Before you investors start salivating….Keep in mind that even though a foreclosure filing happens on a property, several things can happen.  The owner can pay the past due amount and fix the problem.  They can sell it in a short sale.  If neither of those happen, we need to wait 6 months for the end of the redemption period for the properties to hit the market.

The staggering numbers from the report show that one in every 162 houses in the Twin Cities (only .62%) has at least one foreclosure filing in the database.  This is slightly lower than the .72% national average.  The Twin Cities ranked 80th on the list of large cities (over 200k people) in number of foreclosures.  Of the top 10 cities with the worst foreclosure rates (like cities in California, Florida, Arizona), eight of them reported improvement in foreclosure filings over last year.

That is why the Minnesota Association of REALTORS® was shocked by provisions in the House DFL Tax Bill that hammers homeowners. Two of the most significant changes are the elimination of major income tax deductions – property taxes paid and mortgage interest. These two provisions have been part of Minnesota tax law since 1933 and are readily utilized by homeowners to help offset the annual expense of owning and maintaining a home.

Studies show that ninety-seven percent (97%) of the tax benefits from these deductions go to Minnesotans with household incomes starting at $30,952. In many cases, these are young families who have recently purchased and are struggling during this recession. Not every taxpayer utilizes these deductions; however, 75% of homeowners use these deductions when filling out their taxes. Other homeowners have paid down their mortgage over the years and now claim the standard deduction. More significant is that homeowners understand the overwhelming public policy benefits these deductions provide and realize their children and grandchildren will need these deductions so they can own a piece of the American Dream.

Home ownership has been widely recognized as good public policy for stabilizing families, neighborhoods and communities. Altering these widely accepted tax deductions at a time when the residential real estate marketplace has been struggling seems to be the wrong solution at the wrong time. You can access the House Tax Bill at: https://www.revisor.leg.state.mn.us/bin/getbill.php?session=ls86&number=HF2323&session_number=0&session_year=2009&version=list

Here is where it get’s circular.  Jeannie Hoholik, from Keller Williams, comments on this blog.  In fact, she commented about my above post.  She is also the main character in Johnny Northside’s post.  Got all that?

I encourage you to check out those other posts.

Scott

I have recently just launched such a site at www.mnirea.com. The search capabilities are top notch and comparable to any that you will find on other real estate sites. The best part is that I have pre-loaded some common searches. Go ahead and browse the Minnesota MLS here.

1. The agreement must be in writing and signed by both the landlord and prospective tenant.
2. That agreement must specify under what circumstances the deposit will be returned to the prospective tenant.
3. If the above circumstances occur, the landlord must return the deposit within 7 days.
4. Once the landlord and tenant enter into a lease agreement, the money must be applied toward the tenant’s rent or security deposit. Any payments for tenant screening are not included in this requirement.

If the landlord violates any of these requirements, s/he is liable to the prospective tenant for 150% of the deposit amount. Once the landlord and tenant sign a lease and the landlord complies with #4 above, this law no longer applies. The moral of the story is: make sure everything is in writing!

See Minnesota Statute 504B.175 for more information

This is a simple form that your tenant can use when submitting their taxes. Depending upon their income, they may be eligible for a tax deduction for a portion of the rent they paid for 2007. Although you must send your tenant this form, this does not affect any taxes you pay or anything else. It is simply for their tax purposes.

The instructions are rather lengthy (and like any other government form, rather confusing). Without going into great detail, here are some of the tips and tricks that I have figured out over the years:

• Only rent paid by the tenants is used in the calculation (any Section 8 or other rent subsidies are not included). In my accounting system, I mark each subsidy payment in the memo field to make this easier at the end of the year.
• Do not include any damage deposits, late fees, or other non-rent payments.
• I typically only include actual rent paid, not rent billed (or accounts receivable).
• Fill in a copy of the form with your business information and make copies to save yourself time when completing many of them. With almost 30 rental units, you can imagine how much time this saves me!
• I do not try and track down past tenants and send them these forms. If they are interested, I let them call me (again, there is no penalty for not sending these forms of for them being late).
• You must divide the rent paid by the total number of adults (married couples are considered 1 person) in the unit regardless of how much rent each paid. You should then send a form to each adult.
• To save on postage, I send their monthly statement in the same envelope.

You can purchase software packages or services to do this work for you, but I have always found they are expensive. The easiest way I found to get these done is do a couple each night until you have them all finished. Turn the music on and just fill them out!

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.

