Many people are using FHA loans these days. The FHA offers low government backed rates but has the problem of high mortgage insurance payments. FHA however offers guidelines that help people who have tighter budgets because they allow otherwise well qualified borrowers to exceed the standard debt to income ratios if other compensating factors exist.
This market has brought many home flippers into the fold.The large quantity of foreclosures that followed the market crash led to an abundance of investors flipping homes. The FHA has a rule loosely called the "Flip Rule" that requires at least 90 days of ownership before the sales contract is written. I think this is a stupid rule. Most of the homes that investors buy are houses that are too rough to be financed. They buy them for all cash and then make the improvements and repairs to bring the home up to market value. The FHA doesn't like to see a rapid price increase out of character with the rest of the market.
Many of these home flippers are professional companies that do a great job. There are probably some hacks out there as well, but for the most part, these companies provide a service to the community by rehabilitating otherwise dilapidated houses. My experience has been mostly positive when confronting these sellers with repairs after a home inspection. They tend to fix all the reasonable problems on an inspection report. Traditional sellers are often obstinate regarding repairs.
I think the FHA needs to re-visit this rule. The FHA is a loan program specifically designed to help entry level buyers and families get into homes and these "flipper" properties are often ideally suited for them.
Buyers intending to use an FHA loan may find a flipped property. Be sure to have your Real Estate professional check the closing date and write the offer after 90 days has passed. Your local agent should be aware of the better home flipping companies that operate and offer some guidance in this area. There is a procedure for purchasing a house before the 90 days. The FHA requires two appraisals and some paperwork from the seller regarding the repairs/upgrades. Banks may have their own overlay requirements as well. Be sure to consult your trusted mortgage professional before making an offer on a home with a seller that has less than 90 days of ownership.
Musings on the state of the market with tips, information and a little fun.
Showing posts with label house. Show all posts
Showing posts with label house. Show all posts
Friday, October 17, 2014
Friday, June 27, 2014
The Investment Trap
Many buyers fall into a trap when looking at homes. This trap is especially common during a market that is robust and appreciating. This is what I call the "investment trap". I wrote about this in a chapter of my first book in 2010 (Don't Panic, Now is the Time to Supercharge Your Portfolio, America Star Books, 2010). What is the "investment trap"? Read on...
To understand what I mean by this we first must look at the core reason people choose to buy a home rather than rent. There are many advantages to home ownership but there are some disadvantages too. So buyers are making a choice between the two. Today I am skipping the reasons for and against and working under the presumption buyers have made the choice to buy. Most buyers however, and there are a great many surveys that validate this, buy over renting because of the "investment" opportunity in the house.
First of all understand that there is a legitimate investment opportunity in buying a home. The opportunity lies in the creation of equity through appreciation and reduction of principle over time. But many buyers spend way too much energy worrying about the investment angle rather than the suitability of the property for its intended use. All too many buyers treat the purchase process as if they are buying an investment property to rent out rather than a property for which they will live.
In the book I query the notion that if a buyer wants to treat a home as an investment then they should be renting out rooms to tenants to maximize the investment. This may seem extreme, but many buyers miss out on the perfect house because they low ball offer in a seller's market, looking for an investment deal. The real estate market is a commodity market like any other. It is cold and ruthless and does not care about the plight of those who ply its roads. There is nothing wrong with looking for a deal but at some point buyers need to take the counsel of their trusted real estate professional. If a buyer does not trust their agent, then perhaps they need a new agent.
If a buyer is seeking a house to live in, then that house is first and foremost their home. It is designed to provide safe and comfortable shelter for their family. That is the primary function of the home. It is secondarily an investment opportunity. Those that insist upon seeking a "deal" often miss out on the best value of all, which is the perfect home for their family and lifestyle. In an appreciating market the equity advantage is near parity across the whole of the market. Don't get me wrong here; a trusted professional should be looking out for buyers by helping them negotiate the best terms possible once the buyer has chosen a home. Buyers need to be aware that some houses are priced right.
Owner occupant buyers are well advised to look at homes that will provide them with the most comfort and convenience within their budget. Once that home is found they can work out the best terms possible in the marketplace. In my experience appreciating markets do occasionally produce overpriced listings from sellers trying to capitalize on the upswing in values. A professional agent that knows the market well, can help buyers identify an overpriced listing and advise them on a solid offer that gives them an opportunity to get the lowest price possible on that particular property. A well priced property in this market will likely get sold at full price and rather quickly. Under priced homes are often selling instantly with multiple over asking offers. There are some nuanced exceptions, but like I said before, the market is cold and ruthless.
Those buyers caught in the "investment trap" that place the investment value of a listing in front of the value it can provide as a "home" often miss the best opportunity of all. There is a secondary "trap" as well. In an appreciating market prices will likely get higher rather than lower. Every time a buyer misses out on a home the next one that comes on the market may be more expensive than the one they passed over or lost in the bidding exchange. They are also at risk of unfavorable interest rate changes that create greater expense and reduce the investment value. These buyers may end up "settling" for something less than ideal when the best option was missed.
