Completed Rehab in Spring Valley

If you are reader of my blog, you will know that our main business is hard money. When I do a hard money loan, I am always thinking of the worst case scenario; that one of my clients is not going to finish the job and I'm going to have to complete the rehab in order to sell the property or rent it out.

I think that everybody needs to put their money where their mouth is so what I decided to do is to buy a distressed property and do a rehab project myself from A-Z. Here is the deal that I put together;

$262,000 - Purchase Price
$49,258.25 - Construction Costs
$449,000 - List Price


The property is a 2,642 square foot single family home. This house consists of 5 bedrooms, 3 bathrooms and an office/optional bedroom. The property was built in 1997 but was very abused since it was built. This lot is zoned RS4 meaning it is zoned for four units. The house has a detached garage that has been converted into a 2 bedroom 1 bath house that can be easily converted back into a garage. This property has an incredible 270 degree view as well.

This property sits on a 55,000 square foot lot (1.27 acres). Most of the time when I see that there is a property with such a large lot, the case is that the lot is not buildable. This particular lot is graded and sits below grade of this house. In theory, if you were to build another house on that lot, you would not be side by side with your neighbors. I like these types of properties because the buyer has the opportunity to possibly subdivide in the future and either build another house or sell the lot. The lot that is attached to this house would sell for $50,000 right now but much more in the good times. This is a potential retirement plan for the person that decides to buy this house.

Here are some pictures of the completed product;

http://sequ.com

New Flip in La Mesa

Here is a new project that is about to receive funding. The rehabber is buying this house as a short sale. He is utilizing leverage from me in the form of a hard money loan.

This property is currently a 2 bedroom 1 bath house. The rehabber is planning to add a master suit and bedroom to this house. Making it about 1,300 square feet when it's done.

The purchase price is about $175,000 and I am doing thew hard money loan at about 80% of the purchase price or $140,000. The rehab is should cost approximately $50,000 and will take about 4 months. I estimate that this property should sell for about $330,000 when it's done.

There is one thing that I really like about this property that does not show on paper but I'm sure will show on the MLS when the property goes for sale. This particular property is zoned for 3 units. I like these types of value adds because it give the perspective buyer an opportunity to make money on the back end. When someone buys this house, they will know that in the future they will be bale to do more with this property. These days no one know what is going on with their retirement plans or pensions, properties like this give the buyer an alternate source of future income.

Take a look at these picture of the before;

I Survived Real Estate 2011 - Appraisal Issues

Last Friday I had the pleasure of attending the "I Survived Real Estate 2011" meeting that was organised by Bruce Norris.

First of all, I have to say that Bruce Noris and his team really do a great job of putting together information and asking the questions that everyone has on their mind. Bruce Norris has a hard money company that is in Irvine that does a lot of the loans that I do, they also have a loan program that they extended to the public where they give loans for 8 years at a lower interest rate with higher points (kind of the opposite of what I do). Even so, at any event that I go to where Bruce speaks, he never pushes his product and I must really commend him for that.

The reason for this blog post is to address a certain topic that was barely touched on by Shaun O'Toole from ForeclosureRadar.com (great site for anyone that is interested in learning about trends of foreclosures or looking to buy properties at the auctions). At the end of the whole evening when the panelists were asked about what they would like to see happen in real estate this upcoming year, Shaun stated that the whole appraisal process is completely screwed up and I agree with him. He stated that if you go into a market where there are no comparables for an appraiser to pick out, they pick the closest comps that they can get and a lot of times the values don't make sense. His idea was to comp out properties not by other sales but by the cash flow that they produce. If you can make sure that the property cash flows with the market rent, then you can decipher the value from the rent that the property will produce. I don't necessarily agree with him on the whole idea but if someone is willing to buy a property based on the cash flow at a certain price, there should be some sort of variance that you can have on the appraised value.

