My Pinole Real Estate

Fannie Mae is offering a 3.5% incentive for buyers who purchase and close on a Fannie Mae-owned home between January 28 and April 30, 2010. Buyers purchasing properties being sold by Fannie Mae that are closed within this period may receive up to 3.5% of the final sales price. Please contact me for more details.

1. REO/ Foreclosure

REO stands for Real Estate Owned and is a foreclosed property that goes back to the mortgage company after an unsuccessful foreclosure auction.

 2. Short Sale

A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed.

 3. BPO (Broker Price Opinion)

A BPO is like a Comparable Market Analysis (CMA). Banks pay local Agents to give their ‘opinion’ on how much a house would sell for, using comparable Sold, Pending, and Active listings.

 4. PMI

Private mortgage insurance is required by the mortgage company to protect lenders against loss if a borrower defaults. Most lenders generally require PMI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent.

 5. LTV

Loan-to-value is the percentage relationship between the amount of the loan and the appraised value or sales price (whichever is lower). For example: you purchase a home for $100,000 and you get a mortgage for $90,000. Your loan-to-value is 90%, therefore, the mortgage company would require PMI. 

7. ARM

Adjustable Rate Mortgage is a mortgage in which the interest changes periodically, according to corresponding fluctuations in an index. All ARMs are tied to indexes. There is usually a cap (ceiling) on the amount to which the interest rate can increase.

 6. Negative Amortization

Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes the minimum payment, it may not cover all of the interest that would normally be due at the current interest rate. In essence, the borrower is deferring the interest payment. The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization.

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.

1. Huge profits while demand and prices are low!

The lack of competition in the market right now allows investors to negotiate great terms, get lower prices, and find more deals. 

2. The right properties WILL Sell!

There has never been a larger demand for entry-level housing. By finding the Highest and Best Use of a property, investors can create large amounts of affordable housing. 

When we maximize the potential of a property, the future value of the property skyrockets. The secret is to acquire a property at the low “current value”, and THEN expose the Highest and Best Use or higher “future value”. Doing this creates affordable Entry-Level housing by adding density in areas with that potential.

 3. Rents are rising, Rising, RISING!

Smart investors will own cash-flowing rentals in the near future. Jjust as property prices soared over past 5 years, RENTS will be increasing over the next few years! 

The national market is creating a LOT of renters. With low purchase prices, and rising rents, cash flow has never been better.

 4. Sellers are very flexible right now

Right now, sellers have more urgent needs, and are more willing to agree to things like Seller Financing, longer closings, and other negotiated terms.

 Remember, Seller Financing is often even better for the seller than it is for the buyer. Don’t forget to educate sellers you work with on this point!

 5. Know how to see the “vision” of foreclosures

The vast majority of foreclosed properties are single family residences with bad financing. For most of these properties the only options are traditional foreclosure techniques. These are not the type of properties we are looking for.

 However, there is another large segment (15-20%) that have upsides most investors don’t see. When a foreclosed property has an unexposed Highest and Best Use, THAT is the kind of foreclosure we want! An example is a single home on half acre of land. Another is a home on a lot actually zoned for a much higher density. Foreclosures can be a great way to find deals with this kind of potential.

Sellers are looking for the deal and psychologically believe they are getting a deal by buying an REO. Whether they are or not, remains to be seen. I’ve seen a property with obvious foundation problems be listed at $240,000 close for $310,000. Another property listed at $325,000 closed for $360,000 and the buyer redid the entire foundation after purchase. The house is on a busy street and a corner and the other houses on this street are listing and closing closer to $300k. 

Many times, the bank owned homes need a lot of work and can be a worse deal than slightly more expensive ready to move into homes. Many people don’t realize that the difference between a $300,000 home and a $350,000 home is less than $300 a month difference in payment, including taxes and insurance. There are tax incentives to owning a home that can make that difference up in more take home pay. 

Many people looking for the deals think, they’ll buy it cheap and do all the work themselves over time. Well, my experience tells me that the work will never be done. For the entire time you live in the home, you will be working on the home. For a small group of people that might be a great idea but for the majority of people out there, they want to spend their weekends with family having fun not constantly working on their home.

Additionally, constantly having to fix your home is a costly decision. Many times doing repair items piece meal is much more expensive than doing the work in one fell swoop with a licensed contractor. You will probably spend that extra $300 a month payment on all the repairs you will be doing. 

So don’t be afraid of the slightly more expensive well maintained home. It’s probably a better deal than that cheaper REO next door.

Based on my last posting, you might think that you should avoid FHA loans. On the contrary, FHA loans are a great option right now. Here are some of the benefits. The main thing to look for is a loan agent that has a good FHA appraiser and a good relationship with a direct FHA lender.

• Lower down payment (currently 3.5%)
• Down payment can be all gift from eligible source
• Seller may pay all closing costs up to 6% of the sales price
• Cash reserves not required for single family home purchase
• Higher and flexible qualifying ratios
• More leniency on derogatory credit than a conventional loan (minimum score is 580)
• Lower cost than a conforming loan if credit is less than perfect
• Monthly mortgage insurance cost is less than a conventional loan
• Blended ratios with a non- occupant co-borrower
• Up front Mortgage Insurance Premium can be financed or paid for by a seller credit (within the 6% limit).
• FHA loans are assumable
• No prepayment penalties
• No termite required if not called for in the contract and property is over 1 year old
• Loan amount for single family residence up to $625,500.00!