HUD-Owned Homes Expected to Surge

The U.S. Department of Housing and Urban Development is reportedly going to be releasing more of its homes to the market, which could be welcome news to buyers who have faced slim pickings in for-sale inventories.

Over the next two years, experts predict that HUD homes on the market will increase significantly as lenders work through the backlogs of foreclosures and foreclosure reviews.

“The inventory is there, [it’s] just not being released during the banks/servicers review of the loan/mortgage documents,” says Nat Genis, a HUD listing broker in Riverside County, Calif., which is already seeing an increase in HUD-owned homes.

“HUD homes are back,” Genis told HousingWire. “FHA financing went away with the ‘creative’ financing of the 80/20 loans, and now with the increase of FHA financing, these government-backed loans guarantee that if the borrower defaults, HUD will pay off the mortgage, obtain the deed, and re-sell the home.”

HUD-owned homes can be appealing because of the discounted sales price, even though they can be in poor condition often times, HousingWire reports.

HUD had 39,442 homes in its REO inventory nationwide as of Feb. 28, 2013—with 20,536 of those having pending contracts on them, according to HUD.

PositionRealty.com
Office: 480-213-5251

8 Best Markets for Flipping Houses

More investors are rehabilitating homes and looking to sell them for profit, a move known as flipping. RealtyTrac recently evaluated more than 600 metro areas to find where flipping single-family homes offers some of the highest returns based on the investor’s gross profit. The top eight metros for house-flipping are:

Orlando
Average purchase price: $103,701
Average flipped price: $168,677
Gross profit percent: 63 percent

Las Vegas
Average purchase price: $133,198
Average flipped price: $203,945
Gross profit percent: 53 percent

Phoenix
Average purchase price: $146,528
Average flipped price: $210,290
Gross profit percent: 44 percent

Tampa, Fla.
Average purchase price: $79,538
Average flipped price: $113,676
Gross profit percent: 43 percent

Memphis, Tenn.
Average purchase price: $68,318
Average flipped price: $96,870
Gross profit percent: 42 percent

Miami
Average purchase price: $138,064
Average flipped price: $189,291
Gross profit percent: 37 percent

Lakeland, Fla.
Average purchase price: $68,444
Average flipped price: $93,715
Gross profit percent: 37 percent

Nashville, Tenn.
Average purchase price: $108,851
Average flipped price: $146,872
Gross profit percent: 35 percent

PositionRealty.com
Office: 480-213-5251

Builders More Upbeat About New-Home Sales

Builders are feeling more confident about new-home sales, sales expectations for the next six months, and prospective buyer traffic, according to the May reading on the National Association of Home Builders/Wells Fargo Housing Market Index.

The index—which gauges builders’ sentiment on those three indicators—rose three points to 44 in May. Still, it takes a number over 50 on the index to indicate that more builders view conditions as good rather than poor.

All three indicators posed gains in May, with expectations for future sales reaching 53 on the index—the highest level since February 2007, NAHB reports.

“Builders are noting an increased sense of urgency among potential buyers as a result of thinning inventories of homes for sale, continuing affordable mortgage rates, and strengthening local economies,” says NAHB Chairman Rick Judson. “This is definitely an encouraging sign even amidst rising challenges with regard to the cost and availability of building materials, lots, and labor.”

The new-home sector continues to battle against low inventories. It will take time for builders to “re-establish themselves following recession-related cutbacks,” says NAHB Chief Economist David Crowe. “Builders’ view of current sales conditions have improved and expectations for the future remain quite strong as consumers head back to the market in force.”

PositionRealty.com
Office: 480-213-5251

Phoenix Residential Market Report Summary

As you can see from the first chart above, Position Realty Market Index, the first time home buyer tax credit created a great deal of demand in the market similar to the real estate boom from 2004 to 2006. Currently the number of transactions is slowing down due to the lack of inventory but real estate price are continuing to increase.

Since May 2012 (12 months ago), the average sold price has increased approximately +12.6% (up from last month), the average days on market have decreased approximately -18.1% (up from last month) and the number of transaction has increased approximately +3.3% (up from last month). The current average sold price is $232,000 which is back to the average sold price experienced in 2008. Since January 2013, the number of transaction are up approximately +31.6% as we enter the summer home buying season.

