We have not seen the bottom of this foreclosure market yet.  This is especially true in the winter season and an uncertain political climate.  While there is a bright note that the FHA has once again waived the Anti-Flipping rule to allow people to rehab homes and sell them quickly there are other gloomy stats.

CoreLogic’s Home Price Index shows a 4th straight month of housing price declines for November.  Prices fell 1.4% from October and are down 4.3% year over year.  Most of this decline is being driven by dropping prices on distressed properties (foreclosures and short sales), but if you remove them from the equation, retail homes still fell 0.6% in November.  Year over year, retail prices are up only slightly (which is actually decent news).

On the foreclosure front, serious delinquencies (mortgages that are more than 90 days past due or actually in foreclosure), declined to 9.3% in December.  This is down from a high of 10.4% in December 2009.  Foreclosures have stayed steady at 5.5% for 3 quarters ending June 2011.

In my opinion, we are seeing the market trying to figure out what to do.  I am not sure there are any other homes that can go into foreclosure in masse.  While we will see a steady stream, I think the flood is over.

I wrote a post about how to write a low ball offer on bank owned foreclosure properties in September 2010.  You can review that low ball REO post here.  I think that all of my original thoughts remain.  Surprisingly though, I get many questions about this process.  One example is that there are 74 comments on that post!  Lots of people are still confused by how much they can offer on a foreclosure.  Let’s review.

Many of my customers and people that comment on the above post want to talk about tax assessed value, previous mortgage amount, how much work it needs, etc.   The number one driving force that allows you to make lower than list offers on REO properties and get them accepted is….(wait for it)…..time on market.  Nothing else typically matters!  Here is why:

• Yes, the property is a pile of junk, needs 47 windows, a new furnace and a new kitchen.  If the bank did the process correctly, the listing agent they hired should have accounted for the current condition and priced the home accordingly.  Unfortunately, just like anything in life, some listing agents are better at their job than others.  Some listing agents think that if they give the bank a higher resale number up front, they may get lucky and get the listing (often they are correct).  You can argue all you want that this home is not worth $200k because it needs this and that.  In the end, that argument is falling on deaf ears.
• Tax assessed value is absolutely worthless in this market.  Repeat.  Tax assessed value is absolutely worthless in this market.  It serves no value for determining anything any longer.  These values were set by the tax assessor 1-2 years ago.  Many municipalities will not reduce the market value dramatically because they lose too much tax revenue.  Plus, with the wild swings in prices in the last 2-3 years, you need to compare this house to the others currently on the market, not data from 2 years ago.
• I have yet to see where the previous mortgage amount is at all relevant on what the bank sets the listing price at.  If this was the case, there would have been zero $30,000 house like we see by the truckload in North Minneapolis.  In fact, I wrote a story about a how the bank had a $189k mortgage on a house that my customer bought for $12k.

I have had two different customers call me in the last 6 months saying that their tenants have found bedbugs in their units.  Unfortunately, both of these calls were from customers that owned 4-plexes.  It turns out that bedbugs have become an increasing problem in the last couple years.  More international travel and the bedbugs increasing resistance to long-used pesticides is causing an increase in reports.

It has become so bad that some municipalities across the US have put new regulations in place.  In Maine, landlords must inspect a unit within 5 days or being notified of a possible infestation and contact an pest control specialist within 10 days.  Additionally, affected units can not be rented until treated.  Most often, though bedbugs are treated just like mice and other pests in state and local statute and regulations.  Even in Minnesota with the cold, we are not immune to bedbugs.  In fact, there is now a bedbug registry that anyone can post reports on.

Whatever the regulations, I recommend that you spare no expense to treat these bugs.  You need to act quickly and bring in professionals to get rid of them.  If you have them in one unit of a multi-family building, you don’t want to run the risk or infecting more units (and increasing the ultimate cost).  Proper extermination of this problem and elusive bug can be complicated so taking shortcuts by doing it yourself increases the chances the problem will continue to get worse.

Because the extermination can cost as much as $1500 per unit, my customers were obviously trying to figure out where the bugs came from.  Unfortunately, it is often difficult to find the source of bedbugs and even harder to prove it, especially in a multi-family building.  One way to at least try and minimize your risk for infestation up front is to add lease clauses such as:  ”Tenants will not bring any furniture that is found outside or or from unknown source into property”.  In this case, you may not be able to prove the tenant brought in the bedbugs, but you may be able to evict them based upon the lease violation of bringing in the furniture.  Also, bed bug infestations are not limited to beds and mattresses, and they can be found on tables, drawers, and even electronics if these items were located in a bedroom or other place that could support an infestation.

