Real Estate Investing

The month-to-month renter was very proud of the work he’d done in the house to make it habitable.  He had painted and found cheap flooring - the throwaway materials from a carpet wholesaler.  Although the outside of the home showed evidence of wood rot, he tried to keep up the appearance that the house was well-maintained by mowing regularly.

Across the street, his friend had a two-year lease on the home she rented.  She also cared deeply about the house she occupied, though she occasionally had to request a pest treatment to keep the mice and other critters at bay.

Unfortunately both houses changed ownership.  The bank foreclosed on the first home and the second was sold after it had been listed on the real estate market for several months.  Both tenants worried that they had to vacate.  And one of them - JUST ONE - did.

Which one?

If you guess the first tenant, you are right. Because the lease was month-to-month, the new owner (the bank) was able to give an eviction notice and required the tenant to vacate in 60 days.  The second tenant was safe because the lease did not contain a SALE CLAUSE which meant the lease survived the sale of the property, therefore the tenant was not required to vacate the premises at or before closing.  The lease survived the purchase and sale of the home.

Laws may vary state to state and situation to situation, but in a regular sale of a residential listing, a buyer should be aware that if the home is currently rented and there is no sale clause in the lease agreement, then they inherit the buyers until that lease expires.

It was with great interest that I read a post on Active Rain by Ken Cash of Incline Village, Nevada.  He poses the question of rent v. own - a question Realtors regularly face in this market.

This past week, I had the usual buyer who says, ‘why buy?  Shouldn’t I just rent?  After all look at the costs of owning.  Sure the interest rates are low, yes I have good credit and can qualify.  Yep, I have 40+% for the down.  But why?  I mean look at the costs.  I am going to pay $3000 month in payments, the taxes are $19,000 a year, the homeowners association is $385 a month.  OK, I have $60,000 in deductions.  So what?  I can rent this same place for $2000 a month.”

After seeing property taxes of $19,000 per year and knowing my own are under $1500, I think I’d definitely rent, too!

There’s a web site that I won’t say the name of here (not so G-rated name), but it touches on some of the myths of home ownership that are valid.  For example, the writer says it’s a myth to think that when you buy you build equity through forced savings of paying your mortgage.

ABSOLUTELY NOT! That is exactly what home equity lines and continuous refinancings were all about. Spending your savings as opposed to accumulating it and making yourself a “renter with an option to eventually own”.  A person very close to me has just refinanced a 30 year mortgage after 21 years effectively turning it into a 51 year mortgage and unless the almighty intervenes they won’t be paying it off in this life.

I have refinanced my home about two or three years ago and very much regret it.  It was when home values were climbing like crazy, so we thought we suddenly had $40,000 in equity after just two and a half years.  We refinanced and paid off credit cards, two cars, and consolidated our 80:20 mortgage into one mortgage. Now if we want to sell, we’re in upside down because our home is worth only about $20,000 more than when we first bought because of dropping home values.  We plan to ride it out, though.  Or see if our bank can do a refinance at its current value.

Welcome to the reality of the popped housing bubble.

In a very unscientific survey - I talked with a friend of mine who is an apartment manager - I found it fascinating that the jump in home foreclosures did not provide a big boost to apartment and other property rentals. In fact, many companies that specialize in tenant housing saw the foreclosure problem coming and BUILT to accommodate the displaced homeowners in advance.  Some are still building.

Instead of renting, people are doubling up.  They can’t afford their mortgages, much less rent payments, so they’re moving in with family and friends instead of leasing somewhere else.  Between this and the new construction of apartments, some rental communities are struggling to find tenants.  For example, in Phoenix you can find some really great incentives to move into apartments according to the Arizona Republic,

At Papago Crossing Apartments, 4530 E. McDowell Road in Phoenix, Daniels is offering a $99 move-in special that covers a new tenant’s first month, which is fairly typical in today’s market.

The company is also promoting a drawing it plans to have in June for one lucky tenant to win six months’ free rent.

What can a current resident do when they see their neighbors moving in at a hugely discounted rate?  Not a thing.  They are still in a lease obligation until the contract expires.  However, they may be able to renegotiate the terms of their new lease when the first one expires.

Finally, many possible renters may not realize that apartments and other property managers EXPECT renters to have low credit scores…. it’s a sign of the times.  What’s most important is they have the income to pay the rent and they have a good reference from the apartment BEFORE the place they are now living.  (Current landlords may give a great reference in an attempt to get rid of a problem renter).

It’s definitely worth the application fee to see if you can rent before you move back in with Mom and Pop.  You may just find yourself living in a place with a swimming pool and no home maintenance fees!

Photo by CincyProject through Flickr Creative Commons.