Category Archives: Uncategorized

Do you qualify as “low income” in Orange County?

Source: OC Register

A family of four with an annual income of $84,450 or less now qualifies as low income in Orange County. A single person living alone qualifies as low income if he or she earns $58,450 or less a year.

Orange County has the fifth-highest income threshold in the nation, according to new income limits released last month by the U.S. Department of Housing and Urban Development.

Record-high rents and home prices are driving up Southern California income limits. Orange County apartment rents, for example, increased 20 percent over the past seven years, while the median sale price of an Orange County house has jumped 40 percent.

Dana Point harbor revitalization


Here’s an update on the Dana Point Harbor Revitalization Project :

We’re already seeing some improvements being made to our beloved Dana Point Harbor.
Check out this 3-minute video on the proposed future state of Dana Point Harbor.

According to an article published in the Orange County Register, 3 firms are being interviewed, design proposals have been submitted, and final design plans will be reviewed this month. Under the proposed public-private partnership, a developer would design, fund and build the proposed improvements, then operate those portions of the harbor over a 50-year lease, before returning the improved property back to the county.

County officials say reconstruction of the area’s main retail center will be completed first, and the harbor should be fully restored within a decade. In the meantime, the county has begun work along Dana Point Harbor Drive, which encircles most of the harbor’s land side, adding light signals and extra lanes in preparation for the larger project.

In January, OC Public Works will start putting new facades on buildings on the wharf to keep them solid until the actual project begins. For more information on the revitalization project, visit www.ocdph.com/revitalization.

Also, check out the most recent concepts around the Doheny Village Renovations here.

Finding a property’s square footage

Home for sale in Dana Point. Click photo for details.

Who is right? The appraiser measures your house, but tax records show something different. Or, maybe you’re walking a couple of different townhomes that appear to have identical floor plans but one listing has a higher square footage estimate than the other. Why is there sometimes a disparity between the all of these square footage figures?

At times, an area such as an enclosed patio, basement, detached studio, porch, or garage is included in the square footage when it really shouldn’t be included. Remember too that an area must have direct access to the main house to even begin to be considered as living area. If you have to exit the home to enter another area, that other area is not considered square footage (it might still have value, but it’s not counted in the total square footage by the appraiser). There is square footage and livable square footage.

What do appraisers INCLUDE in the square footage of a house?

  • Interior spaces that are conditioned spaces (heated, and cooled, if necessary) such as bedrooms, bathroom and living rooms
  • Enclosed patios that are heated and (if the rest of the house is) air-conditioned and are similar in workmanship (quality) as the rest of the home
  • Finished attic space as long as it also conforms to the original structure (can’t just add carpet and call it a bedroom)

What do appraisers EXCLUDE in the square footage of a house?

Some common spaces are not considered to be living space and are therefore not included when calculating the square footage of a house:

  • Screened patios (and open ones as well)
  • Garages, unless they have been converted to living space
  • Unfinished areas, regardless of the level in the home
  • 2nd floor airspace (for example: open space, above an entry, or a vaulted room)
  • The open area above a stairway on the second floor
  • Detached living space such as an office in a extra building on the property – these spaces are measured separately
  • Spaces that are accessed only by traversing non-living space, like an enclosed storage area of a garage

These spaces may be determined to add value to the property upon analysis of the comparable properties in an area, but they are not included in the square footage.

Why this matters: This conversation underscores the importance of marketing your home accurately. After all, it can make a price and value difference whether a property is actually 1500 or 1700 square feet, right? Case-in-point: I recently measured a home for an investor that ended up being the 3400 sq ft model instead of the 3000 sq ft model as tax records incorrectly stated. My advice? If you doubt the accuracy of your square footage, hire an appraiser or someone else who knows how to measure a house accurately. It’s better to be informed up front than leave money on the table unnecessarily.

 

Beginner’s guide to loans

Home for sale in Dana Point. Click photo for details.

How much home can you afford? There are several loan programs available, and depending on your credit history, there is bound to be one that is perfect for you. Here are a few examples of the most popular programs offered today:

Fixed-Rate Loans

The fixed-rate mortgage is the most popular mortgage program in use today. Fixed-rate loans offer the borrow a fixed interest rate for the life of the loan, typically 15 to 30 years. Borrowers have peace of mind knowing that their monthly payment will not change over time. Conventional fixed-rate mortgages have underwriting requirements established by Freddie Mac and Fannie Mae, and require certain down-payment and debt-to-equity ratios to qualify. Fixed-rate loans are especially attractive to buyers who plan to stay in their home for more than a few years.

