Alice Smith Albuquerque and Rio Rancho Real Estate

Floyd's identical twin Lloyd Smith was the second brother to visit the Albuquerque area a few weeks ago.  Lloyd has a dream of one day having a "home on the range" somewhere outside the Albuquerque city limits.  It will be a two step process - buy a parcel of land now and build his dream home later when the stock market and his 401k recovers somewhat.  While watching his budget, Lloyd plans to buy an old mobile home (one that has already depreciated extensively), or a newer one that is in foreclosure, and live in it during the preparation and construction of his permanent home.  Besides running a few cows, Lloyd may also plant agricultural crops or inexpensive, small trees on the land to generate some income to help pay the bills.  As we started the process, I wanted to make sure Lloyd understood the importance of due diligence before the final closing in order to "land" the best deal.  To help Lloyd along, we sat down and generated a check list to go by as we visited available properties.

1.  Always buy land in the direction that growth in the nearest large town or city in headed.  That way, if you should ever want to sell for maximum profit, all you have to do is simply wait for the growth to arrive and become established.

2.  Land near a river or lake will undoubtedly remain among the most desirable to future purchasers.

3.  Raw (unimproved) land is almost always cheaper than improved (cleared) land, but it will cost a great deal of money to clear the parcel.  Ideally, if you can find improved land for the same money or less than similar raw land values, the improved land becomes a great deal.

4.  Research the history of the area surrounding your land very carefully.  You don't want to buy land next to an area that was once a toxic waste dump!

5.  Make sure that electricity, phone service, cable, and water and sewer are available to the property.  If water and sewer are not available, you will need to make sure that a well can be built and a septic system installed.

6.  If you are going to bring water and sewer lines to the property, always have a feasibility study performed.  A land feasibility study is done to evaluate and determine the suitability of the soils realtive to the land where an on-site sewage system is to be employed.

7.  It is also important to have an appraisal, survey and flood certification done for the property, as part of your pre-closing due diligence.

Lloyd has started negotiations on his green acre dream and I am so happy for him.  It is such a rewarding feeling of self satisfaction to watch someone achieve a dream that perhaps they have worked for all their life.

 Oh, there's one more Smith brother to come sometime in the next couple of weeks.  I understand Boyd to be somewhat of a musician but I have no idea of exactly what genre to expect.

 Let me make your realty dreams a reality - Alice C Smith

It doesn't seem all that long ago prospective home owners could find a multitude of lenders willing to grant conventional mortages with zero money down.  As it turns out, this merely added kerosene to the fire known as sub prime loans leading to a real estate and general economy melt down continuing to this day.  Now the zero down convential loans are gone and lenders are requiring anywhere from 5-20% down on convential mortgages, depending on the type of property.  There are still a few ways to possibly purchase real estate with limited cash however.

VA LOAN:  You can qualify for a Veterans Administration (VA) loan with no money down if you or your spouse are a current or past Veteran of the Armed Services, Reserves, or National Guard.  One disadvantage of this type of loan is that you must pay a funding fee, which currently is 2.15%.  The fee is intended to enable the verteran with the VA loan to contribute toward the cost of the benefit, which reduces the cost to the taxpayer.  The funding fee is very often added to the loan amount, so that the loan amount becomes greater than the sale price of the home.  This creates a situation of negative equity for the buyer which will last until the principal is paid down below the present value of the home.

Veterans who are receiving VA compensation for service-related disabilities and surviving spouses of veterans who have died in service or from service related disabilities are exempt from paying the funding fee.  The maximum VA loan is $729,750 - until the end of 2011.  There are some other eligibility requirements that are related to the length of your military service.

VA loans are for owner occupants only and not intended for investment property purchases.  However you can always live in the home for a few years, and then move out and turn it into a rental property.  For more information about the specifics of a VA loan, email me at acs926@aol.com and I will get you hooked up with my qualified mortgage lender.

FHA LOAN:  This loan is is insured against default by the Federal Housing Administration (FHA).  FHA does not lend the money, they insure the loans.  The purpose of the FHA is to promote home ownership for those who do not have a lot of money.  Almost anybody can get a FHA loan, providing you have reasonable debt to income ratios and decent credit.  A few years ago, the FICO score needed for FHA and VA was only 580.  Recently, however, lenders have tightened standards and raised the minimum scores needed on both loans to 620.

One disadvantage of FHA loans is that they require Mortgage Insurance Premium (MIP), which is 1.5% of the loan amount, and is paid by the buyer at closing.  The Obama adminstration has proposed that the $8,000 first time home buyer tax credit may be used as partial money towards the down payment but the buyer must put up some money as well and of course, these complicated rules are still being worked out.

Presently, the maximum FHA conforming loan limit is $417,000, but in higher cost areas this can be adjusted to 115% of local median prices, not to exceed $625,000.  As with the VA loan, you can not use an FHA loan to buy investment property.  However, you are allowed to buy a duplex, providing that you live in one side of the duplex, while renting the other side.  And similar to the VA loan, you can also buy a home with an FHA loan, live in it for a few years, and then rent it out.  However, you can not have two FHA loans at the same time, so your next home will have to purchased with conventional financing.

Keep in mind that with a small down payment comes a larger monthly payment of principal and interest.  For example, on a $150,000 loan, with zero down, at 5% over 30 years, your principal and interest payment will be $805.23 a month.  But put down 5% on that same $150,000, and your payment drops to $764.97 per month.  The $40 savings per month may not seem like much, but over 30 years it adds up to over $7,000 in reduced interest payments.

