Love Austin Homes Investing Blog

Hi, I am a beginning investor looking at Austin. I have been investing for almost a year in my home market of Salt Lake City, but I want to expand my operation. One of my mentors told me that the secret to finding great markets is researching them. Having no clue where to start, I started seeking out market analysis companies, but was shocked at the cost of most market reports. Then I found this company called Redfish Emerging Markets (redfishemergingmarkets.com). Has anyone heard about them before?

Answer

I’ll assume you are talking about buy/hold rental property. If you were talking about flipping properties, you really need CMAs for prospective properties (to determine value) and you also need to know a little about how easy the property will be to sell, and how marketable it is relative to other properties in the area. I recommend a realtor for that purpose. I use my realtor, Shenoah Peck.

For Rental Property…
For starters – I DON’T recommend investing in a market you don’t thoroughly know. You can spend any amount of money you want trying to determine what cities to invest in, but the truth is that the devils are in the detail. Case in point – droves of California investors bought reports over the last couple of years touting Austin (and central Texas) as one of the hot hot markets to buy rentals in. So in they came, by the bus load. The problem is that many of them bought properties in Round Rock, Hutto, Pfluggerville, Del Valle, Leander, and various new construction areas. When you buy in these areas, you compete with builders. Builders offer financing…often sub-prime financing. Areas filled with sub-prime borrowers have lots of foreclosures. Areas with lots of foreclosures go down in value and not up. Bottom line – lots of California investors got wiped out because they bought in the right city but wrong subdivisions.

Now, you can buy reports telling you where, in general, to invest. Before you spend your money, however, I suggest looking at the free reports done that are all over the internet. If you email me, I will send you one from Wells Fargo, for example. This recent report, which is fairly sober overall, basically says that Austin and several cities in Texas are among the best places to invest nationally.

Keep in mind, however, there is no such thing as a national market analysis report that you can buy that will tell you EXACTLY where to buy within a market. The only way to get this right is with a lot of local expertise. You need to develop that expertise or hire someone that has it. My partner and I, for example, have that expertise and we buy properties for ourselves, and for our clients, in very specific neighborhoods. Our own sizable rental property portfolio has appreciated at 5-12% (12.5% average) annualized, for example.

Phill

I have a question.

A friend of mine and his brother live in a house that one of them bought a few years back. The owner of the home is wanting to move to a nicer house, and the renting brother is interested in buying the home from his brother.

To me it seems that they could cut down on closing costs significantly just by hiring an attorney to write up the contract (anyone know what that costs?).

I was also wondering what else they could do to make the transfer as painless and minimal cost as possible. I don’t think assuming the loan is something they would want to do, as it would probably hinder the credit of the owner making it harder to buy a nicer home.

Does you have any suggestions of what these two could do?

thanks
Andrew

ANSWER

Anyone can download contract at TREC, fill it out, negotiate an offer, and give it to a title company with some earnest money to “receipt” it. for their, the title company will sechule the rest and process the transaction with all parties. If you want copies of contracts, look at my links section at: http://www.loveaustinhomes.com/real_estate_investing_links

Now – keep in mind that this can get a little complicated, which is why most people hire realtors to handle everything. In general, realtors are like insurance – you really don’t need them unless something goes wrong, in which case they are priceless…

A few other ideas for doing this creatively…

The very cheapest simplest transaction would be for the one brother to simply sign a general warrantee deed giving the property to the other brother who would then simply continue making the payments on the loan indefinitely, or until sometime in the future when he refinances. This is sort of a “poor-man’s subject-to” transaction that can work for family to family transactions. The beauty of this is that the total cost of the transaction is just the $25 filing fee for the warrantee deed. The cons is that sometimes relatives don’t trust each other with each other’s loans.

The next slightly more complicated transaction would be for the first brother to sell the property to the second brother with owner financing. In other words, same as above, except the seller collects the loan payment from the buyer and makes sure the underlying loan is being paid. The pro here is that the seller is more protected and could even sell the home at a different price and interest rate than the existing loan. If that is done, it’s called wrapping the loan – “a wrap”. The con here is that the seller still needs to service the loan and the buyer has some risk that the underlying loan payments might not be made.

Either of these transactions could also be done at a title company to provide title insurance, further increasing the cost of the transaction, but providing insurance that the ownership and amount owed on the property is as expected.

Phill

I was wondering if anyone had any referrals of a inexpensive survey company that can do a Elevation stud for a certificate (Flood Insurance).

