My Pinole Real Estate

•  Beginning Feb. 1, buyers may use FHA-insured financing to purchase properties resold through private developers and investors. 

•  Borrowers with credit-rating scores below 580 will be required to put down at least 10 percent. Those with a credit score above 580 will be able to continue to put down only 3.5 percent.

• The upfront mortgage insurance premium (UFMIP) will increase to 2.25 percent up from 1.75 percent.

• Seller concessions will be reduced to 3 percent from 6 percent.

So you’ve decided to buy a foreclosure, you’ve found one you like and you’ve submitted an offer and it has been accepted, now what? You probably signed an addendum stating the contract is “as is, where is.” Your real estate agent has told you that the bank is not required to submit certain disclosures. What does this mean for you and what should you expect to be told?

1.  Hazards - It makes sense that the banks would not be required to “disclose” information directly related to the property or it’s history because they don’t know anything about it. More than likely no one at the bank as ever actually seen the property. However, this fact does not mean that the bank is exempt from every disclosure. The bank is required to disclose information regarding potential hazards that may affect the property. One of the easiest reports to obtain is a natural hazard disclosure report which is completed by a third party disclosure company and can be purchased for about $100. Although the bank is exempt from the Natural Hazard Disclosure Statement, the bank is “not exempt from applicable statutory obligations to disclose earthquake fault zones, seismic hazard zones, state responsibility areas, very high fire hazard severity zones, special flood hazard areas and flood hazard zones.” The foreclosure seller is also not required to supply any information about special tax assessment districts. Therefore it makes the most sense to require the lender to supply a natural hazard report when you submit your contract. Make sure that the report you request has tax information for the county and city in which you are going to buy.

2. Disclosures - The foreclosure seller must give you any information they have that will materially effect the value and desirability of the property. For example, if a prior buyer conducted a pest inspection of the property and supplied a copy of the inspection to the seller, but decided not to purchase the property, the bank must provide a copy of this inspection to any buyer from that point on.

3. Smoke Detectors - The property must have operable smoke detectors in place and a written statement of compliance must be provided to the buyer. The cost of the compliance is negotiable.

4. Water Heater - The same applies to an operable water heater and a statement of compliance. The cost of the compliance is negotiable.

5. Lead Based Paint - Although a foreclosure seller probably has no idea about whether a property has lead based paint, the seller is required to attest to to their knowledge (or lack thereof) of any known hazards, provide the booklet, ” protect your family from lead in your home,” and give the buyer a 10 day opportunity to inspect for lead if the property was constructed before 1978.

6. Tax Withholding- Although the bank is exempt from the actual withholding laws upon the sale of the property, they are required to disclose the withholding requirement. Although this disclosure requirement is in place, it is a minor issue and does not typically effect the buyer directly.

7. Megan’s Law Database - Also known as the sex offender website, the existence of the website must be disclosed to a potential buyer although neither a seller nor a broker is required to check the website as this would be considered out of their area of expertise. The database is maintained by the Dept of Justice and can be search at www.meganslaw.ca.gov.

Buyers who are in search of a home and have 5% or less to put down toward the purchase of their home may choose to use and Federal Housing Administration loan so that they can keep more of their cash. Additionally, private mortgage insurance costs less under FHA. 

If you are a buyer who wants to purchase a house and you want to get an FHA loan, please be aware that many foreclosed home sellers (lenders) are unwilling to look at offers that are FHA approved. The reason is that FHA lenders are much pickier than conventional lenders and ding the home if it has maintenance issues that would be considered minor for conventional lenders, such as a cracked window or a broken interior door. Moreover, all contracts written for REO’s or short sales must be as-is as required by the seller. FHA may require an item to be repaired which is not allowed by the REO seller. FHA also may require more paperwork to be completed and may do additional inspections beyond the appraisal which can stall or cancel the deal. 

This experience is happening in particular in East Contra Costa County where prices have fallen and multiple offers are standard. If a seller gets two offers and the net price is the same but one buyer is offering 5% down and the other buyer is offering an FHA loan, the seller will choose the conventional offer. This situation will happen even if the FHA offer is higher.

 The key is to try to qualify the buyer with a conventional loan first, such as a 5% down loan. Then if you get the purchase contract and after the appraisal has been completed, request through an addendum to switch to an FHA loan with no added time. Your loan agent should have qualified FHA lenders that can close short of 30 days. Since the appraisal will have already been completed, you will know if the property will be able to qualify for an FHA loan.

In this market, there are a high number of investors who are buying real estate for cash in this extremely opportunistic market. Many people are buying homes in extremely bad condition, fixing them up and then selling them again. There is one aspect to this process that I would like to suggest. Become the bank! Let’s say you decide to buy a house for cash and then fix it up. You have three options, live in it, rent it, or sell it. It’s likely that you want to rent it or sell it. One of the biggest impediments to selling is a loan for the prospective buyer. It will most likely be an FHA or conventional loan but something could go wrong.

What if you offered seller financing?

Suddenly you open up your buyer pool substantially. I know what your thinking! What if they default??? OK let’s back up. First, you find a buyer, then you do your due diligence. Do they have a job? How many years? What’s their income how much do they have in savings, check their credit. So the point is you won’t be as conservative as the bank but you’re still going to be smart. I would recommend at least a 5% down payment. You use a title and escrow company to complete the transaction. Everything is recorded, legal and on the books. The buyer then starts sending you his payment. Here’s an example. Let’s say you buy a house for $100k cash and you fix it up and it’s now worth $200k. You decide to sell it to a buyer with seller financing.  After your due diligence, the buyer puts $10,000 down and you finance $190,000. The monthly payment is as follows (assumes a 6% interest rate):  Principal and Interest $1,133.48. This is your income. You may say this is less than I would receive in rent, but remember you just received $10,000 up front. Your income for the first year is $23,601.76.

