Reducing the Risk of Buying Foreclosures

Many investors have heard that some of the best deals in Florida are foreclosures.

How Good are the Deals ?

According to RealtyTrac foreclosed properties sell at 38% below regular non-distressed sales.

In October a client bought one of these condo for $ 110,000. The developer sold 2 identical for $ 175,610

Aren`t Foreclosures Risky

Buying foreclosed properties carry some additional risks.

Many of the same questions apply to buying properties that you are unfamiliar with generally:

·         Do the units tend to have certain repair issues ?

·         How much do they rent for ? Are they easy to rent ?

·         Is the HOA (Condo Corp) financially sound ?

·         Are there special assessments or leasing restrictions ?

In foreclosures there is usually less information available to work with and tighter time constraints in the deal.

Template Deals

One solution to reduce uncertainty is to do the same deals in the same buildings over and over again.

In buildings where we actively trade we are aware of all of the above points before an offer ever goes in. This cuts down the live issues to the physical inspection of the unit itself and particulars of the individual deal.

Experience also comes into play in evaluating the unit. If you have replaced the flooring or kitchen in a similar unit it is easy to come up with a relative accurate assessment of work and cost.

Likewise the best way to know about the rental market in a building is to be actively managing rentals. In that case you can know how long it took your agent to rent the last one and how much they got for rent before you buy.

Returns From Florida Condos

The first question that comes to mind when considering any investment is what type of return the investor can expect to make. Advertisers consistently make claims of 15 %-20% cash returns on everything from vacation rentals to trailer parks.

Of course it all depends on how you calculate the returns. We recently received a proposal for tenanted condos at 10% where the return was arrived at simply by multiplying the rent by 12 and dividing by the price. No condo fees. No taxes. No vacancy. No repairs. No management or leasing costs of any kind.

Another online ad boasted 15% -20% but had no particulars at all

If comparing properties try separating the cash flow from any potential for appreciation. You can then compare both on an even footing.

Standardizing Cash Flow

There are standard “rules of thumb” that can be used when comparing different properties. One is static cash flow during a typical month including all known variables:

While this will not take into account vacancy and debt loss and extraordinary expenditures it is useful for comparative purposes between properties of similar class or different classes of properties for that matter.

Potential for Appreciation

Perhaps the best indication of the future comes from both present and past.

Present value

The definitive source for pricing information is MLS data and municipal tax records. When comparing comparable sales, it is important to note not only the prices but also how the properties were sold and by whom.  Distressed sales for example will generally be at lower prices and bulk asset sales for even less still. These atypical sales often skew automated valuations and similar online tools.

In the case of distressed sales there is an immediate increase in value realized as a result of the discount from similar market sales. This initial “kick start” will not be repeated on an annual basis however but will be factored into the overall gain during the hold period.

Conversely many structured investments sell at a premium as compared to local market MLS sales. In these circumstances the property must be held for a sufficient time to “recapture” the premium.

Past value - 50% off

Isn’t it amazing that you can buy a nice property for 50% of what it cost only 3-4 years ago ?

It is more amazing that you can actually buy one for 30% of former value depending on how you buy it.

Prices that properties used to sell for in a more balanced market seem useful for comparative purposes.

Barring any extraordinary factors, it is reasonable to assume that a property that previously peaked at $200,000 will maintain approximately double the value of one that peaked at $ 100,000 given similar characteristics.

If there is an extraordinary variance compared to similar properties there is generally an extraordinary circumstance to be avoided or taken advantage of. Determining which is which is the secret to catching the best deals.

11 Months of Price Growth – Is the Worst Behind ?

Florida Realtors released the November 2011 median condo sales prices today showing consistent and solid growth on the year to date major Florida markets.

In Tampa where most of out business is concentrated the November median price was $ 82,300, up from $ 66,100 in January 2011 for a gain of 24.51%

Onlando also showed string growthin recent months finishing at $ 59,700, up 19% from the $ 50,000 recorded in January.

Ft. Lauderdale backed off slightly in November to $ 75,700, still up 9.8% since January’s $ 68,900.

Miami has been less stable but is up 37% from January to November, $ 91,200 to $ 125,000.

Boca Raton however is up only 4% to $ 79,100 from 76,100 in January.

