PART TWO: Distressed Sales and Foreclosure Lists Demystified

The water near the bottom is very murky, and it may not be possible to know we have reached the bottom until we get there.  I believe we have reached a bottom on the Charlotte metropolitan area, and we are actually beginning to see prices move upward slightly again.

Another factor for the potential buyer to consider in this market is interest rates.  The Federal Reserve has intentionally kept interest rates extremely low in an effort to strengthen the recovery of this delicate economy.  The Fed has actually signaled it intends for interest rates to remain low for some time to come.  Most economists expect that interest rates may not begin to rise again for two or even three years, as the economy gradually regains some balance.  This consideration, combined with the notion that we have reached a bottom in home values/prices, render this a very favorable time to buy a home or investment property.

Having said all that, how does a buyer find the “bargains?”  Have you ever noticed the advertisements for “Free Foreclosure Lists” and recommendations of distressed properties?  Of course you have; the Internet and print media are littered with them.  Haven’t you ever wondered where these lists and recommendations come from?  Is there some great secret resource that no one but “insiders” and the publishers of such lists is aware of?  Of course not!

Think about it.  Lenders acquire properties in their REO inventories by foreclosure.  They don’t want these properties; the properties are really just a liability to them.  Banks are not in the business of owning property; they are in the business of lending money.  They want to dispose of these properties as quickly as possible.  Why would they maintain some secret list that only a select few are privy to?   Of course, the answer is they would not.  They want as much exposure as possible because they want these properties sold and off their books– yesterday!  Any Realtor who is a member of the Multiple Listing Service (”MLS”), and is competent enough to use it effectively, can quickly and easily find and prepare a list of properties in the foreclosure process… or REO’s that are currently bank-owned… or short sales.  There is nothing mysterious about it, and anyone who would lead you to believe that they possess some secret list of opportunities no one else knows about is probably not being as forthright with you as they could or should be.   And deception is probably not the best way to begin a relationship with a professional in whom you plan to place your confidence and trust.

 

But finding distressed properties is only a part of the process.  You still need to assess whether a property is really a good value.  This is done with thorough research and analysis-- gathering data concerning recent sales (and sale prices) of comparable homes... pulling up public records information about a property... researching rental values and vacancy rates for investors... etc.  This can get a bit tricky but, as the saying goes, "solid research identifies great opportunities."  And it is in the research where "the rubber really meets the road."  For that, competent assistance is not only a good idea, it is really critical to avoiding a big mistake.

 

Distressed Sales and Foreclosure Lists Demystified - PART ONE

Anyone who doesn’t live on a remote desert island knows that we are experiencing the most challenging economic climate since the Great Depression.  The tailspin our economy has endured over the last several years began with “the housing crisis”– the “mortgage bubble” that was created by predatory lending practices and irresponsible borrowing, combined with years of accelerating appreciation in home values that most people thought would never end.  The net result of this is that an increasing number of homeowners owe more on their homes than the properties are worth– in some cases, substantially more.  By some estimates, more than 25% of all homeowners in the United States fall into this most unenviable position.  As foreclosures continued to accelerate and short sales and REO’s flooded the market of homes for sale, downward pressure on home values will continued.  Until these “distressed properties” are absorbed by the market at a faster pace than they are replaced in bank inventories, the percentage of “underwater” homeowners (those who owe more on their homes than they are worth) will continue to rise.  Most data seem to indicate that we did reach a "bottom" of the market, however, in 2012.

I defined “short sales” and “REO” properties in my February 2012 edition of my blog, and for those who do not really understand the general categories of distressed properties, I would suggest that you review that discussion before you continue.  These terms are tossed around frequently these days by people who do not fully understand their meaning.

The conditions described above created a real “buyers’ market,” and while I believe we reached a “market bottom” in the Charlotte area in 2012 (the point at which prices are as low as they are going) and can be expected to rebound in 2013, if the politicians can avoid sending us over the fiscal cliff and into another recession, that "buyers' market" persists.  Again; the downward pressure on property values is largely caused by a stream of distressed properties into the market.  When that subsides, as it appears to have been doing in late 2012, market conditions will begin to change.  But this will be gradual, as the economy in general remains weak.

