Are Andresen - Northern Virginia Real Estate

Idylwood Towers is located on Pimmit Drive in Falls Church, half a mile off Leesburg Pike (Rt 7) and a few minutes down the road from Tysons Corner. In 2008, 18 total units were sold. 10 units sold were one bedroom units and 8 units sold were two bedrooms units. The price range of solds start at $146,000 for a Junior 1 bedroom and end at a 2 bedroom unit sold for $255,000.

Idylwood Towers consists of two apartment buildings with about 14 floors each. The building has concrete between the floors, and units are large compared to current building standards. Units are allowed to have their own washer and dryer. Amenities include things like landscaped grounds, tennis courts, exercise rooms, party rooms, extra storage units and a swimming pool. Parking is by permit and is located outside. Extra storage space is also available in the basement for the individual units. Both buildings have controlled access entry with a 24 hour receptionist and security guards.

Like most places in the area, the prices have kept dropping steadily over the last few years. The community still offers a great value for the size of the units and the convenient location.

At Idylwood Towers, 1 bedroom units currently rent in the $1,300-$1,500 range and 2 bedroom units rent in the $1,600-$1,800 range.

For more detailed information on each sale, please click on Sales Details 2008 for Idylwood Towers or send me an email at are@tysonsliving.com.

As you can see from the GRM graph - now is a great time to purchase investment real estate. With falling prices, stable/increasing rents and low interest rates the time is better now than in many years.

Are Andresen, Broker
Soldsense - your sixth sense in real estate

As part of the market dynamic in "good times", younger purchasers generally move-up as they age (condo->townhome->single family detached) and then downsize when children are moving out and when nearing retirement. These days, those two overlap more and more, but I digress...

Real estate agents, I included, often advice clients keep their existing homes and rent them out instead of selling them when moving up or downsizing. This enables my clients to slowly build a real estate portfolio with owner financing terms (better interest rates, smaller down payment.) As the average homeowner often stays in their home 5-7, a savvy individual could amass quite few investment homes over time. This is a great retirement strategy for many people.

The last few years, many upside-down homeowners try the same strategy. It enables them to move without bringing cash to the closing table, or at least delay it for a few years. Traditionally, lenders have been ok with this as long as the borrower has enough income to carry the new mortgage as well as pay for any negative cash flow on the old home (typically, the lender will credit only 75% of the rental income against the expenses.) Even though the owner may have to subsidize the mortgage payments for the old home, they do not have to sell and come up with a potential large amount to pay off the negative equity to the bank when selling. They can also purchase a new home in a different location or in a different price range, avoid renting and benefit from tax write offs and long term appreciation.

A typical transaction would go something like this:

1) Make all payments on the existing mortgage
(To get a new loan you better be making the payments on the old one...)

2) Have a Realtor help you locate a new home
In the current market you can get the same house as you currently have for a lot less money and hence a lower monthly payment. Or, you may want a smaller home to reduce your monthly payment. Or, you can go all out and purchase that McMansion you always wanted as your payment possibly will remain the same as for your current home.

3) Contact a lender and get qualified for a loan

4) Get a lease for your existing home
In most cases you will need a ratified lease on your old home before your mortgage can be approved for the new one. You should find real tenants with a Realtor, but if you have a shady agent or mortgage broker they may look the other way or even help you commit fraud by making up a fake lease.

5) Close on the new home
Your (hopefully real) tenants will be moving into your old home and pay most of your old mortgage. You will be living in your new home paying a new mortgage.

Now, this all seems pretty straightforward and smart up to this point (apart from the occasional fake lease part.) However, with the declining market it turns out that some otherwise solvent homeowners look at their $100's of thousands of negative equity and has decided they don't like it (go figure...) Mind starts churning and the upside down homeowner thinks about years of long days and hard work to make up the lost equity. At the same time they see people snap up foreclosures down the street of similar homes at half the price they paid...So what to do?

Well, they do like the idea of buying another property at a low price. However, they really would like to not pay for the old one. Before I forget, I need to add a 6^th last step to the above 5 step list...

6) Keep paying the mortgage on your old home!!!