Even if the buyer defaults after the first year, you will still be positive in income and you can sell it again. Most attorney’s will give you a flat rate for a basic foreclosure. Additionally, the legal fees are tax deductible. Even if you have to re-carpet, paint and put in new appliances, it’s still a great deal. I think the benefits out-way the deficits.

Benefits

1. Increase your buyer pool.
2. More flexible than a bank.
3. Use short or long term financing.
4. Be in first position.
5. Charge higher than market rate interest rate.
6. No appraisal required.
7. Someone else is responsible for taxes, insurance, and maintenance.
8. If they default, you get the property back.
9. Legal fees are tax deductible.

Deficits

1. Buyer could default.
2. Buyer may not maintain the property.
3. Potential legal fees for a foreclosure.
4. Possible tax consequences for income.

We are in an interesting situation in the bay area. There is now a lack of inventory on the market and there are a number of buyers waiting for homes to come on the market that want to buy desperately. There is currently a moratorium on foreclosures that has been enacted since June 15 which requires the banks to show that they have worked diligently with home owners and offered them an extensive workout package before they proceed to foreclosure. This law along with previous laws and encouragement from state and federal government have slowed the number of homes coming on the market to a dribble. The low prices that are unprecedented along with low interest rates has encouraged buyers to enter the market. We now are in a sellers’ market.  Now obviously this does not mean that you can price your house at an above market amount and expect to get that price, but it does mean that if you meet certain criteria, you are in a position to capitalize on the current market conditions and meet or exceed the national average of home appreciation over a 10 year period.

1. The first criteria you need to meet is that you’ve owned the home for at least 10 years. On average, a home will double in value over a 10 year period. This means that if you bought your home for $100,000 in 1999, it will be worth approximately $200,000 today. Of course this is a national average and does not account for flexibility in local assets so of course you will need to talk with a local real estate agent to determine the current value of the home.

2. Additionally you cannot have over mortgaged your home. Many home owners took advantage of the high appreciation over the last 10 years and have mortgaged their homes up to the unrealistic values of 5 years ago. In many cases, home owners took out additional mortgages up to 100% of the value of the home. Additionally, the money was not used to maintain the home and instead was used for personal consumption. If you bought your home for $100,000 ten years ago, you should not have used more that 30% of that value. If that is the case, you will be in a good position to sell.

3. The third requirement is that you must have maintained your home. If you have let your home fall into disrepair and there is a lot of deferred maintenance required, you will have to price your home extremely low to attract a buyer. There are a couple of reasons for this. Your home rather than standing alone, is now competing with foreclosure homes. These homes are for the most part in terrible condition. Many must be purchased with cash or financed with a heavy cash down payment. If your home, due to it’s condition will not qualify for all types of financing available, it will not demand top pricing.

4. The forth condition you must meet is that your home must have some sort of attractive asset other than it’s condition. If you live in a great school district, have an amazing view or live on a cul de sac in an area known for home ownership or safety or something similar to these qualifications, you are in a great position to sell your home.

5. The last and most important criteria is that you must be willing to show your home in the most stunning way possible. This means it must look model perfect or as close to it as possible. Staging is a must and can be done relatively inexpensively. You must be willing to paint and repair everything down to the smallest detail. This includes replacing light switch covers, changing those out-dated light fixtures, and keeping the home spotless.

These five requirements will ensure that you will sell your home for the maximum price possible in this current market. I’ve heard a lot of people say, “I’m waiting until the market turns around.” In my neighborhood, home values are approximately $400,000. About 4-5 years ago, they were $600-$700,000. $400,000 is a fair price for the age of the homes. So if you want to “wait for the market to turn around,” you will be waiting about 5-10 more years to realize the “fake” values of 5 years ago.  If you are not ready to sell now then of course this makes sense. But if you need to sell now, if you can meet the above criteria; you will be pleased with the result.

We all remember the way property prices shot through the roof. Those times of skyrocketing appreciation are over. Prices have now dropped precipitously around the country.

Because of the drastic price drop in all areas of real estate, owning rental property makes even more sense now. Most rental property can be purchased with cash or with 25% down under $200,000. Cash flow and rates of return close to 10% are easy to come by in this current buyers’s market especially if you are willing to purchase a property that needs a little improvement before you can install a renter. In the same way property values went up the past 10 years, RENTS will be increasing over the next few years!

Now is the time to own income-producing properties. Home ownership is difficult for many at this time. Due to the tight mortgage market and record numbers of foreclosures, our markets are starting to see a large amount of renters. Just as the housing market cycles, so does the rental market. We are currently in the beginning of the upswing in rental rates. Especially if you are willing to offer a home for rent to someone who has gone through a recent foreclosure, someone whose credit is not good, or someone on section 8, you have the ability to ask for slightly higher than market rates as these renters have a reduced pool of homes to choose from and will look for those code phrases when searching for a rental home.

Have you found yourself wishing you had bought more properties 10 years ago? Imagine how your life would be different if you had taken advantage of the low prices, and purchased more properties. Don’t make that mistake of inaction again by missing this next rise in the rental market!

1. Decide exactly what you want.

2. Determine what you will give in return for that which you desire.

3. What is your definite date by which you will possess this desire?

4. Create a plan to carry out your desire and begin at once.

5. Write it out. Describe your desire, the length of time it will take to possess it, the plan of action and what    you intenet to give in return.

6. Read it aloud twice daily, once in the morning in the morning and again before bedtime.

7. Creat a visual and post it where you will see it often.