MIAMI (ad)VICE

Hi Readers

I've been in Miami since the end of January 2011.  I stuck with my Dream House (a waterfront property in Surfside, on the northern end of Miami Beach), and after waiting a full 7 months while the property was dragged through court, we were finally able to purchase it at the end of July.  It was an REO (foreclosure) and I paid way above the asking price.  I'm convinced it's worth at least $100K more than I paid, even if I sell it without doing any work (actually, I think I could get $150K more, although I'm not even slightly tempted to sell).  Since I intend to keep the property for many years, perhaps until I'm on my deathbed, I've begun serious renovation, which entails replacing both bathrooms (at a cost of $5K each) and  the kitchen ($9K), and turning the garage into a 3rd bedroom/bathroom (20K).   I'm also planning rebuilding the dock and seawall (20K and 5K respectively), and putting in a pool (20K).  I intend to use this property as my base over the next 2 years while I make many more purchases.

I've also bought another property in Shore Crest for $133K.  It has a pool, vaulted ceilings, 2500 square feet, and many other pluses.  Minuses are that the area isn't as renowned as Surfside or Miami Shores, although it's not a bad area.  It's just a one minute drive from one of the bridges heading over to Miami Beach, so if you're a water lover it's well situated.

To sum up my Miami Adventure since first flying here in October last year:

I still love this city.  The weather from October to June is phenomenal.  Warm and sunny every day.  Right now it's hot, but if you're living near the beach it's not too bad.

Buying property has been far harder than I'd imagined, although perserverence has paid off.

There aren't a lot of REO's hitting the market.  I've heard rumors that Obama has put pressure on Fannie Mae and Freddie Mac to keep REO's off the market until after the election next year.  This would seem logical.  I expect that he'll come out with another property stumulus policy (eg. a tax break) to push up prices over the coming year, thereby ensuring his re-election.  As soon as he's re-elected, he'll allow Fannie and Freddie to dump the enormous backlog of REO's, which will bring down prices in 2013.  But considering how hard it is to lock in a good deal, I still recommend investing in any property that speaks to your heart.  But again, there's no need to rush things.

There are great deals out there, but one needs vigilance, patience, and presence (there's no way you're going to get amazing deals unless you're here).

Renovation costs are roughly 10 times the price of China.  It's been quite a shock.  However, if you buy sensibly you should easily recuperate your expenses.

The ONLY way to buy REO's is through the listing agent.  Don't bother using an agent who isn't the one who will be submitting all the offers, since you won't know how high you'll need to bid to secure the property for yourself.

Short sales are becoming a much more feasible way of buying distressed properties than they were last year.  Banks are agreeing to short sales much faster than before, and for much lower prices.

I've noticed some regular sales (Ie. not short sales or REO's) that went through at phenomenal prices.  I house near mine in Surfside sold (as a regular sale) for $220K in June, and the following month the buyer flipped it for $280K!  The lesson is that it doesn't matter if it's an REO, a short, or a regular.  If you know the market and you make lowball offers regularly, sooner or later you'll hit the jackpot.  I believe that I have, twice!

Hi Ajay

I've paid cash for both properties.  The reason for paying cash is not because foreigners can't get financing, but because NOBODY can get financing when buying REOs.  All banks have stringent criteria when granting mortgages, the most important being that the house is move-in ready.  REOs never satisfy this criterion.  This means the only way to purchase an REO is with cash, and then apply for cash-out financing after the purchase.  I haven't done so yet on either property, but intend to do so as soon as they've been fully renovated. 

I'm looking at houses in the $120K to 350K range.  If they're at the bottom of this range then I assume they'll need at least 100K to renovate, which means a real price of around 220K.  There are two reasons I'm sticking with this range:
1. It's easier to get financing for houses in this range
2. You'll be renting the house out for about $2K to 3K a month, which means a much higher standard of tenant – someone who will hopefully pay on-time and not destroy the house

When I'm shopping for houses I always consider the rental income, and always use the 1% rule, meaning I make sure that the estimated monthly rental income is at least 1% of the total house price.  So if I'm looking at a house for 200K that needs the bathrooms and kitchen remodeled (that'll set you back a total of 20K) then the total house price will be 220K.  If I don't think it'll rent out for $2,200 a month, then it's a bad deal.

It's good to use zillow.com to get a rough estimate of the value of the house, and the estimated rental income.

When buying in certain suburbs (particularly Miami Shores and Biscayne Park) you must be careful not to buy a house that has any illegal additions.  The most common illegal additions are when the garage has been converted into a bedroom plus bathroom.  In the areas I just mentioned you need to get a permit from the government (called a Reoccupation Permit) after you buy the house.  An inspector will come to the house to check it out, and if they see illegal additions (meaning changes made to the house without using an architenct, structural engineer, licensed electriction and plumber) then you'll need to bring the addition "up to code" or demolish it completely.  I've come across many such houses, in great areas, selling for almost half their estimated value simply because people don't want the trouble that comes with illegal additions.

The rental market is very strong here in Miami.  There is a shortage of rental houses, simply because so many people have lost their homes due to foreclosure and they now need to rent.

A lot of people on this site want to know more about financing.  I haven't tried yet, but the info I've gleaned from lenders is this:
If your house is worth more than 100K you will most likely be able to get a mortgage (just ask any realtor to introduce you to a mortgage broker, who will then introduce you to a lender, but they'll charge up to 2% of the mortgage amount in commission, which they call an Origination Fee).  If you want to get a pre-purchase mortgage (ie. apply for it during the buying process) then you can borrow up to 70% of the purchase price.  If you want to get cash-out financing (which means paying in cash, and then applying for a mortgage after you purchase) then you can get up to 50% of the purchase price.  However, if you apply for cash-out financing within 6 months of purchasing then they'll still treat it as a pre-purchase mortgage and still lend you 70%.

Very important is to know that they won't necessarily lend you 70% of the price you've paid.  They'll only lend you 70% of what they think the house is worth.  They ascertain the value of the house by making you get (and pay for) an appraisal.  This is simply some idiot working as an appraisor coming round to look at the house and telling the bank what he thinks the house is worth.  The cost of the appraisal is about $400 to $500.  Don't be surprised if he appraises your house a lot lower than what you've offered, especially if it needs renovation.  Let's say you've bought a house for 300K but it needs a new kitchen, bathrooms, a paint job, and some landscaping work.  These changes will cost you about 30K, which means you'll end up spending 330K.  However, the appraiser will most likely take the cost of a similar home in perfect condition (let's say 350K) and then come up with an appraised value of 70% of that, namely 245K.  He does this because he's an idiot and has no idea how much it really costs to fix up a house, so to cover his back he just multiplies the cost of a similar but perfect home by 0.7.  The problem for you is that the bank will now only want to lend you 70% of the Appraised Price, which is 171K.  So instead of being able to borrow 70% of what you've paid you'll only be allowed to borrow about 50% of what you've paid.