Opportunities in the Housing Slowdown
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Opportunities in the Housing Slowdown
By Patricia Mertz Esswein
Investing in a foreclosure can be rewarding, but success is hardly a sure thing.
If you flip channels late at night, you probably see the infomercials that portray investing in foreclosed houses as a sure thing. But talk to people doing it, and they’ll tell you that buying a foreclosed home to flip or rent out isn’t an easy, quick, cheap or surefire route to wealth. The pitch for foreclosures seems timely, with all the talk about homeowners overburdened with rising ARM payments and little or no equity who will throw their keys back at the bank. But the typical deal comes with more problems than the average do-it-yourselfer can handle.
Investing in a foreclosure can be rewarding if you’re willing to do your homework. Compared with a year ago, foreclosures are up more than 60% nationally, according to RealtyTrac, an online marketplace for foreclosed properties. And the chance of obtaining a bargain is likely to rise as the slowing housing market forces foreclosing lenders to offer bigger discounts to lure a smaller pool of buyers.
Investors Andy Heller and Scott Frank say they’re "licking their chops" in anticipation of diminished competition for foreclosures as fair-weather investors flee the market and would-be owner-occupants look for easier pickings. "This is the time when you should be diving in," says Heller, who co-wrote, with Frank, Buy Even Lower: The Regular People’s Guide to Real Estate Riches (Kaplan $19).
Range of Discounts
At the market’s peak, in the first half of 2005, the nationwide median discount off market value for foreclosures was 14.6%, according to First American Real Estate Solutions, in Santa Ana, Cal. As the market slows further, the discount is bound to increase, although opportunities will vary from area to area.
How much of a bargain you need to make a deal work depends on your post-purchase plans. The shorter the time you intend to hold a property, Heller and Frank say, the greater the "minimum investor discount" you require. They recommend trying to buy homes for 20% to 30% off market value if you plan to flip the property; 10% to 20% off if you’ll rent it out with the option to buy; and 5% to 10% if you intend to rent it out indefinitely. Keep in mind that the days when you could flip for a quick profit are over–at least for now.
Savings per Square Foot
Bruce Reeks has been adding to his retirement savings by buying foreclosures. Reeks, who owns 15 such properties, identifies a bank-owned foreclosure on a multiple listing service, then compares its price per square foot with those of homes recently sold in the same subdivision. The difference signals opportunity, he says.
Last year, Reeks purchased a five-bedroom, two-bath home in Austell, Ga., northwest of Atlanta, for $102,900. After he spent $7,800 on repairs, the property appraised at $142,000. If Reeks had flipped the house, he would have made about $24,000 after commissions and other costs. Instead, he collects rent of $1,190 and pays $850 per month toward the mortgage, reaping a gross profit of $340 a month. Meanwhile, Reeks builds equity as he pays the mortgage with the renter’s money, he enjoys tax write-offs, and he expects to benefit from price appreciation. He anticipates cashing out his portfolio in the next five years and retiring to Asheville, N.C.
SAFEST STRATEGY
Buying it back from the Lender
For novice foreclosure investors, the best bet is often a real estate owned home, or REO, a property that a lender bought back at auction to resell for close to market value. You can find REOs on local multiple listing services, which may be available online. Other sources include the Web sites of federal agencies and government-chartered corporations or their affiliates, such as HUD.gov, Ocwen.com (for VA-owned homes), FannieMae.com and FreddieMac.com; national online listing services, such as Realtytrac.com and Foreclosure.com, available by subscription; or property wholesalers, such as Homevestors.com (the "We buy ugly houses" people).
Foreclosure laws vary by state (for an overview, go to www.realtytrac.com, then verify the information with your county’s clerk of court). You can buy foreclosures three ways: negotiate with a homeowner before the bank forecloses, bid at a county foreclosure auction, or, as Reeks does, buy a real estate owned property, or REO (see the box at right).
Plenty of Pitfalls
At a foreclosure auction, you’ll buy a home "as is," and you might not be able to do more than peek through the windows beforehand. Cleveland agent Mike Phillips says you could be bidding on a home that has been vandalized–sometimes by a distraught owner who has stripped it of everything valuable. Long-vacant homes may have water or mold damage. And the property may have legal warts: liens, difficult-to-evict tenants or, in some states, a mandatory "redemption period" that gives the former owner time to try to get the home back.
