Thursday, September 30, 2010

Smoking and Foreclosures

Smoking and Foreclosures.
When I set out to find town homes to purchase, I never thought it would be a health hazard!
The Minnesota adult smoking rate is at an all-time low of 17% - significantly below the national average. Yet of the 5 town homes in or heading toward foreclosure that I recently inspected, 100% were or had been occupied by smokers. Including a beautiful unit I looked at when the owners were there, smoking, as I toured the property.
I realize its a small sample, but 100%? Versus the one town home I looked at recently that was NOT a short sale—and the owners didn't smoke.
Smoke gets into the air ducts, the carpet, stains the walls,etc and its not an easy thing to get out once its there.
The very noticeable effect of smoke on furnishings is its distinct odor that it cannot be removed by ordinary washings. No amount of household cleaning can ever completely remove the odor from fumes emitted by cigarette smoking.
Cigarette smoke fumes cling on to walls and permeate upholstery, draperies, clothes, and other furnishings. Cleaning them will only cleanse the surface but will not remove the deeply ingrained smoke particulates. This is where the damage brought about by long term cigarette and cigar smoking really is.
Sometimes, smoke particles can get inside open pores of walls especially during the hot summer months. Once these pores close in the cold months, the smoke gets trapped only to be released in the summer where the pores open again.
Possible reasons for a correlation between smoking and foreclosures? Average pack of cigarettes is $5.53 or $66 a month not going to house payment. Plus higher health insurance premiums.
Some foreclosures happen due to medical problems. Like the owner who was smoking when I inspected their unit. She had a stroke and could no longer work, the reason the home was headed to foreclosure.
When 83% of Minnesota adults don't smoke, I wouldn't consider purchasing a property that will only appeal to, at most, 17% of the market. As well as one that may have hidden property damage from the smoke that will increase my ownership costs. Not to mention not being able to enter a property without having breathing problems. I'm a yoga teacher: breath is the link between your body, mind and emotions. As well as what separates life from death.

Wednesday, September 22, 2010

Obama Care Taxes Real Estate Transactions

Obama Care Taxes Real Estate Transactions!

George and Mable bought their house in 1979 for $70,000. Roll forward to January 2013 and assume the real estate market has recovered. George and Mable sell their home for $270,000 with a capital gain of $200,000.

Their joint income before the real estate sale is $60,000. With the capital gain their reported income is $260,000. They will have to pay a sales tax of 3.8% or $7,600 tax as part of the HEALTH CARE BILL.

Did I say the market had recovered in 2013? What impact will this new tax have on it?

Here is the law:

Taxes: Start date of a 0.9 percentage point increase in the Medicare payroll tax and a new 3.8

percent tax on unearned, non-active business income. The tax applies to individual taxpayers

earning more than $200,000 ($250,000 for taxpayers filing jointly). The Joint Committee on

Taxation estimates that this provision will cost Americans an additional $210 billion in taxes

over 10 years. Effective for tax years beginning after December 31, 2012. (Sec. 9015 and

H.R. 4872 Sec 1402)

This applies to interest, dividends, annuities, royalties and RENTS.

Check it out for yourself. Its buried on page 42 of this report:

And this link as well:

Tuesday, September 14, 2010

T-Shirts and Townhomes

T-Shirts and Townhomes

As the temps drop I reach into my closet for a long sleeve shirt to bike to Yoga. Despite the emphasis on the spiritual side of our Yoga program at Maple Grove's Hindu Temple, as shown in today's Star Tribune, ,regular yoga practice reshapes your body. The shirt fit differently so its time to go shopping.

I don't like shopping for clothes. It more fun to shop for rental townhomes. But the process is pretty similar: its about first determining the proper criteria to even decide to try them on, and then using all your senses to determine if its a good investment for you.

I have very specific criteria for both townhomes and t-shirts. For townhomes I run some quick numbers to see if they make financial sense before I bother to look at the units. Once I choose to inspect the property, my senses kick in to high gear as I can determine a “no” as fast as I can determine the shirt doesn't fit.

Sight. I looked at a townhome that had really cheap vinyl siding that was filthy! Without even looking inside this tells me the HOA isn't taking good care of the development. Even the rear deck looked tired.

Smell. That the owner smokes is obvious the minute I walk in the door-and turn around and leave. Smell may also indicate mold or mildew. The one benefit of being allergic to mold is saving money on mold inspections as I gasp out the door!

