APPLE VALLEY ’06 UNIT VALUES RISE AT A SLOWER PACE

By Bill Swift
Weist Realty & Mortgage Co., Inc.

    Wiest Realty tracks price patterns in Adelanto, Hesperia, Victorville, and Apple Valley.  Data taken from public records indicates a general continued rise in prices per unit, per square foot, and per bedroom.  Apple Valley data indicated sustained price rises for 2 to 4 unit properties in 2005 with a moderation in price increases in the 1^st quarter of 2006.

Apple Valley price trends by various units of comparison were reported as follows:

The data for 2005 suggests a 34.61% average annual increase in unit prices as compared to an annualized rate for 2006 of 12.78%.  The average quarterly price per square foot rose 39.94% over the 2005 calendar year with a corresponding 34.61% increase in prices paid per bedroom.  However, 2006 data indicated reduced values per square foot and per bedroom.  The overall trend in unit prices implies continued demand given the fact that the prime rate increased from 5¼% in January of 2005 to 7¼% by the end of 2005 (a 38% increase) and had risen to 7½% by March 2006.

Hesperia 2 to 4 unit sales data indicated a flattening of price increases in the 3^rd and 4^th quarter of 2005 with a rebound in 2006 as follows:

The increase in average prices per unit between the last quarter of 2005 and the first quarter of 2006 was 8.66% which equates to an annualized increase of over 34%.

Victorville had the lowest average prices per unit with relative price stability on a “per unit” basis.  It also has the smallest sample size of the group, thereby increasing the chances of error.

Data showed the following trends in Victorville:

The data suggests unit prices in Apple Valley and Hesperia reached similar levels in 2006 due to greater appreciation in Hesperia during the first quarter of 2006.

What does it mean to us?

 •  We believe 2 - 4 unit prices will increase at a slower pace baring any sustained increase in interest rates or other factors such as job loss, or energy costs.

 •  We believe Adelanto 2 - 4 unit values will accelerate quickly in the 2nd quarter of ’06 since this area is a viable alternative to higher unit prices in this region.

 •  We find that many investors from Los Angeles and Orange Counties view the High Desert as a desirable market.  Affordability figures in the area are among the best in the state and key demographic indicators are positive.  Income multipliers are reasonable relative to Los Angeles and Orange Counties and upward rent pressure has been favorable resulting in the prospect of positive cash flow over a shorter holding period.

DEBT SERVICE COVERAGE - WHAT DOES IT MEAN TO YOU?

By Bob Blanchard
Washington Mutual Bank

If you’re a seller, you need to be aware of the possibility that your buyer’s loan request may be cut.  If you’re the buyer, know how the system works so you don’t get caught with a loan that is too low to close the deal.

Here’s an example — let’s say the bank’s appraiser or underwriting department projects a net operating income (gross income less vacancy and operating expenses) of $50,000.  The sale price is $900,000.  The loan program calls for a maximum 75% LTV with a DSCR of 1.2 and assume the underwriting interest rate is 6% (Note that the underwriting rate may not be the same as your actual note rate).

Here’s how it’s done — (NOI / DSCR) = Amount of NOI available service.  DSCR’s are commonly over 1.0 so there is some cushion for a reduction in NOI without compromising the amount of NOI available to pay the mortgage.  In this case, our NOI available for debt service would be $41,666 or $3,472 per month.  If our rate is 6% and our term is 30 years, our monthly mortgage constant (principle & interest payment expressed as a decimal) would be 0.005996.  Now take your NOI available for debt service ($3,472 per month) and divide it by your monthly mortgage constant to get your loan amount.  Thus, $3,472 / .005996 = $579,100.  Surprise!!!!!  Your 75% LTV just turned in to a 64% LTV!

Know the numbers before you make the offer!

FINANCING OPTIONS FOR YOUR 2 TO 4 UNIT PROJECT QUESTIONS & ANSWERS

By Ted Grose
1st Mortgage Advisors

    Duplex, triplex and fourplex rentals also known as 2-4’s; it’s a world most of us can afford to play in and where many a successful investor made their start. Some have even preferred to stick with 2 to 4’s in order to spread risk and provide for greater liquidity.

If you don’t intend to occupy you are an investor.  Buyers intending to occupy the property have the financing advantage, both in loan amount and rate.  The choice of whether not to occupy will affect the cash flow of the property.  Investors pay more in rate, often 1% or better, than owner/users.  If you’re a first time buyer it may be worth considering the purchase of rental property rather a single family primary residence, especially given today’s market and affordability issues.

Does my credit matter?
    Competitive mortgages are available for most anybody with average credit.  Lenders frequently offer favorable financing to those with credit scores as low as 640.  Financing is also available for the more credit challenged and is priced accordingly.

Will my income be a factor?
    Today’s mortgage market offers a tremendous variety of financing options depending on your credit and assets.  They range from fully documented loans evidencing income and assets to the extreme no income no asset verification mortgage.  Most are offered to 2-4 purchasers and have acronyms such as Full Doc, SISA, NIVA and NINA to mention a few.

What is the smallest down payment I can make?
    While your best pricing will be had with 10% down or more, programs are offered that will finance up to 95% of the purchase price of 3 to 4 units.  Some lenders say they will finance 100%, but the pricing (rate and cost) of the loan may not make sense.

How will the lender look at rental income?
    Rental income will be a factor.  Unlike larger apartment buildings, 2-4’s are qualified much like a single family residence.  Depending on the loan program the lender will want to know your gross household income along with the rental income of the building.  The best priced financing will consider only 75% of the gross rental income and it will be added to your gross income to give a debt ratio.

If I purchase under market can I leverage my equity as soon as I close escrow?
    He who has the gold makes the rules and he who makes the rules says the value of a property will be the lower of purchase price or appraised value.  If you choose to refinance the day after you receive title to the property your purchase price will be a huge factor in the appraised value.

When can I refinance and pull out equity?
    Generally lenders are looking for a year’s ownership (seasoning) of the property.  However, today’s market is so competitive many lenders are accepting appraised values for determining loan amounts with as little as six months seasoning.

How do I get it to cash flow in the first few years?
    The magic is in finding out if the total mortgage payment, insurance, property taxes and estimated maintenance expenses will be covered by the rents.  There are a number of very popular financing options that provide for reduced payments in the beginning years of ownership.  They include hybrid adjustables, pay option ARM’s and mortgages with interest only payments.  Careful consideration needs to be given whenever using these programs as part of your investment strategy.

What kind of financing…
    Remember when it comes to financing real estate you pay to play.  The less income documentation you show, the less down payment you provide and the lower your credit score the higher the rate and fees will be.  The good news is that mortgage money has never been easier to get.

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