Does Eviction Mean It’s Over?

The “E” word.  And in today’s world, the “F” word . . . evictions and foreclosures abound in this economy.  In the early 2000s, people bought homes with little or no money down, and we all know what has happened in the past few years.

So whether you’ve been evicted or foreclosed on, your credit is pretty much trashed, and there isn’t a landlord in the city who’ll consider renting to you, right?  Wrong.

Along with those who lost their homes due to an ARM they couldn’t afford when it came time to pay the higher rate, there are many legitimate reasons people lose their homes and apartments:

  • Personal or family health problems/related hospital bills
  • Being laid off or downsized, loss of job
  • High, unplanned-for utility bills resulting in budgeting problems
  • Loss of second income that helps to pay rent or mortgage
  • Loss of extra income, i.e. child support, SSI, etc.
  • Stolen money, cars or other prime essential belongings

These are all legitimate reasons for losing a home and many times, people are able to rebound and get back on their feet after a few months.  As a landlord, I look at the reason behind an eviction or foreclosure, check out the applicant’s current ability to pay rent, and make a decision based on those things.

Bad applicants tend to have a string of evictions, and always have an excellent excuse to accompany each eviction.  I don’t go there.

Here’s the bottom line:  if you rent to lower-income individuals, you’re going to have some applicants who have an eviction on their record.  And in this economy, evictions and foreclosures are plentiful at every socio-economic level.  So if you refuse to look at someone with “a history,” you may be without a tenant for a long time!

Look at the reasons behind the eviction . . . some are understandable, and some will disqualify the applicant.  You decide . . . go with the facts, and go with your gut.

Better to Buy Right Now?

Mortgage rates are near a 50-year low and foreclosures continue to flood the housing market.  It was also recently disclosed that the banks are withholding thousands of these foreclosed homes, and will release them into the market throughout 2012.  This is only going to delay the housing recovery even more.  But I guess the good news in this: for investors (or other buyers who can qualify) there’s plenty of inventory out there, prices are going to bump along the bottom for a long time, and it’s a great time to buy, as mentioned in the following article that appeared in Kiplinger on line:            http://www.kiplinger.com/magazine/archives/should-you-buy-or-rent.html.

Indianapolis is actually cited as one of 10 cities where the prices are low/stable and unlikely to drop much further.  They also talk about a price/rent ratio, often called the rent-to-buy ratio.  To find out whether it’s smarter to buy or rent in your area, you take the value of the home you’re looking to buy, and divide it by the annual cost of renting the same type of dwelling. If the number is below 15, it’s a good buy.  Above 15, smarter to rent.

For example, on the foreclosure I bought last fall, I paid 35K and have a total of 40K in it.  At 825/month rent, my ratio is 4! Definitely a buy.  And even at the true market value of the home, compared to those around it (80K), the ratio is only 8.

The rent-to-buy ratio here is excellent, and we have a very strong rental market.  I was able to find a fantastic renter for that home as soon as it was finished and ready to go.  So we’re fortunate here.  It’s a great market for buyers — if you can qualify.  And there’s the catch.  The banks have tightened their purse strings and are making it difficult.

They’ve gone from way too lenient to way too strict.  Hopefully, the pendulum will swing back to middle ground soon . . . in the mean time, people everywhere are being forced into rentals.  For us landlords, life is good . . .      🙂

Rent, or Buy?

The early 2000s . . . ah yes, the good old days, when home prices were soaring and investors were flipping houses and making money hand over fist. And then, the total collapse . . .

With today’s economy in a state of flux and the real estate market still flat-lining, thousands of wonderful homes are sitting on the market. Homeowners are under water on their mortgages and can’t sell, and are becoming landlords by default.

People are nervous. The banks, who were so crazily free-wheeling a few years back, have tightened the purse strings to the point where applicants who deserve loans are being denied. Even those who are capable of purchasing homes are hesitant:

  • They’re unsure of the direction of the economy
  • They fear being laid off.
  • With the rising cost of education, they’re choosing to put money in their children’s college funds rather than invest in “The American Dream.”