 

In Part Two of this article, I will explore the opportunities that remain in 2012 and into 2013.  There are still many, for those to recognize them and are willing to act.   Distressed sales do not have to mean abject suffering, and identifying foreclosure and REO opportunities is more a matter of doing your homework than it is being privy to some "super-secret inside information."  It's really not that complicated, and as my motto goes: "solid research identifies great opportunities." 

  

PART TWO: Freddie Mac Homesteps Division… Another Source of Potential Bargains

Homesteps holds for resale single family homes, townhouses and condominiums.  It offers incentives to owner-occupants, such as a 15-day “first look” preference on homes that have entered the market.  It also offers 2-year home warranties and discounts on new applicances to owner-occupants.  Like Fannie Mae and unlike HUD, Freddie Mac may also repair and refurbish homes in its inventory.  Prices and areas in which Freddie Mac Homesteps homes are available vary widely, and the reader is invited to search the Homesteps site at www.homesteps.com.  You can even register to receive automatic updates by email.

Freddie Mac warns the prospective buyer that it invites multiple offers on its properties, and therefore recommends that the buyer make his or her “highest and best offer.”  I find this admonition to be more than a bit self-serving, like the representation frequently made by the listing agent in a short sale: “There has been a lot of interest, and I am receiving multiple offers on this home; so if the buyer really wants this property, he or she had better present his or her best offer.”  Do you believe that?  Maybe it’s true, maybe it isn’t.  The reality of the current real estate market is that there a lot of homes competing for a more limited pool of buyers.  The smart homebuyer is well advised to be moved less by emotion and more by data and analysis.  Of course, this is always true for investors.

And that is probably the best way to close a discussion of Freddie Mac Homesteps… or Fannie Mae Homepath… or HUD Homes… or other types of REO’s.  There is no magical source of great values.  There are no secret lists, although I do compile a weekly investor suggestion list that I research carefully.  All of these entities have their own web sites, and I would encourage the reader to check them often.  But even more, solid analysis identifies the really great opportunities.

 

PART ONE: Freddie Mac Homesteps Division… Another Source of Potential Bargains

In previous editions of this blog, I have defined and discussed foreclosures, REO’s and short sales (see February, 2011).  I have taken the reader through an exploration of HUD Homes devoted an edition to Fannie Mae and “Homepath.”   All of these sources of distressed properties can offer value and potential bargains.  But, as I always say, it is solid analysis that identifies great opportunities; and no single source of inventory can always be presumed to provide winning purchases.  Research is the key– current, accurate research gathered and analyzed by someone who knows what he or she is doing.  Having prefaced this discussion with that caveat, let’s take a look at another source of REO inventory: Freddie Mac and its “Homesteps” unit.

Like Fannie Mae, Freddie Mac is a “government sponsored enterprise” (a “GFE”), chartered by Congress for the stated purpose of stabilizing the mortgage markets and expanding home ownership.  There is currently much debate over whether either of these entities has effectively fulfilled its mission– and even whether these entities have actually harmed the real estate market by fueling the “real estate bubble” whose collapse will be working its way through the system for years to come… and causing a great deal of suffering along the way.  Indeed, in September of 2008 Freddie Mac was placed in conservatorship by its regulator, in an effort to mitigate systemic risk and diminish a further erosion of confidence in the system.

Freddie Mac does not loan money or write mortgages.  Like Fannie Mae, Freddie Mac purchases mortgages from banks on the secondary market.  The goal is to provide liquidity and stability by providing banks with more cash to make more mortgage loans.

