Property Management and Keeping Costs Down

In keeping with last weeks blog on how to stay in your home we are going to take a quick view of the markets this week and then offer some articles on how to maximize your tax benefits and how to manage property if you now realize you want to rent rather than sell until the dust clears.

First a quick look at the markets this week:

MSNBC: Housing worst isn’t here yet. According to Richard Syron, chairman and CEO of Freddie Mac “The mortgages written in 2006 in the sub prime market are probably the most troublesome. They haven’t hit the reset point yet on interest rates.”
Syon went on to say "These steps are focused on helping individual people, and it will help the market. But once you get one of these market dynamics going, you don’t reverse them without it taking some time .... Theyve got to play themselves out.” NOTE: This is the best wisdom on changing markets yet! You can talk about it all day long....but trends play out according to changing circumstances and can be inconsistent.

International Herald Tribune: The S&P Housing index was released and it is an index based on twenty cities. The famed Robert Schiller is involved in crating this index and "
He said the numbers indicate "a widespread downward trend" that started at the end of 2006 and has extended into the beginning of this year." How Steep a Downturn? The index looking at ten major metro cities notes a 1.5% decline in sales of single family homes. Seattle and Portland are the lucky ones with modest price increases.

Freddie Mac: Weak home sales are keeping a lid on mortgage rates. The 30-year fixed-rate mortgage (FRM) averaged 6.16 percent down slightly from last week. Last year at this time, the 30-year FRM averaged 6.58 percent. The fifteen year FRM this week was 5.87 and down slightly form the week before.

Now for the good news: Seattle, Portland and Dallas saw rising prices... There are always minor trends within a major other words its still a local market. Relief is on the way, to be sure it isnt enough to turn a trend but we hope to keep enough bad news out of the markets to keep this downturn moderate and cyclical. Here are some of the important institutions helping to keep people in their homes:
1. Washington Mutual Inc., one of the country’s largest financial institutions, said it will refinance up to $2 billion in sub prime mortgages to help borrowers avoid default and foreclosure.
2. Citigroup and Bank of America have pledged $1 billion of mortgage financing to help sub prime borrowers who are facing the loss of their homes
3. Freddie Mac will buy as much as $20 billion in fixed-rate and adjustable-rate mortgages to help borrowers with high-priced loans keep their homes. Hopes are this should be in place by mid summer.

What if You cant sell Now

If your home or condo has lost value an you are willing to wait the market out, then its a good time to rent. generally, when sales are down rentals are in more demand since people have to live somewheres. Strong rental markets are making rental property increasingly lucrative. Keep in mind that managing property is really work. You have to begin to see your home as a cash flow investment and rent wisely using good tenant screening policy.
Renting requires a working knowledge of your local rental markets and a good understanding of how to price your rental so that it rents quickly and at the right price. Too low and you will rent very quickly at at a loss....too high and it will sit on the market and you will lose months of valuable rental income.

Good Property Management Keeps Costs Down

Focus on fixed costs are where we think successful property management is made. Mortgages and Insurance are necessary but prices vary considerably. Always comparison shop these products and have agents bid against each other and keep more of your money. is a good place to get bids and have agents compete for your business

Taxes and tax credits are areas where savings can be had but you must know whats available. We found a few good articles that can serve as a tutorial. Please do take a look:

A Tax-Break Tutorial For New Homeowners:
By Bill Bischoff. While the cost of renting is generally a nondeductible expense (except for when part of the home is used for business purposes), homeowners can claim an itemized deduction for interest on up to $1 million worth of mortgage debt used to acquire or improve their principal residence. Ditto for interest on up to $100,000 of home-equity debt secured by their principal residence. Real-estate property taxes can be claimed as an itemized deduction, too. You also can generally deduct any points you paid (or the seller paid on your behalf) to take out the mortgage"

A Primer on Homeowner Tax Breaks: Now for the tax-law catches your realtor probably never told you about. Don't worry: What's detailed below probably won't have you running back into the arms of your landlord. But it just might give you a more realistic expectation of how home ownership will affect your future tax bills.

Mortgage insurance Gaining Steam: "This time next year, some homeowners who pay mortgage insurance will have an extra deduction on their federal income tax returns."
"In recent years, many borrowers have opted to get around using the insurance by taking two loans: a primary mortgage as well as a second, "piggyback" loan in the form of a home equity loan or line of credit. The equity from the second loan fulfills the down payment of the first, and there are tax breaks on the interest of both loans.
But many piggyback mortgages have variable rates that fluctuate based on the prime rate, which has risen over the last year. The set rate for mortgage insurance has become attractive to homeowners aiming for predictable loan costs, Katkov said. There's also the lure of simplicity that the mortgage insurance offers, since borrowers only need to deal with one set of loan documents in that option, he added. "

Its your property

Forclosure Fears....Help is on the way

This week we wanted to offer information for those who are having trouble making the mortgage payments. The sub prime markets have collapsed with fifty lenders going belly up or closing shop in the year. Millions of homeowners will be affected and foreclosures are up substantially.