But for those who still lust after that traditional dream, there’s a formula — although a loose one at that — that might help determine if your city is one in which it’s better to rent or buy. It’s called the rental ratio formula and here’s how it works.

You take the cost of the house you’re looking to buy, and find out what the comparable place would cost to rent, for one year. Divide the total yearly rent by the sale price of the home. If the asnwer is less than 15, it makes sense to buy rather than rent.

For example, on the three-bedroom foreclosure I purchased last fall (See “And Speaking of Fortunes Being Made . . .”, October 2010) the rent I receive is $825/month x 12 = 9900. In this Indianapolis market, I bought that home for 35K and with repairs, have a total of 40K in it. But, the surrounding homes are worth (in a normal market) 80K. Either way, when I do the equation, the results are 4 and 8.5, meaning Indy is definitely a city where it’s better to buy.

But don’t be fooled by the numbers or the gurus. Even though this formula says it’s more costly to rent than buy, our Indy rental market is very strong and I don’t see the end in sight. My 27 rental units never stand empty, which tells me there’s opportunity on both ends — both as a buyer, if you can qualify, pay cash or use private money — and as a landlord who rents out your properties.

So don’t be shy . . . now’s the time to buy!

Meet LouLou . . .

This is LouLou, actually, Louise.  I bought the duplex she and her husband Warren lived in, back in 2000.  It was in less than stellar condition but I got it for a song ($19,000) and knew it had potential.  The rents were ridiculously low but I was going to raise them quickly.  Well, it didn’t work out so well . . .

As I got to know them, I learned they’d been in that home for 23 years, were on a fixed income and Warren was dying of cancer.  They were dear, sweet people, and I just couldn’t do it.  Just couldn’t.  I kept the home for a couple years, drawing ever closer to LouLou as she and the hospice people cared for Warren until he passed away.  I was unable to attend the funeral, much to her dismay.  Her comment:  “George’s people don’t like white people, but I think you woulda done okay.  I woulda had you in the family row…”  (Yikes!)

I sold the home and — surprisingly — made a profit.  The next owner did a poor job of managing it and paying the mortgage, and went into foreclosure.  I continued to visit throughout this time, and was relieved when LouLou found a senior living facility (a renovated old school).   She’s lived there for the past several years and I’ve continued to visit.

She’s a fun, feisty old girl — loves B.B King and the blues, and when I get off the elevator, I often hear the music cranked up loud, coming from her apartment.  She gets many visitors: her son and daughter and various grandkids, nieces and nephews, great grandkids, etc.  They drift in and out on a daily basis.

Sadly, she was diagnosed with colon cancer a few years back and has declined.  Initially, she told me, “I think it’s down there in my utica (uterus).”  One operation was all her body could handle, and now her 5’6″ frame is down to about 80 lbs.  She had a bad episode a month ago and has been in a rehab facility since.

Her daughter calls me with updates and I visit her often, but LouLou’s 81 years may be drawing to a close.  My job as a landlord has enabled me to meet some extraordinary people, and LouLou is one of those.  I’m proud and honored to have known her all these years, and will hope for the best in the coming weeks.

May God bless her . . .

Rent-to-Buy Gone Wrong

A rent-to-buy, or land contract, is a great way for someone with less than stellar credit — or even no credit — to buy a home.  I’ve done a few of these over the years and for the most part it’s been a good thing.

The buyer gives me a down payment, at least $1,000, and I work out payments over a set period of time.  I include interest, property tax and insurance in these payments.  Interest is 10%.  I know, that’s a lot, but since these people are higher risk, they understand the reasoning behind the high interest.  And I make the payments within their budget.  We discuss this beforehand.

I’ve had three buyers default.  One got in an argument with his boss of six years and quit.  Another had a major health problem resulting in high medical bills, and couldn’t continue to make payments.  95% of the time, when people can’t pay, they just quietly admit it and leave.  They feel badly and know they must vacate.

On just one occasion, I had a buyer default and not leave.  He decided to stay to the bitter end, so I had to enlist the help of my real estate attorney and file foreclosure on him.  The process took about three months and cost me $600 in fees, but I got him out.  Unfortunately, the buyer owed meabout $2400 in payments by the time it was all said and done.  So, I’m glad I got a $2,000 down payment from him up front!

