Welcome to Apartment Building Trader

As lending guidelines continue to become more stringent, real estate investors are facing new challenges everyday. It’s now more important than ever to have a professional mortgage consultant that has an in depth understanding of lender guidelines and specializes in financing for investment properties.

Below are six important things every real estate investor should be aware of.

1. Loan to Value Changes

Some lenders have recently reduced their maximum loan to value guidelines. Very Few Mortgage Companys can still offer up to 90% financing for stated income investors, however as market conditions continue to deteriorate; this could soon become a thing of the past. With today’s favorable interest rates, we recommend not waiting any longer to take advantage of these programs.

2. Title Seasoning

There are two main issues when it comes to title seasoning. The first involves refinancing an existing property to appraised value. Most lenders require 12 months on title in order to refinance a property based on current appraised value, however, there are still some products available for non-seasoned refinances. Secondly, the length of time the seller has been on title needs to be taken into consideration when purchasing a new property. Lenders will typically require that the seller has been recorded on title for at least 90 days; however, no seasoning is still available on a limited basis.

3. Declining Markets

Foreclosures are one of the driving forces behind most declining markets. There is no standard industry definition of what constitutes a declining market, and is within the lender’s discretion to determine if the appraisal accurately reflects the current market value. If the lender determines the property is located in a declining market they may reduce the maximum loan to valve.

4. Appraisal Comparables

Many lenders are now requiring up to two closed sales within three months and one closed sale within six months. They may also require comparable pending sales validating the market is stable.

5. Stated Income

Lenders are becoming increasingly cautious regarding stated income borrowers. Many lenders want to see three to four times the monthly stated income in reserves. Although these are unwritten guidelines and typically only six months PITI is required, it is the underwriter’s discretion. This is especially relevant when stating income as a full time real estate investor.

6. Holding Title in the Name of an LLC or Corporation

Although there are benefits to holding title in the name of an LLC or corporation, few lenders will allow it. Recently, some lenders are requiring the property being held in the individuals name for a minimum of 90 days before it can be refinanced. This is something to be aware of if purchasing property in a company name with the intent of refinancing it immediately. You should always consult with a qualified attorney or CPA regarding holding real estate in an LLC or corporation.

By Rein Mortgage Co.

“If we don’t learn our history, we are doomed to repeat it.” With that said, let us use the price correction of the residential market as a possible precursor to what may lie ahead for the multifamily market.

Currenty, many residential Realtors are advising clients thinking about selling in the next few years to sell now and list their home for less than what the sales comparables show. This is known as pricing the property ahead of the market.

It has been our experience that Effective Pricing in Multifamily is also beginning to adjust with the changing market. A year and half ago our team would have priced your building as high as 50 basis points higher on the CAP Rate than any sales comparable in the area. Back then, this was the most effective way to price because we were still in a bull market. Inventory was low and demand was extremly high pushing up values accross the charts. Prices would be negotiated between buyers and sellers and the properties would end up selling as high as 25 basis points higher on the CAP Rate than any other recent sales comparables. This meant for multi-family that the sales price would be higher than what most comparables reflected for like properties.

Now, things have changed. Cap Rates have already began to creep back up. Therefore, to Effectively Price and Sell your apartment building you must be sensitive to the changing market and it’s many indicators i.e. Cap Rates discussed in this example.

Today, we advise you to introduce your building to the market no more than 25 basis points higher on the CAP Rate than what the comparables reflect. By the time the negotiation process is over your buildings value should fall right in line with the sales comparables for like properties.

So, if you are on the fence about selling, jump off now and step onto the other side. A common belief we continuously hear is that prices will continue to fall for the next 15 to 18 months. Many believe it will take that long for the price correction to fully adjust. However, this is mere speculation, the down cycle could drag on for much longer, or may pick up mid-year, no one really knows.

Yet, if you are planning on waiting this down cycle out (however long that may be), there is another issue at hand: Taxes.  In 2010, the Tax Reconciliation Act of 2003 will expire. It is expected, that the Federal Capital Gains Tax will adjust from its current 15% to 20% or more. In addition to the Federal Capital Gains Tax increase, there is lots of chatter about tax increases in general and a restructuring of the system. So if prices do begin to rise in the next 15 to 18 months, the tax consequences will be greater and thus eat into profits. -Catch 22 

The Essence of Destiny…

“Watch your thoughts, for they become words. Choose your words, for they become actions. Understand your actions, for they become habits. Study your habits, for they will become your character. Develop your character, for it becomes your destiny.”

