HomeSmartReports
This blog brings new needed information for the investor either just starting out or the seasoned investor waiting to increase their knowledge in the market place.
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Thu, 01 Nov 2007 17:18:23 -05:00 - Collateral is King
A person's credit history has always been an essential part of qualifying for a real estate loan. To qualify for a real estate loan these days, the Collateral is King (that is, the property being purchased or refinanced) and is also going to qualify for the loan. Part of the reason the real estate market is so challenging today is that the entire market is viewed as "overvalued". Prices went up fast, interest rates were lower than they had been in 40+ years and various loan programs made it easy to get into a property. Lenders didn't seem to be worried about the overall value of real estate, so why should consumers? Today things are different, and consumers should worry a little and take these matters into their own hands. They should not rely strictly on the lenders' or real estate brokers' assessment of value. After all, as a buyer you are making an investment which you hope will pay off in the future.
The information resources are available to help consumers and investors do better research, and do it faster than ever before. Current price is a critical factor in determining Collateral Value. Market trends are also an essential element. Is the market going up, down or sideways? What is the market strength in the area; are there an excessive number of foreclosures in the area? Is property flipping creating a volatile market in the area surrounding your home? All of this information is readily available and can help you do a better job of assigning overall value to a home.
There is a very old saying; "If we do not learn from our mistakes, we are destined to repeat them". Investing in real estate is not the "slam dunk" winner it was 3 or 4 years ago. A lot of people have lost money and lost their homes as the result of a super-hot real estate market that went flat, and then it went down. Consumers, investors and lenders must learn from this financial tragedy and do fundamental research to confirm value, For the first time in a long time, Collateral is King and without the fundamentals of value being present, your investment could be at risk for future value, so do your research!
Thu, 01 Nov 2007 04:17:52 -05:00 - More On Property Flipping TV Shows
Here's more on property flipping TV shows as a tag on to yesterday's entry. It's a scary thought on Halloween. At the end of every show, we generally see people telling us about the "gross profit" they made, but they ignore the many other costs referred to in our last blog entry. Here's another angle the show's producers use to distort the end result. I mean, they want these people to win and make a profit because it brings you back to their TV Show, right? Well, there's more you should know.
In other scenarios, a property investor buys and property and goes through a fix up process and completely blows up their budget by a factor of two or three times their original intent. So, now they may be faced with the situation of being "upside down". This means that after they have purchased the house, done all the fixing up, kept paying on a mortgage during the fixing period, the house is worth less than the total combined cost of the project. Here's what we mean.
Suppose the same house as yesterday cost $250,000 with an overloaded budget of $45,000 when the original intent was to spend $15,000. Using a monthly carrying cost of $1,250, less say it took an additional three months to try to sell, costing another $3,750. Let us again, assume 8% cost of selling and a $315,000 market value. Here the picture.
$250,000 price + $45,000 fix up + $7,500 for 6 months of holding cost + $25,200 selling costs (broker fee + normal closing costs (est.)). In this case, the loss would be -$12,700.
Rather than accept a loss (which the TV guys don't want you to know, the tag line at the end is the investors chose to turn this into a rental property they will sell at a future date. Over time, that may work out though in this market it is tough to predict. The other aspect of this situation may have several ramifications:
1) The investor's money is now all tied up in the property and they can't get it out until the market improves.
2) If the market doesn't turn, and they have no more available capital, they can't invest in other flips. Their investor capital is all ties up.
3) There is a very good chance that they will not be able to rent the property for as much as their monthly payments which would mean they have continuing negative cash flow to some extent.
STOP! We are not saying that you shouldn't invest in property with the idea of flipping, we simply saying you need to consider everything. You can do a fabulous job of rehabbing a property, but if you can't get enough to get out of it and make a profit, you should look for another investment property. Don't kill yourself to make nothing. Work hard on initially finding a property and then determine what it call sell for in top shape. After you've done that, consider your cost, your fix up budget, broker's fees and all other costs (don't forget the time on market component) and then figure out how much you'd make or lose by pursuing this investment. Do your research and you stand a better chance of achieving your objective...profit!