Yepp, you guessed it. As soon as the upside down homeowners are in their new home they just stop paying the old mortgage. Don't want the house anymore and don't want to make the payment - want to return the house to the bank. They may have a new tenant in the old home (hey, we'll take your rent until you get kicked out by the bank - too bad for you!) or may just leave it vacant to deteriorate (without heat, freezing pipes, flooded basement without sup pump etc) for half a year before the old bank gets around to finish the foreclosure. Generally, the only asset the bank will go after is the old home through a foreclosure. The credit of the owner will be ruined, but for many people $100,000 or $200,000 is a small price to pay for 5 years of horrible credit. And, they are still homeowners in their brand new dream home!

Unethical? Absolutely. Illegal? Probably not. Proving intent or fraud is hard and banks are generally too overwhelmed these days to run after foreclosing homeowners. Who knows though - they may get around to attaching liens to other assets of homeowners.

The lenders are onto this scheme though, and FHA now requires at least 25% equity in an existing home if you want to purchase another and keep the old one. Countrywide has apparently also changed their rules, requiring purchasers to qualify for both homes and not counting any of the rental income on the old home.

There are people legitimately trying to build wealth through this strategy and that intend to keep paying the mortgage - this option has now been taken away from most of them due to the greed of others.

There are people that through circumstances beyond their reasonable control can no longer afford to pay their mortgage (negative equity would not be what I am talking about here.) They appreciate and need the forgiving foreclosure rules in this country. The current system allows needy people to start over without being hindered the rest of their lives with debt they are unable to pay (in India families are sent to salt mines for generations to repay debt.) This debt forgiveness may at some point be taken away and the remaining home mortgage balances could become personal liabilities - that would be a shame for people that truly deserve a break.

Honor and integrity used to be values that people strived to uphold and looked for in others. What would your parents or grandparents do in the current market? What would they say if you told them you could genuinely afford your current mortgage but had chosen to walk away from your old home and mortgage and purchased a new one?

Some in my own profession see this strategy as legitimate financial planning - see this article. I disagree.

If I had a million dollars sitting around, I would buy real estate. I would buy it with all of it. This may seem counter-intuitive with the current state of the real estate market. However, currently you would be able to get lots of units for a million dollars at a great discount from the market high.

For example, in Herndon Virginia, you can get a 3br/2ba foreclosed townhome for about $150,000 these days (if you are lucky, you may even get some 4 bedroom/3bath end units at that price.) Most of them need a little work to get them up to a rentable shape. On average, you would probably spend about $30,000 per unit. For that amount you can refurbish the kitchen and baths as well as repaint and re-floor everywhere.

Investor financing has gotten a bit harder over the last few years, so you will definitely need to have a 20% Downpayment on any property you purchase. For a $150,000 property you would therefore need another $30,000 per property. At a cash cost of $60,000 per property you would be able to buy about 16 properties (there are other loan qualification issues, but we'll assume those can be worked out.)

On average, these townhome properties would rent for $1,400 in today's market. If you look at a quick cash flow analysis, the properties would about break even from day one in the current market. That may not seem like such a great deal at first glance - a million dollar is a lot of money to tie up in an illiquid asset like real estate. Just breaking even wouldn't really make the endeavor worth the risk.

Just a few years ago, investors would have done anything to get their hands on a property breaking even on a cash-flow basis at 20% down. When the market was hot, speculation drove the prices sky high while rents remained pretty flat. So, since about 2001/2002 it has been nearly impossible to purchase an investment property breaking even on a cash-flow basis paying 20% down in the Northern Virginia area. Until now, that is.

The nice thing about real estate is something called leverage. Leverage allows you to buy with borrowed money and realizing the gain on the full amount (your down payment + the borrowed money.)

With federal spending on the rise, it is not unreasonable to assume that we will keep having inflation. We can further assume that you borrowed with a 30 year fixed loan at about 7%. Rents should increase with the rate of inflation (rents are actually a large part of some of the inflation indexes) while your mortgage amount and interest rate would remain the same.

So, let's assume an inflation of 5% per year and no appreciation in property value and see what happens over the next 10 years for the $1,000,000 investment in 16 properties:

 While you do get a theoretical return of 14.9% in the 10^th year, I doubt many investors would be happy with it taking 5 years before the return catches up with the assumed 5% inflation. Also, the 14.9% adjusted for the assumed inflation of 5% would be 9.9% - not too bad.  But when you account for the negative return the first few years and add in the whole money now versus sometime in the future thing, it doesn't seem that it would be wise to purchase these properties based on cash flow alone. There are obviously some tax write-off advantages, but we have partially accounted for those already.

