Real Estate Investing

Homes in default are up 140 percent from 2006.  One-third of all home loans that closed in 2006 were considered subprime loans - or loans given to buyers with a credit score of less than 680.  The number of homes entering into foreclosure is expected to top one million this year, with 60 percent of those being subprime mortgages, according to Freddie Mac.

Yesterday at our sales meeting, a speaker from a title company gave us these facts and figures in an effort to help prepare real estate agents for what is expected to be a flood of short sales.  Why would a lender forgive part of the homeowners debt through a short sale?  Because on average, if a lender puts a home back on the market it will cost $62,000 for them to sell it.  If a lender can stand a loss of just $10,000 they’re in.   Further, many times a lender will offer the seller/homeowner CASH to leave the home in good condition - ranging from $1000 to more than $5000.

A pre-foreclosure sale (PFS) might be an option when a home is worth less than is owed and the homeonwer has demonstrated financial hardship (loss of job, flat out inability to pay because ARM went sky high, medical problem, etc.).  But if a homeowner is in trouble, they’ll hae to submit all required documents proving this information within a very specific time-frame.  If they’re an hour late, the short-sale (or pre-foreclosure sale) could be over before it even begins.  Also for a PFS to work, if there is a second mortgage (a junior lender), they will have to be agreeable to accept little or nothing as a result of the short-sale.

Things You May Not Have Known

Everything is negotiable in a preforeclosure sale!  You may be able to preserve your credit rating - or at least not take a nasty dive - if you negotiate it and if you’re NICE.  The average drop due to a foreclosure is 250 points, the drop to a preforeclosure sale is 100 points.  But if you negotiate how it will be reported, the credit score drop could be as little as 25 points.

If your home does go into a preforeclosure sale, it will have to be appraised.  Ask the lender to pay for the appraisal - they generally will if you just ask.  If you have an escrow account with the lender, be sure also to ask for a refund of your insurance and taxes that have been paid.  Technically, that money should be yours so the mortgage holder should not hold it.  If they resist, talk to a tax or real estate attorney so they can clearly explain your rights.

There may be tax implications if your home is sold as a short-sale.  Uncle Sam considers the $20,000 in loan forgiveness as earnings, so you might owe taxes on the $20,000.  Again, talk to a tax expert for advice about this.

Want to buy?

If you’re interested in buying a short-sale home, the Pensacola Real Estate News site has some great information.  Karl quoted someone from the Active Rain community about short sales,

“Here in Florida many of us agents have been throwing cash and buyers at the short sales to no avail. There are not enough processors.  What I am being told is that they cannot find enough “qualified” people to make decisions and that the board of director’s only meets once or twice a month to make these decisions.”

Do your homework before selling or buying a home through a short sale!

Most excellent photo from the Pensacola site.

Yesterday I talked about exploring the option of a lease-purchaes for my first home when there were no down payment or seller closing cost assistance programs.  Those days may be returning - and more quickly than you think.

Assistance programs are coming to an end on October 1, 2008 thanks to the Housing and Economic Recovery Act of 2008 which was signed into law last week.  Both lenders and Realtors are expecting a spike in home sales as house hunters rush to buy their homes while they can still get help with down payment assistance and seller-paid-closing programs.

Greg Goodman of Countrywide Home Loans recently wrote that some observers believe these programs exploit a loophole in federal housing lending laws by allowing nonprofit organizations to gift mortgage down payments. 

In some ways, these gifts have become a substitute for subprime loans, in that they give builders a way to place first-tine and low-income buyers into homes even when they can’t afford a down payment.

All is not lost for buyers because there are other programs available.  For example, the Tennessee Housing Development Agency still offers grants to buyers when they complete mortgage counseling coursework.

On the other side of the housing bill, the Feds are granting a $7500 tax credit this year.  This seemingly juicy tax break comes with a price, though.  According to AccountingSolver, the money has to be paid back,

The tax credit has to be repaid 2 years after the purchase. At the tax credit of $7500, the resulting average increase in your tax bill for 15 years will be $500.

I voice my agreement with Miranda at Mortgage News,

Um, wow. Maybe first-time homebuyers would be advised to avoid the tax credit after all, and just focus on the interest rate and property tax benefits that are already offered.

Sometimes you should look a gift horse in the mouth.

The message here is if you’re on the fence about buying and you are already approved for a down payment assistance and / or seller assisted closing cost program, then you need to move now to make it happen.  If you delay too long, you may not be able to purchase after October 1st without having your own money saved - and you’ll need from $7000 upwards depending on the price of your home.

Three of my favorite agents from my office are standing here right now brainstorming about real estate.  So I’ve asked each one to give their best piece of advice to a buyer and to a seller.

BUYER ADVICE

Karmen:  “Just because a lender says you can qualify for a certain amount of money, it doesn’t mean you can afford it.”

Butch agreed, “Right.  If you, for example, get a $200,000 loan, you may not want the monthly note of a $200,000 loan in your budget.  You have to remember the taxes and insurance that are added to it, not to mention the PMI and other charges.”

Butch:  “If you qualify for a loan in this market, this is the first time in 35 years where the availability of homes versus the low interest rate has been together.  This is a perfect time to buy.  Yes, I understand the gas dilemma and all that, but if you can get past that, now is the time to buy in all markets.”

Celia: “People need to understand the difference between prequalified and preapproved.”

Butch:  “Prequalified says you should get ‘this’ amount based on your income.  Preapproved means you’ve done the paperwork - full application - and done the credit checks to get the ‘Yes, we can definitely give you this money.’”

Celia:  “The only thing left is to go through the underwriters.”

Celia:  “Don’t expect to get foreclosures for cheaper than they’re listed.”

Butch, “Don’t forget the amount of extra paperwork required, plus the delay in time of even getting an answer from the lender.  Many times, this can take two to three months or even longer  just to get an answer, whether you get the house or not.  The problem with foreclosures is you can’t talk to anyone at the bank holding the note.  This is very frustrating to us a as realtors, whether we’re representing the seller or the buyer.”

Karmen, “It is frustrating! It’s frustrating!  It’s frustrating!”

SELLER ADVICE

Celia:  “Make sure your house is ready to sell.  Fresh paint, clean carpets, clean floors, clutter put away.  Remove unnecessary furniture.”

Butch:  “Have your home show-ready.  Definitely get rid of the clutter.  Remember the first impression is what will sell your home.  If a buyer comes into your home and finds something they don’t like, they are out of there.”

Butch:  “Listen to the advice of your realtor.  We are trained to help you price your home in a competitive market, as well as staging and the entire process of selling.  Don’t look for pie in the sky.”

Celia:  “Sellers needs to be sure they can afford to sell.”

Karmen:  “Be realistic in your expectations when you sell.  If you’ve lived in your house for less than five years and you haven’t borrowed money against your house you should be happy if you break even.”

Butch:  “You should look at it like you’ve gotten free rent for those years.”

Karmen:  “Find a way to make your house stand out.  Either price, exceptionally clean, or something extra that will make your house stand out like new hardwoods or new light fixtures.  It’s the little things that make a difference.”

Butch: “You’re competing with every house for sale in the neighborhood.”

Celia:  “Curb appeal is definitely a plus.”

Karmen: “Selling your house involves work.  You need plan to work hard to get it ready and spend some money.”

Butch:  “It has to be show-ready 24 hours a day.”

Karmen: “Don’t smoke in your house if you’re trying to sell!”

Butch:  “And get rid of pet odors!”

Celia:  “Replace the carpet if needed to get rid of odors.”

Thanks, my friends!  Great advice!

Photo from Bill Kennedy.