BiggerPockets

HR 1728 and Age-Based Discrimination

Saturday, June 20

Yes, I have read the Bill in its entirety.

Three specific things things to worry about:

1. How self-financiers are about to be regulated as per the definition in 101 (3)(E)). This is age-based discrimination as I will outline below.

2. How landlords will be regulated according to Section 220.

3. How Congress is washing its hands off of its responsibility of the creation of boom-bust in Section 701.

I have a niche client base that insists on 0% financing for purchase. That kind of financing could only be negotiated with owners who are in full control of their properties. According to Census 2000, 33% of owner-occupied houses were "free and clear" which is about 30-40 million houses, depending upon whose estimate you use.

HR 1728 Sec 101 Definition (3)(E)) contains built-in age discrimination. Most of the sellers who own their properties "free and clear" are 52 years-old and above. Even though writing to senators will get some attention, it is not going to do much good in terms changing the language.

This is what will work.

- Find at least one 55+ owner in each state who has one or more "free and clear" properties and wants to sell. If you cannot find them in each state, then find a few in CA, TX, FL, NY, IL, PA, VA, etc., where most of the American population lives.

- Get him/her to lodge a discrimination complaint with their states' departments which handle age-based discrimination. For example, in Connecticut you they would contact Commission on Human Rights and Opportunities http://www.ct.gov/chro/site/default.asp

- Let the attorneys on states' payrolls fight the silliness in HR 1728.

Also, get AARP involved. This article may be relevant to educate people in the pervasiveness of age-based discrimination in America. http://researchnews.osu.edu/archive/agediscrim.htm

More on the Fallacy of Down Payment.

Sunday, June 14

I wrote this forum post some time ago. 

There were some questions so I am responding to them here.

The mess we are in is because of too many people got houses at high DTI when they bought the houses AND many people ended up having high DTI after they bought because they lost all or most of the income due to bad economy.

For example, if Big Three were hiring like crazy in Detroit, would people we walking away from their houses or would the be bidding the prices up?

No money down DOES NOT mean that anyone off the street just shows up and demands to get an ownership of a property.

Let's break it down.

A potential buyer wants to buy a $1,000,000 property.

He DOES have $200,000.

The property has 1.2 DSCR (Income 20% above mortgage payments)

The bank requires him to "donate" that $200,000 to the seller.

Bank finances $800,000 and may require that the buyer have 6 months of reserves, which is less than $40,000.

The bank could have required the seller to hold $200,000 second which is junior to banks $800,000 anyway. So what does the bank care if it has to foreclose on the property and the second lien position? It cares because of the "skin in the game" mentality.

Let's say, as soon as the closing happens, 30% of the tenants leave, furnace blows up, etc.

Unless the buyer is experienced enough to handle such things, he is going to be up the creek without a peddle. The six month reserve may turn out to be 2 months reserve.

If he can survive, then he is fine. Otherwise he will be foreclosed upon and the bank will destroy not only his credit and equity but also the valuation of the property.

Even if nothing major happens, the buyer will just be working with less than 20% of the total cash flow he collects.

If he wants to upgrade the building to increase rent, he has to produce that money from somewhere else.

Banks like to lend money to people who already have money stashed away even after walking the tight rope they want you to walk on.

The better solution is to avoid working with banks and work with private money. If you can find debt partner, you are doing great. You avoid all of those points and pre-payment penalties.

In the case of equity partners, you may have to share some of the profits with your partners, but you will have the peace of mind while you make money off of one projects and go to the next.

You may want to read my blog on the $6.6 trillion funding source.

The $6.6 Trillion Funding Source.

Sunday, June 14

According to the National Association of REALTORS (NAR), as of February 2009, the size of “owner occupied” residential real estate is $20 trillion, and the size of commercial real estate is $5 trillion. According to US Census Bureau 2000 Census, 33% of all “owner occupied” residential real estate in the United States was owned “free and clear.” That is, there were no mortgages on those houses.

This author understands that due to the real estate boom and bust in the past 8 years, the very houses which were “free and clear” may have  been financed, and the houses which had mortgages on them may now be “free and clear” due to mortgage pay off or foreclosure. So until Census 2010 is released, we can safely assume that up to $6.6 trillion worth of “owner occupied” residential real estate is available “free and clear.”

According to the Federal Reserve, at the end of the third quarter of 2008, the mortgage debt on commercial/multifamily properties was $3.4 trillion. This means that the owner equity in commercial properties is around 32% which is almost the same as the “free and clear” number for owner occupied residential properties. 

Additional drill down into a property's title data, in terms of age of the owner and the length of ownership could reveal potential candidates for “free and clear” residential and commercial properties. It is safe to assume that older owners would have more equity in their properties, and may entertain alternative financing proposals compared to younger owners who may have a mortgage and are not able to make independent decision. Also, a retirement age owner may entertain monthly payments over a period of time instead of selling the property and then wasting his/her money with Wall Street.

It is interesting to note that according to Census 2000 33.4% of the US population was 45 years old or older which means that today at least 33% of the US population is 54 years old or above.

According to the NAR, In 2008 approximately 5 million existing houses out of 125 million (according to American Planning Association) were sold in America at $198,000 = $976 billion. At 5% interest rate Americans paid 48 billions to banks.

I have not yet found data to estimate how many of those 5 million existing houses were "free and clear". Let's say that only 20% of those houses in the market were "free and clear" and that only 1 in 10 of those sellers could be convinced to enter into a seller-financing arrangement. 

That's 100,000 houses sold for around $19.5 billion. At 5% interest, we are talking about $976 million which those 100,000 owners could make at an average of $9,760/year. That is a fairly reasonable amount to complement social security income instead of risking their capital with Wall Street, or making 1.75% which is the average percentage banks have been paying to their depositors.

Note: Low 30's seems to be a good percentage. So if you want to wing a number, 30% seems to be a pretty good bet. LOL!