REOs, properties that lenders have bought back at auction, generally offer the easiest route for novices. With an REO, you won’t become entangled with a harried homeowner facing foreclosure. You’ll probably find nicer properties than the dregs left on the courthouse steps by lenders. And although an REO is likely to be sold "as is," you will have the right to an inspection, a title search and contingencies. Another advantage: You can finance the purchase with a conventional loan. However, the buyer of an REO is generally not likely to get as deep a discount as an investor in other kinds of foreclosures.
In Stone Mountain, Ga., Kelly Wiley shopped REOs but took a slightly different tack on buying-and-holding. Wiley, a real estate agent with Metro Brokers/GMAC, decided to look for a foreclosure large enough for herself and her sons, Javon, 13, and Juwan, 11, and to rent out her former home. To start, she focused on a few desirable neighborhoods, setting strict standards for price and condition. Over two and a half years, other buyers outbid her on several homes, mainly because she took anticipated repairs into account when calculating her offers.
Last summer, Wiley finally found her dream home: a four-bedroom, two-and-a-half bath house in Stone Mountain. It was in move-in condition and listed for $214,000. Wiley bought the property for $199,900 with a no-money-down, fixed-rate mortgage, for which the rental income on her former home helped her qualify. Her new home appraised for $221,900. "I had instant equity," she says.
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How to Sell Your Home in Todays Market
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This seems to be the hot question among Los Angeles county residents lately. What makes the difference? Price, location, Real Estate Agent, marketing? To keep it short and simple we will break it down to the 5 main ingredients.
1. THE RIGHT PRICE: In order to compete well in a buyers market you must be able to offer a competitive and realistic asking price for your home. If all the other homes in your market area have recently sold between $700,000 and $725,000 setting a market price of $750,000 is not going to sell your home. The market value has been set lower. Amenities such as a larger garage, pool and spa, covered patio are all incentives for buyers to pick your home over others, but value in use is not paid dollar for dollar. Rarely does a family recoup all of the costs incurred with landscaping, upgrading, remodeling, etc. Condition and upgrades will make your home more competitive but not necessarily a much higher value. This does not mean for you not to get your home in tip top condition. To compete this is more important now then has been for years! So where do you want to price it? This is where your Real Estate professional comes in. They need to have their fingers on the pulse of what is happening in your neighborhood. If your area is continuing to drop you can not afford to chase the market down.
2. AVAILABILITY OF INFORMATION: Once you have set a price, determined and finished any improvements/staging it is time for you agent to get to work. Multiple website listings, virtual tours, specific descriptions detailing the fabulous features of your home and what sets it apart are essential and needs to be accessible 24 hours a day. In our area we have many buyers working off hours and statistics are showing that 80 to 90% of buyers are stating to look for homes using the Internet. Not in print ads. The National Association of Realtors is stating that only 3% of buyers found their home in traditional print ads. Today's buyers are looking for information to be easily accessible and complete. Rich media is very important! The homes advertised on multiple websites sold 86% faster then homes that were not.
3. ATTRACT THE BUYERS: We need the buyers to view your home. In order to get them out from in front of their computers and into their cars, offering the right price and accurate information is a start, but your home also needs to be available to view when the buyers are available! Excellent photos and a flexible position on showings is one of the best ways. A seller needs to offer beneficial terms (escrow period, possession date, home inspections, financing options, etc.) The last step in attracting the buyers is the real estate agent and brokerage you choose. Ethical dealings and a true 'everybody wins' philosophy will ensure we move to the next, and almost final step.
4. NEGOTIATIONG A WIN-WIN DEAL: You know how much money you would like for your home. The buyer knows what they can pay for a home. In a perfect world, you accept more money than you expected and the buyer pays less then they thought they would. Unfortunately, this is not a perfect world. Negotiating is the key to a successful transaction. Knowing when to push and when not to is crucial to ensuring all parties are satisfied and willing to go forward. The absolute last thing you want to do is become overly emotional or act in haste. An example would be the buyers want you to leave your refrigerator and not pay for it. It is not uncommon for buyers to ask for all appliances, children's play sets, new carpets, a laundry list of repairs, etc. That is fine we are negotiating now. This is what we want. As long as your representative remains impartial and both sides understand everyone is going to walk away satisfied, we can work through it! This is not a war, it is not you against them. It is more like a marriage, we are working professionally and strategically towards mutually beneficial terms for both the seller and the buyer.
5. COMPLETE THE DETAILS: Unfortunately, after all of the advertising, showings, negotiating and finalizing of the accepted offer, a lot can happen. Ensuring the buyers obtain competitive financing, a competent escrow, a home inspector (that does not scare them), government retro fitting, termite reports, the buyer either completes the sale of their existing home or has adequate housing until yours is available, can all affect the deal. Your real estate professional ensures the details are taken care of on your end and the buyers purchase. Having, and making use of excellent colleagues and resources for the closing of your deal is the crucial and final step in the sale of your home.
