Rental income—a good indicator for real estate stabilization:

Most of my buyers and sellers are concerned about where home prices are headed and want to know whether or not it is a good time to either buy or sell.  I, along with most which have an interest to buy commercial property, wish we had a crystal ball.  If we were so lucky.  Possibly the next best thing is to follow the rental income to establish current market conditions.

“If you look at the trend in rents to see where housing prices are headed, you’re looking at the right measure.” Says Yale economist Robert Shiller who is the co-developer of the S&P Case/Shiller Home Price Indices that monthly track residential real estate values nationally and in 20 metro areas.

In the past, people have been willing to pay a modest premium to own rather than rent a home with recent studies reporting that in 1999 rental income averaged 87% of the after-tax mortgage payment for dwellings of similar size in the same neighborhood.  This percentage changed when home prices skyrocketed.  By mid-2006, rental income had fallen to less than 60% of after-tax mortgage payments with investors banking on appreciation.  In some markets, owners of property were paying twice as much as renters for a similar property in the same neighborhood and in select pockets, owner monthly payments were three times more than the average of rental income.  Wow!

The 87% ratio of rental income to ownership cost for 1999 is a very good benchmark since it stayed around that level throughout the 1990’—prior to the steep rise in home pricing.  With that as our guide, one can conclude that the stabilization of home pricing is on the horizon. By the end of 2009, rental income on average was up to 83% of ownership costs!

Conditions vary from market to market so check with me on current market pricing in our area.  With historically low mortgage rates plus the homebuyer tax credits, this is a great time to be buying.  Call me today for a no-obligation consultation!

*The idea for this particular post along with some misc statistics were used from an email sent from Guild Mortgage.

Don’t Be Ashamed. . . Seems like everyone’s doing it

Lack of jobs, divorce, injury and death of a loved one often forces hard working folks into default on their home loans.  Without help, foreclosure looms.  Don’t be ashamed to save your home and the opportunities for homeownership in the future.   There is hope. 

Three options that a homeowner in or nearing default has are 1) Deed in lieu of foreclosure, 2) Loan Modification, and 3) Short Sale.  From experience, the first two options have had a low success rate with the third having the highest.  It’s a mystery as to why this is the case yet feel the banks are a step behind and lack the work force to service those in need within a timely manner. 

You will need the services of an experienced short sale specialist upon deciding that a short sale is needed.  I specialize helping homeowners in need of alternatives to foreclosure.  Call me for no obligation consultation at anytime—869-3469.

1)  A Deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default and avoid foreclosure proceedings.

The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure. Another benefit to the borrower is that it hurts their credit less than a foreclosure does. Advantages to a lender include a reduction in the time and cost of a repossession, lower risk of borrower revenge (metal theft and vandalism of the property before sheriff eviction), and additional advantages if the borrower subsequently files for bankruptcy.

Neither the borrower nor the lender is obliged to proceeed with the deed in lieu of foreclosure until a final agreement is reached. 

2)  Loan or Mortgage modification is a process where the terms of a mortgage are modified outside the original terms of the contract agreed to by the lender and borrower (i.e mortgagor and mortgagee). In general, any loan can be modified.

In the normal progression of a mortgage, payments of interest and principal are made until the mortgage is paid in full (or paid-off). Typically, until the mortgage is paid, the lender holds a lien on the property and if the borrower sells the property before the mortgage is paid-off, the unpaid balance of the mortgage is remitted to the lender to release the lien. Generally speaking, any change to the mortgage terms is a modification, but as the term is used it refers to a change in terms based upon either the specific inability of the borrower to remain current on payments as stated in the mortgage, or more generally government mandate to lenders

Mortgages are modified to the benefit of the borrower in one or more of the following ways:   1)Reduction in interest rate, or a change from a floating to a fixed rate, or in how the floating rate is computed, 2)  Reduction in principal, 3)  Reduction in late fees or other penalties, 4)  Lengthening of the loan term, 5)  Capping the monthly payment to a percentage of household income./

The borrower can be current, late, in default, in bankruptcy, or in foreclosure at the time the application for modification is made. The programs available will vary accordingly.