Adjustable Rate Loans

With an Adjustable Rate Mortgage (ARM), the interest rate changes periodically, and payments go up or down accordingly. Rates are tied to an index that reflects the cost of money at any given point in time. Generally speaking, lenders charge a lower initial interest rate for the ARM than for the fixed rate mortgage. If you are expecting interest rates to decrease in the future, or if you are trying to maximize your purchase power today knowing your income will rise in the future, then this loan may be right for you. Adjustable rate loans are attractive for buyers who expect to be in the home for a short period of time.

FHA and VA Loans

The Federal Housing Administration (FHA), offers loans for low-to-moderate-income home buyers. FHA loans have lower down payments, and have relatively easier requirements than conventional fixed-rate mortgages. FHA mortgages have no income restrictions and even those with lower credit scores may be considered. Past bankruptcy does not necessarily disqualify borrowers from using this program.

In addition, the Department of Veterans Affairs (VA) offers a zero-down mortgage program. To take advantage of this program, borrowers need to be among those listed as veterans and service personnel in the U.S. military. One of the biggest benefits of this program is that it eliminates the need for private mortgage insurance.

>> Review common mortgage terms

A rookie’s guide to buying a rental home

Duplex for sale in Dana Point. Click photo for details.

Source: OC Register

As rents hit record highs, here’s a rookie’s guide to buying a rental home

Hugh Siler had a vision when he bought a full block of small houses in Orange this spring. He would restore the homes, built in the early 1900s and long fallen into disrepair, to their original state. After that, he’d rent them out at top dollar.

One house is done, and if it’s any sign, his payoff will come sooner than later. The 450-square-foot, one-bedroom cottage on Palmyra Avenue near Orange Plaza rented for $1,850 a month – immediately.

“Literally, it rented before I even stuck a sign in the ground,” Siler said a couple of weeks ago. His tenants, a young couple, plan to move in by the end of November.

As rents break records, apartment vacancy rates stay low, and millennials delay homeownership, buying houses to rent appeals to investors large and small. But the foreclosures of the Great Recession have been receding for years, and bargains can be hard to come by in Orange County, where the median home price was $640,000 in September.

That’s led many local buyers to set their sights on less pricey property in the Inland Empire and sometimes other states.

“Most investors still invest in their backyard,” said Daren Blomquist, spokesman for Irvine-based Attom Data Solutions. “So for those folks in Orange County, Riverside and San Bernardino are good options.”

Of course, risks abound, including the impact of housing and economic policies to be shaped by a new president, albeit a real estate developer. Also, Federal Reserve Chair Janet Yellen said last week the U.S. central bank is ready to lift interest rates. The hike is expected in December.

Earlier this year, real estate adviser RCLCO predicted, “If household income growth for lower and middle-class Americans remains slow relative to historic gains, and home mortgage standards do not loosen for subprime borrowers, it is likely that the recent boom in single-family rentals is here to stay.”

Here are five additional things investors and would-be landlords should take into account.

POPULAR PLACES

Attom released a report in October showing potential profits on rental homes throughout California. The analysis included capitalization rates – or rates of return on a real estate investment property based on the income the property is expected to generate.

With a potential annual gross rental yield of just 4.3 percent, Orange County came in at No. 461 out of 473. By comparison, San Bernardino County has a 7.6 percent potential capitalization rate, ranking No. 311. Riverside County has a 6.1 percent potential cap rate, ranking No. 399.

So where else are Orange County investors looking?

The company did an analysis for the Register last week and found the top 10 counties where Orange County residents own investment homes are led by Riverside, Los Angeles and San Bernardino counties.

Those places were followed by Clark County, Nev.; Maricopa County, Ariz.; San Diego County; Mohave County, Ariz.; Kern County; Wayne County, Mich.; and Harris County, Texas.

FINDING A NICHE

Many investors specialize in one type of residential property, whether it’s single-family houses, mobile homes or apartments.

Siler has found a niche within a niche: restoring and renting out historic homes.