I was just affected by this issue on a certain multiple unit property that I was selling. We went through the whole inspection, appraisal and walk through process and the buyer was completely satisfied with the sale. When the appraisal came back, it came back lower than the sales price and it put a hitch in our sale. Now this property is superior to any comp that the appraiser had on the appraisal report but because there was a value discrepancy according to some HACK appraiser, the buyer was thinking to back out of the sale.

The buyer was agreeable on the sales price based on the market rents of the units and the cap rate until the appraisal came in. This particular property was completely superior to other multi-unit properties in the area yet the appraiser could not bring the value up. There should be a 2% variance on the allowable discrepancy between the appraised value and the purchase price. When you go to buy a car, the loan company has an allowable 20% variance on the purchase price and that is just on a car. When you are buying a property that is in some cases close to a million dollars, you can't stretch even $10,000. This is ridiculous.

If the case is that the appraiser knows EXACTLY what properties are worth what do you need real estate agents for? Why doesn't someone that is selling a property just get an appraisal and put that appraisal in the classified section? The seller can save 5-6% on commissions that way and there is no second guessing what the property will appraise at.

The other problem is that if a bank orders an appraisal, they are held to the  "Home Valuation Code of Conduct" or HVCC. According to HVCC the bank must use a third party company that will order the appraisal for the bank. The bank can not contact the appraiser directly as well as anyone else that is in the transaction. The company that is responsible for picking the appraiser only have a certain amount of choices to pick from (appraisers that have signed up with them). Most of these companies will not give the same appraiser more business than the others so what they do is switch appraisers that they send requests to so that everyone gets their fair share (kind of like communism). What ends up happening in many cases is they pick appraisers that are not from the area to appraise properties. If you are sticking with the current appraisal system, this presents a problem because it's really easy to overlook the railroad tracks that the appraiser is crossing.

In my business, this is not a big deal because most of it is hard money loans but I feel bad for my clients that are rehabbing properties because they are at the mercy of this royalty that we call appraisers.

Thank you for lending me your ear, or rather your eyes, and entertaining an issue that I'm sure many of you have run into.

I would lime to thank Michael Khunis for lending me some ideas for this post.

Completed Casita

Now I have been using the word "casita" very liberally for this particular property. According to dictionary.com this is the formal definition; 

Casita - A small cude dwelling forming part of a shantytown inhabited by Mexican laborers in the southwestern U.S.

WOW was I incorrect for calling this thing a casita all this time!!!! 

This is a really attractive 570 square foot craftsman style house that is located in Normal Heights. This thing was very unattractive when I went to make the loan. It was in desperate need of repair, especially the foundation. 

Here you can see my previous post for this thing; 

http://pfllc.blogspot.com/2011/04/new-loan-in-normal-heights.html

The property is in escrow now and it looks great. This thing is really charming and will be a great purchase for the next people that plan to live in it. 

Take a look at the after pictures, the rehabers really did a great job fixing this property. 

Completed Flip in La Mesa

A few months ago we took on a project to flip ourselves. Although I am in the hard money business and don't really take on many flips, when a "home run" property comes up, I can't help myself but to latch on to it (this was one of those deals).

The property was purchased for about $370,000, we put about $70,000 or work into this place. The property went on the market for $650,000 about a month ago and is in escrow now. 

I'm going to keep this blog posting short because the last one about this property was fairly long winded. 

Please see the completed pictures below; 

Completed Flip in Encanto

Hello all,

I have not had the time to make updates to this blog lately but I have come to realize that the San Diego Hard Money Blog has viewers that are anxious for some San Diego hard Money Deals that have funded.

My last post was about a property in Encanto where the purchase price was $155,000 on the acquisition of a 3 bedroom 2 bathroom house. This house is on the market for $250,000 now.

Well here are some pictures of the completed project:

New Flip in Encanto

Here are the before pictures of a new loan that we gave a hard money loan on in Encanto.