Complete data sets and graph of historical sales prices since 2007

Commentary

With 11 months of solid growth, the worst seems to be behind the major urban centres (Miami, Tampa & Orlando).  The more vacation oriented areas and south Florida while still up on the year are giving up earlier gains.

In Tampa there was a shortage of available investment grade product in the summer and fall of 2011. We have just started to see some attractive listings and foreclosed product come back.

2012 is supposed to be the start of the comeback according to the Chase Report and a number of other forecasts. For condos according to the statistics it might have already started.

Do Canadians Pay Higher Property Tax on Florida Properties ?

There is a common belief that Canadians pay higher rate of property tax than their US counterparts.

In truth it is investors who pay a higher rate. Only homeowners who live in their Florida homes as a primary residence are eligible for a “homestead exemption” in the form of a discount off the assessed value for tax purposes.

If the property is not a primary residence however the taxes are the same regardless of the investor’s country of origin.

The investor who owns this 1 bedroom unit downtown for example paid $ 648.10 for 2011.

Florida Bulk Purchases Pose Unique Investment Opportunities

Before the market crashed in Florida it was booming with new developments.

Recall all of the stories about partially completed or new condo buildings that were basically empty ?

What do you think ultimately happened to them ?

In many cases the units were rented, either by the developer, the bank that took over the developer, or the receiver that took over bank. In some cases entire newer (2007 vintage) luxury buildings were converted to rentals.

Neither the developers nor the receivers intended to be landlords. Many are happy to exit from the rental market.

One of the biggest markets for these complexes are non-resident investors. An organization will generally buy the units in bulk and then market them at seminars abroad, adding substantial premiums. While the units offer investors a turn-key solution they are generally sold at considerably higher prices that the same units sell for locally. The investor must wait a considerable period to recapture the premium from increased values.

We are happy to offer investors the alternative of subscribing to the bulk purchases directly so as to bring them the lowest possible price: After we select a complex using strict criteria, we solicit for a group of investors to purchase the individual units. We then act for the investor group to acquire the units as aggressively as possible.

How do you know if you are paying too much ?

The same as in your local market: Look at the comparable MLS sales.

In Florida you can look not only at the regular sale prices but also the foreclosure and short sale prices on MLS.

On our subscriptions we can show prices not only below the local MLS prices but in some cases approaching or below foreclosure sales !  All for premium units in superior locations.

Oct 7, 2011 MLS Sale $ 225,000. Bulk price $ 160,000. 

Nov 4, 2011 REO/Bank sale $ 195,000 Bulk Price $ 174,000

Typically, bulk sales will be prices slightly higher than distessed sales but well (20% +) below MLS non-distressed sales to locals.

To find out about any upcoming subscriptions I invite you to call or email.

Canadians Financing Florida Properties

Financing is a key challenge for non-residents investing in Florida.

For Canadians however the prospects are better: Currently there are several bank lenders who will lend on vacation properties and second homes at favourable rates and to 65%-80% LTV depending on lender and applicant. With some if the investor owns a single property and rents it these seems to be no objection.

However the search for bank lenders that will finance non-resident investors continues, condos posing a further challenge. So for those who own multiple units (as most clients do) or where the properties are clearly rentals financing remains an issue. We continue to check with various sources on a regular basis.

Of course there are private lenders who will lend at 9-13% however most find other alternatives.

Regardless of the availability of US financing, Canadian financing remains an attractive and low rate alternative. It is currently possible to borrow at some 3%-3.5% against Canadian real estate while at the same time earning 7% + cash return in the US. The investor pays the Canadian mortgage from the rents, keeps the spread (about the same as the mortgage payment) and owns the property so as to have the benefit of any gain.

Actual example: Recent Tampa harbourfront Condo

Cost investor:                                    $ 90,000 USD

Net monthly revenue                     $ 611.75 USD after expenses.

To borrow $ 90,000 at 3.5%          $ 450.56  CDN (and some of that is going to principal)

In some cases clients have bought foreclosures and resold them at substantial profit within a very short time. In these cases it is almost certainly better to finance the purchase in Canada. Even if US financing were available the fees of having to place and discharge a mortgage on the U.S. property would have been substantial. Short term money is also less expensive here.

Check out today’s rates from our in-house mortgage brokerage

As with many issues surrounding buying US property, there are special benefits applicable to Canadian investors and an equal number of pitfalls to avoid.