Thanks,
Tim

ANSWER

Tim,
My experience is that any survey company can do this. At least every one I have talked to.

Phill

I’m looking for recommendations for attorneys who are well versed in
SEC regulations as they relate to raising capital from private investors.

Of course, if you are an attorney who has this expertise, please chime in.
Iain

ANSWER

Iain,
One of my mentor students, and a fellow club member, John Greytok, is an attorney that has done extensive research in this area. He can be reached at 512-474-4770.

Regards,
Phill Grove

A friend sent me a scan of an article regarding Texas House Bill 2207
(signed by the governor this summer) that goes into effect Jan 1, 2008
which appears at first glance to say that Sub2 deals now REQUIRE the
consent of the lender.

I’m not positive if attachments come through on this message board, but
it is the file “House bill 2207-2.pdf” OR you can find it by clicking
here (or copying and pasting into a web browser):

HYPERLINK “http://www.dadsbuyhouses.com/Housebill2207-2.pdf”http://www.dadsbuyh­ouses.com/­Housebill2207-­2.pdf

The article makes it sound like all of us that purchase property sub2
are screwed.

But I read the bill differently. Attached as “HB02207F[1]­.pdf is the
actual text of the bill. It can also be found here:

HYPERLINK “http://www.dadsbuyhouses.com/HB02207F”http://www.dadsbuyh­ouses.com/­HB02207F[1].pdf

MY interpretation is that we are all OK, but I really want to hear other
people’s interpretations about this bill.

****** THE FOLLOWING IS MY INTERPRETATION AND IS NOT LEGAL ADVISE.
PLEASE SEEK THE ADVICE OF A LICENSED ATTORNEY BEFORE ACTING FOOLISHLY ON
ANY OF THE INFORMATION PROVIDED ******

My interpretation is that this act obligates the SELLER (not the buyer)
to notify the buyer and each lien holder of certain risks involved in
taking a property Sub2.

However, a violation of this law by the Seller (most of whom won’t know
about the law), does not undo the conveyance. You can see that in
Section 1: (b): “A violation of this section does not invalidate a
conveyance.”

Furthermore, the Seller becomes exempt from the law if either of these
conditions are true (in our case, both or true, but in your case, at
least the second is probably true):

1. From Section 1: (c): (10): “where the purchaser obtains a title
insurance policy insuring the transfer of title to the real property”

2. From Section 1: (c): (11): “to a person who has purchased,
conveyed, or entered into contracts to purchase or convey an interest in
real prperty four or more times in the preceding 12 months.”

So from MY interpretation, this law was meant to keep scammers from
selling property with liens and without title insurance to buyers who
are unaware of existing liens. That’s why it exempts “experienced
buyers” or where you got title insurance…­. because that person SHOULD
be aware of liens and it becomes a buyer beware kind of issue.

Would love for your comment. Thanks!
Daniel

ANSWER

Thanks for contributing this Dan!

Fellow Investors,
I do a lot of Sub-To deals. I do them in an LLC and WITH title insurance. I know many investors that buy sub-to by conveying the property into a land trust and not utilizing title insurance. This is quick and cheap, however, I believe these transactions are very problematic on many levels, and are soon probably illegal.

The reason this law was promoted, was because, unfortunately, there are a lot of crooked investors, and we as investors (and unlike realtors, builders, etc.), have done nothing to regulate our own industry. Unfortunately, some investors have been running scams where they buy properties sub-to, and then turn around and sell them with a down payment and wrap-around mortgage. The investor pockets the down payment, and keeps collecting the mortgage payments from the new buyer, but then stops making the underlying mortgage payments. Eventually, the underlying mortgage lender forecloses on the unwitting buyer – who looses their home and down payment, after making all their payments and having done nothing wrong. The original seller also gets screwed, because their credit is ruined. The crooked investor, however, just moves on to the next location.

The problem with this law, is that, although well intentioned, it probably does little to solve the problem. Crooked investors are probably not going to get title insurance or sell with title insurance, and are certainly not going to tell the lenders what they are doing. By the time the deals unravel, the money to fix things will be gone.

The investor is under assault in Texas. We now have laws on the books or pending that ban lease-options, now restrict sub-to deals, will make rehabbers have to register, certify, and warrantee homes that are remodeled. There are additional laws in effect or pending effecting leases and landlords. As people get burned by unscrupulous investors, more laws will be enacted restricting everything we do, until there is not much left.