So, for this to make sense, we will have to assume some appreciation. With the current market it is hard to think about prices going up again, but over the long term, real estate has appreciated by about 5% annually. Assuming that real estate will appreciate by 5% per year over the next 10 years (following inflation) we get something like:

Those returns look much better! Some may think that the return would be 5% per year like the inflation, but as you get the appreciation on 100% of the value and you put down only 20% as your investment, you get to keep the full appreciation. The numbers don't take into account the equity buildup as the 30year fixed mortgage is paid down over time (we just assumed that mortgage balance would remain the same.)

If we combine the equity buildup and the cash flow, we get your estimated return:

 Now, that's what I call an investment! Smart investors are doing this right now as we speak.

With all the foreclosure talk and the reasons behind it, it may come as a surprise to some that 100% financing still is alive and well. While conventional lenders have abolished straight 100% financing, the Federal Housing Administration (FHA) loan has again become the favorite loan program for home buyers everywhere.

Long the last choice of borrowers, FHA financing has gotten hugely popular due to the continued availability of 97% financing (allowing purchasers to bring just 3% of their own money.) Borrowers will have to pay PMI, but most people gladly accept these terms in return for the reduced amount of money required.

Of course, even a 3% down payment may be a stretch for some wanting to live the American dream of home ownership. Hence, demand dictated that the market would try to find a way to cater to such borrowers. The solution was the Downpayment Assistance Program (DAP).

So, how does DAP work? It starts with a purchaser with no money finding a seller willing to give 3% or 6% (amounts allowed vary) of the home sales price as a donation to a non-profit DAP company. The DAP company in turn gives an equivalent amount of their "existing and different funds'" as a gift to the borrower. FHA allows gift funds as long as they are not from the seller, so going through a 3^rd party non-profit organization as described above was found to be a legal way around the current rules (info here.)

About 40 percent of the monthly FHA loan origination volume utilizes DAP these days...

So, what is the problem with this you may ask? (It has after all been found to be legal.) Even though you may not have heard of Ameridream, Nehemiah and others, they have all contributed to almost bring the whole FHA mortgage insurance program to its knees. According to HUD, FHA loans purchased with the help of DAP programs are 3 times as likely to default as for a traditional FHA loan (where the purchasers have put 3% into the property.) Allowing DAPs to continue would require a raise in the overall insurance rate for all loans and/or a federal subsidy according to HUD.

Not wanting the FHA program to go away, the mortgage rules will change effective October 1, 2008. President Bush signed H.R. 3221 Housing and Economic Recovery Act of 2008 into law on July 30, 2008. Included in this bill was the elimination of DAPs. The bill also increased the minimum amount of money a purchaser would need for FHA loans to 3.5%.

As an aside, downpayment assistance is not going away totally. Purchasers will still be allowed to receive gifts for the full 3% downpayment from 3^rd parties which includes family members and government entities like local city, county and the state. Apparently, the default rate on those is almost as high as those where the funds come indirectly to the seller.

Personally, being a Realtor working a lot with sellers, the new law will affect some of my own clients. In many neighborhoods, down payment assistance has been a part of a large portion of the offers received over the last year. The DAPs have allowed "regular" people to buy in at the bottom of the marked despite the stricter lending standards. It has also allowed my sellers to trade up into more expensive homes. As a consequence of DAPs going away, I do expect the market to slow on the lower end and for the slowdown to ripple up towards the higher price ranges.

However, in the long term requiring borrowers to bring at least some money (lets face it, 3.5% is still a low amount to bring in historic terms) should reduce the number of foreclosures and help strengthen the real estate market overall.

Some Realtors are vocal and unhappy with the changes. That is understandable as Realtors that specialize in helping cash-strapped first time homebuyers will find it harder to help their clients purchase a home. That may not be a bad thing - renting may be the prudent thing to do until a down payment can be saved.

One of the reasons we got into the current foreclosure mess was that purchasers with no or little financial discipline were allowed to purchase homes they could not reasonably be expected to afford. The housing market will recover and will be stronger - coming up with 3.5% of the purchase price doesn't seem to be too big of a minimum requirement.

Using tax payers money to shore up the program so people can buy a home with no stake in it (and just walk away when times get tough) does a disservice to responsible homeowners everywhere.

If a private bank or private investor wants to take the risk of providing 100% financing, be my guest. Just don't turn around and try to sell it off as AAA+ rated securities again...