It is estimated that the state of California’s budget gap is approximately $14-million and Gov. Arnold Schwarzenegger is expected to announce that California is in a state of fiscal emergency! As the Governor and his advisors’ strategize to find means of closing the gap, one option that is being researched to create more income for the state is revisiting Prop. 13.

 L.A.Times (Full Article)

The Sheik Mohammed bin Rashid Al Maktoum, the ruler of Dubai has been preparing his country for an undoubtable crisis: the dissipating supply of it’s most precious and fruitful resource - Oil. With an inevitable economic disaster at hand, the strategy was to create an oasis in the desert. Thus far, that oasis consists of the Palm Islands - the man-made series of islands which includes residential and commercial development projects to be built over 10-15 years, an ultra luxurious hotel - Burj al-Arab hotel and the $4 Billion, 164-floor Burj Dubai, expected to be the tallest man-made structure in the world.

The Persian nations have been actively seeking other means of revenue to replace the current income they generate from oil. The investment of $7.5 Billion in the largest U.S. bank, Citigroup, is a prime example of how they are expanding their portfolios. They are using the wealth they have generated from oil and capitalizing on a weakening U.S. dollar. Dubai based companies have vested interest in various parts of the United States from the purchase of the luxury department store chain Barney’s New York, to the $5 Billion investment in MGM Mirage in Las Vegas.

Recently, various U.S. Investment firms and Brokerages have stated that they are receiving an increase of calls from Mideast investors looking to purchase U.S. real estate. Other foreign investors are following suit and interest is beginning to stir, the weakening dollar is enticing many to scour the U.S. for opportunity. Many speculate that foreign money will begin to pour into the economy and sustain the falling real estate market. With the pound and the euro overtaking the dollar, the U.S. appears to remain a land of opportunity.

Abu Dhabi invests $7.5 Billion for up to 4.9% of Citigroup.

Mideast Governments and Monarchies Buy U.S. Office, Industrial, Apartment and Hotel Assets.

“The chill spreads to commercial,” were the words printed in the Business section of the Los Angeles Times. The article discussed how the turmoil that plagues the credit market has slowed sales and softened prices for commercial office buildings.

“…with a falling stock market, a shrinking dollar and widespread concern about recession, real estate deals are getting dicer.” - Los Angeles Times, Roger Vincent. (Full Article)

There is a lot of talk about a coming recession and many would argue that the signs are all around us (myself included); higher gas prices, less equity in homes, tighter credit and a struggling dollar. It is evident that as consumers, we are cutting back. Here are the numbers for October sales and the trend is expected to continue.

Retail sales in October grew at a sluggish 0.2%; Furniture/furnishing stores posted a decline of 0.9%; Department stores suffered a 0.5% decline; Sporting goods, book & music stores fell 0.4%; E-commerce declined 1%; and clothing sellers gained a mere 0.1%.

“It is the real-estate equivalent of turning lemons into lemonade. Take a condo project that isn’t selling and turn it into a successful rental -apartment property.” - Dec. 5 2007 Wall Street Journal, Alex Frangos. (Full Article)

Despite the drastic changes that have been happening in the real estate market, there are still individuals out there who are waiting for their pot of gold. I’m referring to those individuals out there who want to get land value for their multifamily property. They believe a developer is going to come into the area and purchase their 6 units on a 10,000 square-foot lot for some “above market” offer that is well above any sales comparables. I always ask these owners if they have gold plumbing or fancy toilets that would justify such a price. Yet, there answer is always “No.” I then ask what justifies their price. The answer I always get is the same, “You can build 9 to 12 condos on this property!”

The days of condo conversions are gone! The Condo market is in distress! The mere word “conversion” scares several investors out there. Many have gambled on these projects and are now realizing a loss.

“Many condo developers are desperate as they fall behind on their payments to banks for construction loans at a rapid clip. Delinquencies increased from 4.1% of loans outstanding in the second quarter to 5.9% in the third quarter.” - WSJ

What we are seeing is a “Condo Reversion.” Reverting condos back into regular income producing apartment units is a strategy that is being implemented across the nation, especially in the hardest hit markets of Florida and Arizona. The Mozaic Apartments at Union Station in downtown Los Angeles are a prime example of this in our own backyard. The 278-unit, 500,000-square-foot complex was introduced to the market as Luxury Condos with prices in the $600K range. After being unable to secure enough deposits, Lincoln Property Co. switched strategies and decided to market the condos as luxury apartments. Mozaic now leases studio, 1 bedroom and 2 bedroom floor plans ranging from $1900-$2700 per month.