Wed, 31 Oct 2007 13:54:45 -05:00 - TV Shows Featuring House Flipping for Profit
There's only one thing that grates on me when it comes to TV Shows that feature house-flipping for profit; they never seem to tell the truth about the profitability picture. I love what these shows teach about innovative ways to fix things up and the treatments people use to make a home look stylish. The number of talented people who can fix things up to show their best are truly amazing. However, here's a classic scenario that always leaves the viewer up in the air as to how much was made or lost on the deal, and always leaves me irritated.
This situation is pretty straightforward where Matt buys a house or condo for $250,000 and has a budget of $15,000 to fix it up and then resell it in the open market. So, he's in the property for $265,000. What the TV viewers aren't told is that while Matt holds the property, there are maintenance fees, taxes, insurance, utility payments, gardening (if a home), interest payments on the loan and other miscellaneous cost. Assuming Matt paid 20% and carries a $200,000 loan, his monthly carrying costs are about $1,250 per month while the house is being fixed up and then marketed. So, if we assume that from the day he closes escrow on the home it takes him 90 days to fix-up, market, obtain and offer and close the deal with the new buyer, it has cost him another $3,750 in carrying costs. That is a very fast turn around, by the way.
The TV Shows' favorite trick is to say Matt bought the home for $250,000 and fixed it up for $15,000 more so he's in for $265,000. He sold it for $315,000 so he made a $50,000 profit! Wrong again! After fixing the property up, the owner always seems to have a real estate agent come in and price the home. This suggests they are going to use a real estate agent. That costs about six percent of the purchase price on top of another normal two percent of the price for title and escrow fees and other miscellaneous transaction fees. So, let's do the math with that in mind.
$315,000 minus eight percent selling fees for real estate services and normal closing costs ($25,200), minus holding costs ($3,750), minus fix up costs ($15,000), minus the prior purchase price ($250,000) equals $21,050 pre-tax profit. If you are in a 25% tax bracket (State and Federal combined), you must also pay tax on your profit of $5,262.50 which leaves you a gain $15,787.50. (Taxes and other fees vary by state so these numbers could be a little higher or lower depending on your location).That is a nice profit for 90 days work, but it is a far cry from the $50,000 profit TV Shows would have you believe.
Three of the most important things you need to know are; 1) How much can I get for this place when it's all fixed up? 2) How much will it cost me to fix this place up and will I stick to my budget? and 3) How long can I afford to have this property on the market with the other carrying costs I'll have? If you answer all of those questions and you believe you'll still make a profit, it may be worth it for you. So, prior to buying, do your research on the area and make sure of where the value ranges are to justify future value. If the property doesn't make financial sense after you've gone through that exercise, find another property. There are a lot of properties out there.
Tue, 30 Oct 2007 09:16:46 -05:00 - What's My Home Worth?
This is an age old question, "What's my home worth?" We've taken a different approach because what a home is worth not only includes a value estimate, with our reports you can also analyze local market activity and market strength. Value depends on more than just price. You need to understand the trends in the area. That is, appreciation or depreciation so you know which way the market is headed. Our reports help with that insight.
What about foreclosure and flipping activity? It all means something. If there's a lot of foreclosure activity in the area, appreciation is at best moderating and at worst, is negative appreciation meaning market values are going down. If you base a decision to buy or sell solely based on comparable sales, you're probably not going to be happy with the result in this market.
As a seller, if you price your home incorrectly (too high) it will only sit on the market. As a buyer, if you see a price in today's market, it could be less next month so you may choose to be patient. However, there's always the risk someone else will swoop in and buy your dream home. So, you have to balance your desire for the home and the market conditions to pick the right price.
Market pricing and trends, plus local market strength conditions all factor into overall market value. Consider all when buying or selling your next home.
Mon, 29 Oct 2007 15:17:37 -05:00 - Industry, consumer groups critique anti-predatory-lending bill
Michael Calhoun, the head of the Center for Responsible Lending, told House lawmakers that investor demand for securities backed by subprime loans "lies at the heart of today's mortgage meltdown."
