FItRealtor blog

April 30, 2013 by Edwin Baloloy

Moving? What to do with your existing home? Selling vs. Holding as a Rental

If you’re like many, you’ve been watching the Real Estate market on the sidelines and decide it’s time to make a move. What to do with your existing home? Should you keep it as an investment property? Or do you cash out the equity and use it toward your down payment? Maybe use the equity toward another type of investment?

When deciding to move from an existing home, you need to classify yourself in one of two categories:

A homeowner who must sell in order to buy
A homeowner who can qualify to own an additional property

In order to find out which category you belong to, you’ll need the help of a loan officer and Realtor. The Realtor will determine your home’s value and potential rent from today’s market conditions. After those numbers are determined, a loan officer can determine if your credit, income, and other factors will allow you purchase an additional home.

Without getting into too many details, some situations allow you to use potential rent as part of your income when your home has enough equity. Your income and existing debts will factor into your “debt-to-income” ratio.

If the loan officer determines that you can’t qualify for an additional property without selling your existing home, the analysis ends here. You need to sell before thinking of purchasing.

If the loan officer thinks you can qualify, this brings to the table further analysis. Not all properties should be held as a rental.

Most Real Estate investors take into account 3 factors when evaluating a property:

0913081134a — A local investor shares his methods at a Landlord Workshop.

Appreciation & rent improvement potential – does the neighborhood or local area have an upside that will outpace surrounding markets? Some examples include a new school, shopping center, rejuvenation or updating projects by government, influx of affluent neighbors, etc. Are there improvements that can be made to the home that can increase rent or value? Especially in the case where a property has 2 bedrooms or less, adding an additional bedroom can make rent and value increase significantly.
Cash flow – I know several homeowners who have neglected this aspect of an investment property. In one instance, I remember a homeowner who had a negative of $2,000 per month and ended up selling when his home’s value increased by $50,000 in 3 years. He actually thought he “made money” when the truth was that he LOST money from -$72,000 in cash flow. Another common mistake is when a homeowner incorrectly calculates their expenses with only their mortgage and property taxes. Don’t forget about maintenance, your time, repairs, income taxes, and time the home will be vacant. Some landlords simply deduct 20% from their income to estimate their “NOI”, or Net Operating Income.
Acquisition price – Buying a home low and below market value is the key to everything. You probably realize that it has a direct effect on #2 above. Since you already own the home in this situation, it’s something to be mindful about on your next rental.

Meet with a local Real Estate Agent to help you plan. — Meet with someone experienced at rental properties.

It would be a good idea to sit down with someone who has investing experience. Buy them lunch or have a discussion over a cup of coffee. Their advise can go a long way. I have a friend who keeps things simple without anything fancy: “if it doesn’t have positive cash flow, it’s not worth it to me.” In contrast, I have a co-worker that has detailed spreadsheets where it looks like the stuff Fidelity would give you when you invest in one of their mutual funds. I personally use Dolf De Roos’ Real Estate software called “REAP”: http://dolfderoos.com/software/

April 2, 2013 by Edwin Baloloy

New Townhome Community in North Orange County: Paseo at La Floresta, Brea

In my last blog, I reviewed the two newest luxury communities of Blackstone in Brea: Montserrat and Coral Ridge by Standard Pacific and Shea Homes.

About 1-1/2 miles from the 57 freeway, La Floresta opened it’s first non-senior community called Paseo a few weeks ago. With 118 homes planned to be built, Paseo features 3 different townhome-style floorplans starting in the mid-$400s. Each floorplan features an attached garage, front patio, and generous-sized kitchens.

What I liked

The master-planned community of La Floresta sounds intriguing. There will be a 60+ senior community, a 55+ community, a mix of townhomes, work/live townhomes, and a few single family homes. There will also be a retail section of the community at the corner of Valencia and Imperial Highway. La Floresta’s website shows a site plan along with an artist rendering of the swim and play club.

swim club — Rendering of the La Floresta Swim Club (from the Official La Floresta Website)

Assuming the retail offerings are good, residents would enjoy being able to grab a cup of coffee or eat out just steps away from their front door.

Dislikes

Residents would be responsible for (2) HOA payments. The master HOA is expected to be $135 at built out and the Paseo HOA is expected to be $210 per month.

2013-03-21 11.31.32 — 3 foot walls won’t offer any privacy

The front patios don’t appear to be private or even semi-private at all due to low walls. I can easily imagine an irritating neighbor (in pajamas, of course) yapping away on the cell phone or having a cigar while in plain sight.

Lastly, the floorplans attempt to cram an awful lot into 1,500-1,800 square feet. Although the largest floorplan may be listed at 1,867 square feet, it feels more like 1,400 from no open spaces or large gathering areas. I estimate the average stay for a homeowner in this community to be around 5 years as they will eventually want a detached home or a townhome with a backyard.

Overall, the community appears to be priced accordingly when compared to the entry-level communities of Blackstone communities Serano and Amber.

March 22, 2013 by Edwin Baloloy

New Construction Update: Shea, Standard Pacific and Toll Brothers in Brea and Yorba Linda

I think an update is long overdue since my 3 part series that covered the new construction boom happening in North Orange County.

Since that blog, many communities have sold out, a new community called “La Floresta” in Brea has broken ground, Blackstone has added 2 more communities, and Toll Brothers added 2 communities adjacent to Vista Del Verde in Yorba Linda.

