All Forum Posts by: Chris Mason

Some people do it.

If you decide to do it, please talk to your lender if you plan on using her or his services for 'soft money' mortgage financing within the next 2 years.

 There's not all that much accountability for appraisers when we disagree with their valuation opinions, for various fairly good reasons, but there IS accountability for them when they can't show up to work on time to do their jobs. 

Do homebuyers in your area a favor and run him up the flagpole after the deal closes.

> I'm primarily interested in a HELOC for the flexibility of having cash on hand when I find the deal. Then, I imagine I'll pull out the equity of the investment property to pay off and free up the HELOC funds.

That's one way to go, but you would have to wait/bet on appreciation of the investment property in order to do that. And investment property HELOCs aren't a lot of fun.

It may end up playing out like this...

Primary residence: owe $300k, worth $500k.

Open HELOC with $0 balance but $100k credit line.

Find investment property you like, listed at say $375k.

Draw upon HELOC to cover 25% down, closing costs, and a few repairs you want to do. You close on the investment property, but now you have this $100k HELOC that is either an ARM (which makes you nervous) or at an ugly fixed rate (which you don't like).

Now...

Primary: owe $300k on 1st, $100k on HELOC, worth $500k.

Investment property: owe $281k, worth $400k.

Even if you go to 75% LTV on the investment, that isn't enough to nuke that HELOC debt.

However you could refinance the primary, rolling 1st and HELOC into a new first lien at $400k and 80% LTV.

After you close on the investment property, make sure you don't immediately blow an amount of money left over that your lender will want to earmark (but not touch) as "6 months PITI reserves" on fixing it up. If you have a healthy 401k/IRA, your lender can earmark that counting it at 60% of value to "check the box," but really it isn't a horrible idea to have a healthy "oh crap" fund as someone that owns multiple pieces of real estate in any case.

Hello,

Long time lurker, decided to start being active in the BP community.

I'm a lender, of the traditional 'soft money' mortgage sort. 

Investment property purchases are mostly really interesting problems to solve from my POV as a lender. All the extra moving pieces are fun to work on. In particular I also tend to be impressed with the performance of multi-unit properties in my area. Even the sneakiest of sneaky CPAs can't hide that they are often pretty strong money makers when preparing tax returns.

Experienced investors are great clients who appreciate factual statements and don't like BS, which has historically meant that I get along pretty well with them. 

So I started lurking BP to learn about the analysis and thinking that investors do (or should do!) BEFORE the ratified purchase contract hits my desk.

Here's where the "thoughts on 50% rule with prop 13 in CA" comes in.

50% rule: "Over time, 50% of your real estate investment’s income will be spent on expenses, not including the mortgage."

Or, arithmetically:

1. Rental income / 2 - P&I payment = a number.

If "a number" is positive number that you like, take a closer look at the property and run more thorough numbers because you might be onto a good deal.

Intuitively, it makes sense: as rent increases, why wouldn't expenses increase proportionately? If rents go up 10% over a time period, let's be cynical and assume that expenses will find a way to follow. I get it, I like it.

Except that we have one significant expense in CA that cannot go up beyond a certain low amount each year without a full blown amendment to our state constitution: property taxes, thanks to Prop 13.

In California, how do folks account for the fact that one large fixed expense is virtually guaranteed NOT to go up as fast as rents go up when applying the 50% rule? How should they? Prop 13 was rolled out in '78 basically to help long-time-owning grandmas, but has the positive side effect of also greatly benefiting long-time-owning landlords. 

Thanks for your thoughts, 

Chris

> they are "upside down" in the sense in drowning in payments. They want to try to work this out, as their houses have higher value than what they paid.

Am I reading correctly that they have a lot of equity and don't like their current mortgage payment...?

• Sell, and buy a smaller home (or a home in a cheaper location) with a smaller (or no) mortgage using net proceeds from sale.
• Or, if they've been there a while, refinance. The new 30 year fixed loan will be based on the current balance, not the balance when they purchased, so the new monthly payment will be lower. Downside is that they will be back at year 1 of 30 again.

I think you may be overthinking this, my friend. 

Russel Brazil is correct.

Behind the scenes:

When people "shop" lenders, a challenge they have is that CFPB wants us to quote title/escrow fees too because they consider these "loan costs" (even though you will still have title/escrow fees even if you purchase all cash... but that's another argument). 