Once infected, I recommend that you document your actions carefully including pictures of units before, during and after infestation.  If a court case happens, you want to have that documentation, which may help you proof that either the tenants were at fault or that you acted as quickly as possible to resolve the issue (minimizing your liability, but not eliminating it).

By the way, these little bugs creep me out too much, so I chose NOT to post a picture of one!

I was reading posts on several of the other agents blogs over the weekend.  I found some excellent posts that I wanted to share with anyone that reads this blog.

Steve Howe posted a little insider information on his Minnesota First Time Home Buyers blog about how the typical Minnesota MLS search that you find on an agent’s website.  He explains both how this information can be outdated and incomplete, plus how you should expect a call from the agent that owns the website after you register to use his tools.  Take a read at finding homes online.

The group over at Cornerstone Mortgage was producing a bunch of great posts.  So many that I needed to include them all from their Know Your Home Loan blog.  First, a post dear to my heart (and this site, being a landlord.  So what do you do if you can’t sell your home?  Rent it out.  Carrie has some great ideas on how to be successful in her post: Can’t Sell Your House? Time For A Renter? Next, a post that can help anyone in the market for buying a house:   Minneapolis Homebuyer Assistance Programs.  I never realized there were so many and Carrie pulled them all together in one easy place to find them.  I bet if you are one of Carrie’s clients, she would steer you to the correct program.  But, maybe you aren’t looking for a home in Minneapolis.  No fear, Carrie also compiled a list for all of Minnesota in her post, Minnesota Down Payment Assistance from Minnesota Housing.

I hope you enjoy reading these post and find them as informative as I did.

As we all know, in certain areas, vandalism of vacant houses is almost expected.  When I am touring some neighborhoods, I am almost surprised when the copper water lines have NOT been stolen.  I saw a house in North Minneapolis a couple years ago that had something that looked like steel plates over the windows.  I should have taken a picture, but I was amazed at the security of it.

This is not an advertisement for this company, but I recently received an email for a company that will secure your property using these lightweight metal panels over the doors and windows.  Their website says that there is no nails or screws used to secure the panels.  I am guessing they must open the window/door and then use a bar across the inside to basically clamp the panel to the opening?

I have no idea what this costs (it appears you lease the panels and pay for install), but what a cool idea.  In fact, I was thinking that the homeowners down in hurricane and tornado country should own a set of these they could install in an house or so.  No more plywood (or better, no unsecured houses).

EFFECTIVE JANUARY 1, 2011-

On September 27, 2010, President Obama signed into law the “Small Business Jobs Act of 2010.” The bill contains a number of tax provisions that are designed to give tax breaks to individuals and small businesses.  The bill also includes multiple revenue raisers in an attempt to pay for the tax breaks.  Among the revenue raisers is the expanded use of Form 1099 to rental property owners.

Beginning January 1, 2011 rental property owners will be required to file Form 1099-MISC with the IRS reporting payments of $600 or more during the year for rental property expenses.  Separate 1099’s must be filed for each person providing services of $600 or more during the year.  The taxpayers will be required to provide a duplicate copy of the form to the service providers (painter, plumber, accountant, etc.).  The forms must be filed by January 31 of the year following the expense.    The service providers are required by law to give the taxpayer his name, address, and Federal identification number to be used on the 1099.  Rental property owners will need to include their own information and the total amount they paid to the recipient on the 1099.

Failure to comply with the law will result in increased fines.  Individual violations result in fines from $30 to $100, with the maximum calendar year penalties ranging from $500,000 to $1,500,000.

As with any tax law, there are exceptions.  Taxpayers who are temporarily renting their principal residence, or whose rental income does not exceed an IRS determined amount (which is TBD), will be exempt from the new filing requirements.  For those whom the filing requirement would create a hardship, as defined by the IRS, would also be exempt from filing.

Feel free to visit our Olsen Thielen CPA Blog at www.otcpas.com/blog

Mark Angell, CPA  mangell@otcpas.com

Olsen Thielen CPAs

952.829.3418