How can I get the best deal on a home? Where do I start? Part 7

 

If you have had the patience to read through the previous Blogs

in this thread, many of which go into great detail about loans,

you now have an idea of what to expect and the long term impact

the decisions you are about to make will have on your future.

There is an old Latin saying, “forewarned is forearmed.”

 

REO Property Update

 

It may be a good time to discuss some aspects of the current market

in August of 2008 for our local area.  Bank Owned properties (REOs)

are a significant segment of that market.  At least 25 percent of the

homes sold in the past year have been REOs.  They are properties

that have gone through foreclosure.  The bank now owns them and

puts them on the market for resale.  The banks are not intentionally

in the real estate business and they would like to clear these off their

books.

 

However, the banks are just like any other seller.  They want to get

as much as they can for each property.  Observing the activity, the

asset managers seem to be as vulnerable to poor decision making as

are individuals who sell their own homes.  REOs often come on the

market over priced.  When they sit on the market without receiving

offers, the asset managers reduce the prices and the properties do

sell.

 

Over 25% of the REO properties in pending sale status (properties

for which a purchase price has been agreed upon by the

buyer and seller and are waiting for the buyer to complete their

inspections and wait for lenders to process and fund loans) were on

the market for FOURTEEN days or less.

 

Historical data shows that REO properties consistently sell for a lower

price per square foot than do the overall properties sold, usually by

more than ten percent.  That fact coupled with buyer perception that

REOs are the best deal on the market creates an interesting dynamic. 

Buyers frequently find themselves in multiple offer situations when

placing offers on REO properties.  Buyers find that if they really want

a property the have to submit an offer OVER the asking price (an

undesirable position for any buyer).  The banks want to create a

bidding atmosphere, increasing the selling price considerably.

 

The perception that a buyer could pick up an REO property for fifty

to sixty percent of the asking price was always a pipe dream.  In

today’s market the myth has evaporated completely.

 

My year long study of REO sales in El Dorado Hills and Folsom clearly

shows that it is difficult to get any bank to lower their price more than

5% of the asking price.  It does happen in rare instances but it is more

common for an REO to sell at, or over the asking price.

 

If one views the data with perspective, a five percent reduction in

asking price still represents a significant savings.  The key is not to

let emotion take control and pay above market price for any REO

property. 

 

Also remember that REOs are sold AS/IS.  The buyer usually has to

pay for their own inspections and repairs.  The only thing the bank

usually guarantees is a clear title to the property—an important issue.

 

Of course, each property is unique.  Each has to be studied individually.

Once you find a property that you like, you should ask your Realtor to

do extensive research.  When you decide to make an offer you should

know about as much about the property as possible.  Understand what

the market value of the property is and no not offer more than that

market value.

 

There are a lot of excellent buys out there.  You just have to expend the

effort to find them and decide on the one which meets you needs and

wants.

 

Of course, I would be pleased to help you find that ONE.  Just give me

a call.

 

Stay tuned for part 8.

 

 

  

 

 

 

How Can I Get The Best Deal On A Home? Where Do I start? Part 6

 

If you are still with me at this point—and still awake—you are doing

well.  Home financing is not the most exciting topic, but it is very

important to those who are about to make a long term commitment.

It is very confusing. If you are lost, join the crowd.  Find a loan

consultant that you trust and ask lots of questions.

 

At this point you should be aware of the type of loan that will work

best for you and after your consultation with your loan consultant

you will know what price range you can afford. 

 

It is a good time to select an agent to help you identify the perfect

home and help you complete the purchase.  Note that a licensed

agent in California does no have to be a Realtor®.  I Realtor® is

a licensed agent who is a member of the National, California and a local

associations of Realtors®.  They subscribe to a strict code of ethics

and are committed to providing the highest standard of representation for

their clients.  I recommend that you select a Realtor®.

 

Another important aspect real estate law is a concept known as agency.

To put it into simple terms, an agent can represent a buyer, they can

represent a seller AND they can represent a buyer and seller in the same

transaction.

 

Most properties are entered into the local MLS (Realtor’s® Multiple

Listing Service) in order to gain the most exposure.  When the listing

agent enters the property into the MLS they also commit to pay a

commission to the agent who brings a ready, willing and able buyer

to the negotiating table and completed the purchase transaction.