Thank you for taking the time to read this article. Please feel free to call or email us for an up-to-date value assessment for your home and a comprehensive marketing plan to sell your home. Or click here and fill out a simple form. We are looking forward to serving you! |
New Conforming & FHA Loan Limits
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Fannie, Freddie may have to tiptoe into 'jumbo light' market
Monday, February 11, 2008
By Matt Carter
Inman News
While Fannie Mae, Freddie Mac and the Federal Housing Administration will soon be allowed to dive into what until now has been the jumbo loan market, it remains to be seen how many borrowers will benefit.
Congress and the Bush administration have agreed to raise the $417,000 conforming loan limit until the end of the year, under a provision of the $150 billion economic stimulus package approved by Congress last week (see Inman News story).
But the devil, as they say, will be in the details. The new formula for determining the conforming loan limit will allow Fannie, Freddie and FHA to guarantee loans of up to 125 percent of the median home price of an area.
While housing markets where the median home price exceeds $216,840 will benefit from higher limits for FHA loan guarantee programs, one analysis suggests Fannie and Freddie will be able to tiptoe into the jumbo loan business in only 19 metropolitan statistical areas (MSAs).
The first step to be taken to implement the changes will be determining median home prices. The Department of Housing and Urban Development has been given 30 days to publish median-home-price data once President Bush signs the stimulus package into law.
But where will HUD get the data? And with prices falling rapidly in many markets, will the data be updated monthly, quarterly or annually?
HUD spokesman Lemar Wooley said FHA will use a combination of existing government data sets and available commercial information to determine the median sales price. He said FHA loan limits are based on the county a property is located in, except when the county is part of a larger MSA, in which case the county with the highest loan limit determines the limit for the entire MSA.
Not only does HUD have to come up with median-home-price numbers for every housing market in America , but Fannie Mae and Freddie Mac will have to come up with credit guidelines for a class of loans that, until now, has mostly been off-limits. The government-chartered mortgage financiers will have to decide what their standards will be for the loans they will purchase, or securitize and guarantee.
As they venture into the jumbo loan market, Fannie and Freddie will have to decide if they need to be more cautious about the minimum down payments they will accept, borrower's credit histories, and the fees they charge for taking on more risk. The task will be complicated by the fact that the maximum loan size will vary from market to market, instead of the uniform $417,000 limit in place today in 48 states other than Alaska and Hawaii .
In high-cost markets, the $417,000 conforming loan limit for loans eligible for purchase or guarantee by Fannie and Freddie will be raised to 125 percent of the median home price, with an upper cap of $729,750. That formula means that the $417,000 conforming loan limit will remain in place in markets where the median home price is $333,600 or less.
While there's no time limit for Fannie and Freddie to publish guidelines for the new class of loans, the companies have promised to work with regulators to expedite the process. James Lockhart, director of the Office of Federal Housing Enterprise Oversight, told members of the Senate Banking Committee Thursday that the process could take months.
The temporary increase in the conforming loan limit is likely to have a bigger impact on FHA loan guarantee programs, because the current limits for FHA are lower. In high-cost markets, the current ceiling for FHA loan programs is $372,790, and $200,160 in other markets.
The new ceiling for FHA loan programs in normal markets will be $271,050 -- meaning that even borrowers in housing markets where the median home price is below $216,840 may be eligible for FHA-backed purchase or refinance loans up to that amount. In areas where the median home price is above $216,840, the limit for FHA loan programs will be 125 percent of the median home price, all the way up to $729,750.
Fannie and Freddie will be allowed to buy and securitize jumbo loans originated any time between July 1, 2007 and Dec. 31, 2008 . That means jumbo lenders may be able to sell some of the loans they've made in the last seven months to Fannie and Freddie, freeing them up to make more loans.
One reason Congress and the Bush administration agreed to raise the conforming limit, at least for now, is that Wall Street investors will no longer buy most mortgage-backed securities that don't carry the backing of Fannie, Freddie or FHA. That means borrowers are paying about 1 percent more for jumbo loans that exceed the $417,000 conforming loan limit.
But there's no guarantee investors will accept the jumbo loans backed by Fannie and Freddie -- which are private, publicly traded companies that face potentially billions of losses in the current mortgage morass -- as safe investments. They may also need some time to familiarize themselves with how FHA is handling the larger loans, said Jaret Seiberg, an analyst with Stanford Group Co. who follows the secondary mortgage market.