Also, he really disappointed me in the way he left the house.  Here’s some video I took after he left:

As you can see from the video, he not only left it a mess, he also took (stole) some things.  Frustrating, yes, but you can’t worry about the stuff you can’t control.  So I moved forward, and rented this home out to a wonderful guy who now wants to buy the place.  It worked out.

Doing a rent to buy is a great way to make money for yourself as a real estate investor, and to provide housing for people who can’t buy a home in the traditional way.  It’s worth checking into . . .

Thinking of Flipping?

Home prices are low right now, as you know.  And from what I’m reading, they’re going to stay low through 2011 and into 2012.

So, are you thinking of snatching up one of these homes at a great bargain price, putting a little money into it, and reselling it for a nice fat profit?  Think again.  Those days are gone, at least for now.

I flipped a few along the way, back in the late 90’s and early 2000’s when the real estate market was booming.  Aaah, those were the days.  Back then, the foreclosure I just bought last fall would’ve been a perfect candidate for a flip.  Purchase price, 35K.  I put another 5K into fixups and it was ready to go.  The homes around it are worth 80-85K.  But!  Who’s going to pay 80K when they can find a nice foreclosure for 30?  No one in their right mind, that’s for sure.

So, I’m renting it out.  And actually, there are thousands of homeowners who need to sell their homes and can’t — for a decent price — so they’re renting them out.  They’re becoming unwilling landlords, poor things.  At least the rent payment should cover the mortgage.  The demand for rentals is strong and is driving the price up in most areas of the country.

So, if you think you’re going to make a fast buck by flipping a property, think again.  Now is not the time and, if I were you, I wouldn’t hold my breath.  If you want to make money, buy the bargain home and rent it out.

You won’t get the fat reward of the one-time payoff of a flip, but you’ll reap the nice tax breaks and steady stream of income the rental  provides.  I know, it’s not glamorous.  But it works.   🙂

Onward and upward!

The American Dream Revisited

When people ask me about buying rentals in Indianapolis, I like to tell them stories like this one.

Back in 2005, I found a cute three-bedroom foreclosure and bought it for $26,000.  It didn’t need a lot of work, really.  The basement was full of junk, the place smelled like dog urine (it made my nose and eyes burn) and the previous owners had left trash all over the house.  It needed to be totally redone but it was structurally sound, and the major operating systems were in good shape, as was the roof, siding and garage.  So I jumped on it.

It didn’t take long to complete the rehab . . . I planned ahead and got it done quickly, spending about $5000.   After the purchase, every day that goes by is a day I’m not making money, so I organize myself and my sub-contractors and get the rental up and running.

My first tenants wanted to be buyers, so Idid a land contract with them, also called a “rent-to-buy.”  It didn’t work out — they defaulted — so I got them out and rented to a wonderful guy who’d fallen on hard times.  Bill had been in an accident and wasn’t able to work for two years, due to multiple major surgeries.  He tried to keep up with medical bills and just couldn’t.  He ended up losing his home, etc.  But now he was back on his feet (literally) and had a good job. 

I started renting to him about two years ago and he called yesterday and asked about the possibility of buying the house, below:

Of course, my first question had to do with his credit situation.  Bill told me he had been working on credit restoration, and also that he was going to receive clost to $20,000 in monies (disability payments) that were owed to him from the time he was injured and out of work.  He wanted to know how much I’d charge him for the house so I did a quick review of comps in the area —  comparable homes for sale and sold in the area — and came up with a $50,000 price tag.  I felt this would hold up to an appraisal by a bank.  So, he’s working on it from his end, and we’ll move forward.  He’s excited and so am I.  I’ll take that money and run!  Maybe pay down some debt, buy another rental . . . we’ll see.

But, I’m so happy for him.  For Bill, the American Dream is alive and well.  This is why I love what I do . . .    🙂

And Speaking of Fortunes Being Made . . .

I’m referring to my previous post titled “Now is the Time When Fortunes Can be Made…”  I had just bought a darling three bedroom, one and a half bath foreclosure on a quiet cul-de-sac, and I was pretty excited about it.  I purchased the house for 35K and knew I’d have to put about 5K in it to get it in rentable condition, but all the homes around it were valued (according to Zillow.com) at about 80-85K.  What a great buy!

