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Buy ‘n’ Rent Strategy

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Posted On: 12/17/2008

Q: Our local market has slowed. There are huge numbers of homes for sale, and prices have dropped more than 10 percent. I don’t want to sell into this market; instead I want to buy a house, rent the one I’ve got and then refinance the first property in two years when values rise. What will lender think of this strategy?

A: Who says prices will rise in two years? Where are the stone tablets promising such a result?

Let’s go through your plan: You want to buy a replacement property. Can you get sensible financing for such a purchase, a fixed-rate mortgage and not a toxic loan with low rates up front and then steeper payments in two or three years? Non-traditional “affordability” loans as well as stated-income loan applications and the presumption that prices must rise are at the heart of today’s mortgage problems.

You want to rent the property. However, if the local market is filled with unsold properties what has happened to rental rates? There may well be a lot of potential tenants among those who have been foreclosed, but will they reliably make rental payments?

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The real test for your plan is this: Will what you propose make sense if prices do not rise, if they stay flat or even fall? If the answer is yes, if you can get a great replacement property and a steady rental income that covers all costs, then in your market you may have something.

Go no further with this until you have spoken with local real-estate brokers and lenders.

Q: If I a provide a security deposit for a landlord, why do they also have to see my credit report?

A: Security deposits may be insufficient to cover missed rent and damages. The landlord wants to know that you have a history of full and timely payments so that he doesn’t have to worry about chasing you each month to collect the rent. In turn, you want a good recommendation from the landlord when you move, if warranted.

Q: I made a full-price offer on a foreclosed house. The bank never got back to me. What’s wrong with these people? Don’t they want to sell these houses – especially when I’m willing to pay the price they asked?

A: Most probably you’re not dealing with the property owner – the mortgage investor who has title to the home through foreclosure. Instead you’re likely in touch with a loan “servicer” who depends on instructions from the investor.

With increased foreclosure levels, both investors and servicers often do not have sufficient staff to handle all the homes they now own. The result is that selling to one buyer is often tough. Instead, there are some mortgage investors who are selling wholesale, marketing properties like bananas in groups of 100, 500 or even 1,000 homes. The wholesalers then retail the properties, selling to small investors, individual homeowners, contractors and smaller-scale wholesalers.

Go back to the lender, speak with the highest-ranking decision-maker you can find, be sympathetic and ask what you can do to make their life easier. You might be surprised at the reaction.

Q: I want to buy a home. The market here is slow. The homeowners have both a house that isn’t selling and a Corvette. Can I make an offer for both the house and the car?

A: When you make an offer to purchase real estate you’re really bidding for property at a particular location and all the “improvements” on the property. In this case “improvements” really mean the house, garage, etc.

In your offer you also want to get possession of “fixtures” which are related to the property. Generally, a “fixture” is defined as something that is attached to and intended to go with the property. The usual example goes like this: A microwave sitting on a kitchen counter is personal property, a microwave built into a kitchen cabinet is a fixture – if you remove the microwave you have a hole in the wall.

You can make something a “fixture” by simply saying that’s what it is in the purchase offer. If the sellers accept then your fixture stays with the property. For example, lawn furniture is typically not a fixture – but it can be if that’s what the buyer and seller agree.

Things that are personal property, or “personality,” do not stay with the home – unless both parties agree otherwise. So you can make an offer that includes the purchase of both the house and the Corvette. For specifics, speak with a local broker or attorney.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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