The purchase price was $155,000. The flippers have an estimated $40,000 in repair costs for this property. We did a hard money loan for $125,000 on this property. When the property is completed it should be worth about $220,000.  This is a great price point because it's the low end and the low end sells fast.

The comparable rents on a property like this 3 bedroom 2 bath house should be about $1,500 a month in the area. If I need to take this house back, I will be making $1,500 on my investment of $125,000. After taxes and insurance I will be $1,370 positive every month, this is a $13% cash on cash return.

This hard money loan is paying the investor 10%

Take a look at the pictures;

Winners of the rental economy

By Nin-Hai Tseng, writer-reporter May 25, 2011: 5:00 AM ET

Members of the Rent is Too Damn High Party beware! Residential rental prices are on the rise. Here's who wins in the new non-ownership society.

FORTUNE -- There are still many factors discouraging even the most savvy homebuyers from purchasing a home, but a new class of renters is expected to bring a bright spot to the troubled U.S. real estate market. Prices for rental apartments are expected to rise nationally – by approximately 4.5% in 2011 and up to another 3% in 2012, according to Rent.com.

During the housing boom between 2001 and 2005, prices for rentals fell by nearly 10% as easy credit offered by banks lured many newcomers to homeownership. Since the bust of the housing market, rents have more than made up those declines as more people now question the financial merits of homeownership or simply can't get approved for a mortgage. From 2006 to 2009, rental prices on average increased by more than 15%, according to Moody's Analytics economist Andreas Carbacho-Burgos. Nationwide, the average rent today is $1,360 a month.

Why Buy when you can rent?

Experts predict rents will continue rising.

Christina Aragon, director of strategy and consumer insight of Rent.com, says this is being driven by demographic changes coupled with an improving economy and ongoing foreclosure problems hampering the market for single-family homes. Much of the demand for rentals will likely come from younger people who tend to rent rather than buy. The economic recession pushed many jobless twenty- and early thirty-somethings to crash with friends and parents, but Aragon expects that the improving job market will get them to find their own place. What's more, the number of people aged 25 to 34 is forecast to grow 1.4% per year through 2013, helping drive demand further.

Paying more to the landlord might be bad news for renters, but it could signal that better days are ahead for the overall housing market. Here are a few winners of our burgeoning rental economy.

Builders and developers

Since the bust of the housing market, residential construction has dropped to record lows. But that is poised to change as builders and developers have already begun trying to cash in on higher demand for rental apartments.

Charles Brindell, chairman of the National Association of Home Builders' Multifamily Leadership Board, says he expects apartment construction to pick up to at least 160,000 units this year, mostly in urban areas along the East Coast. This would be significantly higher, given that construction since 2009 has totaled less than 90,000 a year – the lowest in 50 years.

Brindell, also CEO of a Texas-based firm that invests and develops apartment communities, says he's bullish because of the improving job prospects for younger workers. Brindell's Mill Creek Residential Trust is planning to build 3,000 apartment units this year, mostly in the Northeast including the Boston area, Long Island, New York, and Virginia.

However, while a burst of activity in multi-family homes is certainly good news for the construction sector, it is by no means enough to return the homebuilders to their previous level of activity. The NAHB index that tracks builder confidence remains low at 16 -- it was as high as 72 in 2005.

Real estate investment trusts (REITs)

It's not that homeownership is dead, but people are certainly renting more and investors have picked up on the higher demand.

REITs, which invest in commercial properties from office buildings to rental apartments – have outperformed the S&P500 since the financial crisis. In 2010, investments in apartment complexes led gains in the overall REITs market with total returns at 47%. Returns for the overall REITs market was 28%, markedly higher than the S&P500 that saw returns of 15%.

Last month, real estate investment trusts Equity Residential (EQR), headed by real estate mogul Sam Zell, and AvalonBay Communities (AVB) -- both among the nation's biggest apartment owners -- posted higher year-over-year revenue as the companies raised rents.