3) A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency

In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Neither side is “doing the other a favor;” a short sale is simply the most economical solution to a problem. Banks will incur a smaller financial loss than foreclosure or continued non-payment would entail. Borrowers are able to mitigate damage to their credit history, and partially control the debt. A short sale is typically faster and less expensive than a foreclosure. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.

Lenders often have loss mitigation departments that evaluate potential short sale transactions. The majority have pre-determined criteria for such transactions, but they may be open to offers, and their willingness varies. A bank will typically determine the amount of equity (or lack thereof), by determining the probable selling price from an appraisal or Broker Price Opinion (abbreviated BPO or BOV).

Lenders may accept short sale offers or requests for short sales even if a Notice of Default has not been issued or recorded with the locality where the property is located. Given the unprecedented and overwhelming number of losses that mortgage lenders have suffered from the 2009 foreclosure crisis, they are now more willing to accept short sales than ever before. This presents an opportunity for “under-water” borrowers who owe more on their mortgage than their property is worth and are having trouble selling to avoid foreclosure as a result.

Buying a foreclosed home 101

Don’t bother browsing through the legal filings in your local paper or showing up to courthouse auctions—there is too much risk and most banks will not sell at auction for less than the amount currently owed against it. Instead, contact myself or another Realtor at Trust Realty that can provide a list of homes for sale that are bank owned. Also, you can go directly to www.TrustIdaho.com to search specifically for bank owned property being offered at rock bottom prices.

It’s makes more sense to purchase homes that are being sold directly through the bank since a buyer purchasing homes at foreclosure auctions must have cash on hand at the time of the sale and typically hasn’t had an opportunity to inspect the home appropriately. Also, many homes sold at auction may have additional liens such as a home equity line of credit or a second mortgage that may have fallen under the cracks. If that is the case then the buyer of the auctioned home is responsible for clearing the lien(s).

When a bank takes final possession after foreclosure and lack of a winning bidder at the auction, the entity will clear the home of all liens and encumbrances. When buying a bank owned home, the purchaser has an opportunity to inspect the home and the offer and earnest money put down is contingent upon buyer approval of the inspection. A home purchased directly from the bank can also be financed.

Bank owned homes currently for sale on the public market typically have been sitting vacant for no less than six months and have often been vandalized or stripped of items such as water heaters, oven/ranges, microwaves and even cabinetry. “One mistake a lot of people make is underestimating how much work the home needs and the cost associated with fixing it,” say Rick Sharga of RealtyTrac. To avoid getting stuck with any surprise bills, it is essential to have a certified home inspector provide the true condition of the home. Secondly, it is important to properly estimate the amount of time and money needed to bring the home back to a livable condition.

Be aware, not all banks are selling their inventory (foreclosures) at fire sale prices; some are listed at or around market value. However, most firms offer property at or around 10% under current market value with the hope that a buyer will purchase within a 30-day timeframe. The larger the inventory of foreclosed homes the bank is holding along with the length of time the home has been on the market will determine your chances of nabbing a home drastically under market value.

Determine your offering price by finding out how many days the home has been on the market along with the activity associated with it (it is important for your representation to inquire with the banks representation to find out if there are alternate interested parties). I suggest offering 10% under the banks asking price unless it is found that the bank is highly motivated. You must also consider alternate buyers that may be willing to pay more than you at that time.

Be prepared to wait for a response to your offer when attempting to purchase a bank owned home. While some banks respond w/in 36 hours, others dealing with an enormous backlog can hold up response for as long as three month. While you wait, another party can unfortunately trump your offer with a higher one. With that, it is important to have multiple properties in mind and to get pre-approved for financing prior to making an offer (unless you plan on purchasing with cash). Even if the home of your dreams has gone into pending status prior to you writing an offer for it, be sure to have your representation continually check the status since real estate transactions do fall.

Remember, it is essential to have representation when purchasing bank owned, short sales or fair market homes. Contact me today to discuss the possibilities!

Short Sales 101

Brushing up on your short sale knowledge is essential in this market since nearly 50% if all homes currently for sale are distressed (either short sale or bank owned).  Bank owned homes can typically be purchased within 30 days since the home has been foreclosed upon and title has been transferred to the bank.  Purchasing a bank owned property is very similar to purchasing from a normal seller yet there are much more disclosures involved.  A short sale means that the current owner is requesting the bank to take less than what is owed in order to avoid foreclosure—short the bank on what is owed is a way to look at it.  This requires approval from the lending institution. 

