Verification Of Mortgage (Updated)

I got an email from my mortgage broker last night regarding the refi of Rental #1. He said the current mortgage for Rental #1 does not show up on my credit report, so he would need me to fill out a Verification Of Mortgage form.

There are two reasons the loan doesn't show up on my credit report: 1) It's in the name of my LLC, not me personally. 2) I have not reported any payments to any credit agencies. If you recall, this is a mortgage from one of my LLCs to another and no bank is involved. I haven't reported any payments, although I suppose I could if I wanted to establish credit for my LLC.

Anyway, I emailed the broker back and asked what exactly a Verification Of Mortgage is. After all, I've already sent him a copy of the actual mortgage, complete with the county recorder's filing stamps on it. I've also already sent a payoff letter to the escrow company. I can't imagine what other verification he would need. No response so far.

Update: Turns out a Verification Of Mortgage means the new lender wants something from the old lender showing that the payments were made on time, the loan is current, etc.

Property Management Blues (Updated)

Rental #1 is the first rental I've had that I've used a property management company for and I must say, I am not happy so far. I've had several occasions to contact them about various issues and their response has not been good. Whenever I call, I am unable to get the person I need to speak with on the phone the first time I call. I have never had a phone message returned and I only manage to talk to someone on my second or third attempt at calling. I have tried email, but even that takes two days for a response. Furthermore, the email address I was given seems to be a personal email address instead of a business one, so I have misgivings about using it. And finally, the item that bothers me the most - I still have not received my rent for April. It is the 24th of the month and it still isn't here. I was told the bookkeepping department was behind this month and that my check was put in the mail on the 18th. I called yesterday when the check was still missing. It was after hours in Oklahoma, so I got voice mail. I left an upset message and said I wanted a call back immediately. I still have heard nothing.

Update: Of course, the day I post this, the rent check arrives..

Slow Week

Not much progress will be made this week on the purchase on Rental #2 or the refi of Rental #1. The mortgage broker I am using for both is on vacation. I did mail back the paperwork on Monday, and he said his assistant would be working on it, but it's been my experience that the paperwork just sits around until the main person gets back from vacation.

I did get a call from the escrow agent asking for a payoff amount on the mortgage for Rental #1. I faxed that to her this morning.

Other than those things, I don't think any progress will be made this week. I hate that.

Foreclosures Skyrocket In Phoenix Area

The Arizona Republic is reporting that foreclosures in the Phoenix area have increased ten times over last year's number. Delinquencies are also at a four year high, so the problem may get even worse.

The reader's comments after the story are interesting. Several people say they will be picking up deals as they become available.

Zillow Ordered To Cease Estimates In Arizona

Zillow.com, the real estate value website that has been the talk of the town for the last year or so, was ordered by the Arizona Board Of Appraisals to stop providing "zestimates" of property values in Arizona. They claim the company needs an appraiser license to do this. The full story can be found at the Arizona Republic website.

This could be a huge blow to Zillow, especially if other states start following suit. On the other hand, I can't believe no one at the company saw this coming. I'd be willing to bet they have some sort of plan to deal with it.

Personally, I don't use Zillow. I've found their valuations to be a bit inaccurate. Of course, I last looked at them in detail a year ago, when they didn't have much data in the Phoenix area to work with. Supposedly, their estimates will get better with more data.

Loan Doc Errors

Last night, I got the loan docs for the refi of Rental #1 and the purchase of Rental #2. There were errors galore:

• In both packages, the last digit of my wife's social security number was wrong.
• In both packages, the Rate Lock Agreement does not list a lock-in start or expiration date.
• In the package for Rental #2, my wife's last name is spelled incorrectly on every page. (Since she has the same last name as me, I don't see how mine could be right and hers wrong.)

I spoke with the mortgage broker this morning and he said his originals are correct but the copies made by his assistant and sent to me are incorrect. I find this doubtful, but whatever... He said to go ahead and manually correct the errors and sign and send the papers backs. I'll go ahead and do that. Since these are just applications and not actual recorded documents, I'm fine with that. However, if these errors show up on future paperwork, there is no way I will sign them until they are corrected.

Louisiana Update

I got another update on the Louisiana project. As of my last report, it was decided that a second mortgage would be placed on the property and the money from that would be used to make payments to the first mortgage holders, while the payments on the second would be delayed. I'm pleased to say that now all the players have agreed to the terms and the deal is now in escrow. We expect to have our payments be resumed before the end of the month.

Things Are Progressing

Things are moving forward on both the purchase of Rental #2 and refinance of Rental #1. I got the good faith estimates from the mortgage broker and, as some had suggested, the interest rates were a tad higher than I planned. The rate on the loan for Rental #2 is 7.25%, not the 6% I had used in my projections. I'm not too concerned with this however. Based on the existing $439 a month rent, the higher interest rate drops my ROI down to 10.9%. However, the lease is up June 1, at which time, my property manager believes I can easily raise the rent to $460 or more. At $460 a month, the ROI goes back to 13.4%, close to the 13.8% I estimated originally. Escrow is scheduled to close on June 1 or sooner, so I may be able to get the higher ROI from the start.

The rate on the refi of Rental #1 is 6.75%. The figure I used for my calculations was 6.25% and the difference is less than $25 a month, something I can live with easily.

