Tuesday, March 25, 2008

Multi-Unit #1 Is Still Alive

Despite my earlier pessimistic outlook for this deal coming to fruition, it appears it now stands a good chance of happening. There is a group of investors that will be coming in to fill the funding gap that the loss of the mezzanine loan created. They still have to raise the money from their investors, but they have analyzed the deal and have a "high confidence" it can be done.

I know some readers don't feel this is a good deal. Everyone is entitled to their own opinion, of course, but it has been pointed out that the setup of this investment has some significant advantages over other similar investments by other groups. The principals of this project have structured it so that the bulk of the cash flow goes to us investors - the 9% preferred return. The principals have not marked up the purchase price of the property and do not earn a commission on the purchase price. They charge a 2% fee simply for their time and effort in putting this together. Further, after the 9% return to investors, the profits will be split 50 / 50 between the investors and principals. However, if the annualized total ROI drops below 20%, the profit split changes to 70 / 30 in favor of the investors. In short, the principals make much more money if the deal performs as they projected.

Of course, the biggest point of dispute is how accurate those projections are. If there is no profit, no one gets anything. While some people don't think the projections are realistic, I trust the principals and their knowledge and experience in this area.

Escrow is now set to close at the end of April. I look forward to that happening!

Monday, March 24, 2008

Possible Trouble For Arizona Landlords

This is an email I received from the ACLU today and it applies directly to all landlords in Arizona.


Currently, the Arizona House of Representatives is considering a bill that, if passed, would restrict housing for Arizonans, and cost the state of Arizona millions to enforce.

HB 2625 would prohibit landlords from renting to undocumented immigrants. Private landlords are not trained in immigration-related document review and verification, yet this bill would compel them to assess whether a tenant has presented proper documentation. Studies show that the elderly and disabled populations are much more likely to lack government-issued photo identification, like drivers' licenses, or ready access to birth certificates or citizenship documentation-so, if passed, HB 2625 would have potentially devastating effects on lawful residents.

In addition to punishing landlords by forcing them to act as federal law enforcement agents, HB 2625 would also violate the property and contract rights of both landlords and tenants, as well as federal fair housing and privacy laws, and disproportionately discriminate against Latino families.

HB 2625 raises serious concerns about procedural due process guaranteed by the Fourteenth Amendment to the U.S. Constitution. To date, not one anti-immigrant housing ordinance has withstood constitutional scrutiny anywhere in the country.

The Arizona House of Representatives will be voting on HB 2625 next week, and we need you to urge your Representative to VOTE NO on HB 2625!

Please contact your local Representative by clicking here

Tell your Representative that HB 2625 is:

  • Bad for landlords
  • Hurts U.S. citizens & authorized visitors
  • Constitutionally suspect
  • Imposes major enforcement costs


I know as a landlord, I would not want to get involved in determining the citizenship status of my tenants. At the very least, what if they have fake documents? How am I supposed to detect those?

Tuesday, March 18, 2008

Time Is Running Out For Rental #1

Well, the potential renter never panned out and my rental is still empty. There have been some other people who looked at the place and, according to the property manager, the problem is with the trashy neighbors. Not only do they have a habit of throwing their trash into my yard, but apparently they don't keep their yard too tidy either. So, in an attempt to fill the place, I've lowered the asking rent back down to $750, which is what it was rented at before. I'm waiting two weeks. If it isn't rented by then, I'm also going to list it for sale. I really would hate to sell it because, even at $750 a month, it had some nice cashflow. But if no one will rent it, the cashflow isn't there.

Thursday, March 13, 2008

Fear Mongering Comes To Mortgage Commercials

Mortgage companies must be hurting for business right now because I was shocked at a commercial I heard on the radio this morning. In an attempt to get people to refinance their mortgages, it used fear-mongering tactics that would have made the President proud.

The ad started off by saying that private mortgage insurance, or PMI, is required on all loans where the loan to value ratio is greater than 80%. That's true. However, the ad then went on to talk about the declining housing market and how homes may now have lost equity. Your loan, the ad warned, may now be above an 80% LTV! Don't be hit with an added PMI charge on your mortgage - refi now!

First of all, there is truth in the statement that the housing market has declined and equity may have been lost, thus pushing your LTV over 80%. But, and this is the deceptive part, I have NEVER heard of any lender that regularly appraises the houses their mortgages are based on to make sure they stay above 80% LTV! Never! If the loan is being paid on time, no one at the bank is going to ask for a new appraisal. The ONLY time a new appraisal will be obtained is if the house is sold or the loan refinanced. In short, PMI will not suddenly be added to a mortgage that does not already include it, despite what the ad implies.

When you stop to think about this ad, it doesn't even make sense. If a loan truly did rise above 80% LTV due to falling home values, and the current loan did not have PMI, then refinancing it would only serve to ADD PMI, no matter what, because a new appraisal would be obtained, thus verifying the higher LTV.

Tuesday, March 11, 2008

Update On Multi-Unit #1

Time for an update on my potential multi-unit investment.

The short version: I don't think it's gonna happen.

The longer version: The buyers have not raised enough money to be able to buy the place. They were looking to get a mezzanine loan for about $500,000 and the lender they had lined up decided not to make the loan. They are looking for a new loan or additional investors to provide the additional capital.

Escrow was supposed to close at the end of February, but the sellers agreed to extend it. The seller is willing to work with us, but I imagine there is going to be a limit to their patience.

If the deal doesn't happen, the buyers will look for other investments that might be available for slightly less. The investor's funds are currently in an escrow account earning interest. Should this deal fall through, we can get our funds back or elect to take part in any other opportunity that might be found.

Tuesday, March 4, 2008

The Case For Foreclosures

I was pleasantly surprised to see an article titled The Case For Foreclosures on Slate.com the other day. Finally, someone was taking a critical look at the recent desire by Congress to "do something" about the wave of foreclosures sweeping the nation.

The article doesn't touch on one of my pet peeves, namely that capitalism, by definition, requires some businesses to fail, or in this case, some loans to default and go into foreclosure. Capitalism is sort of a Darwinian financial system where only the strong survive. Whenever Congress or someone else steps in to prop up an industry, they are subverting free-market capitalism.

The article does, however, rightly point out that someone's loss is someone else's gain. There will be many families who are now able to afford a house they otherwise couldn't, all because another families had to get kicked out. Saying this does not mean I have a lack of compassion. It's merely the facts of Financial Darwinism.