Oh boy!  Great statistic if you are an investor (more cheap house coming).  Not good if you are a retail seller or you flip houses.  CNNMoney.com reports that there were 2.1 million homes that are very seriously delinquent or in the REO bank’s inventory, but have not been released to the market.  They are just sitting waiting for the right time.

Add that to the existing inventory and we have 6.3 million homes for sale, or 23 months worth of inventory.  As a comparison, a normal inventory is 6-7 months worth (we saw 3-5 months in 2002-2005).  With all that inventory coming, experts are predicting that home prices are expected to dip another 8% before they start to clime (unfortunately, they didn’t say when the 8% decline would end).

Read more of the article here.

Most of us are so used to buying REO properties in the last couple years, we forget all the details of buying a home with tenants in it!  I know I do.  In fact, I am so used to showing vacant houses that I recently showed up 2 hours late to a house (assuming it was vacant and not a big deal to be late), only to walk up the sidewalk and find the lights and TV are on!  Oops.

Writing offers on tenant occupied properties needs a little more attention to ensure that you get what you think you are getting when the closing is over.  If you miss something or simply assume everything will be fine, you may get a rude awakening after closing.

Here is one example:  my client put in an offer on a short sale in February and the seller accepted our offer.  During that process, we got copies of the lease and confirmed the rent amount.  We showed up at the closing today to find out that the landlord had signed a new lease with the tenant in March, dropped her rent by $300 and let her use the damage deposit to cover the March rent when she was out of work.  Now we received a much smaller amount of cash at closing, no damage deposit, and need to have a delicate conversation with the tenant that we’ll be raising the rent $300 (and she needs to pay a new damage deposit). I can see I need to update my boilerplate rental addendum.

Here are some tips on how to craft your purchase agreement when buying investment properties with tenants in them.  Most of these will take the form of an additional addendum on the purchase agreement.

• Write into the purchase agreement that the seller is not allowed to sign any new agreements with the existing tenants without written approval from the buyer. This would have fixed our problem today or at least have given us more notice than 1 hour before closing.
• In the purchase agreement addendum, write in the amount of the security deposit and language that effectively says:  “Seller will provide the buyer the security deposit in the amount of $xxxx at the closing in certified funds, regardless of the disposition of those funds between the tenant and seller, as long as tenant remains in the property”.
• Do not allow the old landlord and his bad rent collection skills to start you off in the hole.  Add language that the rents will be prorated at the time of closing between seller and buyer, again regardless of the collection status of the rents.
• Also, make sure the seller understands that you want to be notified instantly of any tenant issues at the property, such as rent collection, notice to move out, or other problems.  This can be especially important when dealing with short sales that can take months to close after you offer on the property.
• Do not allow the landlord to sign any lease extensions as it is a good idea to let them roll month to month so you can see how the tenant perform with everything prior to signing a new lease.  Worst case, if you don’t like them, give them the 60 days notice and move them out.

Buying an investment property that has tenants in it takes some additional due diligence and purchase agreement language to insure that you get what you think you are getting.

You have to love this lawyer……..

Part of rebuilding New Orleans caused residents often to be challenged with the task of tracing home titles back potentially hundreds of years. With a community rich with history stretching back over two centuries, houses have been passed along through generations of family, sometimes making it quite difficult to establish ownership. Here’s a great letter an attorney wrote to the FHA on behalf of a client:

A New Orleans lawyer sought an FHA loan for a client. He was told the loan would be granted if he could prove satisfactory title to a parcel of property being offered as collateral. The title to the property dated back to 1803, which took the lawyer three months to track down. After sending the information to the FHA, he received the following reply.

(Actual reply from FHA): 
“Upon review of your letter adjoining your client’s loan application, we note that the request is supported by an Abstract of Title. While we compliment the able manner in which you have prepared and presented the application, we must point out that you have only cleared title to the proposed collateral property back to 1803. Before final approval can be accorded, it will be necessary to clear the title back to its origin.” 
Annoyed, the lawyer responded as follows:

(Actual response):
“Your letter regarding title in Case No.189156 has been received. I note that you wish to have title extended further than the 206 years covered by the present application.  I was unaware that any educated person in this country, particularly those working in the property area, would not know that Louisiana was purchased by the United States from France, in 1803 the year of origin identified in our application. For the edification of uninformed FHA bureaucrats, the title to the land prior to U.S. ownership was obtained from France, which had acquired it by Right of Conquest from Spain. The land came into the possession of Spain by Right of Discovery made in the year 1492 by a sea captain named Christopher Columbus, who had been granted the privilege of seeking a new route to India by the Spanish monarch, Queen Isabella. 
The good Queen Isabella, being a pious woman and almost as careful about titles as the FHA, took the precaution of securing the blessing of the Pope before she sold her jewels to finance Columbus’s expedition. Now the Pope, as I’m sure you may know, is the emissary of Jesus Christ, the Son of God, and God, it is commonly accepted, created this world. Therefore, I believe it is safe to presume that God also made that part of the world called Louisiana. God, therefore, would be the owner of origin and His origins date back to before the beginning of time, the world as we know it, and the FHA. I hope you find God’s original claim to be satisfactory. Now, may we have our loan?”

The loan was immediately approved.

I am no stranger to selling cheap houses.  In 2008 & 2009, I sold well over 100 homes that were priced under $50k with the majority under $40k.  My cheapest house I sold was $12,500 back in March of 2009 (the bank netted $69 on the deal-read the post on my Saint Paul Real Estate site).

So with that all said, it was amazing to be out with a customer of mine the other day looking at condos in Brooklyn Park.  We looked at 4 that were priced at $19,900.  I remember saying to him “I can’t believe I am about to say this, but this condo is too expensive.”  Wow!   I would say even the cheapest new car these days costs more than $19,900.  So why did I say that?  Here is how the numbers break down:

While $90 is not the worst cash flow I have ever seen, if this customer ever has to replace the flooring in the unit, it would require an entire year to pay back the cost of it!   We started talking about offering $15k for the unit and even at that price it is still not enough cash flow to make it worth it.  Now you could pay cash for this unit, but is it really that great a use of your money to get $146 per month for your $20k?

You can’t make every deal work.  Making it cheaper doesn’t always solve the problem.

For a while now I have been using our own title company when my customers are purchasing foreclosed properties.  This is all despite the contracts “requiring” that we use their title company, which is against the law.  Here is a great email that Charity at Trademark sent out:

Associates,

In the last couple of weeks it has been brought to my attention that the title companies representing the banks have taken it a step further now. They are not just trying to fairly compete for the buyers business they are actually calling the selling agent and using scare tactics on them.

Most recently, the title company called a Selling agent telling her that the Buyer HAS NO CHOICE and must use them to close because the contract was written that way.  PLEASE do not allow these title companies to bully you or your buyers into closing with them, THIS IS AGAINST MINNESOTA LAW!

Another instance, the same title company as above called the Selling agent and told him the Buyers would end up paying $900 more to close with Trademark than with them. NOT TRUE!  We offer special pricing for buyers of bank owned properties.

Last week a very reputable title company who has now started representing banks sent us multiple emails stating the Bank won’t send the deed back unless the Buyer uses this title company. Again, THIS IS AGAINST MINNESOTA LAW!

Please, don’t be fooled by the latest tactics, if in doubt CALL A TRADEMARK CLOSER!

Lots of people have been asking about when do you have to have a deal signed and then when does it has to close to be eligible for the $8000 tax credit.

I am not an attorney nor do I play one on TV.  This is what I have read and heard from my mortgage broker friends.

A buyer have a fully executed contract in hand by April 30, 2010 for the transaction to be considered eligible.  Then the deal must close by June 30, 2010 in order to take advantage of the first time home buyer tax credit.

The primary key here is that you need a “fully executed” contract.  The typical REO or retail sale that gets done signed by April 30 should have no problem skating across the finish line.  Conversely, I bet most short sales will not make it.

Many short sales will agree to your offer, sign it, send it to the bank for approval and then wait.  If you as the buyer do not receive a signed copy, you do NOT have a fully executed contract in the state of Minnesota.  The way to fix this is to demand that the seller sign the contract and give you a copy, but make it contingent upon bank approval.  The contract can still be “subject to bank approval” for it to be binding and fully executed.  That is simply a condition of the contract like an inspection contingency.

I know you don’t want to hear this, but I believe that it is already too late to make an offer on a property that is a short sale and get it through the bank’s short sale department before June 30.  Some agents may disagree, but every short sale I have been involved in takes at least 4-6 months to close.  You would have needed to get an accepted offer on one January 1 or earlier to feel good that it will probably close by June 30 (even then it is a crap shoot!).