investingfromtheright

I am retired and take educated guesses on all things financial.

July 07, 2009

July 7, 2009: Billions for Urban Real Estate Investors

Let the monies roll in! The Housing and Economic Recovery Act of 2008 has arrived in an urban area near you. Almost $4 billion in Federal grants and an almost equal amount of matching State and Local Grants are pouring in to targeted urban areas for the purchase, renovation, demolition and new construction of homes.

My opinion is that this operation will ultimately fail. But for the investor, the ability to purchase and make use, for better or worse, of real estate with this manna from heaven is compelling as an immediate investment opportunity.

If you live near an urban area, make haste wisely to find out through a Realtor, Banker or City Planner (already, politicians are awarding property grants to political friends) about areas approved for investment.Five areas are included in this legislation that opens the gates for investors:

1. Financing Mechanisms (2301-c-3-B) for purchase and redevelopment of foreclosed upon and residential properties, including such mechanisms as soft seconds,loan loss reserves and shared equity loans for low to moderate income buyers.

2. Purchase and Rehabilitation (2301-c-3-B) to purchase and rehabilitate homes and residential properties that have been abandoned or foreclosed upon in order to sell, rent, or redevelop such homes and properties.

Relevant Definitions:

Abandoned: A home is abandoned when mortgage or tax foreclosure proceedings have been initiated for that property, no mortgage or tax payments have been made by the owner for 90 days or more, and the property has been vacant for at least 90 days.

Current Market Appraisal Value: The current market appraisal value means the value of a foreclosed-upon home or residential property that is established through an appraisal made in conformity with the appraisal requirements of the URA at 49 CFR 24.103 and completed within 60 days prior to an offer made for the property by a grantee, subrecipient, developer or individual homebuyer.

Acquisition: Section 2301(d)(1)of HERA requires any purchase of a foreclosed-upon home or residential property under NSP be at a discount from the current market-appraised value of the home or property. Such discount shall ensure that purchasers pay below-market value for the home or property. For the mortgagee foreclosed properties, grantees must seek to obtain the maximum reasonable discount from the the mortgagee, taking into consideration the likely carrying costs of the mortgagee if it were not to sell the property to the grantor or subrecipient.

Rehabilitation: Direct home ownership assistance to persons whose incomes do not exceed 120% of median income.

24 CFR 570.202 states eligible rehabilitation snd preservation activities for homes and other residential properties. Note that rehabilitation may include counseling for those seeking to take part in the activity.

3. Land Banks: 2301 (c-3-C) states that a Land Bank may not hold a property for more than ten years without obligating the property for a specific, eligible development in accordance with NSP requirements. HUD does not believe that holding property alone is sufficient to stabilize most neighborhoods.

4. Demolition:2301 (c-3-D) allows the purchase and demolishment of blighted structures.

5. Redevelopment: 2301(c-3-E) allows redevelopment of vacant or demolished properties. New houses may be constructed.

Well-schooled investors or consortium of investors will do extremely well in all phases of this program. As mentioned above, I do not think this will have a long term positive impact upon urban housing. Tenants determine what remains clan and fit for habitation and what does not. However, the investor(s) will reap a windfall buying distressed real estate and flipping it to builders or local homeowners who can get cheap financing on great terms. Sound familiar? Shades of the housing bubble all over again.

Many years ago, I was rehabilitating properties and innocently asked a long time -and very successful- urban real estate investor "When will A_______run out of properties to rehab?" He laughed and said,"There will never be a time when an urban area runs out of properties to rehab". He was right. And now is a great time to jump on the bandwagon and flip,resell or use the Section 8 program for your rental tenants using other taxpayer monies.

And here I am vactioning in Palm Beach. Time to get on home and get in on the action.

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