So the rehab is now finished, and I was actually under budget on the rehab, which is a nice surprise.  Thanks to a tip from a good friend of mine, I was able to buy some of the items I needed from the Habitat For Humanity Re-Store.  It’s a big warehouse in downtown Indianapolis, and when people are redoing their kitchens, baths, or just want to get rid of some furniture or decent appliances, etc., the Re-Store will pick them up and re-sell them. 

I was able to purchase a couple of bath sink vanities with sinks and faucets, a stainless steel double bowl kitchen sink, some laundry room cabinets, all for less than half what I’d have paid at Lowe’s.  What a deal!  From here on out, I’ll be shopping there first.

This kitchen had no cabinets or counter tops when I bought the house.

The tile above the counter top area was still intact, so I bought cheap, unfinished cabinets and stained and varnished them myself.  The counter top had to be ordered but only cost $200.  The guy I had helping me charges me $20/hour for his time and he does great work . . . however, he works full-time so I had to be patient.  He did the work for me late in the day or on the weekends. 

But as you can see from this “after” picture, my patience paid off.  The kitchen and the rest of the house look fantastic.

In fact, it looks so good I’m going to put it up for sale for two months. I checked the comps in the area, which are comparable homes which are on the market or have sold over the past year or so, and 1) the neighborhood is very stable, not many houses come on the market and 2) when they go up for sale, they don’t take long to sell.

My strategy will be to list it for only two months.  We’re heading into winter, which isn’t a great time to sell a home.  Two months are plenty of time, and I know it will rent quickly for at least $850/month, which will give me a 12% return on my investment, according to the worksheet I’ve included in my book, The Landlord Chronicles. 

But my investment strategy has always been to pay off debt, and own everything free and clear.  I just don’t like debt.  But when you own 27-30 units, debt is unavoidable.  So I live with it.  But I always have my eye on the long-term goal.  And if I can sell this house for a reasonable, under-market price, (maybe 70K) when I only have 40K in it, that’s a hell of a profit in a couple months’ time.  I think it’s worth a shot . . .

I’ll keep you posted.  Onward and upward!     :-))

Tax Credit Extended and Expanded

The government was hoping to clear the shelves of lower-priced homes and foreclosures by offering the tax credit to first-time home buyers.  This tax credit of up to $8000 helped somewhat, and now lawmakers have extended the time frame.  The offer was due to expire on December 31st, but has been extended into 2010.  In order to qualify, buyers have to sign purchase agreements before May 1, and close the sale before July 1.  Lawmakers were under pressure from realtors, mortgage bankers and builders throughout the country, who had seen modest improvement in their businesses due to the tax credits offered to first time buyers.  As of last August, about 1.4 million first-time buyers had taken advantage of the tax credit.

To sweeten the pot even more, the tax credit has been expanded to include buyers who  have owned their current homes at least five years.  These home owners will be eligible (subject to income limits) for tax credits of up to $6500.  Of course, these credits are available only for primary residences (not vacation homes), and the home must cost less than $800,000. 

Many argue that expanding the tax credit to include current homeowners will do little to improve the state of the economy.  After all, when you purchase a new home and take advantage of the $6500 tax credit, even though you’re buying a home, you’re also putting your existing home on the market to sell.  You’re merely replacing one with the other.  This isn’t helping the over-supply in the least.

Fannie Mae is in on the assist, however.  It’s offering borrowers who are on  the verge of foreclosure an option to stay in their home and rent for a year.  Rental rates are established by current market rates in the area.  The family transfers title to Fannie Mae for a year, avoiding foreclosure.  This helps the family avoid damaged credit from foreclosure, saves Fannie Mae the costly process, and many people are able to get back on their feet within the year.  One-month extensions are also possible beyond the year point. 

Hopefully, the number of foreclosures will start to decline in the near future.  Coupled with that, there has been a modest surge in home sales due to the tax credit to first-time home buyers; the extension should help the housing market and related businesses in the long run.