My Pinole Real Estate

Selling a property in this tough market can seem like a challenge. Here are four factors that actually make this a good time to post a For-Sale sign.

1. Sell low and buy low. Because all property values are down, the sellers’ loss on a property is really only a paper loss because the next property they buy also will be a bargain. If they buy smartly, when prices come back up in a few years, they’ll be in better shape.

2. Down-payment help is widely available. While nothing-down loans have disappeared, it is easy to find down-payment assistance for lower-income and first-time home buyers. Programs vary all over the country, but one good way to find them is to search online for “down-payment assistance programs” and the name of your region.

3. Your uncle has money to share. Besides the $8,000 first-time home buyer tax credit and the $6,500 move-up credit, there are an array of energy tax credits that can make home improvements pay off in cash.

4. Good help is available. Really talented real estate practitioners, contractors, and designers are available and eager for business.

Source: McClatchy Tribune, Kate Forgach (02/07/2010)

Strong gains in existing-home sales were the predominant pattern in most states during the fourth quarter, with many more metro areas seeing prices rise from a year earlier, according to the latest survey by the NATIONAL ASSOCIATION of REALTORS®.

Sales increased from the third quarter in 48 states and the District of Columbia; 32 states even saw double-digit gains.

Year-over-year sales were higher in 49 states and D.C.; all but three states had double-digit annual increases.

Total state existing-home sales, including single-family and condo, jumped 13.9 percent to a seasonally adjusted annual rate of 6.03 million in the fourth quarter from 5.29 million in the third quarter, and are 27.2 percent above the 4.74 million-unit level in the fourth quarter of 2008.

Distressed property accounted for 32 percent of fourth quarter transactions, down from 37 percent a year earlier.

The Tax Credit Affect

Lawrence Yun, NAR chief economist, said the first-time home buyer tax credit was the dominant factor.

For many deciding to buy a home is an exciting and proud moment. Whether it’s your first or third home, the likely scenario is you don’t know what to do first or you don’t remember what you should do first. I can’t tell you how many times I’ve received phone calls from prospective buyers who, when I start asking them questions about financing, closing costs, repair costs, say, “I don’t know,” or , “I haven’t done that yet.” Talk about putting the cart before the horse!

Most of the time I start out with the requirement that they get their financing in place before we start actively looking for a home but in fact there is a lot to think about before you even decide if buying a home is a good idea for you.

THINK ABOUT YOUR DECISION!

1. In today’s housing market, buyers need to think long term. If you cannot safely say you will be living in your home for 7 years or more, it’s not a good idea to buy.  It’s likely that a slow or depressed trend in housing is going to continue for a few more years. If you suddenly had to move or are thinking of starting a family and needed to sell, you would most likely not recoup your costs if you sell within those seven years. The one caveat to that sentiment is that if you could rent your home for as much as or more than your total payment, that would be a good option. However, most people use their equity from their existing home when they sell to put down on another home. You will not be able to do that for a while as no one is doing seconds on homes when the first is over 65% loan to value.

2. Where do you really want to live? Of course price is always a factor in purchasing your home. Consider what you have to pay for a home and know where you can afford to buy. Visit those areas extensively and decide where you will be happy living. If you won’t be happy living where you can afford to buy then don’t. Keep saving your money. But if you will be happy, be specific. When I was buying my last home, I had specific zip codes where I wanted to live and I told my Realtor to only send me listings in these zip codes.

3. How much can you really afford? This is a very important. BE REALISTIC!The money to buy a home is not just your down payment. Closing costs can be somewhere between 3-4% of the purchase price of the house.  Many cities and counties have point of sale ordinances that are the buyers responsibility in this market. A sewer lateral replacement can cost up to $4,000 and must be done within a certain time period after the sale. If you are buying a foreclosure, it’s likely the condition will be poor and repairs will be needed. Assume you will need at least $5,000 in reserve money for repairs to the home.

4.  Find a good agentwho you can work well with, whom you trust, and who knows the local market. Be willing to trust their knowledge. Being a realtor myself, I can’t tell you how important this last point is. I can’t tell you how many times I’ve received calls from people who are looking for homes but who refuse to work directly with an agent. They drive around and call when they see a property they like. What a waste of time! That’s the Realtors’ job. Realtors make sure you are getting the listings that match your criteria. I’ve also had conversations with prospective clients who don’t want to hear what I have to say about pricing and writing offers. I have refused to write offers for people who won’t listen to me. I had a client the other day want to offer $55,000 on a house listed for $65,000. I told him he would have to offer at least $80,000 to be competitive. I have confirmed that all 8 offers that were received were at least $20,000 over asking.

5. Keep your options open!Most people think that in today’s market, the deals are the foreclosures but that’s not necessarily true. For people purchasing with cash or large down payments, foreclosures may the right purchase for them. Keep in mind that these home are in poor condition generally and need a lot of work. For most home buyers, you’re goal is to purchase your first home, not your first project. Additionally, if you are using an FHA (Federal Housing Administration) loan to purchase, you will be limited to homes in relatively good condition. Short sales are becoming a good option too as more of them are closing and with less wait time.

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.

•  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.