, 6:30-8:00pm in Burnsville. This seminar will be a one and a half hour presentation in regards to wealth building through real estate. There is no charge at all, no contracts you sign with us, no consultation fees, no hidden agenda. The seminar simply will be an excellent opportunity for you to learn more about our process: how you get pre-approved, what type of low-down loan product to choose, and then how we step you through the process of finding the home and helping you get it rented out.

Call 952-649-1456 to register and get exact directions. Tell them Scott Ficek told you to call!

Over the last several months, I have been working with many investors that want to rehab properties in North Minneapolis. As I have mentioned before, you can purchase some of these houses for $30,000. Lately, I have received many questions about how these rehabs work.

It has been a while since I wrote about Flipping houses. Unlike many Realtor blogs, you will never see posts about “my new listing”. This blog is for you: The new or seasoned real estate investor. I thought it would be interesting to show you one of these North Minneapolis rehab projects.

Background

Just like other areas of the country, Minneapolis has been hit hard by foreclosures. In my opinion, North Minneapolis has been hit worse than other areas with some streets having 5-10 REO (bank-owned) properties on them. These large numbers of REOs are driving down the REO house prices in these areas dramatically. Houses that sold for $150-$175k a couple years ago are now vacant and selling for $30-$50k. Most of them have had their copper stolen and all need some work (but that work varies from simple paint and carpet to something short of a tear-down).

This situation has created a unique opportunity for real estate investors to profit from this glut of bank-owned properties. Most investors are buying low, fixing up the property and unlike a traditional flip: renting it out, and expecting to wait 3-5 years to cash out.

Search Process/Criteria

You would think that with the sheer volume of REO properties on the market in Minneapolis, it would be easy to find a property to buy, but we are searching for just the right combination. Here is what we are looking for (in order of priority):

1. Total cost of project including: acquisition, holding, rehab, and overhead costs < $95k
2. ARV (after repaired value) = $125k or greater
3. Decent floor plan/layout
4. Close to properties of our other real estate investor friends.

That’s it. Note that I did not say anything about size, bedrooms, bathrooms, garage, basement, etc. Number 4 is simply to have someone to ask “what’s the neighborhood like”? Ultimately, if we hit #1 & #2, everything else does not matter. In fact, even a 1 bedroom house finished at $95k with $850 per month rent will cash flow!

North Minneapolis Rehab Example

Mr & Mrs Customer G purchased a 1.5 story single family house on 33xx Girard Ave N for $35k. This was a very typical North Minneapolis rehab. It needed new windows, new bathroom, new flooring, all new plumbing, plus new paint throughout (and other miscellaneous items). Fortunately, the kitchen only needed new counters and appliances, saving about $3000 in cabinets. The total renovation costs were $41k bringing the total project including closing and holding costs to about $80k. Best of all, the property was filled by the general contractor/property management group with a tenant that signed a 2 year lease and will cash flow about $400 per month. The property had a final appraisal of $159k, giving the buyer less than a 50% LTV ratio.

 

See some of the before & after pictures here:

What an outstanding deal! The buyer has a completely renovated property, fully rented for 2 years with decent cash flow and a mortgage for only 50% of the value. Keep in mind that this was a turn-key rehab. The buyers bought the house and 6 weeks later the contractor had renovated and rented the property. The buyers only took their down payment and closing costs out of their pocket (in fact-talk to me about how you can get your down payment back).

There are many similar opportunities out there right now. Contact me for more information.