HML #30 Started

Things have picked up lately. After a period of low activity, it seems our borrowers are now once again buying properties. My partner has five loan requests to evaluate. Here are the details of the one I invested in.

This is a vacant single family home in Vallejo, California - in the San Francisco Bay area. It's a 1,310 3 bed, 2 bath home with an attached 2 car garage. It was built in 1994 and it sits on a lot just over 6,000 square feet. The front exterior of the property looks nice, although the back needs some work. Some landscaping needs to be done and, in fact, there were landscapers there working when my partner went to look at the property.

The borrower is our biggest borrower and he purchased the property for $141,000 at a foreclosure auction.The opening bid was $132,000, so others wanted this one as well. Zillow.com estimates the property to be worth $180,000. Based on MLS sales of comps, my partner estimates it to be worth $225,000 as-is and $265,000 after repairs. There are five good comps in the MLS. Four of them were short sales. Three of the five sold for more than the listing price. One of the comps is from May and the rest of 3 months old or less. All sold for higher than their Zillow.com "Zestimate." (Really, the only usefulness of their estimate, IMHO, is to get a ballpark figure of value. I'd never use it as a basis for REI analysis.)

My partner gives the neighborhood a not so good rating, but that normal for this borrower. He specializes in those areas. In terms of the loan, we are lending $105,000, giving us a 74.5% loan to value ratio using the auction buy price. Using our as-is estimate of $225,000, it's a LTV of 46.7%. The biggest drawback to this loan is that it is in an area we don't normally lend in and that our borrower doesn't usually buy in, meaning we could be off on our value estimates.

Here are some pictures.

 

Funny Article

I was reading some news stories that mentioned one of the REIT stocks I own, and came across this piece on The Motley Fool. Now, given the source, it's somewhat obvious that it will be biased towards stock ownership over rental property, but I thought it did provide a good example of what the typical first time landlord thinks - not too concerned with cashflow, relying on appreciating property values, no thought or budgeting towards maintenance costs, etc.

Houston Apartment October 2013 Update

The numbers for October are in and things are still looking good. Occupancy remained at 94%. Rental income reached a high for the year, coming in $1,000 over September, which was the previous high for the year. Overall income dipped slightly due to some higher administrative expenses that consisted of once time charges. Year to date, the net income for the property is $100,000 over budget. (!)

As I mentioned before, the property is up for sale. I had a talk with the managing partner (of our investment group, not the property) a while ago and he mentioned that the property does need a little bit of work to bring it back up to being a highly desirable location for tenants (which isn't to say it's a pit right now). We did some renovation when we bought the property, but with the multi-year economic downturn, management didn't have the funds to keep adding amenities. As a result, at least one of the potential buyers we are talking to has indicated they plan to put about $1 million into improvements if they end up as the owners. That's good news for the tenants. Of course, now that the property is performing well, we have the option to not sell the property and invest in making improvements ourselves. However, that would require raising additional capital from the owners (us) and our managing partner told me he spoke with the largest shareholders in the property and they did not want to invest any more money. So the property is up for sale. I can't really blame them. I also miss getting the quarterly distribution checks and can understand wanting to get back into something that produces income on a regular basis.

HML #29 Started

My partner found another deal to loan on and my funds from HML #25 and #26 are being used to help fund this one.

This property is a nicer one than I normally lend on, although after looking at the photos below, you may think otherwise. The biggest difference is this property is in a fairly nice location and is surrounded by homes in the $1 million and higher range in the city of Orinda, California. Our borrower also is buying this house through a Realtor, rather than at an auction, where most of the properties we lend on normally are purchased. The buyer is also paying an assignment fee, meaning she found this property with the help of a bird dog.

The property is a single family home (2/1) with an attached two car garage. It was built in 1951 and is about 1400 square feet. Here are some pictures:

The interior looks like it still has the original fixtures, tile, etc. It will need extensive remodeling to bring it up to the standard of the neighboring houses. (Those were also built in the 1950's, but interior photos of comps on the MLS show completely re-done and very modern looking interiors.)  Externally, there are several issues - termite tubes have been found in the crawlspace under the house, there are some cracks seen in the foundation, and there are some drainage issues with the slope of the landscaping. The buyer had a professional property inspection performed, which I have a copy of. Besides the previously mentioned issues, an electrician will likely need to be brought in to re-wire pretty much the whole house. There are no GFCI circuits (they didn't exist when the house was built), the breaker box is a 50 amp circuit and not the standard 100 amp used today, and there were several places where the ground circuit was either non-existent or poorly wired. The roof appears to be OK, although it needs to be cleared of some debris. Rain gutters need to be removed or re-hung. There is a porch that is practically falling down that will probably also have to be removed. Based on the inspector's report, I would estimate between $50,000 and $75,000 in repairs are needed. But that's based on Arizona costs. I don't know what they would run in California.

The buyer is purchasing the house for $520,000 plus a bird dog fee. We estimate the current as-is value to be $600,000. Our loan will be for $460,000. Based on comps, we estimate the after repaired value to be at least $825,000. Given the good neighborhood (three comps describe the neighborhood as "coveted", "premier", and "desirable" - all written by different agents at different agencies) and the large amount of equity, my partner rates this as one of the top 10 safest deals he has done, out of close to 200 total. The borrower is our second largest borrower and the loan will be personally guaranteed. She has always paid promptly in the past and has been rehabbing property for at least 5 years (although we've only worked with her for 2 years). The drawbacks: this is the smallest property of the comps we looked at, so the comps may not be truly representative of the property's value. However, they are all we have to go on. The other big drawback, of course, is the condition of the property. It needs a lot of work. If we have to take this one back from the borrower, we will have some serious work to do if we want to fix and sell.

Houston Apartment Up For Sale

I received word this weekend that the Houston apartment complex is up for sale. In fact, we already have two offers for it. Unfortunately, I'm not allowed to discuss any details at this time, but after any sale completes, I'll talk about them. The property was just appraised at between $13.2 million and $14.5 million. We bought it for around $12 million back in 2008.