During the housing boom, Calhoun said, "The demand from Wall Street (for mortgage-backed securities) was so intense that it encouraged subprime lenders to abandon reasonable qualifying standards, to forget about standard documentation requirements, and to ignore whether borrowers could actually afford the loan." , all according to Inman News Features.HomeSmart Reports avidly supports consumer rights and full disclosure of lending terms in real estate and all financing transactions. However, Mr. Calhoun has somehow placed this problem more at the feet of investors who buy mortgage-backed securities rather than at the feet of the originators. What's wrong with the originators telling the truth? What's wrong with full disclosure? What wrong with writing it down on a piece of paper that every party to the transaction signs so the borrower really does "get it", rather than the legal mumbo-jumbo that never gets read by the borrower in a loan document?
Let's look at the closing process these days. The day of closing, the buyer appears with their real estate agent to sign documents amongst real estate professional representing the lender, an escrow company or law firm. They are presented with volumes of long legal documents, many of which they have seen for the first time and expected to "read" them, understand them and sign them. Well, they don't want to look stupid in front of these people do they? So, most act like they understand and sign away. I've done it several times and the documents are overwhelming and what if I disagreed with them? Here's what.
I'd be told, "This will blow the deal", or "the seller will probably back out", or "your loan commitment expires today and your rate and fees will most certainly go up" and yada, yada, yada! So the buyers look at each other, and in a panic at the thought of losing their new home, sign on the line. So here's my answer; everyone signs off on the disclosure statement that outlines the TRUE aspects of the loan the borrower is originating. If it's not the truth, fine the lender to the extent the borrower was damaged! Make it hurt. If it happens again, increase the fine. Sooner or later, crooked lenders will get out of the business, go broker, go to jail, or forced to be honest. But do it on the front end of the transaction where the lender has all the key information and can review borrower credentials and a full loan file.
We're already seeing what happens when the investor interest dries up in real estate. Values are going down and there's very little money on the horizon to keep liquidity in the market. The money has gone elsewhere for now; stocks, commodities, bonds, off shore or somewhere else. Lay this one at the feet of the investor community and investors will keep running for the hills.
Thu, 25 Oct 2007 17:53:56 -05:00 - Housing Improvements for Senior Citizens
Housing Improvements for Senior Citizens
A recent survey conducted by the American Association for Retired Persons (AARP) revealed important information about the improvements seniors make to improve the livability of their homes. The fact is most people don't want to leave their homes if they can maintain their independence. Many times, that involves making modification to their homes to create a more convenient environment. As quoted below, here are the Top 10 things those surveyed, did to their homes to maintain an independent lifestyle. That is not to say it's for everyone, but we figure it's best to share the knowledge and learn from those who have done it before to improve their living conditionsThe top 10 home improvements reported were:
Levered doorknobs.Grab bars in bathrooms.
Levered faucets in kitchen sinks.
Handrails on both sides of stairwells and on front and rear steps.
Grab bars in showers; removal of any door threshold.
Movable shower heads for those who must sit.
Portable shower seats.
A bathroom with a bath/shower as well as a bedroom on the first floor.
Widened doors to accommodate wheelchairs.
Ramps for those using walkers and wheelchairs.
Seniors spend billions of dollars each year on home improvements. If you are planning on making repairs or improvements to your home it is important to know how to pick the best contractor, and choose the financing that's right for you. AARP has developed extensive resources on home modifications, to obtain this information visit AARP. An important thing is to not only trust the person who is doing your work, but also to know that they are competent. That's why references from people you know are very important. Many of the above improvements can be accomplished by a skilled handyperson, but if a contractor is needed, make sure they are licensed and remember that AARP can help you in this area.
