Ben Dorland

A lot of investors ask what an egress window is and when one is needed. Technically, it's a window for a room below grade that a municipality has deemed large enough to be safe for exit in case of emergency. While there are some variations, the window needs to be large enough that a firefighter with an oxygen bottle on their back could get in, then carry out an injured person in a fire. Most often, it's associated with a basement bedroom window, making it a legal bedroom. Basement bedrooms without egress windows are illegal. Installing an egress window makes them legal.

The confusion is that different cities, counties and agencies have different size requirements and height-above-floor requirements for these windows. Therefore, before you start cutting into the concrete foundation you better make sure you've visited the local building department to get their requirements. In addition, HUD, distributing Section 8 vouchers, also has their own requirements for egress windows. So if you're going to rent to a Section 8 tenant make certain you know what their requirements are. If you don't, you won't get credit for that basement bedroom and get way less rent than you expected - believe me it happens every day.

To be honest, there are probably hundreds if not thousands of rentals in Metro Denver that have basement bedrooms without egress windows. In my opinion, this is not only illegal, it's immoral. And if that wasn't enough to discourage you from having one, ask yourself what happens if there is a catastrophic fire and someone dies in your illegal basement bedroom. Not good! For about $1,500 - $2,500 you can get a competent contractor to install an egress window (only one is required per basement bedroom) and sleep better at night.

Topics for Investors: Basement Kitchens

You walk into a property you're looking to buy and rent and you walk down into the basement and voila! you find a full second kitchen. Great! You start calculating how much rent you could get if you could rent the downstairs separate from the upstairs and the cashflow is out of this world! But wait, there are a number of very real problems with this scenario.

First of all, it's illegal unless the property is zoned for more than one tenant and the property has been converted to non-residential use. But there are even more practical reasons why having two separate tenants is often not a great idea. The first is the utilities. Since it's a house there will only be one bill for Excel and water. Who's going to pay it? Can you really get the tenants to pro-rate their share if you pay it? Good luck. Or do you just pay it, figuring the extra rent will more than offset paying the utilities? Maybe, but what you'll find is that when a tenant is not paying the utilities they have the heat at 90 degrees all winter and every time you go to the house the kitchen sink is running.

Your great cashflow gets eaten up by outrageous utility bills and you're back where you started. For these reasons and many more I suggest you don't try to put two tenants into a property made for one. But that doesn't mean the second kitchen has no value. It might be useful for an extended family who needs the extra space kitchen and might actually command a larger rent. Check with your local building department and your insurance agent though, to make sure it's acceptable to have a basement kitchen in the first place.

Colorado Mortgage Broker Licensing

In response to the troubled national real estate market and Colorado's high volume of home foreclosures, efforts have increased to make higher caliber professionals involved in real estate. Licensing, rules and regulations have become more stringent for agents, appraisers, title companies and mortgage brokers. In regards to mortgage brokers, the below items are mandatory. No longer can someone open up the Yellow Pages, claim to be a mortgage broker and then be compensated for placing a loan --- what a novel concept. Before committing to a mortgage broker, please make sure that they are licensed in Colorado by searching for them on the following link: http://eservices.psiexams.com/crec/search.jsp

• Licensing
  All mortgage brokers conducting business in CO must be licensed with the Division of Real Estate and pass the criminal background check. Only those mortgage brokers who are licensed or exempt from licensure by law may broker a mortgage, offer to broker a mortgage, act as a mortgage broker, or offer to act as a mortgage broker. Licensing registration and renewal is $200 every three years.

•· Surety Bond
Prior to licensing, an applicant for license shall post with the Director of the Division of Real Estate a surety bond of $25,000. Yearly premium approximately $190.00.

•· Errors & Omissions Coverage

All CO mortgage brokers must carry Errors & Omissions coverage. For mortgage brokers with less than five years of experience, the annual premium is $600. With five years or greater lending experience, the premium is $500 per year.

•· New Pre-Licensing Education & Continuing Education

1. Complete 40 hours of licensing education and pass the two-part licensing exam (Mortgage Lending Basics & State and Federal Law) by January 1, 2009. Approximate cost for course is $250 and $74 for the exam.
2. Complete a minimum of nine hours of continuing education every three years.