Both loans are standard 30 year, fixed rate mortgages. I asked the mortgage broker to look for 5/1 ARMs, since he thought some could be found with interest rates a quarter point or so lower, but with the small loan amounts, no one was interested.

Rental #2 Purchase Moving Forward

I had a nice, long discussion with my property manager this afternoon and was impressed with what I heard. I first confirmed that she had spoken with the tenants in Rental #1 and told them they now need to send payments to them. She said she both sent them a letter and spoke with them in person. They were still processing the rents checks for this month, so she couldn't tell me if they had paid yet or not, but I think they probably have.

I mentioned that my lease specifies that the tenant is responsible for pest control and minor plumbing leaks. I told her I already had sent people out to spray for bugs and to fix the leaky toilet, so I would pay for those, but I wanted to make sure she knew that in the future the tenant would be responsible. She said I could send her the bills and she would go after the tenants for reimbursement! Well, assuming it was their fault. She said she wouldn't make a tenant pay for a leaking toilet if the problem was a 30 year old wax ring that needed to be replaced, but if it was leaking because they were abusing the toilet or something, she would. I am torn though as to if I should bother with it this time. The former owner told me she thought the tenants might move out if they were forced to pay. Maybe if it was closer to the expiration of their lease, I wouldn't have second thoughts about this.

As part of the above discussion, the property manager told me a story about how she went after someone to collect what they owed. I guess one of their renters moved out while still owing them $60. To collect, the PM wrote a fake letter to a collection agency and cc'ed the old tenant. The letter gave the tenant's information and asked what else was needed to move forward with garnishing their paycheck. She said the day after the old tenant received the letter, she came in and paid the bill :-) Now in this case, the PM didn't actually mail the letter to a collection agency, but she did say she has a relationship with one in case it comes to that.

I also mentioned Rental #2, which the current owner is just moving to their management company. I told them I had that property under contract and hope to close on it soon. It is a Section 8 rental and the lease is up on July 1. I told her I'd like to raise the rent from $439 to $460, which is about a 5% increase. I spoke with the Section 8 agency in Oklahoma yesterday and found out the procedure to raise rents. First, you must give 60 days notice to the agency. The 60 days must commence on the first of a month, which means I'll need to get the request in by May 1. Once the request is received, the Section 8 worker assigned to your property will do an evaluation of neighborhood rents and see if your new rent is comparable to what other properties in the area are going for. The management company deals with Section 8 all the time and my PM said there is a fixed percentage increase that is allowable that does not trigger a new comp study and she usually raises rents one percentage point less than that. She didn't know the exact amount off hand, but thought that it was more than 5%. So it looks like I'll get a rent increase shortly after buying the property, which will help my ROI.

The PM also mentioned that she had four properties for sale right now and asked if I was interested. I'm close to tapped out right now with the purchase of these two properties, but I will keep them in mind. I'd like to get to up to 4 properties to get the discount they offer on management services.

I also (see, I told you it was a nice, long chat with her) spoke briefly with her about a mutual acquaintance...

Another Rental Property Purchased

I picked up another rental property over the weekend, again in Tulsa. Here are the details: 3 bed / 1 bath, 908 square feet with a carport. The tenant is a Section 8 renter with the rent 100% paid by the state of Oklahoma. The lease is up in July and I'm investigating if the state will pay a higher rent at that time. An older appraisal valued the place at $48,000. I'm getting it for $40,000. I've got a 60 day escrow on this one and will be putting down about $10,000. Numbers below are monthly.

Rent:	$439.00
Taxes:	$43.42 ($521 / year)
Prop. Mgt:	$60.00 (10% of rent, but a $60 minimum)
Insurance:	$20.33 ($244 year)
Maintenance:	$20.00 (approx. 5% of rent)
Est. Mortage Pmt:	$179.87
Profit:	$115.38
Annualized ROI:	13.85%

The mortgage payment amount is estimated and depends on what interest rate I'll be able to get. I used a 6%, 30 year loan for these calculations. I've run the numbers with interest rates from 5.875% to 6.125% and with a $10,000 and $15,000 down payment and all results are acceptable to me. (The ROIs range from 11.47% to 14.13%.) With these down payment amounts, I won't be paying PMI, so I don't have to worry about that cost.

I like this deal because the property is already in the Section 8 program, so I don't need to go through all the headache of getting it approved. The rent is 100% paid by Section 8, so I don't have to worry about late payments from the tenant. The drawback is that I am limited as to how much I can charge for rent because Section 8 will only pay the prevailing rate for a similar property in the neighborhood. But then, that's pretty much how all rents are determined. The difference is that with Section 8, I'll have to wait for neighborhood rents to increase and then follow suit rather then be the one leading the rent increase :-) Another plus is that Section 8 inspects the property every 6 months and makes sure the tenant is keeping it in good condition.

The property management company charges 10% of the monthly rent with a $60 month minimum. I'll be paying the minimum and you can look at this two ways: On the one hand, right now I'm paying more than 10% in management fees each month. On the other hand, 100% of any future rent increases go directly into my pocket and nothing goes to the management company - at least until the rent reaches $600 a month. I also inquired about volume discounts with the PM company. In order to get a discount, you need to have at least 4 properties with them. At that point, their monthly fee drops from 10% to 9% and the new tenant fee drops from 75% to 65% of one month's rent. I told them I only had two properties so far and she mentioned that they have some older owners who may be looking to sell their properties. I told them I'd be interested and to let me know if anything comes up.