MarketWatch: Quotes an interview with Goldman Sachs which takes the observation “Median California home prices are still creeping up, and the state's strong employment trends should support the real estate market. But Goldman is worried that surging prices in the state in recent years weren't driven by traditional factors such as strong employment and income growth. Instead, the bank reckons an increase in ARM mortgages offered to borrowers who were already stretching to buy high-priced homes fueled the boom”.

In an effort to keep the lid on this the institutions are mobilizing and help is on the way.

Freddie Mac: Freddie Mac today announced that it will purchase $20 billion in fixed-rate and hybrid ARM products that will provide lenders with more choices to offer sub prime borrowers. The products, currently under development by the company and slated to be introduced by mid-summer, will limit payment shock by offering reduced adjustable rate margins; longer fixed-rate terms; and longer reset periods.

Federal Reserve Board: They issued a press release “reminding their institutions that existing regulatory guidance and accounting standards do not require immediate foreclosure on homes when borrowers fall behind on payments. In addition, under the Home ownership Counseling Act, institutions are required to inform delinquent borrowers about the availability of home ownership counseling.”

The Mortgage Bankers Association: They issued a statement “committed to keeping Americans in their homes and, to that end has partnered with NeighborWorks® America, a national nonprofit organization created and supported by Congress to provide financial support, technical assistance and training for community-based revitalization efforts…
“linking homeowners in danger of foreclosures to a free counseling hotline (888-995-HOPE)
provided by the Home ownership Preservation Foundation,”

HUD: The Fed requires that the customer be told about the availability of home ownership counseling offered by the creditor and also advise the customer about home ownership counseling information available through HUD. The toll-free telephone number (1-800-569-4287) provides information about home ownership counseling. The HUD web site
also provides a list of counselors by state.


What is an ARM? Much of the sub prime market consists of ARM’s or adjustable rate mortgages. Lenders generally charge lower initial interest rates for ARM's than for fixed-rate mortgages, against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. Its a trade-off you get a lower rate with an ARM in exchange for assuming more risk.

Home owners may face when seeking help from the Government with their foreclosure problems, because each agency has its own rules for qualifying people. Among them are whether the borrower is employed, how much cash is on hand and more..

If this is all new to you then half the battle is getting the language. A glossary of foreclosure terms and a glossary of mortgage terms will help you get the process faster.

Its your property

A Look at the Housing Markets

Well...the jury is still out on what the sub prime mortgage melt down will do, but you know its serious when the IMF does a study.

Some observations:

IMF: Happily, they concluded that the sub prime problems were likely to be contained to that area. ""Major dislocation still appears to be a low-probability event," If it were to spread the fear is that banks would tighten credit even for their best customers. That would make it harder to borrow and that's a slowdown.
FRB: Fed Chairman Bernanke told congress that its likely that this can be contained. Now, this doesn't mean a crash or even a severe correction.
NOTE: At this point all we can conclude is that there is a slowdown in the real estate markets...that has already happened. Changing markets are always murky and it takes quite a while to actually figure out what is happening, predictions aside we usually get it after the fact.
NAR: They predicted this week that prices would drop by only 0.07 percent form 2006 levels and sales of existing homes will drop 2.2%....thats digestible.
NOTE: Of course, there is real pain out there. One of the major new home builders. DR Horton Inc reported a drop of 37% of new home orders in just the last quarter! Seems the new home sector is in much more dire straights.
Freddie Mac: Interestingly the 30 year mortgage was 6.49% last year and this week its 6.17%...Just as it should be. When markets slow money cost should drop eventually creating demand again.
SF Chronicle: Govt to the rescue! "The Federal Housing Administration could be revamped to refinance mortgages in danger of default, the JEC's report said, citing a proposal by a Harvard professor under which the housing agency could oversee a "rescue fund" that would restructure failed or failing mortgages. Aid could also be provided to community organizations or banks that work with borrowers to refinance loans."

Whats Ahead....

We think the markets have changed and the big question is how much. Markets such as Detroit or Richmond in California may be harder hit, since the sub prime mortgages help poorer people into homes to a greater extent. Although, much can be said for other over extended markets in high priced California. The same home builder DR Horton reported that the biggest decline in new hoe orders was 59% in California.
Be a cautious buyer. Don't overextend. Shop well and mind your fixed costs. Shop your insurances and mortgage rates. When shopping for the best mortgage, keep a close eye on extra costs such as points or fees.