The volume of REO purchases since May 2012 has decreased approximately -30.9% and the volume of short sales have decreased approximately -49.9%. The volume of REO purchases are shrinking due the increase in real estate prices, more banks are accepting short sale transaction as opposed to foreclosure and an existing supply of inventory is getting purchased at a faster rate.

Since the May 2012 (12 months ago), the number of homes for sale on the market has increased approximately +7.7% (up from last month). As real estate prices increase, more and more sellers that purchased during the real estate boom are putting their homes on the market to break-even or sell with a small amount of equity. The inventory of active homes are consistently being replenished but purchase prices continue to increase.

As more and more buyers enter the market and as more of the supply of residential homes are exhausted, real estate prices will continue to increase at a faster rate (lack of supply causes prices to increase).Real estate prices are still at an all time low (near 2008 prices), mortgage rates are still at a historical low and the market is improving both in terms of prices and the overall economy. Time to buy is NOW!! Give us a call to discuss your best buying strategy, TODAY!!

Position Realty
Office: 480-213-5251

Phoenix Luxury Market Report Summary

Price in the luxury real estate market in Phoenix typically go up during the winter season and go back down during the summer months. Since November 2012, the average sold price has increased approximately +14.5% (up from last month), the average days on market have decreased approximately -33.3% (down from last month) and the number of transaction has increased approximately +67.1% (up from last month). The average price per square foot is approximately $307 PSF, average days on market is 156 days and 117 transactions last month. The Luxury Market Index shows the real estate boom from 2004 to 2006 created a great deal of demand in the market and the number of transaction is back down to the 2003 to 2004 levels.

As you can see from the fourth chart above, the luxury market is showing signs of improvement. The average price per square foot is increasing; the average days on market are decreasing and the number of transaction are increasing. These are good signs from the market but we will have to see if this improvement continues during the summer months. The improving market is contributed to consumers sentiment that the overall economy has recovered and lenders are becoming more willing to issue jumbo loans to qualified buyer.

Trying to “time the market” for the perfect time to buy is nearly impossible but there is no better time than now to purchase. Real estate prices are at an all time low and the economy is starting to see signed of improvement both in terms of real estate prices and the overall economy. Time to buy is NOW!! Give us a call to discuss your best buying strategy, TODAY!!

Position Realty
Office: 480-213-5251

Condition of The Economy ~ April 2013

U.S. Snapshot
U.S. initial weekly unemployment insurance claims continued to decline. BlueChip consensus forecast indicates growth in 2013 with a modest acceleration in 2014. Credit grew but mostly for non-revolving credit. Total wholesale trade numbers slowed in March but only modestly up from year earlier levels.

Arizona
The trends of the last year continued in Greater Phoenix housing over the last month. Single family listings declined modestly as did the total sold. Normal sales continue to play a larger role in the mix as foreclosures continue to decline. Resale prices continue to increase and now stand almost 25% over a year ago. Days on market continue to decline. This is all good news.

Arizona weekly unemployment total claims have actually increased over the past month. They are, however, still almost 40% below year earlier levels. The Department of Economic Security modestly reduced its forecast for 2013 employment due to issues related to sequestration. The forecast still calls for growth in 2013 and more rapidly so in 2014, yet still slow by historic standards in Greater Phoenix.

National
Initial claims for unemployment insurance have been in a significant downtrend over the last month (this is a positive because there are fewer people filing). Initial weekly claims are down to 323,000 compared to 348,000 a month ago. The Blue Chip national consensus forecast suggests that real GDP will be up a modest 2.0% this year. This is because of the sequestration effect on the second and third quarters of this year. For 2014, a more respectable but still modest 2.7% growth is expected.

Credit outstanding continues to grow (up 3.4% at an annual rate in March). But, the real story is that there has been very little growth in revolving credit (credit card debt). Non-revolving credit (used for items such as cars and light trucks), continues to grow rapidly in response to continued car and truck sales.

Wholesale trade numbers in the U.S.showed modest growth in March compared to February, but are still up 4.7% from year earlier levels. While inventories were up in March, the inventory to sales ratio was up only modestly for the month and now stands at about 1.21 compared to 1.17 a year ago.

Position Realty
Office: 480-213-5251

How to Use Your Retirement Funds for Real Estate

In this articles, we will examine how one can use the tax-deferred money in their retirement plans to take advantage of real estate investing opportunities. This article explains how you can use your 401(k) funds to diversify your portfolio mix into real property.

