It may be a buyer's market, but landing a house is not as easy as it seems, even with a near-perfect credit score
I was chased by a wild dog. I saw a home so stripped someone had even taken the front door. I attended a foreclosed-home auction that featured cheerleaders yelling in my ear. Finally, in March, I closed on a home I'm now renting out as an investment property. I paid $125,000; it had sold for $345,000 four years ago. In my one-year search, I came to expect surprises and to realize that even a good credit score doesn't get you far.
One thing I learned: Avoid foreclosure auctions. The homes need lots of work, and most buyers don't have time to do proper inspections. Ditto for "short sales," where an owner tries to sell a home for less than what he owes the bank. There are too many decision-makers involved. I made an offer on a short sale. Nine months later it's still on the market.
I began my search in my Los Angeles neighborhood, but even with a big down payment, prices hadn't fallen enough to produce positive cash flow for a rental property. So I searched Realtor.com for homes in suburbs a train ride away that seemed likely to have job growth. I found a two-bedroom, one-bath Spanish-style bungalow listed for $129,000 in Ontario, Calif. I offered $123,000; we settled on $125,000.
I figured getting a loan would be easy. I have good credit, no debt, cash in the bank, and a job. I was pre-approved for hundreds of thousands of dollars. Bank of the West wanted to charge me five points—a $5,000 fee to borrow $100,000. Says a bank spokesman: "Higher points for an investment property reflect the higher risk on that mortgage." A rep at a major national bank said it wasn't "competitive at loans under $100,000." LendingTree.com promised to find me five offers in 48 hours. Two days later it said it couldn't help.
Ultimately, an independent broker, Los Angeles' Legend Mortgage, found me a loan with an institution I had never heard of, Burlingame (Calif.)-based Provident Funding Associates. I had to put down more than planned: 25%. And I'm paying 6.2% and one point in fees, more than the 5%, without points, I would have paid if the house were to be owner-occupied. Provident put me through the wringer. Bank statements, tax returns, notarized interspousal escrow instructions. At one point, I was scraping and painting a house I didn't own because the lender wanted damage repaired. I was out about $1,000 for inspections and other work before I was even sure I was going to get the loan.
The bank that owned the property wasn't much fun, either. With such properties, banks offer a tight window for you to cancel your purchase based on inspections—seven days, in my case. And the bank wanted me to pay $100 a day if I didn't close on the agreed day. This led to stress—and requests for waivers—on my end. On the bright side, bank-owned properties commonly sell "as is," but with mine the bank paid more than $5,000 for a new sewer line, termite abatement, and other repairs.
Then it was time to rent it. I checked similar properties on Craigslist, then underpriced the rent at $1,100 a month to get a tenant fast. I had 16 interested parties in a few days. Some of the stories were heartbreaking—families living in cramped apartments and on food stamps just wanting a house for their kids. I showed it to two people and took an application from one, verifying employment and paying $30 to MySmartMove.com to check his credit.
In the end, my total cash investment was $47,000. Payments—taxes, insurance, everything—will be $750 a month (plus any repairs). If my tenant pays me for a year, I'll get a 9% return, not including tax advantages or price appreciation. If being a landlord is a hassle, the hope of a 9% return will ease the pain.