  • Ask each lender and broker for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week.
  • Ask about the loan's annual percentage rate (APR). The APR takes into account not only the interest rate but also points, broker fees, and certain other credit charges that you may be required to pay, expressed as a yearly rate.

  • Check your local newspaper for information about rates and points currently being offered.
  • Ask for points to be quoted to you as a dollar amount rather than just as the number of points so that you will actually know how much you will have to pay.
Well What If You Now Own...

Management Tip: A good manager pays a lot of attention to the variables in ownership. Vacancy's are one of those areas that can be controlled to keep your unit full at a good rent rate. It begins with good tenant screening. Here are some tips:
  • Have potential tenant complete and sign a standard rental application to provide personal and employment information and authorize the landlord to obtain a credit report and background checks. Obtain the applicant credit report through a Credit Reporting and Tenant Screening Agency
  • Do call prior landlords. They are your best, most honest source for information regarding on your prospective tenant. Present landlords, wanting to get rid of bad tenants may not be most objective source for you.
  • Set a minimum income requirement as a multiple of the rent. We are comfortable with 3X the gross income as a qualifyer.
  • Credit Rating: Consider a minimum score, a minimum of late pays, income to rent ratios

Its Your Property

Housing....How Bad

Some observations:

CBS.Marketwatch: American Home Mortgage Investment Corp. cut its first-quarter and full-year profit forecast by more than 25% Friday after being hit by problems in the secondary market for home loans and mortgage-backed securities.
The company also said that it's stopped offering some types of so-called Alt-A mortgages because of the high cost of delinquencies on those loans.The warning suggests that problems in the sub prime-mortgage business have begun spreading to other parts of the home-loan industry.

The price of new century stock, a sub prime loan originator, at this time last year the stock was as high as $53, today it is $1.26. Some of the sub prime market is experiencing a dot com type crash.....
Freddie Mac: Frank Hothaft writing for the office of the chief economist of Freddie Mac, "Despite the pullback by sub prime lenders, there are no signs of a general drying up of liquidity that could develop into a broader “credit crunch” in the prime mortgage market. Mortgage rates moved back down in recent weeks, with the rate on 30-year, fixed-rate mortgages touching 6.18 percent in early March, equaling the lowest rate of the year". In other words the sub prime markets will feel the pain, but the overall credit markets are still ok.
Note: We see contrary reports indicating that at least some lenders are tightening up their lending requirements for prime loan customers. We think it natural for lenders with higher risk loan portfolios to tighten requirements or offer at higher rates to lower their risk profile. But today, it seems that there is no overall trend in that direction. Our take away: shop your loan and find lenders more able to remain flexible on rates and fees.
San Francisco Chronicle: Helpful news! "There is a mortgage source that is actually expanding its business nationwide for credit-impaired and first-time home purchasers. That source is the golden oldie of the mortgage arena -- the Federal Housing Administration, which recently has seen a doubling of customers refinancing out of private, sub prime loans into its insured mortgage programs."
What's Ahead...

Riskier markets. Uncertainty. These kind of post boom markets are tricky to navigate, but if you are a patient shopper this is when bargains arise. There is no evidence that this is like the stock market crash, however the analogy will keep more buyers away and this can create opportunity for the wise shopper. If you are a first time home buyer then you should do some reading on interviewing real estate agents and how to bid.

Housing tracker is a blog site we look at to see how some of the major markets are doing. These numbers are based on the MLS and we cant vouch for their accuracy but Housing tracker shows inventory up in almost all markets, but not that significantly. This is an unfolding story, but it doesn't yet show disaster anywheres but in the sub prime markets which are the weakest areas. The big question is whether it will spread and that's still an unknown.

Well, What if you Own Now

MANAGEMENT TIP: How do you go about renting a vacancy in your property? You should begin by asking yourself a few questions about how to determine a competitive rental rate. Consider the consequences of picking a number that is too low. It will likely rent fast, but if you have a rent controlled building you will take forever at mandated rate increases to get back to a market rate. This can be very costly.
If you choose a higher rent than the market will bear, its likely to sit vacant for a long time before you lower it to finally fill the vacancy. We like to use craigslist to search a like property in the same area and use it as an MLS for rentals.
Once you have a few prospects its important to establish a tenant screening process.
Always follow this same procedure to a discrimination law suit. Fair Housing rules must be followed...don't be surprised to find plenty of people who are well versed and looking for a little extra money by filing a complaint.

Its Your Property