 The process:

 1)     To be a short sale, the homeowner usually is in default or in a position to be in default (divorce, loss of job, injury, etc) The seller most likely has tried to get their loan modified yet to no avail.  Next step is to place the home on the market as a short sale.

2)     The agent marketing the property will advertise to the public as a short sale.  Short sales are typically priced very aggressively yet it is important to remember that the bank determines the final price. 

3)     An offer is submitted to the seller and the seller accepts it in writing (unless the seller feels that the offer would not be accepted by the bank) 

4)     The seller will compile a short sale package for submittal to the lender (or lenders) that includes the executed offer, seller financial statements, bank authorization letters, previous 2 years taxes, a hardship letter and listing agreement. 

5)     Once the package is submitted to the lender the buyer and seller must wait for approval.  The lender will typically request an appraisal to be completed firstly in order to determine value.  Second, they will compare proceeds of the short sale to the proceeds received if the home is foreclosed upon in order to determine whether or not the sale can be approved. Banks such as B of A and Chase can take as long as 4 months for a response.  Patience is a virtue!

6)     The bank approves, rejects or counters the offer.  If there is acceptances of your offer then expect to close w/in 30 days after the approval is obtained. 

 It is important for a buyer who is pursuing a short sale to keep all options open.  Most offers submitted on a short sale can be cancelled at any time prior to bank approval by both the buyer or the seller.  With that, I suggest continuing to look for homes while the offer is working its way through the approval process.  More often than not, an alternate home will come onto the market that fits the buyer’s needs and IS NOT a short sale. 

 The lending institutions are working in association with the US Government to streamline short sales during the year of 2010 and beyond in order to decrease approval timeframes that in turn helps fewer homes go into foreclosure.  Personally, I have noticed that banks are already responding to short sale offers more rapidly and hope that the trend continues.

BUYING A HOME 101

Buying a home has many components associated with the process. Although every transaction is different, below you will find steps linked with most real estate purchases.

  1. Hire a buyers agent. A crucial step since it is essential to have an experienced Broker protected your interests.  Using the services of a buyer’s agent in the State of Idaho is free to the buyer in 99% of all real estate transaction.  Choose wisely!
  2. Get pre-qualified.  A pre-qualification will provide you and your agent essential knowledge prior to step 3.  Visit your local bank or mortgage broker.  Or, ask me for a list of home loan specialists that have provided top-notch service along with lower fees. 
  3. Start browsing for homes online—if you haven’t already. Go to www.TrustIdaho.com to view property descriptions, interior photos, virtual tours, community information, school ratings and much more.
  4. View property.  By now you and your agent have probably have a list of homes to view.  Rely on your agent to schedule appointments and accompany you to all viewings.
  5. Write a purchase and sale agreement. Now that you’ve found the home you would like, it is time to write an offer.  Consult with your agent for strategies.  Things to take into consideration are the following:  how many days on the market?  Short Sale or bank owned?  How much interest is there currently on the property? (your agent will find this out for you)   
  6. Negotiate.  An essential element of the Broker’s duties.  Hiring an experienced real estate broker that has been involved with hundreds of transactions will have the negotiation skills that will save you time and money.  
  7. Earnest money deposited.  Usually after the offer is accepted your earnest money will be deposited in a non-interest bearing trust account.  Your earnest money is credited to you at closing and can be returned if you are unable to obtain necessary financing or have an unsatisfactory inspection or appraisal. 
  8. Open escrow or submit your offer to the title company agreed to on the purchase and sale agreement. Your buyers agent will coordinate this step for you and will review the title policy ensuring that you have clean title at time of closing.
  9. Order an appraisal. Your lender will typically coordinate the ordering of the appraisal.  The purpose of the appraisal is to ensure value and safety for you and the firm providing financing. 
  10. Review and execute all necessary disclosures.  Types of disclosure may include a Seller’s Property Disclosure Form, A Lead Based Paint Disclosure, FHA Disclosures, Lender Disclosures—so on and so forth.  Your agent will help make sense of it all.
  11. Get a home inspection—even if the home is brand new. One of the most important aspects when purchasing a home.  Your inspector’s job is to go over your future investment with a fine-toothed comb.  He or she will typically provide a report of the findings.  Ask your agent for a list of quality inspectors if you don’t already have one.   If there are problems, you have the right to request that the seller make necessary repairs.   
  12. Removal of all other contingencies. These contingencies could sewer and well inspections along with other miscellaneous contingencies—depending upon the type of property being purchased. 
  13. Get Homeowners insurance. Provide to your lender proof of insurance so that it can be reviewed and approved prior to closing.  It is essential to have proper insurance yet remember to insure the structure, not the land.  I suggest shopping for the best insurance rate.
  14. Conduct a final walk-through. Done to ensure that any repairs requested were completed along with making certain there was no damage to the property after the inspection was completed.
  15. Sign closing documentation. Typically done at a title company.  Your lender and agent will most likely be present to walk you through the documentation.  
  16. Deposit funds with the title company. Depending upon the type of financing you choose to use, a check for your down payment and closing costs may be required unless you are taking advantage of the first time homebuyer tax credit.  The title company will verify funds and also request funds from your lender.  
  17. Get keys. Within 24 hours necessary monies will be transferred and the property will be recorded in your name.  At this time the home is officially yours. 