It can be a difficult proposition. For one thing, he said, a bidding war ensued over the five homes – one a duplex – that he purchased in April. He said he spent a total of $1.62 million to come out the winner.

Then, there’s the exacting work of creating authentic restorations. “Most people would say I’m fairly nuts to take this on,” he said. Compared with remodeling homes from the 1970s or ’80s, “When you do a vintage home, the template goes out the window.”

He’s had some experience, restoring the historic Shaffer Cottages, a set of four tiny, attached apartments he bought elsewhere in Old Towne Orange for $585,000 in 2011. That project saw him spend about $175,000 and some 4,000 hours on refurbishing and restoration.

At least he could count on some future cost-cutting. The original, refinished floors eliminate the need to buy carpeting for every new tenant, and it takes only a gallon or two of paint to refresh a small interior.

RENTS UP

One of the most dramatic shifts in the U.S. housing market in the past decade was the “unprecedented” increase in single-family home rentals, RCLCO said in a report this year.

But, the firm added, “While there has been widespread discussion of the economic and demographic shifts affecting the U.S. multifamily rental market, a major component of the overall rental market – single-family rentals – has been largely overlooked.”

Reis Inc., which tracks apartment rents, said rates went up in all 79 major U.S. metro areas it studies. The average rent for all metros was $1,271 a month, up 19 percent over the past 4 1/2 years.

In Southern California, rents hit all-time highs. Orange County rents were the ninth highest among the top 79 U.S. cities.

The average asking rent for an Orange County apartment climbed to $1,781 a month, following 61/2 years of steady hikes, according to Reis. In the past 4 1/2 years, rents shot up 14.3 percent, or $223 a month.

In Los Angeles County, the average asking rent reached $1,676 a month, rising nearly 18 percent over the past 41/2 years, Reis reported. In the Inland Empire, the rents were up 17 percent to $1,239.

Meanwhile, homeownership has been dropping, and millennials are expected to rent for longer than their parents did.

John Burns, an Irvine-based real estate consultant, predicts an overall 60.8 percent homeownership rate among all age groups by 2025, the lowest since the mid-1950s.

THE RISKS

Still, investors can face plenty of uncertainty, starting with their newly purchased property.

For one thing, often, a home inspector won’t find everything, Siler said.

“So make sure to set aside an additional fund of money – about 15 percent of your overall renovation budget,” he said, “and call it your ‘just in case’ fund.”

Investors also say it’s best to have at least six months of reserves in the event a renter doesn’t turn up right away.

Institutional investors – those with 10 properties or more – have purchased more single-family rental properties this year, even though average returns dropped to a nine-year low, Attom said in an Oct. 27 news release. But, the data firm said, “After a drop-off in single-family purchases by both individual and institutional investors over the past two years, we’re starting to see investor acquisition activity pick up again.”

Blomquist said it’s a good idea for smaller investors to pay attention to what the larger, better-capitalized investors are doing.

“In some cases it may be so the smaller investor can simply follow the lead of larger investors who have found a market or strategy that delivers strong returns,” he said. “But in some cases, it may be to avoid the strategies and markets employed by larger investors, so the smaller investor doesn’t have to compete.”

NOT A LANDLORD?

A lot of mom-and-pop investors like the idea of collecting monthly checks, but balk at the hassle of finding renters or fixing dishwashers. Or they worry about being too far away to handle the upkeep.

An Irvine company is one of one of several online investment management firms helping buyers more easily pick up single-family rental homes in lower-cost markets where returns are higher.

HomeUnion acquires the property on behalf of the investor, completes the documentation online, lines up property management, and later helps the investor figure out when to sell. Transaction fees are 3.5 percent of the purchase price; management fees are 10 percent to 10.5 percent of the rent.

The company, operating in 18 U.S. markets, has penned the motto, “You invest, we do the rest.”

It appears to be working.

The firm recently announced plans for an initial public stock offering.

How renters should prepare for home ownership

Source: OC Housing News

To prepare for home ownership, rent a property using 23% or less of your gross income. Save 8% of your gross income in a special down payment account you don’t raid for other lifestyle expenses or purchases. In less than two years, you will have the down payment to purchase a property comparable to your rental using FHA financing. With the discipline you gained from living within your means and saving for a down payment, you will succeed as a home owner and build equity through paying down a mortgage. You might even be rewarded by the appreciation fairies and complete a move-up once you have about 30% equity in your home and you can sell, cover the closing costs and still have 20% for a down payment on a nicer property.

