All Forum Posts by: Brent Seehusen

California has had a real estate downturn every 11 years or so since WWII.  Right now, we are nine years out from the prior peak so I would expect 3-4 years before the next downturn at most.  My suspicion is that due to the unique nature of the recent crisis that the housing market will stay bullish longer than average.  The reason I think this is that lending standards are loosening much more slowly than they have during prior recoveries. We are just now starting to enter what you might call a "normal" lending environment.

Bruce Norris has the best track record I know of when it comes to predicting downturns and the metric he uses is the CAR affordability index.  When that reaches 17, meaning only 17% of Californians can afford a median priced home, that has generally signaled the peak of the market.  It's predicted the last three downturns:

Notice the numbers for 1980, 1989, and 2005.  These years are just prior to 5-6 year downturns.

Currently, the CAR affordability index shows 31% affordability which means this market still has legs, if the historical pattern holds.  

C.A.R. - Housing Affordability Index

Well after many hours of intense thought, I decided to go with @Dave Fontana's advice. This deal is closing today.

The two main concerns I had were the financing risk and the litigation risk.  After doing a ton of research about the financing implications, I also spoke with somebody that has deep knowledge of situations like this.  My day job is with a large independent mortgage company, so I spoke to our Chief Credit Officer to get his opinion.  He has dealt with literally hundreds of unusual underwriting situations where title was clouded.  In his opinion, the driveway wouldn't prevent a title company from issuing a policy unless it was the neighbor encroaching on my property.  Since it will be my driveway that might be encroaching on the neighbor's property, it shouldn't prevent title issuance as long as the tenants can still access the units.  Therefore, getting a loan shouldn't be a problem.

In fact, the more I thought about things, I started to see it like a couple of the posters on this thread. Nobody knows who built the driveway.  The prior two owners of my property didn't add it and it was there before the current owner of the adjacent lot bought his parcel.  If it's proven the driveway is on his land, then it must belong to him and he can put a fence up to keep my tenants off his driveway if he wants.

As for litigation risk, I don't think the neighbor would gain anything by suing me.  He bought the land at a tax sale for a couple thousand dollars and it hasn't risen much in value since then.  Forcing me to demolish the driveway would not raise the value of his land.  He was hoping to get bought out by the current owner of the duplex I'm buying, but they never came to a deal.  At this point, all the neighbor has is a liability that costs about $50 in property tax per year that he's hoping to get bailed out of.  Suing to remove the driveway would be throwing good money after bad.

Bottom line - I'm getting a 2% deal that doesn't need extensive rehab and already has tenants in place.  There is some risk with the driveway, but after thinking it through the risk seems minimal and at any rate, I'm being well compensated for it.

Thanks again for your thoughtful advice.

@Devan Mcclish @Derek Daun @Wayne Brooks

They used to give 'Surf City' lots away for free if you ordered a set of encyclopedias.

City Looking Up Ways to Seize 'Encyclopedia Lots'

@Dave Fontana

I hear what you're saying and I'm trying to reframe this deal into something that makes sense.  The problem I see is that my plan was to do a cash out refi to free up funds for more acquisitions.  If a lender refuses to lend not only will I not be able to cash out, but my ability to sell in the future is limited to cash only buyers.  After pondering @Devan Mcclish's comments for awhile, even if I get the adjacent land owner to sign over title, I would have to combine the parcels into one for a lender to ignore the encroachment (I think). That's assuming the local CCR's and county ordinances allow me to combine the two parcels.

Therefore, the only guaranteed option to clear title on this property is to demolish the driveway, so I need to figure out if that's something I want to deal with.  I wasn't expecting $5k of capex up front and I'm not sure I can squeeze the seller any further.

Thanks for the thoughtful responses.

@Bob B. The funds are held in escrow, so if the seller refused to return my deposit we would go to arbitration as spelled out in the purchase contract.  Believe me... the realtor knows my concerns and  I will be let her know by tomorrow if the deal is still alive or not.

Thanks @Devan Mcclish

Any thoughts about my ability to get a mortgage? Currently, I'm using a HELOC on my primary to acquire this property 'all cash' but my plan was to refi into a conventional. Would there be title issues when the time came to sell?

I have a duplex under contract that is scheduled to close in 5 days.  Everything was going along smoothly until this morning when I received the sellers' disclosures which noted that the land owner next door believes one of the driveways is encroaching on his raw land.  

In looking at the Zillow aerial view it appears that the neighbor has a case:

The current owner didn't install the driveway and it wasn't disclosed to him that this might be an encroachment issue when he bought.  He found out when the owner of the raw land to the South sent him a letter and asked for $8-9k for an easement or title, not sure which.  

They never reached an agreement and the issue is still floating out there.

Here's an added complication... I signed on off on all contingencies yesterday afternoon and this seller disclosure magically appears in my inbox this morning.  It might have been my own realtors fault for not forwarding it to me but she's being a little vague about it.  So if I decide to back out of this deal the seller might try to keep my $2k deposit and we might end up in arbitration.

The way I see it, it might cost $4-5k to demolish the driveway and that's also the fair market value of the entire vacant lot to the South, not just the strip that the driveway sits on. If I proceed with this deal, does anybody see other costs/liabilities or risks that might go beyond being required to demolish the driveway?

It sure feels like the seller was trying to offload this problem and sneak it past me.  Just for additional context, here are some other facts:

1. The seller bought 6 months ago.  Now wants to sell claiming it was too hard to manage long distance.

2. The seller originally wanted all contingencies signed off in 10 days, but we got it pushed back to 15 days.

3. The seller wanted a 3% deposit instead of the customary $500 or $1,000 for this area.

4. They have generally dragged their feet throughout this transaction, but now that I signed off on all contingencies, I get this surprise in my inbox one day later.

What do you think?  Move forward with additional price negotiation?  Pull out?  What additional risks would I be taking on if I bought this place?

My strategy is to work the real estate cycle by buying for appreciation when the market is cratering and near bottoming out, and buying for immediate cash flow (in areas that offer it) when the coastal market is rapidly appreciating and closer to peaking.  There's no point in buying in an appreciation market if all you have to look forward to is 5-6 years of flat or declining prices.  Think 1979-81, 1989-91, 2005-2007... These were terrible times to be buying for appreciation.  

Instead use those times to load up on cash flowing properties with double-digit CoC returns, so you can still earn while the appreciation markets are correcting. Since cash flow markets don't appreciate much during the up cycle, they don't crash as much during the down cycle. They are also cheaper to get into so you can use the equity from your appreciation market properties to help fund your cash flow acquisitions.

Once the appreciation market is nearly done crashing you can use the cash flow you stockpiled from your insane CoC returns to fund buying more appreciation properties.

Rinse and repeat every 10 years or so.

http://www.ocregister.com/articles/market-652959-y...

I'm not one to put much faith in bullish housing articles, but the sharp drop in market time in February caught my eye.  Usually the Spring market doesn't heat up until March/April but maybe the crazy low rates in January combined with the "summer" weather in February got people excited about buying.

Your thoughts @Francis A. @Clint Kreider ?

@Mike R. ,since this is less passive than a monthly rental, how many hours a week do you typically spend on marketing and other aspects of running this property?