Sound. Looked at a townhome in a desirable area. Good schools, jobs nearby, great access. Home was in great condition. But the deck backed a busy road and it was really noisy. I think traffic noise is something people get used to once they live there a while—but a tenant will also have that same first impression and likely find a quieter place to live.

Fit. The floor plan. Three bedrooms and only one bath? Won't consider it. No master bath. Skip. One car garage is a deal killer for me for 2 reasons: limits your renters/future buyers to a one income family, making it harder to financially qualify. Two: many townhomes don't have basements and people have a lot of stuff they want to store in the garage. Even a single person prefers a two car garage. I may waive these criteria if its a really prime location with limited supply where people will overlook these things. But for your typical suburban location these features are what the market expects.

Feel. I dislike clothes shopping because I'm so picky. Clothes have to be comfortable and non restricting. And the same holds true for buying real estate. I can find the unit that seems picture perfect. The numbers work, it looks, smells and sounds good. Like the floor plan and location. But it has to have “good vibes”.

Think about when you chose your current home. Most people will tell you “it felt right when I walked in the door'”. The Yogis have known for thousands of years what our instrumentation and scientists are only now starting to prove: everything is made up of vibration. Hence the terms “vibes”. Just like the smell from the cigarette lingers long after the smoker is gone, emotions linger as vibes after people have moved out. I have many years of analytical quantitative training. Numbers can lie: vibes don't.

I'm extremely sensitive to vibrations, a gift I've learned the dangers of ignoring. An inviting vibe makes me want to hang around. Which is why I so enjoy yoga at the Hindu Temple: the vibes are so amazing that the weight is lifted from your shoulders the minute you walk in the door. It feels like home. I want that same feeling with my investment properties.

When I find a property that meets all of my criteria, but the vibe makes me feel uncomfortable, I leave as fast as I can. Reminding myself about the last time I was so dazzled by the potential profits I ignored the uncomfortable vibe from the home: the City Council turned town my plat with no findings, the owner of the buyer's title company died shoveling snow, and the buyer was in jail the day of the closing.

While our market is flush with inventory, its not any easier to find good properties. In fact, its harder because there are more properties to consider that aren't right and it takes time to rule them out. But I take the time. In this market its much harder to resell a property when you buy the wrong one.

Thursday, September 9, 2010

Transportation Funding?

Transportation Funding?

Quiz: From last year's $814 BILLION stimulus package, what % went to transportation infrastructure?

If you guessed any more than 3% you guessed too high. That is around $24 billion. Which means the other $790 BILLION evaporated like soap bubbles. Yet the debt for it may be around for generations.

As a developer, when you donate cash for park dedication does it pay for the city employee's pension fund? Of course not. There is a concept with park dedication called “nexus”. The fee is directly tied to the use.

Nexus in transportation funding is what Democratic Minnesota Congressman James Oberstar, the chair of the House Transportation and Infrastructure committee, is proposing. The gasoline tax is not a long term viable means to fund transportation infrastructure. When we all drove gas guzzlers and gas was cheap it worked fine. Now, with more fuel efficient vehicles and electric cars the gas tax won't cut it long term.

Jim Oberstar has talked of phasing in a “miles driven based tax” using technology we have now, like what is employed in the sane lane of I-394 that sits on the windshield. And Bill Richard, Jim Oberstar's chief of staff, was also talking about trucks and buses, how much they damage our roads, that they should pay a higher fee. That the roads can't even feel the weight of a normal car. Jim Oberstar has been working on this bill for nearly 2 years now that will totally revamp the way we select, build and fund transportation projects. He has been working in transportation since around the time President Obama was born. But President Obama won't give Jim Oberstar, the time of day. As Congressman Oberstar said in a speech to the Minnesota Transportation Alliance when I was in DC last June, “dealing with our transportation needs is a hill to high for Mr. Obama to climb.”.

When did transportation infrastructure become about short term job creation and not about safety, commerce and improving quality of life for everyone? Transportation Infrastructure is one of the basic needs that government needs to provide. Like Education and Defense. The President's latest proposal, $50 Billion for transportation, is just a drop in the bucket of our national needs. And only double the amount in the last “stimulus” soap bubble bill. And his “funding mechanism”? Closing tax breaks for oil and gas companies and multinational corporations? If these tax breaks don't serve a purpose consistent with our current goals and policies then get rid of them. But they certainly don't look like a stable long term way to fund our transportation infrastructure.

On the local level for transportation infrastructure, congratulations to James. Grube, director of transportation and county engineer for Hennepin County, who was named among the Top Ten Public Works Leaders of the Year in the nation by the American Public Works Association. Jim is a wonderful, humble man who is fond of saying “I'm just a geek.”