Here is why that is a challenge borrowers face:

On a purchase, lenders typically have zero control over who title/escrow is or what their fees are. For a lender being sneaky, this is a **very good thing.**

So the folks Russel is describing will quote the cheapest title/escrow fees that actually exist in the entire state, even if it's a call center title company in India that no one in their right mind would actually use (and this **is** a call center / internet lender and not a local, so this behavior is consistent on paper). 

This is not illegal, because those fees are technically available in the state from some hypothetical settlement services provider that you could hypothetically use (if you were hypothetically an idiot).

And you see a nice sexy bottom line number that you find appealing, and pick your lender based in part on "lowest fees," as you did.

Then, a week or two into escrow, the lender "discovers" the actual title/escrow fees (they naturally don't even bother asking for them until it's too late for you to switch lenders, and the appraisal is done, etc, because they don't **want** to discover the actual fees juuust yet).

Because they quoted you "real" title/escrow fees upfront, and because a full thorough audit will reveal that the lender did not "discover" the actual fees until a day or two prior to you receiving the "updated" disclosure, no law has been broken and this is a lawful practice.

I personally go the other way, and quote the most expensive title/escrow fees in my market for purchase transactions. Might go down from there, but it wont go up, and at the end of the day people like me more when I 'brace them' for a bigger cash to close number than it turns out is actually required. 

I'm not going to name any specific LTV because I haven't run the AUS and have no idea what kind of mood your particular situation would put her in. Your lender needs to run it using your actual credit report, and made up income/assets/properties/mortgages that represent where you will be at that point in the future (no rule says you can't ask for a copy of the AUS findings, btw).

But, ya, if your goal is to pull out as much equity as possible then you want to do 1-4 first and #5 and on afterwards. 

I helped someone reshuffle recently where he had six financed properties. For phase 1 he came in with a little money so that as phase 1 closed he had 4 financed properties - that is the moment in time captured, so the 1-4 financed guidelines were the guidelines that applied at that exact moment. 

Phase 2 we did properties 4 and 5 at a lower LTV. Phase 2 started the day after phase 1 was recorded at the county.

We looked closely at what we anticipated them appraising for and planned accordingly, because obviously a given LTV on a property worth a lot more is going to get more money in his pocket then that same LTV on a less valuable property.

Now he's off buying #7 all cash.

Seven simultaneous mortgages with seven simultaneous closings is going to be a helluva mortgage party for you!

I'm going to suggest not locking your rates on any of them until you have back all seven approvals and all seven appraisals. Yes, this will mean your numbers are a moving target.

However:

The odds of all seven appraisals coming back issue free is fairly low, and each of these is going to be conditional upon the other 6 closing at the same time. So it will only go as fast as the slowest one.

You don't want to get bit with rate lock extension fees, so hold off on the locking. Odds are that a few weeks of random market fluctuations upwards to rate will be waaay less than a bunch of rate lock extension fees multiplied by 7 loan amounts.

For the last few years, Freddie Mac has had what feel like are "shadow guidelines."

The guideline will say "4+ financed properties, max LTV is X% for a cash out refi," but then when I run Freddie's AUS it sometimes only accepts it if LTV with a max LTV of Y%. Frustrating, because I can't just tell you what the guidelines say and give you an answer. LTV is where this seems to mostly rear it's head, and that's what your question is in reference to.

We can't use made-up credit reports when we feed a proposed transaction into the AUS. But we can make up properties and mortgages all day long, which is what you'd want your lender to do in this situation. Obviously you wouldn't want your lender to take a formal RESPA application, trigger disclosures, order an appraisal, etc, using any made up info, but there's nothing wrong with your lender making things up based on where you think you will be in six months, and throwing it at the AUS.

> When looking at income, are improvements subtracted from your income like maintenance?

They can be excluded, sometimes.

Would need to thoroughly document that they are one-time expenses. Did you keep receipts and invoices and the like, and because we're about to disclose improvements to the underwriter did you have the correct permits?

Realistically I'm going to guess that we'd be able to get some significant chunk of that $70k excluded, but likely not all of it, depending on what the paperwork exactly says.

Ultimately it'll be an underwriter judgement call based on what 'makes sense.' And this is one where if it were my deal I'd nudge it to the correct underwriter.