To speak to a Canadian Realtor with proven experience investing and managing properties in the US please contact me by phone or email.

Canadian Investment in Florida Surges

Thinking of investing in Florida ? You are not alone. According to the National Association of Realtors fully 25% of all Florida Real Estate sold in the 12 months ended June 2011 was sold to non-residents of the U.S. Non-resident sales totalled $ USD 12.7 Billon. Of these Canadians comprise the largest portion and account for 39% of the non-resident market.

Among Canadians cash is king. While Canadians have a distinct advantage over nationals of other countries in obtaining financing, a higher percentage (91%) of sales were all cash vs. sales to other non U.S. nationals (87% all cash).

While vacation home users still account for the largest share (40%) of the market, down from 50% the year before. Investors are taking an increasing prevalence however and now account for 23% of the market. An article by Florida Realtors on Oct 17^th of 2011 however cites increasing rents and other factors in estimating the investor market as high as 40% of all home sales.

Experience bears out the strength of the rental market: In some condos rents are up 10% over August,2011 for the identical unit. Look for well over 1% of purchase price for monthly rent in quality downtown buildings. 1.5 % is not unusual.

Another factor favouring investment is solid price gains through the first half of 2011 after what appears to be a bottom at the turn of the new year. Since that time median condo price is up 21% in each of Tampa and Orlando and 27% in Miami.  The suburban markets we monitor have latterly however given up most of their earlier gains.

Statistically non-resident sales are typically at higher prices than those to U.S. residents. While the report attributes this to the type of property being purchased it is also possible that non-residents tend to pay more for the same properties. Many non-residents are reticent to participate in the distressed sale market which is seen as more labour and risk intensive. According to RealtyTrac however, in 2011 to date the average bank sale sold at a price 38% below comparable properties (presumably absent distress). Short sales pose equal opportunity for those with experience and the proper strategy.

Whether for investment or vacation however, many believe we have past the bottom. Canadian ownership in Florida has never been stronger. For a copy of the NAR or other reports referred to please contact the writer.

Source: Profile of International Home Buyers in Florida, National Association of Realtors Research Division, August 2011

Foreclosures vs Short Sales

In dealing with Florida distressed sales the most common question (other than “isn’t that risky”) relates to the different types of sales and circumstances under which properties are sold. Actually, a basic understanding of the fundamentals goes a long way to resolving the question about risk:

Of MLS listed properties distressed sales fall into two basic categories:

Bank Sales or “REO”s (Real Estate Owned) in which the homeowner has been evicted and the bank owns the property. The homes have usually been vacant for some time and may have been neglected by a defaulting homeowner for a substantial period before that. They almost always need at least cosmetic and minor mechanical repairs.

REOs are well publicized as the best deals, selling an average of 38% below comparable properties according to RealtyTrac. In demand locations however the statistics do not tell the whole story: In addition to being lower priced, REOs are a fast and sure closing for the successful bidder, often within 30 days. Because of this attractively priced bank sales often generate multiple offers and regularly sell over asking.

The biggest challenge in buying a good REO is often getting the deal. Once you have crossed that hurdle, the successful bidder is notified of acceptance and is given a period (usually 10 days) to do whatever inspections they deem advisable. During this period the buyer can generally elect to terminate the contract without penalty.

“Short sales” are the other form of distressed sale that are prevalent. In these cases the seller still owns the home but owes more money to the bank(s) than the property is worth. As a result the proceeds will be “short”. The bank(s) have to agree to discharge the loans at less than full value and pay any liens necessary to give clear title

Once an offer on a short sale is accepted by the seller it is forwarded to the banks and interested parties of which there may be several. The various affected parties then start negotiating to apportion the losses, a process that can take months. Once the bank accepts the offer however the buyer is given the same 10 day period as in a bank sale to inspect the property and terminate the contract in its discretion.

Because short sales take a long time and are uncertain many investors avoid them making them some of the best deals. Better yet while the negotiations are ongoing the property comes off MLS and the buyer has control of the contract. The escrow is as little as $ 1,000 and is fully refundable. A prudent buyer can open any number of contracts in a given area and simply pick and choose depending on who comes to the table with the best deal first.

Short sales are usually still occupied by the seller or in some cases come with tenants in place. Because they are being actively lived in they are usually in better repair than comparable bank sale properties. If you can afford to wait and play the numbers short sales can produce some of the best deals.