"Investors understand the risk characteristics of conforming mortgages that are securitized by Fannie and Freddie, and they understand FHA-backed loans securitized through Ginnie Mae," Seiberg said. "But they don't have experience with jumbo loans coming out of those channels. In a market with so much uncertainty, it's a real question whether investors are going to have an appetite for a new product."
If Wall Street investors don't snatch up the larger loans backed by Fannie, Freddie and FHA after they are securitized, that would limit the benefits to the secondary mortgage market and do less to ease the credit crunch than backers of the move have hoped.
As Fannie's and Freddie's losses mount and they bump up against minimum capital requirements, their capacity to purchase and guarantee loans is not unlimited. And as Lockhart noted, it takes three times as much capital to guarantee one $600,000 loan as it does one $200,000 loan.
While Seiberg is confident that HUD can implement higher loan limits for FHA programs, he said Fannie and Freddie have technological and capital issues to overcome before they become "meaningful players" in the "jumbo light" market.
As to which housing markets might benefit from higher conforming loan limits, Seiberg said Stanford Group used median-home-price data from the National Association of Realtors to analyze where Fannie and Freddie might be able to purchase or guarantee loans above the current $417,000 limit.
Stanford Group identified 19 markets -- more than a third of them in California -- where Fannie and Freddie could enter the jumbo light market.
Estimated conforming loan limit increases
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Metropolitan area |
Median price Q3 '07 |
Estimated new limit |
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Anaheim-Santa Ana, Calif. |
$700,700 |
$729,750 |
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L.A.-Long Beach-Santa Ana, Calif. |
$588,400 |
$729,750 |
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San Diego-Carlsbad-San Marcos, Calif. |
$589,300 |
$729,750 |
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San Francisco-Oakland-Fremont, Calif. |
$825,400 |
$729,750 |
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San Jose- Sunnyvale - Santa Clara , Calif. |
$852,500 |
$729,750 |
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Riverside-San Bernardino- Ontario , Calif. |
$377,000 |
$471,250 |
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Sacramento-Arden-Arcade-Roseville, Calif. |
$335,700 |
$419,625 |
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Barnstable Town, Mass. |
$400,600 |
$500,750 |
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Boston-Cambridge-Quincy, Mass. |
$414,700 |
$518,375 |
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Boulder, Colo. |
$367,500 |
$459,375 |
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Bridgeport-Stamford-Norwalk, Conn. |
$491,100 |
$613,875 |
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Miami-Fort Lauderdale-Miami Beach, Fla. |
$346,800 |
$433,500 |
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New York-Northern N.J.-Long Island , N.Y. /N.J. |
$476,100 |
$595,125 |
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New York-Wayne-White Plains, N.Y. |
$550,900 |
$688,625 |
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Edison, N.J. |
$391,800 |
$489,750 |
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Nassau-Suffolk, N.Y. |
$470,000 |
$587,500 |
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Newark-Union, N.J./Penn. |
$459,700 |
$574,625 |
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Seattle-Tacoma-Bellevue, Wash. |
$394,700 |
$493,375 |
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Wash. D.C.-Arlington-Alexandria, Va./Md./W.V. |
$438,000 |
$547,500 |
Source: National Association of Realtors, Stanford Group
If you are interested in moving to or investing in property in any of these cities, contact us! Or click here for the Best REALTORS in other areas! |
California Real Estate Statistics
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Information provided by the California Association of Realtors
Fast Facts
| Calif. median home price - March 08: $413,980 (Source: C.A.R.) |
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| Calif. highest median home price by C.A.R. region March 08: Santa Barbara So. Coast $1,140,000 (Source: C.A.R.) |
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| Calif. lowest median home price by C.A.R. region March 08: High Desert $210,660 (Source: C.A.R.) |
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| Calif. First-time Buyer Affordability Index - Third Quarter 07: 33 percent (Source: C.A.R.) |
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| Mortgage rates - week ending 04/24/08 30-yr. fixed: 6.03% Fees/points: 0.3% 15-yr. fixed: 5.62% Fees/points: 0.3% 1-yr. adjustable: 5.29 % Fees/points: 0.5% (Source: Freddie Mac) | |
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Please note, the medium price home in your area may be going up because less lower priced homes are not selling. This does not necessarily mean the homes in your area have gone up. The only way to know what your home is worth is to contact us for a free market evaluation. To get your free CMA CLICK HERE |
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