Across the nation the situation is growing worse with special taxes restricting flipping, and onerous certifications limiting a homeowners ability to evict a non-paying tenents, and even the possibility that in the future, if you sell a home with owner financing to someone that declares bankruptcy, the court could retroactively reduce the sales price you sold the home for, what is owed to you, and restrict your ability to foreclose, even if you are not getting your payments. These laws get enacted in one state or another, and then get shopped from state to state with little resistance.

I believe, ultimately, we are either going to have to regulate our own industry, or the government will do it for us. Realtors, builders, lenders, and just about everyone else in real estate has already gone through this. Sort of like I always tell my short-sale clients – “you need to come up with a plan, or the creditors will come up with one for you, and you probably won’t like the plan they come up with”

Phill

Austin Business Journal – 3:07 PM CST Wednesday, February 28, 2007

A bill recently filed in the Texas Legislature could essentially nullify an Austin city ordinance that restricts home sizes in certain neighborhoods.

Rep. Edmund Kuempel (R-Seguin) has filed House Bill 1736, which would require that cities only regulate home size on one of three criteria: impervious cover, footprint of the lot or floor-to-area ratio. An ordinance passed in 2006 by the Austin City Council limited home sizes on all three criteria–an effort to stem new construction not in keeping with the character of Austin’s more established neighborhoods.

Ned Munoz, director of regulatory affairs for the HYPERLINK “http://www.bizjournals.com/search/bin/search?q=%22Texas%20Association%20of%20Builders%22&t=austin”Texas Association of Builders, says the group has been lobbying for legislation that would ease restrictions on new home construction. TAB also supports another bill filed by Kuempel, House Bill 1732, which would require a municipality to give proper notice before changing housing regulations. Munoz emphasizes that both bills would apply to municipalities across the state that might try to place so much restriction on new construction that it takes away from property value.

“What has happened with this ordinance is that people who own land are very limited on what they can do with it,” Munoz says.

The ordinance is essentially a one-size-fits-­all law, says Munoz, putting the same restrictions on both small and large lots and penalizing the owners of smaller lots.

“This is impacting property values,” Munoz says. “People will not be able to get the same price for their land.”

Both bills are currently pending before the HYPERLINK “http://www.bizjournals.com/search/bin/search?q=%22Land%20%26%20Resource%20Management%20Committee%22&t=austin”Land & Resource Management Committee.

“The impact of the bill is to gut the ordinance,” says Austin Assistant City Manager Laura Huffman. “This won’t allow us to regulate in areas covered by the ordinance.”

Huffman says the city council put together a 16-member taskforce comprised of people representing development and neighborhood interests. “That strikes a balance of those who are interested in remodeling homes, constructing new homes and protecting the character of our urban neighborhoods.”

Huffman says the taskforce held meetings for five months before making its recommendations to council in June 2006. The ordinance’s implementation was delayed until October to give the city time to get the word out to stakeholders and ensure staff was prepared to process requests based on the changes.

Huffman says Kuempel has asked the city to participate in discussions on the bill, but she adds that the city is opposed to any legislation that would gut its own ordinance.

Kuempel could not be reached for comment.

ANSWER

The formulator makes some good points: 1) It’s not fair for the city to change building codes on existing land owners retro-actively, and 2) Such rules make land difficult to develop and/or less valuable

Phill

Phil:

I am writing to you directly for several reasons. I have been reading your posts for almost a year. My impression is that you are one of the most successful investors in Austin and your emails are always polite, articulate, very informative and to the point.

I moved to Austin last year and just made a verbal offer that was verbally accepted yesterday to a FSBO for a home that will be my residence. Unfortunately, the seller does not have any contracts, thus my reason for writing to you.

Since I have purchased many homes in other states, both for personal and investment reasons, I don’t think I need an attorney, but I do know I need the proper contracts. I have a copy of the Texas Real Estate Commission contract, but was wondering what specific contract and amendments you recommend and if you could share a copy of what you would use.

If I do need an attorney, Charles Brown was highly recommended. Is there another you would recommend? Also, I was planning on using Brett Reed or HomeCritic as my inspector. I noticed you use Eduardo Reash with Wells Fargo. Any other inspector, banker or mortgage broker you would recommend? Any other suggestions?

I know I am asking alot of questions of you this morning, and please know that I thank you in advance and appreciate your help greatly.

Sincerely,

Teresa

ANSWER

Theresa,
I only use the standard TREC contract. On some occasions, I use a subject-to contract (for assuming a loan) or other special purpose contracts depending on the situation. For your application the standard TREC contact sounds perfect.