HARD MONEY LOANS:  I remember the crazy days of home flipping when these fixer upper loans were very popular with investors who had either mediocre credit, little cash, or both.  Although each hard money company is different, most will loan money based upon the after repaired value (ARV) of the property.  Hard money companies do their own appraisal to determine what that ARV will be, and then they loan the investor 65-70% of that amount.

So, for example, let's say an investor finds a handyman special that appears to be below market value, with an asking price of $70,000.  The investor calls the hard money lender, who sends someone out to appraise the property within 24 hours.  The lender determines the ARV to be $110,000.  The investor makes an offer of $57,000, and after some negotiation, the investor and seller agree to a sales price of $62,000.  The lender is willing to lend 65% of th ARV, or in this case, $71,500.

Sounds great, right?  No out of pocket for the investor, and they even receive $9,500 more than the sales price.  But not so fast my friend - hard money lenders generally charge very high closing costs and 4-5 "points" (each point is 1% of the loan amount) on a deal.  So points alone on a $71,500 loan could be as much as $3,575.  By the time all the closing costs and points are paid, the investor may have very little money left to make the necessary repairs to the home.  Additionally, hard money lenders will often charge interest rates of 12-15%, and there is usually a "balloon Payment"  (the total loan is then due in full) within two years.  So one either needs to re-sell the property quickly, or to re-finance it later on.  Renting the property makes no sense, as the high interest rate will more than likely create a negative cash flow for the investor.

 I will not recommend hard money loans to my investor clients - the risks of not being able to re-sell right away with the monthly payments of double digit interest rates killing any chance of making a quick profit are much too great especially in the present economy.

HOME EQUITY LINE OF CREDIT (HELOC):  If you have sufficient equity in your primary residence, or even in other investment properties, a home equity line of credit (HELOC) is another way to obtain cash for a second home or investment property.  However, remember that a HELOC is in essence a second mortgage on your home thus not all that attractive for speculative investments.

At one time, you could borrow about 80% of your total equity on a HELOC.  These days the banks are a bit more stingy, as their fears of declining home values have materialized.  Also, with many home owners now having less equity, or even no equity in their homes anymore, the banks have begun to limit any further draws on already granted HELOC accounts in which the equity has collapsed.

The use of leverage when buying with limited cash is one of the greatest benefits of buying real estate, wheter it's for a primary residence or for investment property.  However we must keep something in mind.  While buying properties with limited money down will provide the greatest return on investment during times of appreciation, it will also hand you a large percentage loss when property values decline.

For example, if you put down $10,000 on a $285,000 home (3.5%), and the property appreciates to $300,000, your ROI is $15,000 divided by $10,000, or 150%!  One could argue that you are paying interest during the time of appreciation, and that brings down the ROI, but what if the property were a rental and the tenant paid you mortgage during that time?

 On the other hand, if the value of the home declined from $285,000 to $270,000, you now have a huge percentage loss, even if you have been renting the home during that time.

I hope this helps show the different ways to possibly acquire property with limited cash with a few pros and cons sprinkled in.

 Please contact me and I promise to personally help you solve all your complicated questions in these complicated times - Alice C Smith

This "buy American" policy is a lot easier said than done particullarly when it comes to your choice of transportation.  I remember being perfectly happy with my Jeep as I approached the outskirts of El Paso for a weekend visit with my family when the check engine light came on.  Learning the repair cost would exceed the value of the Jeep left me little choice as I considered my options realizing I didn't have a great deal of time.  After listening to persuasive arguments against any type of American made vehicle by in-laws, family, and friends, I gave up any dream of one day sitting behind the wheel of a Hummer.  Of course, someone knew someone who knew someone who knew someone who could help me get the best deal in town and I was driving a Honda before I knew it.  Even though time constraints played a major part in my decision, the "crowd" had offered a convincing argument about foreign cars being far superior to anything built here in the good old USA.  Time will tell I guess.

 With GM and Chrysler falling on even harder times since then, one might conclude the "crowd" hit the nail on the head - until you consider a former ever so slight redneck client of mine who would rather push a Ford than drive a Toyota.  You know the type - American by birth, Texan by the grace of God from a generation that believe anything mechanical runs forever with just a little oil and baling wire.  "Just keep her lubed, change the oil, rotate the tires, and look under the hood every once in awhile" he quips while making his way down the interstate surrounded by the chilling sound of sad old songs coming out of multiple speakers representing solid country gold.  To his credit, he's logged over 290,000 uneventful miles in his Ford Suv during a span of 9 years.  With those kind of statistics, you have to take notice and respect his patriotic choices.

 If a slice of Americana is what you're looking for, then New Mexico in general and Albuquerque in particular is the place for you!  Once no more than a dusty frontier outpost of the Spanish colonial empire, Albuquerque is today the most energetic city in New Mexico, spreading 12 miles east of the Rio Grande river to the foothills of the Sandia mountains and 3.5 miles west to a rugged volcanic escarpment.  A major center of high-technology and science industries, it drives the state's economy and serves as its education locus and transportation hub.  With a population approaching 500,000, Albuquerque is a melting pot for the state's three primary cultures - Native American, Hispanic, and Anglo - to which may now be added an ever-growing Asian community.  It has been said that all the reasons why people choose Abuquerque come down to one; they like it.  It is such a pleasant and comfortable place to live.  And the surrounding area is a visual treat, boasting wide open vistas, a vast blue sky filled with double rainbows and nights of a thousand shooting stars, snow covered mountains with world-class ski areas, golf courses, and mile upon mile of hiking, walking, and horseback riding trails.  It's clearly the shortest distance between paradise and the place you call home.