In simple terms, the seller pays the commission.

 

So, it costs the buyer nothing to have professional representation!

 

Sales commissions are usually split in half, 50% to the listing

broker and 50% to the selling broker (the broker representing

the buyer).

 

Some buyers assume that if they find a property and agree to let

the listing agent represent them in the purchase that they are going

to save money. NOT SO!  When a listing agent represents a buyer

that broker gets 100% of the sales commission.  The process is  

legal and happened every day.

 

If you are about to make the largest purchase of your life, would you

feel more comfortable being represented by an agent who already

has a contractual obligation to represent the seller?  Or would you

feel more confident being represented by an agent who is dedicated

to representing you with 100% of their skill and knowledge?

 

I know which choice I would make.  Let’s see now, 100% effort

for ZERO out of pocket…

 

 

 

 

Stay tuned for the next Blog in this series.  

 

  

 

 

 

 

 

 

 

 

 

 

 

HOW DO I GET THE BEST DEAL ON A HOME? WHERE DO I START? Part 5

How do I get the best deal on a home?  Where do I start? Part 5

 

At this point you have decided that you want to purchase a home.  You are tired of paying rent that only makes your land lord richer.

 

You have communicated with a loan consultant and narrowed your selection to a loan package that you can live with—NO UNPLEASANT SURPRISES.  NO PREPAYMENT PENALTIES.

 

You should have a fairly good idea what your payments are going to look like and, although you are not excited about having to pay so much, you can live with the payment.  You will have a good idea of what price range you should be looking in. You will be able to obtain a pre-qualification letter from your loan consultant.

  

   (A pre-approval is better.  That means that your financial

     information has been verified and there are no skeletons

     in your financial closet.)

 

Armed with the knowledge about what you can afford, it is time to start looking for THE HOME. 

 

Remember the old adage, location, location, location.  If you buy in the very best area that you can afford, your property will tend to maintain it’s value and appreciate more over time.  A smaller, older home in a better area is a better selection than a new home in a questionable area.   

 

Almost everyone starts looking on the Internet.  There are thousands of real estate related sites out there.  Select one that you feel comfortable using.  Naturally, I recommend two web sites,

 

                        http://www.BuyYourVilla.com

 

                                            and

 

                         http://www.BMikeWest.com  

 

They are both my web sites and provide access to EVERY property available on the Realtor’s MLS in our seven county area.  They also provide information about our local area as well as information about the real estate buying and financing process.

 

While you are performing your property search, try changing your search criteria just a little in one or two categories.  You will be amazed at the difference in your search results.

 

Note that most property search sites require that you enter your name and e-mail address.  Mine are no exception.  However, the worst that you can expect is the occasional e-mail with real estate related information that you may find useful.

 

Stay tuned for Part 6    Enjoy your search!

 

 

How Can I Get THe Best DealOn A Home? Where Do I Start? Part 4

How can I get the best deal on a home? Where do I start? Part 4

 

It is essential that you understand some of the pitfalls of mortgage loans when making the determination as to which is the best loan for you.  You should be very familiar with

each loan program that you are considering.

 

In the rather lengthy Part 3 we discussed several loans, how they work and where some of the pitfalls are for each.  Naturally, you should discuss these loans with your loan

consultant in detail.  Make sure you are completely comfortable before making the final decision.

 

The last loan that will be discussed is the “Pick-A-Pay” or the “Pay-Option-Arm.”  This type of loan offers the greatest number of options for the borrower.  Each month they can decide to:

 

    1) Pay the fully amortized (paying principal and interest payment for a 15 year payment period.  (The highest dollar payment.)

 

    2) Pay the fully amortized (paying principal and interest) payment for a 30 year payment period. (The Gold Standard for loans.)

 

    3) Pay the interest only (the original principal remains the same) payment.  (A lower monthly payment.)

 

    4) Pay a “teaser” interest payment, far below the market interest rate which will not even cover the monthly interest for the loan principal.  With this option, the difference between this “teaser” payment and what you actually owe is added to the outstanding loan balance EACH MONTH.  This phenomenon is known as negative amortization. 

 

Depending on the lender, once the principal balance reaches 110% to 125% of the original loan balance, the loan recasts. That means that all the rules change and your payment takes a giant leap upward.