PITI

PITI is short for principal, interest, taxes and insurance, but it also includes other known costs such as HOA dues and private mortgage insurance. When a lender calculates the maximum loan they will extend a borrower to buy a particular property, they start with the borrowers income and apply the maximum debt-to-income ratio, currently 31%. They take this number and divide it by 12 to come up with a maximum PITI. For example, let’s say a borrower making $100,000 per year wants to buy a home. The lender will allow them to put $31,000 per year ($100,000 x 0.31) or $2,583 per month to cover PITI.

Maximum loan balance

When lenders calculate your maximum allowable loan balance, they back out taxes (including Mello Roos), insurance, and HOA dues to calculate the remaining amount left over to cover the payment, which includes principal and interest. Generally, about 25% of PITI is consumed by taxes, insurance and other costs. Let’s assume $583 is consumed for these backed-out items. The remaining $2,000 is available to make a payment. From that, lenders use another formula that takes into account the interest rate to calculate the maximum loan balance.

If we stay with our example from above, a borrower making $100,000 per year making a $2,000 monthly payment can borrow $440,000 using 20% down conventional financing or $381,175 using FHA financing.

Rent and Savings

A renter making $100,000 a year should be paying about $1,900 in rent and saving about $700 per month toward a down payment. That translates to a 23% rent-to-income ratio.

From the above example, a $440,000 conventional loan balance leaves a $110,000 down payment to purchase a $550,000 house. At $700 per month, it will take 158 months to save the $142,052 for a down payment. Thirteen years is a very long time. That’s why so many people opt for FHA financing with 3.5% down. At $700 per month, it only takes 20 months, or just over a year and a half, to save the $13,825 required to cover the FHA down payment on a $395,000 property.

Did you notice the catch to using FHA financing? People who don’t have a 20% down payment have to settle for much less house on the same income. This is why the tradition of buying a starter home, waiting until it accrues 20% equity, then selling for a move-up is such a big part of our housing market.

How Trump’s tax plan will shift housing demand

Source: OC Housing News

Trump’s tax plan will shift housing demand from move-ups to entry-level

Like it or hate it, Trump’s Tax Plan will impact real estate markets across the County. By greatly reducing the tax advantage of mortgage debt, many renters may choose to remain renters rather than assume large debts to buy a house. However, by reducing taxes on lower-income Americans, Trump’s tax plan should stimulate demand for entry-level housing.

Photo: The Orange County Register

One of Trump’s tax proposals involves raising the standard deduction. The Trump Plan will increase the standard deduction for joint filers to $30,000, from $12,600, and the standard deduction for single filers will be $15,000.

So how would increasing the standard deduction impact the home mortgage interest deduction? When people file taxes, they can either itemize or take the standard deduction. Only high wage earners with deductible expenses greater than the standard deduction itemize, and most of them do so because they have a large mortgage debt that costs them more than $12,600 per year in interest.

At 4% mortgage rates, any family with a mortgage larger than $315,000 pays more than $12,600 in mortgage interest debt alone to prompt itemizing on taxes. Most Coastal California homebuyers borrow more than this amount because house prices are so high, it’s a necessity. If the standard deduction were raised to $30,000, only borrowers with mortgage debt exceeding $750,000 would pay the $30,000 in mortgage interest that provides them enough deductible expenses to itemize. A huge swath of Coastal California borrowers will stop itemizing and stop taking advantage of the HMID.

Further, since high-wage renters would have a $30,000 personal exemption, the pressure to buy rather than rent would lessen, reducing demand overall.

The current home mortgage interest deduction provides a strong incentive for high wage earners to buy rather than rent. This distorts the market in areas like Coastal California and inflates house prices, and in the end, the subsidy only benefits bankers.

An increase in the personal exemption is a major tax cut for low-income and middle-income Americans because it reduces their taxable incomes by $18,400 per year. Increased disposable income will increase demand for low-end housing. So while the increased personal exemption may reduce demand in high-cost neighborhoods, this may be offset by increased demand in low-cost neighborhoods.