Investment property in the suburbs must be analyzed just like any other property in the metro Twin Cities, MN. There are several key points to consider before buying any property (especially ones in the suburbs):

1. Is the property financially a good purchase for price, cash flow, and potential capital appreciation?
2. Are there other rentals in the area? Competition can be helpful in attracting new tenants. If you are a rental island in the sea of single family houses, it may be difficult to get anyone to be interested in your apartments. Also, setting your rent may be more difficult without other rentals in the area.
3. When it is time to sell, it may be difficult to find comparable investment properties for the mortgage company to use when getting an appraisal. This in turn could deflate the price you can sell your property at.
4. Newer housing can appear on the surface to be a nice alternative to the worn-hard properties in Minneapolis or St. Paul. Often, though, these properties are priced higher than older buildings in the city, thereby reducing or eliminating any cash flow.
5. As I have wrote before, you should also consider where those suburban properties are relative to your own home. They may look appealing, but if they are 45 minutes from your house, you will not anxious to drive there often.
6. Lastly, the price of gas has doubled over the last couple of years and housing starts are at record lows. Most experts agree that the suburbs are the worst hit, as people contract back into the city, wanting to be closer to their jobs and not able to afford that bigger, new house in the suburbs. Consequently, the retail businesses in those suburban areas close, do not expand, or reduce their work force. Because renters generally live close to where they work and renters most often fill retail positions, those prospective tenants will not move into the area where the job market is tight or shrinking. Logically, this reduces the need for apartments in those areas, thereby making suburban investment property more vulnerable in a down market.

I encourage you to evaluate each one of these points before buying MN investment property. I believe that suburban investment properties need extra scrutiny to insure you make the right purchase decision.

If you go to court, here are some items the judge will be looking for:

• Did the tenants have a copy of a written notice they gave you that outlines what repairs they believe are needed?
• Have the tenants given you enough time to complete your repairs?
• Does the tenant actually have all the rent money? If so,the judge may require them to prove the funds availability.

What you should bring to eviction proceedings:

• Pictures of the areas/items that the tenants claim need to be repaired.
• If the work has been completed, receipts from the contractors or suppliers to repair items (and pictures).
• If the repairs are needed because of damage caused by tenants, pictures previously taken of area may help.
• If the repairs are scheduled, but not completed, bring a time line with you to court to show the judge you are working on the problem(s).

The judge can make several rulings:

1. S/He can order the landlord to make the repairs immediately and have the tenant hold the money until completed.
2. Order the tenant to pay the court or landlord until the facts are proven against the landlord.
3. Require the landlord to accept less for the apartment as a remedy to the tenant.
4. Pay the outstanding rent to the court for safekeeping until the landlord makes the needed repairs.
5. Rule that the tenants request(s) or reasoning for withholding the rent is baseless and order the tenants to pay immediately (including eviction filing fees), or be removed from the premises.

Exception: If the property has been condemned by a government agency or department, the tenant typically can not be required to pay rent and typically the damage deposit must be returned.

Written documentation is your best defense against a tenant that is trying to avoid paying rent.  If you are maintaining your properties and feel that your tenant is trying to take advantage of you, I recommend that you process an eviction against them and let the court decide who is right.

At the Sheriff Sale:
You, as the investor, would need to show up at the Sheriff sale with the entire amount of the outstanding mortgage amount to “buy” the house. The foreclosing bank would be excited! Unfortunately, you do not receive the deed at the sheriff sale (and therefore do not own it). You will receive a certificate of redemption. After the sheriff sale, you will enter the next phase, which is:

The Redemption Period:
In Minnesota, the owner of a house in foreclosure has 6 months after the sheriff sale to “redeem” the property by securing new financing and paying off the bank that foreclosed on the property. This is not the area of concern, because if the owner secured new financing, you would simply receive your investment back. The concern is that during the redemption period, the owner still has full use of the house. They can remove all the cabinets, the furnace, and even plumbing pipes. They could kick holes in all the walls and doors. At the end of the redemption period, the bank (or the investor) receives the deed to the house AS-IS. That cute house could now be a rehab nightmare. You just overpaid for a destroyed house.

Alternatives:
1. Wait for the house to go into foreclosure and for the bank to own it. In Minnesota, 99% of all bank-owned property listed through real estate brokers and can be found on the MLS.  Buy it then.
2. Contact the homeowner directly and work with them to sell the house to you in a short sale. You way want to work with a qualified Realtor that is experienced in handling short sales as there can be many speed bumps along the way.