 

Another issue is that the interest rates are adjustable and tied to a financial index. The borrower has no idea what is going to happen to their interest rate.  There are caps involved but the caps allow interest rates that result in frighteningly high

payments.

 

If we go back to our $ 250,000 loan amount used in Part 3 and maintain the 6% interest rate, the four payments would look like this:

 

                1)  15 year fully amortized payment……..$ 2109.64

 

                2)  30 year fully amortized payment………$ 1498.99

 

                3)  30 year Interest only payment………….$ 1250.00

                       (remember with this one you are NOT paying down the principal!)

 

                4)  2% Teaser Rate payment………………….$   416.67

                      (The difference between this payment and the $ 1498.99 above is added to your loan total EACH MONTH.)

 

                After two years of this payment history your principal would be $ 275,975.68, over 110% of the original loan!  When the loan recasts an interest rate of 11% is not unlikely.  At that rate your new payment would be $ 2628.18!  That is 175% of the original 30 year fully amortized loan payment. 

 

We are sure that some people in 2004 & 2005 committed to this kind of a loan package knowing that their home value was increasing at astronomical rates and that they could always sell and get out from under that loan obligation if necessary.  Unfortunately, for far too many in this position, property values dropped.  Thus the foreclosure boom.

 

Experience teaches us that risky loans can produce disastrous results.  Negative amortization was attractive bait created by investors to increase their bottom line.  However, it backfired

on both those who committed to those kinds of loans and well as the investors who were trying to take advantage of the market.

 

There are VERY FEW circumstances in which this loan option should be considered.  They have enabled borrowers to purchase homes that they could not have otherwise afforded.  And more often than not, have resulted in serious problems for those borrowers. 

 

In a word:  DON’T!

 

 

Stay tuned for the next Blog in this series.  

 

  

How Can I get the best deal on a home? Where do I start? Part 3

How can I get the best deal on a home?  Where do I start?  Part 3
As you zero in on a loan for your home you are going to have a number of choices.  This post will discuss the good, bad and ugly aspects of the most common loan offerings. 
Fully Amortized Fixed Rate Loans
The most conservative loans in the market are fully amortized, fixed interest rate option; you are going to know what your monthly payment is going to be for the entire term of the loan.  There will be no surprises or hidden changes.  You will also be paying down the principal each month, along with the interest.  However, the monthly payments on these loans are usually higher and many people can not qualify for them.  (This is one reason that so many borrowers opt for another type of loan.)

The standard loan terms in the industry are 15 years, 30 years, 40 years and 50 years.  The shorter the term of the loan the higher the payment.  Conversely, the longer the term of the loan the higher the amount of interest you are going to pay—MUCH HIGHER.

Let us take a loan amount of $ 250,000 at 6% interest as an example.

The principal and interest payment would be:

     For a 15 year loan…………………………$ 2109.64

     For a 30 year loan…………………………$ 1498.88

     For a 40 year loan…………………………$ 1375.53

     For a 50 year loan…………………………$ 1316.01

As you can see, there is little incentive to extend your loan term to fifty years.

The way the process works is that the early payments are applied mostly to interest, with very little going to the principal.  As the loan term progresses the portion applied to interest declines and the portion applied to the principal increases.  This has an impact on your annual tax deduction, since the interest portion is tax deductable.  However, the lenders get their money early in the transaction in the form of that interest.
Fixed Rate Interest Only Loans
A loan option that many borrowers select is a fixed rate Interest Only product.  In this provides a fixed rate for the term of the loan, usually thirty years with an initial period of interest only payments.  At the end of the interest only period the loan recasts and you end up with a fully amortized loan for the remaining term of the loan. 

The most common interest only periods are five or ten years. The interest only loan rates are higher than the fully amortized loans.  So if we go back to our $ 250,000 loan again, at a 6.5% interest rate the payment will look something like this:

The initial interest only payment would be $ 1354.17, slightly lower than that of a fully amortized loan for the thirty year period.  However, that $ 144.71 per month can be the difference between qualifying to buy the home or not. 

If the interest only period is five years, when the loan recasts the payment increases to $ 1688.02.  You have to repay the principal over the remaining 25 years of the loan period.

If the interest only period is ten years, when the loan recasts the payment increases to $ 1863.93.  You have to repay the principal over the remaining 20 years of the loan period.