And Virgil Hawkins, assistant county engineer of Wright County, was selected Project/Program Manager of the Year by the National Association of County Engineers.

We have wonderful people here in Minnesota chomping at the bit to improve our transportation, including our congressional delegation. And everything is on hold due to President Obama. Don't settle for a short term political solution to our long term transportation needs!

Wednesday, September 1, 2010

Homeowners Associations

Pros and Cons of Homeowners Associations.

My golfing buddy bought 4 bank owned townhomes for rental properties last year. He had them all rented out, positive cash flow. Life was good—he had time to golf instead of mowing lawns on his properties. He believed association maintained homes would be so much less headache, especially for a part time landlord.

Why wasn't I doing this? Even though it took me months to find a little kid slide for Rosie Rabbit (my 3 bunnies go to gymnastics class), I found a townhome in Maple Grove to purchase near my home in a few minutes. It was a short sale, great condition, good vibes. My offer was accepted contingent on bank approval and the contingency for all association homes—10 days to review the Homeowners Association (HOA) documents.

Think of buying a townhome like getting married: your spouse is the townhome unit and the HOA is like your in-laws. My brother-in-law is one of my closest friends. Unfortunately, this Maple Grove HOA was not a good relative.

The first hint of trouble was when I called the number for the property manger listed in the HOA book. The phone was disconnected. Then I realized the book was only updated to 2005 when the current owners bought the unit. Be careful when signing off you received the HOA documents that they are current. If they are not, note that and that the 10 day review clock hasn't yet started.

I contact the listing agent. The HOA of 104 homes is now self managed and all the owner has is an email address. So I send an email, saying my intent to purchase the unit for rental and asked some questions.

Then the homeowner gets a notice for the upcoming annual meeting—and a proposal to ban any new rentals and existing rentals would lose that status when the units are sold. I get the phone number for the HOA president from the City of Maple Grove and I call her.

“Ignorant” would be a kind way to describe this woman. “Did you know”, I asked her, “ by banning rentals the homes in your association are now ineligible for FHA financing and many homes in this price range are be financed by FHA loans?”

“Our attorney didn't tell me that.” They should have used Mary Taylor with Lindquist and Vennum, an expert on HOAs, who told me about the FHA restriction. She asked for Mary's number.

“Well,” I continued. “What happens if one of your owners is in the National Guard and gets called out for a 2 year duty and needs to rent his unit?”

“We can make a case by case exception to that.”

“What if a couple is getting divorced? Someone dies? Someone gets sick. Life happens. You are putting your property owners at risk with this policy. What do you have against renters anyway?”

“We had a really bad experience with a Section 8 tenant. The Met Council owns 2 units in our association.”

“Your policy won't address that anyway as long as the Met Council keeps their units. Why don't you just ban Section 8?”

I was getting no where fast with this lady.

As I was still waiting on a response from the bank, I was going to sit tight and see how the HOA voted on this issue.

I look at another unit in a different city. It was beautiful and had good vibes. The HOA dues were on the high side but there was a pool, clubhouse and tennis courts. I wander around the grounds and come across Matt, the full time on site property manager. He was wonderful. I asked about rentals and he said sure—just supply him with a criminal background check, and the lease for a minimum 6 months that makes mention of the HOA rules. With Matt around I have confidence he would spot troubled tenants.

I came home, wrote an offer on that unit, and canceled the one in Maple Grove. Even if the rental ban didn't pass I didn't want to be married to this particular HOA.

I play golf with my buddy. “How are your townhome rentals doing?”.

“Well”, he said, mine were doing great. I have 2 in the same complex, a 36 unit association. Then someone else bought one to rent, their tenants party until 2:00 in the morning, and now the HOA is voting next month whether to ban rentals .” Now my friend is looking at twin homes that are NOT in an association.

Twin homes have the added risk that your neighbor next door doesn't maintain their unit and yours looks bad. I've owned single family rentals and I don't want to mess with the lawn and the snow and the roof. I don't even like dealing with my own house – though I do like to shovel snow.

So I'm going to see how the HOA thing works, being very careful about reviewing the HOA docs. Experience has taught me that documents don't tell all. You need to talk to people. Ask the listing agent, before I even look at a townhome, if there is a professional property manager. If I like the unit interview the property manager. And talk to the HOA president to see if they plan to keep the same property manager and to make sure there are no wackos like the lady in Maple Grove.

All is subject to change. Which is why its critical to purchase a unit that is good for resale, not just rental.