The investment trap often keeps buyers from getting the very best house for them. Sometimes the ideal house is not the best "deal". In the end buyers will find that almost any home they choose over a long term will be a solid investment. I believe many a great opportunity is lost when buyers buy a house instead of a home because they put investment value first rather than second where it belongs.
To understand what I mean by this we first must look at the core reason people choose to buy a home rather than rent. There are many advantages to home ownership but there are some disadvantages too. So buyers are making a choice between the two. Today I am skipping the reasons for and against and working under the presumption buyers have made the choice to buy. Most buyers however, and there are a great many surveys that validate this, buy over renting because of the "investment" opportunity in the house.
First of all understand that there is a legitimate investment opportunity in buying a home. The opportunity lies in the creation of equity through appreciation and reduction of principle over time. But many buyers spend way too much energy worrying about the investment angle rather than the suitability of the property for its intended use. All too many buyers treat the purchase process as if they are buying an investment property to rent out rather than a property for which they will live.
In the book I query the notion that if a buyer wants to treat a home as an investment then they should be renting out rooms to tenants to maximize the investment. This may seem extreme, but many buyers miss out on the perfect house because they low ball offer in a seller's market, looking for an investment deal. The real estate market is a commodity market like any other. It is cold and ruthless and does not care about the plight of those who ply its roads. There is nothing wrong with looking for a deal but at some point buyers need to take the counsel of their trusted real estate professional. If a buyer does not trust their agent, then perhaps they need a new agent.
If a buyer is seeking a house to live in, then that house is first and foremost their home. It is designed to provide safe and comfortable shelter for their family. That is the primary function of the home. It is secondarily an investment opportunity. Those that insist upon seeking a "deal" often miss out on the best value of all, which is the perfect home for their family and lifestyle. In an appreciating market the equity advantage is near parity across the whole of the market. Don't get me wrong here; a trusted professional should be looking out for buyers by helping them negotiate the best terms possible once the buyer has chosen a home. Buyers need to be aware that some houses are priced right.
Owner occupant buyers are well advised to look at homes that will provide them with the most comfort and convenience within their budget. Once that home is found they can work out the best terms possible in the marketplace. In my experience appreciating markets do occasionally produce overpriced listings from sellers trying to capitalize on the upswing in values. A professional agent that knows the market well, can help buyers identify an overpriced listing and advise them on a solid offer that gives them an opportunity to get the lowest price possible on that particular property. A well priced property in this market will likely get sold at full price and rather quickly. Under priced homes are often selling instantly with multiple over asking offers. There are some nuanced exceptions, but like I said before, the market is cold and ruthless.
Those buyers caught in the "investment trap" that place the investment value of a listing in front of the value it can provide as a "home" often miss the best opportunity of all. There is a secondary "trap" as well. In an appreciating market prices will likely get higher rather than lower. Every time a buyer misses out on a home the next one that comes on the market may be more expensive than the one they passed over or lost in the bidding exchange. They are also at risk of unfavorable interest rate changes that create greater expense and reduce the investment value. These buyers may end up "settling" for something less than ideal when the best option was missed.
The investment trap often keeps buyers from getting the very best house for them. Sometimes the ideal house is not the best "deal". In the end buyers will find that almost any home they choose over a long term will be a solid investment. I believe many a great opportunity is lost when buyers buy a house instead of a home because they put investment value first rather than second where it belongs.
Friday, December 20, 2013
Did you buy a House this Year?
Prior to owning a home most people do not have enough deductions to justify using the 1040 long form. But once mortgage interest is added to the mix it is quite common to have every reason to itemize deductions. Now all those legitimate deductions you have always had can actually be utilized to save money on taxes. This is why it is so important to see a professional tax advisor.
Trying to itemize deductions on your own can be a very daunting task. Not only is it time consuming, but it is very easy to take a deduction that is not a legal deduction. In an audit, you may get into the proverbial hot water. It may cost anywhere from a hundred to a few hundred dollars to have a professional prepare your taxes, but it is well worth it in my opinion. Even if you are good at accounting and feel comfortable preparing your own taxes, I still think it is sound advice to at least have your taxes prepared occasionally by a seasoned tax professional. A significant change in tax, income or deductions status is a great time to utilize a tax preparer.
The federal government is going to waste your money anyway, so you might as well pay them ONLY what you really owe, right? OK, I know that the government has many viable and necessary expenditures, my tongue was inserted in the cheek on that last comment. But none the less, why pay more than you are required? If you want to give away money, give it to a local charity and help someone who is down and out. Or send me a check...tongue in cheek but less firmly on that one.
I hope everyone has had a spectacular year, I know I did and I am looking forward to an even better 2014. Happy Holidays to all of you. They will be a little merrier if you save money on your taxes this year.
Monday, September 9, 2013
Online Auction Sites becoming the Rage with Banks
Many banks are starting to use online auctions for the sales of REO (Real Estate Owned) This is the term commonly used to describe real estate that is owned by a bank, obtained in foreclosure. HUD has been doing auctions for years on its FHA inventory but their auctions are not run live. HUD auctions use sealed bids. REO managers have a different idea. They want to market the house in a classic Ebay style environment. They want to drive the price up as high as possible with a bidding frenzy. This can be a great way for REO sellers to sell, but can have pitfalls for buyers which I will discuss a bit later.