Interest only loans enable borrowers to qualify for loans when they can not afford the fully amortized loan option.  The fixed rate eliminates any surprises.  The borrower knows what is coming.  Since the average buyer only stays in a home for five to six years, many plan to sell before the big adjustment.  However, unless the market value of the home increases, they will have no equity in the property when they sell because their interest only payment has done nothing to reduce their loan principal. 

This option works for many buyer/borrowers, especially if the value of the property appreciates during the interest only period.  Some borrowers also consider an option of refinancing if interest rates decline or their financial picture improves during the interest only period. 

Beware of the possibility that the property may not appreciate and the borrower’s financial picture can get worse.  There is a potential for trouble down the road.  Caveat Emptor–(Let the buyer beware.)
Adjustable Rate Mortgages
A third category of mortgage products is the ARM, or adjustable rate mortgage.  This option enables a borrower to qualify for a loan at a fixed, reduced rate for the introductory period, one, two, three, five, seven or ten years, depending on the specific loan.  

However, at the end of the fixed rate period, the mortgage becomes a fluctuating interest rate.  The adjustments are tied to financial indices such as the Federal Cost of Funds Index or the LIBOR.  Most adjust once a year after the initial fixed period, with caps on the amount that they can adjust each year and a maximum adjustment over the term of the loan.

Usually, the shorter the fixed period is, the lower the introductory interest rate.  Depending on market condition these rates can be far below the fully amortized, fixed interest rate loans or they can be similar.

Adjustments can be increases in rate and payment or decreases.  It is not prudent to expect decreases.  The borrower knows what to expect when an increase is due unless they monitor the specific index very closely.  Few have the interest or training to do so.

If we look at an example of a three year ARM with a fully amortized, introductory rate the payment would be 5.375%.  Our $ 250,000 loan amount will result in a monthly payment of $ 1399.93, $ 98.95 less than the fully amortized, fixed rate, loan payment.  However, at the end of the three year fixed term the interest rate can go up 2%, making the payment $ 1657.62 or less, depending on what happens to the governing index. 

The more seductive three year interest only ARM with the same 5.375% interest rate would yield monthly payment of $ 1119.79.  However, three years down the road the payment could be $ 1726.69, or lower, depending on the index.
As you can see, navigating this process is similar to sailing through a mine field.  Find a loan consultant that you trust and ask a LOT of questions.
 

My next Blog with discuss some other, more risky, loan options.  Stay tuned.

HOW DO I GET THE BEST DEAL ON A HOME–Part 1

How can I get the best deal on a home?  Where do I start?

 

The home buying process can be daunting.  There are many variables involved and my home purchase is likely to be the largest that I ever make.  I don’t want to make any mistakes and I DO NOT WANT TO PAY TOO MUCH! 

 

Thousands of prospective home buyers ask themselves these questions every day.  Most understand that home ownership has both benefits and drawbacks.  A monthly house payment is almost always going to be more than rent.  How is it going to affect my lifestyle?  If I do make a purchase, am I going to be house poor for the rest of my life?  A home purchase in a major commitment, am I ready for that?

 

One of the major advantages of home ownership is long term appreciation.  Although the downturn in the market over the past few years belies the fact, single family homes appreciate 6.7% per year on average.  Buying a home now, after a major market correction, is likely to put the buyer in an excellent position to reap the benefits of that long term appreciation.  And don’t forget the tax advantages of home ownership.  Both interest and property taxes are deductable.  So Uncle Sam and the Governator pitch in to help you make that house payment each month.  Finally, when you buy it, it is YOURS.  You can paint it any color YOU want; you can change it any way YOU want.  There is no landlord making up rules that you have to follow: The American Dream.

 

Once you decide that the possibility of home ownership warrants a little investigation it is time to do some research.  Today, most potential buyers start their search on the Internet.  There is so much information available the one can get overloaded quickly. 

 

If one takes it one step at a time, with an organized approach, things will fall into place more quickly than you might think. The purpose of this Blog thread is to help the prospective buyer with that organized approach.  Every few days a new piece of the puzzle will be added.

 

Feel free to ask questions at any time.  Every buyer’s situation is different and there are over 500,000 licensed real estate agents in California ready and willing to help.  Of course, I would like to think that I am more ready, willing and able to help than any of them!!

 

Tune it for the next segment.