The 401(k) Plan

First, it is important to understand some basic features of a 401(k) program. The 401(k) is a subsection of the Profit Sharing Plan section of the Internal Revenue Code. It allows for employee deferrals on a pre-tax basis. Employers may make this type of plan available to their employees by adopting an acceptable format forsuch a plan. There are limits of how much an employee can contribute. Adoption of such a plan also permits the employer to match employee contributions and to make profit sharing contributions (at the employer’s discretion).

An individual employee may contribute up to about 20% of annual compensation, to a maximum of $9,500 per year. Employers may make matching contributions (such as 25 cents on the dollar) up to 8% of total compensation for each employee. Sometimes profit sharing contributions may also be made and, under certain circumstances, one may have a combined package of 401(k), match and profit sharing/money purchase up to $30,000 in a given year. All of this is variable, and one rule does not apply for all cases.

If you are an employer, you can design the features of the plan and provide the investment alternatives for yourself and your employees. If you are an employee (not defined as an employer), you are permitted to operate your deferrals and investments as established by your employer. If some of the features we discuss here are not available to you as an employee, you may wish to discuss them with your employer to determine whether they can be adopted by your 401(k) plan. If your present plan does not permit the flexibility we are about to discuss, remember any plan may be amended and restated to make such capabilities available.

How to Use the 401(k) for Real Estate and Notes

After all this, how can the funds in your 401(k) plan be used for real estate transactions? Once you have found out that your 401(k) plan funds can be used for real self direction, and the trustee of the plan also permits such transactions, the rules are simple:

You can purchase assets into your plan which are not prohibited. Real estate is not prohibited. You may not deal with yourself or members of your family (other than siblings).

All Transactions Must Be Arm’s Length

This means that you can purchase mortgages with your plan assets. This means you may purchase real property in your plan for income purposes. While debt-financed properties may be subject to unrelated business income taxes, in almost all investment cases we are aware of this has not applied.

How It Works

How does it work? First, you find the property or note. These are self-directed plans, and no one is going to give you a list of real property to chose from. It’s all up to you. Remember, you take all of the risks and receive all the benefits. Neither the employer or the plan trustee has any obligation to you in a properly designed plan. Second, you request that the administrator of the plan ask the trustee of the plan to purchase the asset you have selected for your benefit in your plan. All this is performed through written documents. Third, the security interest in the asset you have asked to be purchased is perfected for the benefit of your plan account. Income and expenses are allocated to your account.

How Often Can You Do This?

As often as you like. Some people like to buy distressed properties, fix them up, and then sell them. Others buy discounted notes. Some purchase income streams. There are as many options as one can think of, provided you follow the rules.

Typically, employers will use the completely self-directed option for compliance with 404(c) of the code for self trusteeship safe harbor. Some combine the complete self direction along with a number of mutual fund choices, making complete self direction available on a non-discriminatory basis to all employees. There is a cost associated with this.

As can be imagined, the process of purchasing notes and real property is a labor intensive process; the process of purchasing mutual funds in a daily valuation environment is almost fully automated. Your 401(k) administrator can provide you with the costs. If your administrator doesn’t handle complete self direction, there are some that will. It’s up to you, as an employer or employee to ask. You may be surprised at the answer.

Position Realty
Office: 480-213-5251

Upside Deals: Building a Money Pump

The quickest way I know to make significant profits with commercial real estate is to do deals with substantial upside potential.

But first let’s define “upside”. I’m not talking about a paper increase in value due to scheduled rental increases, or replacing “below-market” leases, as many for-sale brochures define the term.

My definition of upside is to unlock hidden potential in a property that creates triple digit percentage gains on investment, provides positive cash flow along the way, and avoids major risks of loss. The upside may come from expansion, redevelopment, or by changing the market position of the property with major improvements.

How do you do that?

It boils down to three critical factors: the local market conditions; good structural bones; and a willing seller. When all three are present the deal is there for the taking, but only if the investor can design and implement the proper structure. The focus of this discussion will be in creating a structure to create and capture upside.