One of the real areas of concern I have is short sales. I see this movement towards online auctions with short sales. Many banks are having their debtors sign an auction agreement along with the other short sale documents. The house is then placed up for auction terms and often the auctioneer does not even notify the listing agent. It seems that banks are going to continue to push ethical boundaries on short sales and in some cases take advantage of the American people while cashing in on federal programs like HAFA (Home Affordable Foreclosure Alternatives).
I have had some positive experiences with one loan short sales under auction terms. It seems the first lien holder often pre-negotiates the deal with the auction house and the short sale can move ahead with efficiency. The problem is that there is sometimes a second lien and the auction house either fails to disclose to the buyer or discloses in a fashion that is difficult to find. This can cause allot of grief for the buyer and the home owner.
People that are bidding on these auction homes should have a real estate professional aid them in the process. Typically the homes are listed on the local MLS and your real estate agent will get paid by the listing broker under the terms of the listing agreement. By all means a buyer should always have representation in a transaction involving large amounts of money.
In general the auction houses appear to be decent business operators. The problem is that another party to the transaction is now involved. The more parties in a real estate transaction the more likely it is to fail. Buyers and sellers can be taken for a long and uncomfortable ride when there is two banks and auction house involved in the deal.
If a buyer decides to bid on an online real estate auction, they should consult their trusted local real estate professional. That agent can do some quick research to help the buyer decide whether or not the home is viable. The agent can also help determine a good bidding range. It is paramount to remember that auction terms are designed to get an emotional response by the bidders. The emotion that screams, "I want to win" so as to drive up the price. Some auctions even have disclosures that suggest overbidding will result in mandated payment even if the property does not appraise. This could be a problem for a buyer using a loan to purchase.
In my experience dealing with the short sale departments at most banks is akin to getting a root canal without Novocaine. So adding the auction element on these sales is surfing in dangerous seas. Caution is heavily advised.
Finally, there are some banks now taking their REO inventory directly to auction without listing on the local MLS. They hire a local licensed agent to make the sale legal under state law, but offer no representation for the buyer. I believe that American banks are already about as ethical as your average mugger, now they are trying to engage the direct home buying public in a "dark alley deal" that will almost certainly take advantage of the buyer. If the auction house is listing a property that is not listed on the local MLS, I would tell most buyers to run away. Seasoned investors may feel compelled to bid, but inexperienced buyers really should not take the risk of engaging in a transaction without a buyers agent involved.
One of the real areas of concern I have is short sales. I see this movement towards online auctions with short sales. Many banks are having their debtors sign an auction agreement along with the other short sale documents. The house is then placed up for auction terms and often the auctioneer does not even notify the listing agent. It seems that banks are going to continue to push ethical boundaries on short sales and in some cases take advantage of the American people while cashing in on federal programs like HAFA (Home Affordable Foreclosure Alternatives).
I have had some positive experiences with one loan short sales under auction terms. It seems the first lien holder often pre-negotiates the deal with the auction house and the short sale can move ahead with efficiency. The problem is that there is sometimes a second lien and the auction house either fails to disclose to the buyer or discloses in a fashion that is difficult to find. This can cause allot of grief for the buyer and the home owner.
People that are bidding on these auction homes should have a real estate professional aid them in the process. Typically the homes are listed on the local MLS and your real estate agent will get paid by the listing broker under the terms of the listing agreement. By all means a buyer should always have representation in a transaction involving large amounts of money.
In general the auction houses appear to be decent business operators. The problem is that another party to the transaction is now involved. The more parties in a real estate transaction the more likely it is to fail. Buyers and sellers can be taken for a long and uncomfortable ride when there is two banks and auction house involved in the deal.
If a buyer decides to bid on an online real estate auction, they should consult their trusted local real estate professional. That agent can do some quick research to help the buyer decide whether or not the home is viable. The agent can also help determine a good bidding range. It is paramount to remember that auction terms are designed to get an emotional response by the bidders. The emotion that screams, "I want to win" so as to drive up the price. Some auctions even have disclosures that suggest overbidding will result in mandated payment even if the property does not appraise. This could be a problem for a buyer using a loan to purchase.
In my experience dealing with the short sale departments at most banks is akin to getting a root canal without Novocaine. So adding the auction element on these sales is surfing in dangerous seas. Caution is heavily advised.
Finally, there are some banks now taking their REO inventory directly to auction without listing on the local MLS. They hire a local licensed agent to make the sale legal under state law, but offer no representation for the buyer. I believe that American banks are already about as ethical as your average mugger, now they are trying to engage the direct home buying public in a "dark alley deal" that will almost certainly take advantage of the buyer. If the auction house is listing a property that is not listed on the local MLS, I would tell most buyers to run away. Seasoned investors may feel compelled to bid, but inexperienced buyers really should not take the risk of engaging in a transaction without a buyers agent involved.
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