Fri, 26 Oct 2007 05:23:15 -05:00 - Lower your Property Taxes
If you purchased a home in late 2004 through 2006, it may be time to appeal your taxes. Assessors base the valuation of your property on the current market pricing, or some percentage thereof, or the actual price that you purchased your home for as of a certain date. Well, values are going down in most parts of the country. If you do not proactively appeal those taxes, they will continue to go up, not down.
These days, most every county assessor has a website and there is generally a tax appeals process that is outlined. Essentially, you have to prove that the value of your home today is less than it was when you bought it and that is a key element in obtaining a tax reduction. Gathering sales information on houses that are both comparable to your home and in relatively close proximity to your will help in the justification process.
The important thing to note is that a tax appeals process rarely happens by itself. The property owner has to initiate the process and has to go through the steps outlined by the assessor. The owner generally has the right to be present at a hearing to confirm or refute findings by the tax assessor. Being prepared with the proper area sales information and correct documentation will optimize your chances for a successful appeal.
Fri, 26 Oct 2007 05:25:54 -05:00 - Downgraded Mortgage Securities
We're starting to see regular "downgrading" of mortgage-backed securities from ratings agencies like Standard and Poors and others. What does that mean? Simply put, it means their value is going down. If an investor group buys a $100 Million loan pool based on the Collateral (the homes in that pool) being worth $125 Million, they establish the value of that pool at roughly $100 Million. A $100 million loan pools divided by a projected market value of $125 million would have an 80% loan-to-value ratio.
If the market value of that portfolio starts to go down, let's say to $100 million, the loan-to-value ratio is now 100%, and the portfolio is less secure. Why? If some of those properties go into foreclosure and have to be sold as real-estate-owned (REO properties), they may sell for less than their original value. If this occurs, the investors begin to take a loss on their investment and they begin to look for other more profitable areas to invest their money.
This situation is having a profound affect on the availability of money, or Mortgage Liquidity. Mortgage availability for consumers depends on the availability of funds from the investor community. The way they invest is to buy Mortgage-backed Securities and when these securities are downgraded, they lose value and then investors lose interest.
So, what does it mean to you, the consumer? Fundamentally, loans over $417,000 will be harder to find for quite a while and will probably cost you more to originate and in higher interest rates. If the loans are $417,000 or less and conform to the standards of GSE's (Government Sponsored Enterprises), the market is still quite liquid. If you are buying in an area where a loan of less than that amount is required, funds should be fairly straightforward to obtain, provided you qualify for a loan of that amount. If you are looking for a loan over that amount and can close it soon at a relatively good rate, you should probably take advantage of that opportunity because it may not be available for quite a while. It's going to take a while for the real estate market to return to some type of equilibrium.
Wed, 24 Oct 2007 17:13:27 -05:00 - A Homebuyers Strategy
The real estate market is going down in many parts of the country. How far it will go is anyone's guess. However, there are indicators that suggest when a market's decline is beginning to decelerate or "bottom out" and that is usually a good time to buy a home. Remember that generally, real estate is considered a long-term investment. So, if you are buying with the idea you'll be in that home for a long time, your strategy may be different than someone who is flipping a house.
If any of us could pick the bottom or the top of any market, we would be very wealthy people indeed. We'd know when to buy, when to sell, when to re-finance a property and when to hold tight during tough economic times. There are tens-of-thousands of economists and analysts out there trying to do this constantly, and they've never been able to nail down this phenomenon exactly...because they can't get inside the consumers' mind. However, there indicators like sales trends and risk factors that can help and HomeSmart Reports has some.
If you are buying in a real estate market where a value trend appears to be bottoming out or nearing that point, and you intend to be in that home for a long period of time, it's likely a good time to buy. Since it's almost impossible to pick the exact bottoming out point, get a close as you can. How will I know you ask? Median home sales in an area will normally begin to stabilize over a few months time. The amount of inventory will begin to shrink, meaning the buyers are starting to outnumber the sellers and demand is starting to exceed supply. Local real estate agents should know this and can help you.