Of course, some of the mortgages Freddie Mac purchases go into default and foreclosure.  Enough have done so in the last couple of years that Freddie Mac was placed in conservatorship.  And when a foreclosed home goes into Freddie Mac’s REO inventory for resale, the Freddie Mac unit charged with selling it is “Homesteps.”   In the next edition of this blog, we will explore analyzing Freddie Mac properties, offering to purchase them, contracting for and closing their purchase.

 

 

 

PART TWO: Identifying a Really Good Deal involves Setting Emotion Aside… at least in the First and the Final Analysis

This is Part Two of a blog entry published on August 15.  I ended the discussion in the last entry with the notion of what might be an advisable mindset when searching for a great investment property.

Let me use a real example I encountered recently, without identifying anyone personally.  These people are relatively young, relatively new investors.  They work hard to save, pay their bills and seek to build a strong future for themselves and their family.  They understand that this current real estate market offers extraordinary opportunities and they want to get involved.  So we have set certain search criteria and, based on the financial factors first, we have identified some properties worthy of further investigation.  Not surprisingly, all the properties identified are REO’s (”Real Estate Owned” by a bank or other lender).  We have targeted properties that are relatively new because they will likely require less maintenance in the near term.  We have focused on good school districts because tenants who are responsible enough to research and identify good schools are also likely to be responsible lessees.  And we have researched comparable sales and active listings to make sure these properties are listed at prices that may provide some “instant equity” when they are purchased.  However, bundling all these factors together usually means that the subject property is in less than ideal cosmetic condition.  Walls may need to be painted… carpet may need to be replaced… appliances may be missing.  The property was in foreclosure, after all; it is very sad, but some people even remove light fixtures and cabinets before they vacate a foreclosed property.

These young investors and I looked at three REO’s that fit all the above criteria, and they all needed some degree of cosmetic repair, but they were priced at the lowest end of comparable properties in their subdivisions.  Then they decided they would like to take a look at a new home– actually, a home that had been built about a year prior, but that had never been lived in.  The original builder of this community had gone bankrupt and another builder bought the assets out of bankruptcy and was continuing the community.  The house was clean and smelled new… there was plastic over high traffic areas to avoid damage to carpeting… no repairs needed here!  One of these investors loved the home.  It would be easy to rent, wouldn’t it?  She did not really even want to think about the “numbers.”  The home “felt right.”

I tried to explain why I thought two of the three older homes we had seen earlier in the day presented much better value– by the numbers.  But I promised to pull up comparable sales and listings in this new community, and I did so that evening.  It turns out that the current builder had purchased this new home for about 50 cents on the dollar out of bankruptcy, along with several other inventory homes in this community.  He had them on the market at the highest list prices in this community– about twice what he paid for them.  Now, while I would not begrudge a risk-taker like the current builder from making a return on his investment, I would prefer that profit not be made at the expense of my client(s).  If they had purchased this “new” home, they would have had a very nice, neat, new house in the real estate portfolio.  But they also would have no equity in it whatsoever.  In fact, it is possible that homes in this community will decline further in value for a number of reasons before values stabilize, and if they had purchased at or near the top of the price range, they are the people who would have had the greatest risk of seeing larger declines in the value of their investment.  That kind of misfortune is really wholly avoidable in this current real estate market!

Any “old time flipper” can tell you it is possible to take almost any older home and make it look, feel and smell like new– in many cases for less money than the uninitiated might think.  In the case of the “older homes” we had seen prior to the new one described above, some paint and carpet would have transformed them.  They were otherwise only a few years old, having been built within the last 5-7 years.  But comparable properties in their communities had sold and/or were priced in excess of 25% higher than the subject properties.  Walking through a home that is dirty and has been abused may not give the prospective buyer a warm and fuzzy feeling, but it can surely pay off.  The buyer needs to look first at whether the numbers make sense.  Then he or she can consider the emotional factors.  And finally, the decision should be based largely on the financial analysis– the projected return on investment (”ROI”) during ownership and upon resale.  These things are all quantifiable, within reason.  There shouldn’t be a lot of guess work involved.