This weekend, 2 high end communities open in the master-planned community of Blackstone in Brea. The plans by Standard Pacific and Shea average about 4,000 square feet with numerous view lots toward Catalina and the Los Angeles skyline. Prior to the release of “Castillian” by Standard Pacific Homes more than a year ago, Brea really didn’t have a $1M+ community with the exception of a few streets off Carbon Canyon.

Coral Ridge by Shea Homes and Montserrat by Standard Pacific

Since both communities are nearly identical in price, square footage, and styling, I decided to review them together.

After taking about a 1 year hiatus from touring model homes for clients, I was reminded about how overwhelmed I can feel when touring a fully decked out home while in the presence of other buyers.

I invited 2 other co-workers to view 6 models one morning. My heart rate doubled, my teeth clenched, and I felt very uncomfortable. Referring to the fancy folder, price sheet, and floor plans while trying to observe a home’s features felt like an overwhelming task — and I do this for a living! Model homes can be VERY seductive. I could only imagine what is going through the mind of a first-time homebuyer from overseas. I jokingly mentioned to my co-workers (who were both white) that they were the only non-asians on the tour. More on that later.

Features we liked

I’ve heard a rumor that Shea employs “Feng Shui” experts on their design staff. If so, it’s a no-brainer as I observed that 100% of the buyers visiting that particular day were asian and born overseas. Whether this is true or not, the flow of their homes seem like a science. These homes take up a footprint of what once would be only a 2,200 square foot home under older construction designs. High ceilings, open air kitchens, large island counters, and plenty of windows have a calming effect on the senses. All plans have an upstairs loft area.

The Panoramic Doors are a must-have option.

A “must have” option for these models are the panoramic doors that creates a seamless transition into your backyard or “California Room.” Although you will likely not have this “disappearing wall” open everyday, the effect when entertaining guests can make a room feel twice as large.

The views from the Montserrat community are superior due to the higher elevation and some lots facing west toward the Los Angeles skyline.

Little things to complain about

Of course, no community is perfect. In order to maximize the builder’s land, homes are built extremely close to each other. The sides on many lots likely conform to minimal setback requirements where there’s barely room to drag a trash container through. Compared to other homes in this price segment, some floorplans feel congested where they maximized square footage at the expense of open ceiling areas that usually reach the 2nd level. HOA dues will likely be hovering around $232 (will rise with inflation) and a small “melo roos” that brings the tax rate to about 1.25%. Since there will be numerous communities in Blackstone that includes condos, expect the common areas to be crowded.

Overall, I believe the communities provide good value compared to other options at this price point. If Montserrat and Coral Ridge were built in Yorba Linda with similar views, I’d expect the homes to be worth at least $100,000 higher.

Stay tuned for my review on a new townhome community called “Paseo” in Brea and two new communities by Toll Brothers in “Amalfi Hills” of Yorba Linda.

March 19, 2013 by Edwin Baloloy

Are we in a Real Estate bubble? 5 Reasons why 2013 is NOT 2006

Any of this sound familiar?

The public and press calls it a “hot” market and the majority of buyers think it’s time to buy. Warren Buffet’s saying applies here. “Be fearful when others are greedy. Be greedy when others are fearful.”

Abnormally low rates create a false sense of affordability.

Home builders start or resume building – builders offering very low commissions to brokers (or no cooperation at all), camping out, new developments opening everywhere.

“Move up” sellers make up a significant portion of the market. Although I’ve said all along that a seller trading equity is better off moving in a “bad” market, most will move contrary to what makes sense financially. When you start seeing more listings “contingent upon seller finding replacement property” or sellers asking for a rentback, these are sellers who likely are moving up.

Sounds like we are in a peak market, right? While today’s market may seem this way, this doesn’t guarantee that there is a Real Estate “Bust” that will soon follow like a few years ago. Here are some major differences between 2013 and the “high times” of 2004-mid 2007:

Loans require verification of income: while it’s true that an FHA loan can include countless co-signers that may never contribute a penny, it’s still a far cry from the “no doc” and stated income loans. Today’s lending industry is more “ratio driven,” where a borrower can only have a certain fraction of their income going toward their house payments and overall debts.
Foreclosure alternatives – when a wave borrowers started missing payments in late 2007, there were only two choices: 1) Let the bank foreclose and 2) Reinstate your loan. Today, numerous options exist such as modification, refinance, forebearance, etc.
There were very few choices for a distressed homeowner in 2007.
30 year loans – The most common loan product used today is the good old fashioned 30 year loan where the borrower pays both principal and interest. That payment amount remains the same during the entire life of the loan. Back during the high times, the riskiest loan product was an “option ARM” where the borrower can opt to make a 1% payment and the balance would grow. They were also known as “negative amortization” loans. With those loans, they were time bombs where the balance can only grow to a certain amount.
The Real Estate industry employs specialists today – although the “part timers” who are often liabilities will be around regardless of market conditions, today’s market still has a higher ratio of full-time professionals compared to 2004-07 where just about anyone with no experience at can make a six-figure income in Real Estate or lending. Many of those who jumped on the bandwagon ended up buying properties based on their short term income. When the party stopped, their homes would be foreclosed.
Long term demand from buyers – unlike the peak of a few years ago, today’s market has significantly more pent up demand from overseas investors, population growth, an improving economy, and buyers who have recovered from bankruptcy, foreclosure or a short sale.
In late 2007, inventory skyrocketed. The next cycle will not be as drastic due to long term demand and foreclosure alternatives.

Yes, it’s true that the steeper the appreciation, the bigger the crash. Most agree that we will soon see an increase in inventory and a decline in values. However, just don’t expect the crash to be similar to mid-2007.