Fast-forward five years. You bought a home for $300,000 near the bottom of the market back then and now you're ready to sell it for $400,000, a difference of $100,000. How much would you care if the market (five years ago) went a little lower to $290,000? You still did pretty well at making a good profit. Conversely, if you waited a little longer and bought the home on the way up for $315,000 and made $85,000, you might kick yourself a little, but you still did well.
If you are going to live in the home and enjoy its benefits, look to a long-term strategy of getting in at nearly the right time rather than focusing on exactly the right time. It's very tough to pick the exact moment to buy, so study the trends and get as close as you reasonably can given your situation and your desire to own a home.
Thu, 25 Oct 2007 10:38:06 -05:00 - A Home Sellers Strategy
Getting top dollar for your home is nearly always on the mind of a seller. However, there are other factors to consider, such as motivation. Why are you selling? Are you moving and have to get to a job for which you were recently hired? Trying to get out of a cold climate? Trying to get out of the heat? Going to retire? Tired of a two-story home and want a single story? Bought a new home and are looking at making double payments? It all matters and you should make some decisions about pricing based on these factors.
If you're making a job change and having to leave a family behind until you sell the house "back there" in your former city, it may increase your anxiety during the separation period. If you need to leave the northern part of this country where sub-zero temperatures are common in winter and it's already the fall, you may want to price more aggressively. If you've just retired and have a lot of time on your hands, you may price the property a little higher since you're in "no hurry". However, pricing it too high might get you no activity at all. Financial reasons always seem to be huge motivators and double house payments can be nasty on the budget.
A lot of people right now are faced with having bought a home at, or near the top of the market price a year or more ago. Demand has diminished a great deal. There is a lot of inventory out there and fewer buyers in the market than have been seen in a long time. So what's the best strategy? First and foremost, you have to be realistic about the local market conditions in your area. Where have home prices gone recently in your locale and much inventory are you competing against are questions you can ask your real estate agent. Where is the competition priced? If you are somewhat motivated by one or more of the factors above, or some other motivator, you should price at, or slightly below the competition.
If you want to maximize exposure you might want to consider paying a higher commission, such as 7% rather than a more standard 5-6%. Why? If agents see they can make more money, the will show your property to a buyer if they think there is any chance the buyer would like it. Wouldn't you? Mind you, on a $400,000 home, that's $4,000 more our of your pocket, but if you're staring down the barrel of two house payments at $2,000 per month each (because you bought another one) that $4,000 will be gobbled up in just two months!
If you have to sell below the price of what you paid, that's a hard one because you're losing money. However, you may have a tax advantage for it so check with your accountant. It could lessen the financial blow. Also, even though you could take a loss, if you're buying another home it is also likely you're buying it at a more depressed price and could get more home for the money in the current market conditions.
Ask yourself "where do I want to be in six months". If the answer is "In the new location with some financial stability and doing the things I want to do", it will probably have an
Thu, 25 Oct 2007 11:07:05 -05:00 - Homeowner Insurance - A word to the wise
Our family has received phone calls from friends and relatives in Europe asking if we're okay and if there is anything they can do so the concern goes well beyond the borders of the United States. People are normally concerned about the value of their property and how much the equity in their home is increasing but there is another valuation metric that people need to be aware of and that is the replacement cost of their house in the event of a tragic event. Yesterday I called my Farmer's agent to inquire about an auto insurance issue and for the first time in years I had to leave a message because they were so busy with homeowner insurance customers inquiring about their coverage. People wanted to know what their coverage was and whether their policy was still in force. While you are wiping the ashes off of your car and breathing smoke-filled air is not the time to check on this and hopefully a few lessons have been learned. You need to make sure that you have coverage in place and make sure you are properly covered. More than ½ of the residential homes in the US are underinsured by more than 20% and if you fall victim to a tragedy and lose your home, you want to be in the 50% that are properly insured. Some agents will low ball the coverage to give you a better premium so you'll go with them and well, you get it. The responsibility to see that you are adequately covered with homeowner insurance is all yours.
Thu, 25 Oct 2007 11:52:47 -05:00 - Averted a Risk?
