Ask a Broker: Where can I find undervalued real estate?

By Peter G. Miller/CTW Features

Q: What are the best cities where I can purchase under-valued real estate?A: You may regard this as an odd response, but here goes: everywhere.Real estate is a localized commodity. Its value is established in the open marketplace among, hopefully, informed buyers and informed sellers. The result is that values for the same four-bedroom home differ enormously depending on location.Thus I do not see entire communities that are undervalued. What I do see are individual instances of properties that can be enhanced through improvements, re-zoning, re-capitalization, better management, etc. No doubt some of these properties are in your community.Q: I have a friend who purchased a home, and when the loan documents were prepared he was not sure if he wanted to live in the house or rent it. Since he had to make an immediate choice, he chose to show it as owned-occupied. One reason he did so was the loan rate was better, and he was able to afford the mortgage payment. After he closed the sale, he tried to rent his current home while he was getting the new house cleaned up. His current home could not be rented because it had been remodeled and commanded a higher rental price to cover the costs, so he decided to stay in that home and rent the new home out. Now he has to change the insurance policy from owner-occupied to a rental. What can he do if the lender calls the loan? The loan documents say he cannot rent the new house for 12 months. A: The issue is not that the first house can't be rented at any price, it merely can't be rented at the price wanted by your friend. This is not the new lender's problem.Lenders check insurance coverage because the property is security for the loan and the mortgage requires proper coverage. When lenders see missing, inappropriate or inadequate coverage, they may well have grounds to call the loan, especially in this case since the loan bans rentals at the second property for a full year.When a loan is sought, lenders ask borrowers if they intend to occupy the property being financed within 30 days of closing. A "yes" means the property can be financed with an owner-occupant loan, a "no" means the buyer is an investor and will pay a touch more for the loan and must meet additional requirements. Lenders don't want to make residential loans for investment property because investment real estate is seen as more risky than a prime residence. Your friend now has an investment home with a new residential loan and that will not sit well with lenders. Your friend is best served by moving into the second property, as promised, and renting the first one for at least a year.Q: We purchased a one-acre lot in a South Carolina planned community as an investment for $250,000 three years ago. The community infrastructure is progressing slowly and the real-estate market hasn't helped our ability to sell the lot. We secured a three-year, interest-only loan and are in our second year of payments at 7.25 percent fixed. The monthly payment is $1,440. Is there a better way to finance this property (deferred payments?) and when (hopefully) we sell, is the interest deductible?A: You have an annual cash out-go of $17,280 ($1,440 X 12) for the mortgage plus property taxes, interest and community fees. Because this is raw land, there is no income to off-set your costs and nothing to depreciate. To break even on this investment you'll need significantly more than $250,000.The looming problem is the mortgage. You have 3/27 financing for a loan with a balance of roughly $238,345. At the end of the teaser period, the mortgage balance will be unchanged but the term of the loan will be three years shorter. If the interest rate stays the same, the new payment will be $1,678.41, but if the interest rate goes up then the new payment will be even higher.What to do? You have a tiger by the tail. Get rid of it or it will eat you alive. Sell the property unless you have the financial capacity to hold and the willingness to do so. Refinancing will not solve the cash-flow problem and will only add to the size of the debt because there will be another round of closing costs.As the property is being held for investment, all costs should be deductible. Speak with a tax professional for specifics. CTW FeaturesNeed real estate advice? Peter G. Miller, author of "The Common-Sense Mortgage," would like to hear from you. Send your questions to peter@ctwfeatures.com. Due to the volume received, not all letters may be answered.