Market Is King

First and foremost is the local market. Regardless of property type, the first rule of real estate investing is we do not make markets—we serve them. A poor market will stop any plan dead in its tracks, so the first priority for any strategy is make sure the area demographics of population, income and employment are in a positive trend. Basic demographic research includes statistics for a three- to five-year period to show the trends. One year’s data is useless. To say a market had a 2% population growth in the previous year means nothing. But if the current 2% increase is up from 5% loss over the last five years indicates the market is turning and worthy of further investigation. With that knowledge we can be confident in seeking out the worst property we can find in a good location, because that’s where we’ll make the most money.

Good Bones

What we’re looking for is the things that can’t be changed being sound. We look beyond the cosmetics to the structural elements, such as foundations and basic construction of the buildings, the systems, and the grounds. If the structural elements are failing, then the property may not be suitable for turnaround without expending more funds than can be recovered. Aesthetics can be fixed.

Unless you are an expert in building systems, construction and environmental issues it is advisable to hire experts to inspect the relevant elements of the property. The cost is negligible when compared to the cost of fixing a mistake, or worse, not being able to fix it. Location is something else that can’t be changed. Don’t fall for the old sales line of “priced below replacement cost”. My first question is always “If given the chance to replace it, would I?” Understand the local market and how it works. A great deal in a bad location is not a deal… it’s a problem looking for an owner.

Seller Motivation and Deal Structure

The final question is to assess the seller’s willingness to help us solve his problem. There are a number of ways to accomplish that, and it takes some digging to get into the seller’s mind and discover his true motivations. Most commonly the property has existing debt. The seller may offer to finance part of the purchase price as a second mortgage. But the property can rarely support a new loan, and that requires the buyer to fund improvements from cash out-of-pocket. That’s hardly an attractive proposition, as the cash flow is usually not sufficient to carry the additional debt of the seller’s note and provide a return on the investor’s capital.

Typically the alternative is for the seller to greatly reduce the price, even below the amount of current debt, or accept a subordinated note with no payments. With those options many sellers will opt to keep the property rather than take the risk for no money. The deal falls apart for lack of an alternative structure. The ideal structure would allow the investor to obtain new financing that includes the funds needed for improvements, the seller to realize some of the upside in return for staying in the deal, and designed so the property produces a positive cash flow. Can that be done? Yes it can, as the following example from my files demonstrates.

The Deal

The deal was a 54-Unit apartment complex, well-located in a great college-town market. The owner had let the property decline to the point that the performance had suffered tremendously. The expenses were high and the income unstable due to the poor condition of the property. The buildings needed new roofs, windows, kitchens, paving, heat pumps and new appliances. The existing NOI (net operating income) was about $145,000. The owner had existing debt of $950,000. The improvements were estimated to cost $350,000. The as-is appraised value (and the asking price) was $1,200,000, reflecting an as-is 12% cap rate. The projected value after the improvements was estimated to be $1,750,000, using the same NOI but a lower cap rate (8%) to reflect the completion of the capital improvements.

The Structure

We came up with the following deal structure: In lieu of down payment, the seller would get 20% equity-only (not profits) interest in a new LLC that would acquire the property. The LLC would obtain a bridge loan for $1,300,000 to pay off existing mortgage and fund the repairs.

The Plan

Our investment plan was to complete the improvements over a six-month time frame, and then raise the rents to market levels. In the first year we planned to complete the improvements and raise the rents for upcoming leasing season. No occupancy increases were projected, but the combination of higher rents and lower expenses were projected to significantly increase the NOI and cash flow. In the next two years it was expected that the occupancy would also rise to an average 97%, excluding collection and vacancy loss, further increasing NOI and cash flow. In the third year the LLC would refinance the property based on the increased income, and use the proceeds to pay off the seller’s LLC interest. At that point we would own 100% of the LLC interests and could either hold the property or sell at will.

The Result

The improvements were completed and the rents were raised $50-$75 per unit in the 1st year. Annual increases of $20 per unit were implemented in following two years. The occupancy increased from 90% to 98%, raising the NOI to almost $190,000, and the cash flow to $80,000. Now it was time to turn on the money pump. The property was refinanced with a $1,500,000 loan based on the higher value. We used $200,000 of the proceeds to pay off the seller’s interest and the LLC kept about $50,000. The loan was at a lower rate and longer amortization, so the cash flow actually increased to about $90,000. We held the property for two more years, and then sold it at a 7.6% cap rate on the next year’s projected net operating income of $186,200, yielding a price of $2,450,000.