We just got a call from a client who was doing research on a potential purchase of a single family home in Georgia and he may have just averted a risk. The property had a Market Risk Score of "B" on the report. The area around the property had a 28% appreciation rate over the last three years combined which generally, is fairly reasonable. However, it also had a 34% foreclosure rate and that begins to suggest a higher level of risk. If values are going up, why are there so many foreclosures?
The home was purchased a few years ago for around $175,000 and was now on the market for the low $150,000's. It seems the seller understands that the market has changed and they're probably going to take a financial hit, so they seem to be realistic.
However, I recalled that the FBI broke up a fraud ring in the area a few years ago just from the reading I do related to real estate and mortgage fraud. My suggestion to the client was that they should go to the local real estate agents in the area to get a feel for market saturation, average prices and any general trends in the area they could pick up on in the current market. It may turn out that this is a good buy and in market range given current conditions, but based on the risk factors that showed up, additional research was certainly warranted and our client may have averted a sizeable financial risk.
Thu, 25 Oct 2007 12:19:18 -05:00 - 6% Real Estate Commissions
What are you getting for the services of a real estate professional? The debate over how much a real estate brokerage gets paid for its services has gone one for 30 years that I am aware. Here's the breakdown – high level; 3% goes to the selling brokerage, 3% to the buyer's brokerage. Of each 3%, the broker shares some of that amount and the actual selling agent gets the rest. For simplicity's sake, let's assume each gets 50% of the 3% made by each brokerage.
On a sale of a $500,000 property, each brokerage would get $15,000 and each of the brokers and the agents would receive $7,500 a piece. It is possible during a transaction negotiation that the seller would be able to negotiate that commission a little lower. It happens all the time, especially in larger real estate deals.
Here's what you have to consider as the seller. If you try to save the 6% commission, the buyer is smart enough to recognize that fact. There is a very good chance the buyer would say to herself, "Why should the seller save all the commission, I think I'll offer 3% less and save part of that commission because then we both come out better than if the property was listed". Following that logic and only if you agree with it, you are now saving 3% of the purchase price. You will have to pay for advertising and other marketing expenses, hold open houses, deal with numerous unqualified buyers, opening escrow and title orders as well as home inspections.
Issues will come up during the transaction and you'll need to have continuous communication with the other parties to the transaction and often have to re-negotiate points of the agreement. Are you prepared for that process? Are you prepared for security concerns such as a burglar (posing as a buyer) who may be casing your home for a burglary? These things do happen. The lock box security systems in place today tell you what agent showed your home, on what date and time, and how long they were there with a prospective buyer. All of these things are useful deterrents to the risks of thieves and unqualified buyers.
We are not passing judgment on which is the right way or wrong way to sell your home, but pointing out some of the things you need to consider. Part of this sales process includes trying to maintain your sanity and a home transaction is a nerve-straining process and sometimes the use of a real estate professional is a real advantage, especially during the negotiation process. Today's market is slow due to the economic conditions and the foreclosure properties piling up on bank balance sheets. Take all of this into consideration as you determine whether or not the fee you are paying for brokerage services is worth it to you. By the way, in some tougher markets, sometimes sellers offer a 7% commission because it gets the attention of all the brokers out there and your property gets more attention. So much of this business is about marketing and exposure.
Tue, 23 Oct 2007 09:09:03 -05:00 - Mortgage Week Database Ready for Consumers
"Consumers can now go to the ICBA Web site, key in their zip code and find a community bank near them for ICBA National Community Bank Mortgage Week . Consumers will be able to find a community bank to visit and discuss the terms of their current or future mortgage", according to the ICBA.
This recent announcement indicates that community banks are ready, willing and able to compete with the behemoth, nationwide banks in the mortgage lending arena. If you want to work with a local bank and discuss your mortgage options, this website will allow you to find one in your area.
We think competition is great. Get on there and try it to see how responsive local bankers are to you needs. It just could be the breath of fresh air this country needs and also inject some money into the local economy instead of national corporate coffers.
Tue, 23 Oct 2007 09:42:35 -05:00