For Equity Residential, average rent rose 3.6% to $1,400 and occupancy rose to 95% from 94.6% the previous year on properties the company operated for a year or more. Revenue rose by 4%. And AvalonBay reported that revenues jumped 3.7% and average monthly rental rates ticked up slightly quarter over quarter from $1,873 to $1,879.

As of Monday, total returns for REITs were 8.73% (with about seven months to go), outperforming the Russell 2000, NASDAQ and S&P 500. Investments in apartment complexes continued contributing much of the gains.

Overall U.S. housing market

Given that many homeowners are still trying to clean up their messy finances, it might be hard to see how higher rents could benefit the overall U.S. housing market. In theory, at least, renting could become so expensive that it costs less to buy a house and make monthly mortgage payments.

In fact, that's happening already, even if it hasn't yet translated to a return to homeownership. In Moody Analytics' latest list of rent ratios for 54 U.S. metropolitan areas, 29 cities fell into the  "better to buy" category. With many experts predicting that home prices have further to fall this year and with higher expectations for rentals, more cities could end up on the buy side of the buy-versus-rent calculator.

But much of that will likely depend on huge hurdles weighing on the housing market – namely, record foreclosure rates, high unemployment and tighter lending standards for new mortgages. Areas that continue to experience high foreclosure rates and widespread unemployment, such as Florida and Arizona, might find it more affordable to buy than rent. Yet renting will likely be king in more urban areas with more employment opportunities, such as New York and Seattle.

Posted in: AvalonBay Communities, Equity Residential, housing, Macro, National Association of Home Builders,Real estate investment trust

Flip in La Mesa

Unit 2

Front Unit 

Unit 3

Side of 1st unit

If you are a reader of my blog, you know that Priority First is involved in many aspects of real estate investment from hard money loans, to acquisition and now to flipping.  In this particular case, we are doing a joint venture with one of the flippers that I work with.

I found this great deal near the historic down town area of La Mesa.  This is a 3 unit property that I am in contract for at about $370,000. This is a really great deal due to the fact that this is 3 separate buildings that house one unit each. 

The main building is a Spanish Mediterranean two bedroom one bath. This unit was the original structure on the property, it was built in 1934. This unit will be the main part of the property as we will plan to sell this unit to someone that is planning to live in it. The reason that we are doing this is because the house is so charming and the neighborhood is a very nice residential neighborhood. 

The second building is a two bedroom one and a half bath. This unit was built after the construction of the main house, most likely in the mid 1940s. If you look at the picture of the second unit, you will notice that it looks like it has a 2nd story. Apparently the previous owner has put up some stairs outside of the property and had turned the attic area into a loft/additional rental. When the city came, they made the owner rip off the exterior stairs because they were not permitted. The room is still there but now has no access. Due to the fact that it's an existing part of the house, it becomes grandfathered in legally. What we will do is build a staircase inside the property and open up the loft above in order to give this an extra bedroom. When we are done, this unit will be a 3 bedroom 1.5 bath or we might just add another bathroom upstairs and make it a 3 bedroom 2.5 bath.

The third unit is in the back of the property and it is a one bedroom one bath. This is situated at the back of the lot. Normally this is not a great thing because the tenant will need to go through the whole lot to get out to the street but in this case, there is a alley way in the back of the property where the tenant can come in and out as he /she pleases. There is an additional bonus for this unit, attached to the unit there is a garage AND a car port. If the tenant has a couple cars or has some sort of desert toys, they can easily park them there.

As you can see by the pictures, this place has some serious deferred maintenance. We estimate that the property will need anywhere from $80,000 - $100,000 in work to restore it.

I think that once this place is done, we will be able to sell it for about $600,000. In the area there are two bedroom houses that are selling in the $400,000 range. If someone were to buy this property to live in, they would almost cover their whole mortgage with the rents from the units in the back.

The current rents are at $3,250, once we are done with the work the property should rent out for $4,700.