Loan Considerations for Buy and Hold Investors

As far as investment loans, little or no money down loans are impossible. However, lenders do permit the use of Home Equity Lines of Credit or second mortgages from other properties owned by the borrower as a source of down payment. Or, self-employed borrowers are using funds from business lines of credit to fund down payments or renovations (please note: there are asset seasoning guidelines for doing so and the debt incurred by accessing other credit lines must be accounted for against the borrower's debt-to-income ratio). Thus, we have clients leveraging themselves with other homes they own in order to get in with little or nothing down.

There are exceptions, but practically every lender requires Full Income Documentation on any investment purchase. Full Documentation requires the proof of income through W2s, pay stubs and/or tax returns, as well as proving liquid assets with bank statements. The max LTV is 85% on a non-owner single family property (75% for a 3 - 4 unit); however, most homes are being affected with the ‘declining market' tag. As such, the maximum loan permitted would be 80% of the purchase price. This is due to mortgage insurance companies refusing to provide MI on investment properties in declining markets. Also, if an investor does not have landlord experience in the past two years, new rules will now not allow any rental income to be included as monthly income. Hence, the buyer would need to qualify with the entire payment going against his/her debt-to-income ratio.

Another point to keep in mind is that Fannie Mae and Freddie Mac are only permitting a maximum of 4 financed properties on a borrower's credit report. Hence, if a borrower is looking to purchase or refinance a fifth home and already have four loans on their credit, they will face a tremendous challenge in securing financing. This latter rule only affects someone purchasing or refinancing an investment property/second home and NOT an owner occupied purchase.

All this being said, if an investor can put down 20% (or borrow a good chunk of that 20% from other homes they own or lines of credit), is Full Doc, with a 680+ credit score and DTI below 50%, rates are in the upper 6% range on 30yr fixed mortgages with no prepay penalties. With home prices bottoming up in most neighborhoods, coupled with a bullish rental market with increasing rents and low vacancy, investors can easily generate hundreds of dollars of cash flow per month. In fact, many investors choose 15 year fixed mortgages to pay off the loan quickly, yet still cash flow tremendously.

Loan Considerations for Fix & Flip / Short-Term Investors

Securing conventional financing on a fix & flip or short-term loan is not recommended. Most conventional lenders sell off their mortgages to investors on the secondary market. If the loan is paid off early (before six payments are made), the investor has not recovered their initial investment. The investor will attempt to recover their loss from the lender, who will ultimately come after the loan originator. The loan originator would then be obligated to pay back any premium paid out by the lender. If such activity becomes habitual with the loan officer, the lender can cease doing business with them and their firm.

Furthermore, conventional loans require conventional appraisals. The lender will require that the home is a) habitable in its present state b) in at least ‘average' condition and c) not in need of any repairs greater than 2% of the purchase price. All three points can be challenging to overcome for investments properties, especially bank owned homes. Consequently, many investors use private money, hard money, home equity lines of credit, cash or specialty investment lenders to avoid failing a conventional appraisal. All of the aforementioned sources of funds can be worthwhile to pursue, but they are meant for short-term loans. Hence, the borrower needs to have a clear exit strategy(ies) to avoid costly extension fees and holding costs. Such loans carry higher interest rates and up-front fees due to their considerable risk. They can be a great route to pursue; however, the investor better be prepared in case the home is not able to sell.

Fix & flip investors should also be cognizant of title seasoning issues. FHA guidelines require that a seller be on title for 90 days before a buyer can purchase the home with an FHA loan. Most flips take longer than 90 days to renovate, market and actually close. But, some deals need limited work and can be turned around quickly. Ultimately, you will want to verify that the new buyer's lender understands the title guidelines of the lender being used. Furthermore, a flip investor is going to list the remodeled home for significantly higher than what they had paid for it. The lender providing financing to the buyer purchasing the renovated home will scrutinize the new appraisal to ensure the value is justified. Lenders got burned in the past on property flipping schemes and are wary of substantial value increases in short periods of time.