Over the five year hold period the investment produced:

3 years cash flow @ avg. $80,000 = $240,000
2 years cash flow @ avg. $90,000 = $180,000
Refinance proceeds– $250,000
Equity at sale– $1,050,000
Total cash and equity $1,670,000
Less seller’s interest –$200,000
Total Gain–equity and cash $1,470,000

If you were paying close attention, you realize now that the deal was done with no money out-of-pocket from the buyer, but with none of the risks of over-leverage.

Position Realty
Office: 480-213-5251

Phoenix Luxury Market Report ~ March 2013

Since March 2012 (12 months ago), the average sold price has increased approximately +11.7% (up from last month), the average days on market have decreased approximately -28.6% (up from last month) and the number of transaction has decreased approximately -7.5% (up from last month). The average price per square foot is approximately $322 PSF, average days on market is 185 days and 86 transaction last month. As you can see from the fourth chart above, Luxury Market Index, the real estate boom from 2004 to 2006 created a great deal of demand in the market and the number of transaction is back down to the 2003 to 2004 levels.

Unlike the rest of the Phoenix real estate market, the Luxury market is trending sideways but the good news is that prices are no longer going down. We will not see an immediate increase in prices until consumers feel the economy has fully recovered and lenders become more willing to issue jumbo loans to qualified buyer.

Trying to “time the market” for the perfect time to buy is nearly impossible but there is no better time than now to purchase. Real estate prices are at an all time low and the economy is starting to see signed of improvement both in terms of real estate prices and the overall economy. Time to buy is NOW!! Give us a call to discuss your best buying strategy, TODAY!!

PositionRealty.com
Office: 480-213-5251

Signs That Inflation Is Nearing

The Cost Of Living – COL in the U.S. rose more than projected in February due to the biggest jump in gasoline prices in more than three years. The retreat in fuel expenses this month signals inflation will hover around the Federal Reserve’s goal.

The consumer-price index was up 0.7%, the first increase in four months and the biggest since June 2009, a Labor Department report showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg called for a 0.5% rise. The surge in gasoline accounted for almost 75% of last month’s total price advance.

Bloomberg reports that the cost of living in the U.S. rose more than projected in February due to the biggest jump in gasoline prices in more than three years. The consumer-price index was up 0.7%, a Labor Department report showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg called for a 0.5% increase. The Federal Reserve Bank of New Yorks general economic index eased to 9.2 this month from 10 in February, which was the highest since May. Betty Liu and Sara Eisen report on Bloomberg Television’s “In the Loop.”

Gasoline Prices – Households may get relief as fuel expenses are cooling. The average cost of a gallon of regular gasoline, which surged to a four-month high of $3.79 on Feb. 26, was down almost 10 cents to $3.70 on March 13, according to AAA.

Food Costs - Food costs increased 0.1% after being little changed in January. They were up 1.6% over the past 12 months.

Inflation’s Bite – The rising cost of living gain squeezed paychecks. Hourly earnings adjusted for inflation fell 0.6%. They were up 0.1% over the past 12 months.

Overall consumer prices increased 2% in the 12 months ended in February, after a 1.6% year-over-year gain the prior month.

The core CPI also rose 2% from February 2012, following a 1.9% advance in the prior 12 month period.

There are two factors on the sideline that will inevitability unleash inflation:

Interest Rates – rates will rise. For now the Fed has been artificially holding down rates and the pressure is building and starting to show in consumer prices like gas and food. Rates have no place to move but up and that will dramatically affect all sectors of the economy, especially housing.

Money Supply - The Fed has been flooding billions of Fiat dollars, much of it electronic and all diluting the underlying value of the US dollars. All of it is backed by the credit and good faith of the government, not by a tangible asset such as gold. History is full of lessons of this practice going astray.

PositionRealty.com
Office: 480-213-5251

Results No Excuses

HUD-Owned Homes Expected to Surge

8 Best Markets for Flipping Houses

Builders More Upbeat About New-Home Sales

Phoenix Residential Market Report Summary

Phoenix Luxury Market Report Summary

Condition of The Economy ~ April 2013

How to Use Your Retirement Funds for Real Estate

Upside Deals: Building a Money Pump

Phoenix Luxury Market Report ~ March 2013

Signs That Inflation Is Nearing

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