Escape From Pianosa

“Affordable housing” is coming to Baltimore. Why? Because politicians say so. As if making it more difficult and less profitable for developers was the best way to encourage the construction of new housing. As if Baltimore, a city experiencing a truly remarkable renaissance after being on its last legs not too long ago, should be telling developers: “hey, don’t build here!” If anything, they should be giving out tax breaks and high fives to the companies that are re-building the city.

I can understand this type of political gamesmanship in places like Howard County where there really isn’t much in the way of affordable housing for blue collar workers. But Baltimore City has TONS of affordable housing! Tons!!!

I went to an auction yesterday for a 3 bedroom house that sold for $57,000, and it had just been renovated. It was clean, safe, lead-free, and ready to move in. Does anyone think that a developer is going to build houses cheaper than THAT?

I know what you’re saying, “but what neighborhood was that house in?” And you’re right, it’s not the best (or the worst) neighborhood in the world. Do you know why it’s not so great? Because of the crime and the terrible schools.

And who’s fault is that? Please tell me, who is responsible for the crime–is it the developers, or is it the politicians?

The raucous celebration to commemorate the collection of the lost rent was interrupted by a letter from the Baltimore Department of Public Works. The city fined me for having trash in my backyard. Well, not really my backyard, it’s my tenant’s backyard.

I stopped by today to have her clean it up and she wasn’t there so I went around back to see the offending trash and I found a broken TV laying on top of a deflated children’s swimming pool. At first I thought, wow, this lady is throwing away TVs twice the size of mine, and upgrading to TVs three times the size of mine!

The other thing that struck me was the fact that I practically had to wade through giant mounds of trash, old furniture, and other assorted debris just to get to the alley behind the house. I wonder who fines the city when they leave trash in the public alleys.

Check out this funny parody of newbie real estate investors from Flipper Nation. If this is you then you need to talk to someone with more than 5 weeks experience…

HT to Matrix.

Occasionally I will mail out letters to commercial property owners in Baltimore to see if I can’t find someone who is willing to sell at a discount. Selling to me directly saves a lot of time and money because you don’t have to involve brokers or search for a buyer (I’m already here!).

Anyone who owns a home is familiar with the postcards from people proclaiming that they want to buy your house quickly and for cash. This tactic is very common amongst residential investors and probably not very common amongst commercial investors, meaning the response rates are much higher (5-10%).

Most of the respondents are curious as to why I’ve contacted them and ask questions like “how did you find me?” Maybe they don’t know that their name, address, and most of the information they gave at settlement is available in the public record.

Usually the response is something like: “well, you know at the right price, everything is for sale,” they say with a sly grin. This is usually followed by an outrageous price, which I find amusing. These aren’t the people that are going to sell me a good deal anyway.

My favorite was the guy who had an apartment building in less than desirable neighborhood in Baltimore City and wouldn’t accept anything less than $200,000 per unit. In a neighborhood where single family houses are selling for no more than $120,000. I figured the cap rate to be about 1.5%. No thanks!

Now if I wanted a really bad deal, would I spend so much time writing letters? I guess it never hurts to ask…

Seth Godin shows us why there’s never a “best time” to start anything. My favorite:

“The best time to start is when you’ve got enough money in the bank to support all contingencies.”

Zillow is a fun little website that attempts to give you an estimate of your home’s value. They call it a “zestimate,” which is almost catchy, but not quite. Zillow is a great tool if you want skewed or inaccurate information regarding the value of your home.

Because it’s so inaccurate, it’s pretty much worthless for estimating the value of your home. It may give you a ‘ballpark’ figure, but in the case of my house it was off by 100k, which is nowhere near the ballpark.

For whatever reason, there seems to be a lot of people in the online real estate community that are obsessed with Zillow. I don’t really understand this obsession, although it’s important to educate your clients about the useless and possibly misleading nature of Zillow.

My reaction has always been “it’s not accurate enough to be meaningful, and even if it was accurate, you wouldn’t have any way of knowing without doing an actual comparison of comparable sales in the area.”

So why not just do a competitive market analysis (CMA) in the first place and avoid that annoying step in the middle that involves going to a pointless website?

The only real way to find the true market value of your home is to sell it. It’s only worth what someone else will pay for it. If you want to estimate what it might sell for, then you need a CMA, which is a fancy way of saying “look at similar houses in your neighborhood that have sold recently and see what they sold for.” It’s more complicated than that, but you get the gist of it.

Real estate agents are generally a good source for a CMA, more for their access to sales data via the MLS, and less for their heightened powers of estimation, although a good agent should be competent at judging the value of your home and knowing the ‘pulse’ of the market. For a serious appraisal, you need a licensed appraiser.

If you’re an investor and you’re relying on Zillow to generate your comparable data, then you probably won’t be in business much longer. If someone tries to sell you a house based on its Zillow estimate, then they’re either clueless or trying to pull one over on you.

Update: This (bawld) guy has sense.

I generally use State Farm for my insurance needs and they’ve been very helpful. I have several policies with them including auto and homeowners, so when I went to purchase a rental property last year I thought I wanted to “keep everything in one bin” so to speak. So I called my agent, told her about the place and she sent out an appraiser…

Two days later I get a call from her: “uhh, the property next door is boarded up.” I said “yeah, is that a problem?” Well apparently the big insurance companies don’t like to deal with suspect properties or suspect neighborhoods like that. So I had to get “creative” and call my girl Gilda at Creative Insurance.

If you’re buying in a neighborhood with boarded up houses, just be aware that your ‘normal’ insurance company might not want to help you, in which case you will need a good insurance broker.

What is ground rent?

Ground rent is a system of property ownership prevalent in Baltimore City where the land and the improvements on the land are owned separately. The owner of the ground rent “owns” the land, but generally does not own the rights to use it.

Let’s say you buy a house with ground rent. You will have to pay the owner of the ground rent a fixed sum every year as rent. The exact amount is usually between $60 and $150 per year. The title company may arrange for the lender to pay this money out of your escrow account so that you don’t miss a payment.

Even though you don’t technically own the land, you have the rights to it. The owner of the ground rent can’t wander over and set up shop on your front lawn or dig a tunnel under your house (unless you had a specific agreement with them).

If you’re buying a house listed on the MLS, then the listing should include ground rent information. If there is no ground rent, the listing will say that the ownership is “fee simple,” which is a fancy way of saying the owner owns the land and the improvements.

Ground rent can be redeemed through the city of Baltimore if the owner has not collected the rent in three years, and if the owner is unknown at the time of closing, the title company may require you to hold 3 months ground rent in escrow.

Additionally, if you are selling your house in Baltimore, you can create a new ground rent at the time of sale. You should always contact a lawyer before doing so.

Why is it a big deal?

Generally it isn’t a big deal. Compared to property taxes, the payments are quite low and they don’t increase.

On the other hand, it can cause major fits for the lender. Out of state lenders or lenders who do not do business in Baltimore are often perplexed by the idea of ground rent. Just when you think you’re ready to go, the underwriting department says “wait a minute! You mean you don’t own the land!?” The uninformed lender fears that their investment is not secure.

Their fear is unwarranted but since it can be a nuisance or even cause the transaction to fall through, I generally advise a person that wants to buy in Baltimore City to use a lender who understands ground rent.

For more information on the history of ground rent, check out LiveBaltimore.com’s ground rent page.

For more information on redeeming your ground rent, go to the Maryland State Department of Taxation’s ground rent redemption page.