Of course, this is not only true for investors.  In this buyers’ market, the same principles hold true for owner-occupants who would like to maximize the value of their purchase.  It is likely to be the largest single investment anyone makes, after all.  In my view, it would be a terrible shame to waste the opportunities available to everyone in this market by making a decision based only– or even primarily– on emotion.  There is always plenty of room for emotional considerations.  Analyzing real estate is really as much an art as a science, but there are some pretty fundamental (and quantifiable) principles that an investor and an owner-occupant would be well advised to focus on.

Identifying a Really Good Deal involves Setting Emotion Aside… at least in the First and the Final Analysis

We are probably experiencing the greatest “buyer’s market” in real estate in more than a generation.  For a buyer, this is probably the perfect storm.  Ridiculously low interest rates… REO (that is, foreclosed properties currently owned by lenders) properties continuing to dominate the market… list prices pushed downward by a continuing stream of distressed properties… short sales… Fannie Mae… Freddie Mac… HUD homes… all competing for a buyer’s attention.  Whether the buyer intends the purchase to be his or her principal residence, or the buyer is an investor who recognizes the opportunities this market presents, it is solid analysis that identifies great opportunities.  And in that analysis, there is little room for emotion– at least when a prospective purchase is first identified.

I have increasingly begun to represent first-time investors or investors who are in the beginning stages of building up a real estate portfolio.  Many of these people have worked very hard to build a solid credit history and accumulate some cash or other assets.  They know that placing their money into money market funds, CD’s or mutual funds can hardly be considered putting the money to good use.  There may be some security, but there is hardly any return on investment at all.  Those who had struggled and sacrificed to accumulate decent balances in 401K’s and other retirement savings may have seen those balances decrease significantly in recent years, reducing what had been considered conservative investments to a fraction of the owners’ goals and expectations.   And, of course, many people have seen the values of their homes decline with the other markets over the last several years.  There has been more than enough suffering to go around.

But the real estate market has been showing signs of reaching “a bottom” in recent months.  (Scroll back to the previous edition of this blog for details.)  The financial publications have been buzzing lately with the notion that this is the time to enter the real estate market, and many large and small investors, as well as owner-occupants, have begun to cautiously wade into the water.

As I work with new investors, one issue presents itself frequently.  New investors have a tendency to look for a home based on emotional factors first, and then try to force the financial analysis to support their conclusions.  It’s really only human nature, and it may even have commendable roots in the Golden Rule.  After all, if you are going to buy a property to offer as a rental to someone, it should be a home that you would live in yourself, shouldn’t it?  As a general proposition, the sentiment is laudable.  But as a primary factor in determining the suitability of a property as an investment, this mindset can be a big mistake.

In the next installment of this blog, I will conclude this discussion of approaching real estate and home buying in general with the right mindset.  That installment should be available on or around September 1.  In the meantime, if you have any questions, or I can assist you in any way, please do not hesitate to contact me.  You can do so via my web site: http://www.EricDorerRealEstate.com.  You can also search thousands of listings in the greater Charlotte area free of charge on my site.

PART TWO: So You Think You’re Ready to Buy a Home or Investment Property… How Do You Reduce the Risk of Making a Big Mistake?

The blog entry below is Part Two of the discussion started on July 10, 2012...

So you have access to the MLS data. What should you be looking for? There are things that will be obvious from the data, and things that will be implied. How many active listings are there in a community? How many REO’s (bank-owned properties– scroll back to an earlier edition of this blog) or short sales (scroll back to the February edition of this blog) are actively listed for sale in the community? If there are more than two REO’s and one or two short sales, values have probably not finished dropping in that community.

I generally look back six months at SOLD comps. And, again, be sure you know what you are doing when you assemble your “comps.” (Scroll back to the August 31 edition of this blog: “When performing property analysis, make sure to compare apples with apples.”) This will tell you how active sales are in a community… whether prices are still trending downward or have begun to stabilize… what sort of offer should we make? In this market, unless there is some extraordinary explanation for the lowest comparable sale price (e.g. sale to a relative), I suggest an offer below the lowest sold comp in the last six months. And, depending on the myriad of other factors, I might suggest an offer well below the lowest sold comp to make sure we have some “room” for further declines in value or for periods of vacancy in the case of investor properties.