Now it appears that others are following suit.

The Los Angeles Times recently posted an interesting Q&A. The expert answering the Q&A was Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University.

Nicolas P. Restinas answers several questions regarding the effects foreclosures will have on the rental market. Restinas states that the numerous owners are becoming renters and creating a high demand for housing, a restrained supply and thus causing a rise in rents.

He goes on to predict a steady rise over the next two to three years and believes that this may extend even further — possilbly into the next five years. He makes note of a slight offset due to the fact that some foreclosed properties will not be sold and converted as rentals. Nonetheless, his overall view is that rents will be on the rise as demand for housing increases! -L.A. Times (Full Article)

Since August of this year, when the sub-prime fallouts caused a ripple of fear felt by most real estate investors, many questions have come to mind. Is the market going to tank?  How long will it take to recover? How far will prices or interest rates fall or rise before it makes sense to invest again? What do buyers, sellers and investors do in the meantime?

Real estate markets by their very nature are cyclical. In Southern California in particular, we have benefited greatly from rapidly ascending property values and tidy profits on relatively short-term investments. How long can this last, is the question. As far as home prices go, here is an astounding statistic. The ratio of housing costs to household income in California is 8 to 1, as opposed to 4 to 1 in places such as Seattle. The national average is 2 to 1. This means that a California homeowner is paying eight times his annual salary for his home. One does not have to be a mathematician to conclude that such upside down economics have to change.

I recently had a very nervous client ask my advice about what she should do with the equity coming out of a property she had sold. Poised to do a 1031 exchange to defer taxes on the gain, she was hearing such horror stories from the prognosticators of doom that she was considering paying the capital gains tax and putting her money into stocks, bonds or even CDs. The fear of making a bad investment decision was beginning to outweigh her reluctance to pay the IRS.

In speaking further with the client, I learned that what she was hearing from her well-intentioned friends and associates had more to do with the downturn in the residential market than in commercial. Since she had sold a commercial investment property and would need to replace it with another investment property to satisfy her like-kind exchange, we started looking at her options and trying to decide which ones held the lowest possible risk, if in fact we are heading into a down market.

As real estate cycles are nothing new, it is helpful to look back and see what types of properties have traditionally held their value in good times and bad. Even in the worst of markets, such as that of the early 90’s following the tax law changes and the oil crisis, there are two property types that have weathered the storms with relative ease. They are well-anchored, multi-tenant retail centers and newer, well-located multi-family properties. Here are a few reasons why this is true.

When the economy is in a slump, consumers still need to shop, and do so more frugally. Whereas the higher-end, pricier boutiques and specialty centers may not be able to hold on, a newer regional or neighborhood center anchored by a grocer, a solid discounter such as Wal Mart or Target, and mid-priced soft goods retailers will fare well. As families become more budget conscious, they are more likely to shop at Target, buy clothes at Old Navy or TJ Maxx, and fix up their homes with products from Home Depot. My advice to the client was, if she is considering putting her money into a retail center, look for one such as the one I just described, where the occupancy is stabilized with creditworthy tenants on long-term leases.

Likewise, when the economy slows, many potential new home buyers will be looking at renting instead of buying a home. This is particularly true at this time with the uncertainty in the residential lending markets. Looking for newer, Class A multi-family properties in infill locations where the job market remains strong is a good investment strategy. As more renters come into the market and occupancy levels rise, rents will rise accordingly, creating greater value. Likewise, there will be fewer competing properties built /as credit remains tight. Therefore, well-located apartment properties would be an equally good choice.

I also reminded the client that one important thing to keep in mind is that real estate should not be considered a short-term investment. There are times when investors have been able to flip properties and make tremendous short-term gains, but these times are rare and probably not a safe bet for the future. A savvy real estate investor will consider the long-term benefits of owning exceptionally high quality real estate, such as retail and multi-family, and hold on to it until it reaches maximum appreciation. How long this might be is anyone’s guess, but a good rule of thumb is somewhere between 7-10 years.

Real estate investing is inherently risky, and never more so than in an uncertain market. Wise investors will look at mitigating the risk, however, rather than pulling out and missing opportunities for future profits. Almost anyone can make money in a boom market. It is more challenging to make money in today’s market, but it can be done.

Written By
Jane Hope, CCIM
Vice President - Sales and Marketing
Contact AptBldgTrader Investment Group for further information about Jane Hope and SCI

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance.  However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.  Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation.  In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. 

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were:  Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner;
Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh.  Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.

Released by : 2007 Monetary Policy Releases