As for addendums, you will need an HOA addendum if there is an HOA, and a 3rd party financing addendum, if you are getting a loan. There are other addendums also listed on the TREC contact that may or may not be of interest.

I always recommend you also have the owner fill out and complete a TREC seller’s disclosure form. It states what is and is not included, and what works and what does not work. It’s for both of your protection. It also requires the seller to list known problems and past inspections.

In general, a realtor will complete all of this for you. By not working with a realtor, you may miss a thing or two depending on your experience. In most cases there will be caught by the title company and/or lawyer. If you need a lawyer and a title company all in one, you might try Wally Tingley and Associates. I don’t use them, but a lot of investors in your situation do for exactly this sort of deal.

I also do my own inspections, but I’ve heard of Brett Reed and HomeCritic, and both are good.

As for lenders, Wells Fargo is great for this, but if you want to look at a larger variety of products, I would suggest a mortgage broker – Carrie Richards 512-258-4605. She can make any loan happen.

My only significant remaining concern for you on this is that you are paying the right price. FSBOs are notoriously miss-priced. Usually overpriced. Please make sure you get some advice as to what the home is worth in the event that you don’t have the expertise to determine this on your own.

Regards,
Phill Grove

I’m looking for referrals for a home inspector, particularly one who
is experienced in inspecting high-end property.

Also, the property has a septic system. Should the inspector be
capable of inspecting this, or would you recommend a separate septic
inspection. The system is only about 5 years old.

Thanks,
Iain

ANSWER

Iain,

I suggest you call several and hire the one you like the best.

My own experience is that I have found inspectors to be pretty un-helpful with the high-end homes. They are really good at finding the long list of little things that go wrong with typical homes, but getting a list of $5-10K worth of broken toilet handles, missing collar vents, bent flashing, and cracked windows is probably not going to give you much helpful information regarding what will really affects the resale value of the very high end home.

When you interview these guys, see if they will give you a flat rate. The last one I hired charged by the hour and it took him two full days because of the size of my home.

Phill

Does anyone have any thoughts on how having a high voltage power
pole/line in the backyard would affect the sale of the house?

Thanks,
Rob

ANSWER

Rob,
It’s pretty subjective. Most people find them unsightly. Like being on a busy street or having a view of a power plant.

There are many web sites that tout that power lines are a health hazard and even cause cancer. There are many studies that say that that’s all a bunch of baloney. Regardless, there is some health stigma around power lines that will reduce your market a bit.

I think with all of the these issues – in a hot sellers market, these sorts of things get overlooked. In a buyer’s market some will care and some won’t causing the home to sit around a little longer and perhaps requiring a bigger discount to get it sold. If you are buying one of these – make sure you get the ‘additional’ discount on the buy.

Phill

I have found what I think is a good deal on a house
for my personal residence. It is a KB home. Has
anyone ever purchased a KB home? Please give me your
HONEST opinions.

Thanks,
Michael

ANSWER

Michael,
I have bought and sold dozens and dozens of KB homes though my short sales. As a general rule, they are the least expensively built homes of any homebuilder and therefore offer the highest size per dollar. They are generally a low-end builder, however, they do have several ‘grades’ of homes, some being higher quality than others. Although there are some web sites that claim that KB is low quality, I would say that the quality is average.

The fact that they are cheap, does not in itself mean they are low quality. Most of the cost savings comes from the fact that they have streamlined the building process – their costs are lower.

The bigger problem I have with KB homes is that they DO NOT HOLD VALUE well at all. KB sells to first time home buyers, people with less than perfect credit, and has several zero-down purchase options. While this seems great for buyers, it results in neighborhoods full of people that have credit problems – resulting in extremely high foreclosure rates in KB neighborhoods. Obviously this means everyone in the hood is toast because resales are constantly competing with foreclosures and REOs.

I know of a KB neighborhood, for example, where 100% of all homes sold are foreclosures/­REOs. This is not an exaggeration. The non-foreclosure homes are priced so much higher than the foreclosure homes (because they are priced to the loan pay-off), that they never sell (causing some of them to eventually fall into foreclose).

Now, would I buy a KB home? Yes, I would, but it would have to be significantly discounted (NOT NEW!!!) to typically $45 to $55/ft or whatever the cheapest REOs have sold for in that neighborhood. I would also prefer their higher-end neighborhoods – you can tell these immediately by the amount of brick/stone on the exterior. Lower end KB is 100% hardy plank or vinyl, while the higher grades go up to 3 to 4 sides brick on the exterior with upgrades on the interior.

- LAH Blog