Make sure to keep in touch with your agent.  You may have questions after the fact or others that could use the services of a knowledgable real estate broker. Our  job doesn’t end at closing.

The New Normal?

The crisis that almost collapsed the financial system, the markets and the economy was a once-in-a-lifetime event for most of us. The effect was not only monetary, but psychological. Shifts in attitudes about money, financial independence, retirement, leverage and consumption may leave their marks for years to come.

Many people have seen the values of their financial assets, including real estate, drop close to 18 percent; however, few have changed their approaches to investment management. Some affluent investors suffered losses of 40 percent to 50 percent – enough to shatter their faith.

January is Financial Wellness month, so let’s take a quick look back and then think about what’s to come and how to work toward restoring some semblance of stability.

There is a lot of evidence out there to support all the scary thoughts. The 100-year flood happens about every five to seven years. Markets are never average or normal and are usually above or below the bell curve. The tools available to make investment decisions are not forward-looking. They are always historical. Can you imagine using only the rear-view mirror?

Financial advisors need to help people rebuild plans that address new economic realities and long-term goals. With my long-time clients, I still check and double check to make sure I understand their thinking and feelings. In many cases, my clients’ families have become even more important, and we include them in meetings. Mindsets continue to shift, and approaches need adjustments. Simply keeping in touch is more critical than ever.

Many successful Americans come from average backgrounds and circumstances, and have worked hard to earn their success, wealth and comforts. Their financial position, investing and saving has been a source of pride. They felt they understood the rules of the game – the American dream. The sharp downturn in real estate values, falls of some of the leading financial institutions and job losses lead to weakened faith in the system.

Some have responded by shifting their behavior, reducing discretionary spending and looking for exceptional value. Psychologically, it feels wrong to be wasteful. Saving feels more moral and has increased significantly in recent months.

We’ve arrived at a time many are referring to as the new normal.

High unemployment and slow growth for the U.S. Gross Domestic Product of 1 percent to 2 percent have been forecast. This will be unacceptable to Americans, who will put pressure on politicians to encourage domestic growth. Americans are burdened with high debt and slow growth. Some are unhappy with government presence.
How do we turn the economy toward healthier growth and exports with a cheap dollar? These are questions that will continue to be explored into 2010. In the new normal, people will think and plan differently for the future.

There is a sense that the worst is over and a kind of pride in surviving the worst of times. There is a satisfaction that comes from emphasis on real needs, simple pleasures and a focus on managing what one can control. People are taking pride in their shopping skills. Shopping at thrift stores is no longer just fun and funky; it just makes more sense, in most cases, than buying new.

I’ve seen family ties that have been strengthened. In times of financial crisis, many families are forced to communicate. Even divorce rates are falling.
In the investment world, we’re focusing on quality and value, which is fundamental.

There is some evidence of renewed confidence. But investors remain cautious. Low-quality investments in the early stages of recovery may be attractive, but can be far too risky. It is important to measure the risk of investing against the risk of not investing. Staying in cash at no return won’t help in the long term.

Don’t sit and wait. Know what to fear and what may be advantageous. Embrace the new economic reality.

Contact Carson Wealth Portland financial planning.
**IBR