With respect to investor properties, the MLS will allow us to see what homes or condos are currently available for rent in a particular community, what price they are offered for, what properties are currently leased, how long they were available before they were leased and what the current lease price is. There is no guarantee that your investment will lease within a certain time frame, but the historical data in the MLS system can certainly give you some solid insight into this.

Solid analysis identifies great opportunities– and can avoid big mistakes. We are currently experiencing the best “buyer’s market” in a generation or more. Anyone who is able to take advantage of it would be very wise to do so. But, for the uninformed or poorly advised, what might appear to be a good opportunity can become a costly error. As with most things in life, there is no way to eliminate risk completely.  But sound research and thorough preparation can go a long way toward limiting that risk… and toward finding one of the many great opportunities that still exist in this market.   You can start doing your research on my web site: http://www.EricDorerRealEstate.com.  And when you are ready to get a bit more serious, let me know.  I would be very happy to personally assist you.

So You Think You’re Ready to Buy a Home or Investment Property… How Do You Reduce the Risk of Making a Big Mistake?

Anyone who doesn’t live in a cave has to know that we are currently in one of the best real estate “buyer’s markets” in a generation or more.  Home prices have been pushed down by the steady stream of distressed properties into the market, and mortgage interest rates are at nearly historic lows.  But many potential buyers remain paralyzed by the fear that what happened to a friend or a relative could happen to them: you buy a home at what seems to be a great price, only to find a year or two later that prices in the neighborhood have continued to decline, and you are “upside down;” that is, you owe more on the home than it is worth.  For an investor, the fear may be that market values in a neighborhood decline even slightly, while the investment sits empty and potential profits are consumed by debt service.

Those of you who read this blog regularly know my motto: “Solid analysis identifies great opportunities.”  Whether or not an opportunity really is a good one should be revealed by solid analysis.  And the really dangerous ones should be identified and eliminated.  But what specifically should we be looking for?

First, let’s target a general geographical area.  There may be reasons for targeting an area that are beyond your control.  Commuting distance to work would be one of those.  The need for quick access to transportation or major transportation routes would be another.  But beyond the things over which we may have little control, what else should we be looking for?

Whether you are a homebuyer with school-aged children or an investor looking to attract responsible tenants, one of the first factors I consider is the performance of a school district, as measured by unbiased data.  There are a number of websites that analyze school performance.  I prefer www.ncreportcards.org because it just presents the data and lets you draw your own conclusions.  In a real estate market where mistakes can be costly, whether you have children or not, a property located in high-performing school district is more likely to retain its value, limit investor risk, and see values bounce back after the market stabilizes.  In Mecklenburg County, the Providence, Myers Park and Ardrey Kell High School districts consistently receive high accolades.  In Union County, Marvin Ridge, Weddington and Cuthbertson school districts consistently perform at the top.  But don’t take my word for it; visit the website and draw your own conclusions.

What else should we be looking for?  If you’re one of those people who insists they don’t like the idea of working with a real estate professional, you’re not going to like this next one.  Beyond general location, the research should focus on recent “comps” (comparable sales and active listings in the MLS system).  Of course, the key here is that database called the “multiple listing service” or MLS system.  In my estimation, there is no better or more accurate single resource for thoroughly doing your homework.  Most of the popular websites gather all their information from the MLS, but the information the free sites– and many of the subscription sites– report is not up to date or completely accurate because they are reporting information “second hand.”  The only way to have access to the MLS system is to subscribe to it; and the only way one can subscribe to it is to be a licensed Realtor.   Are all Realtors alike?  Of course not.  Are all bankers or investment advisers or attorneys alike?  No!  It might sound self-serving, but I think you would be well advised to hitch your wagon to someone who really knows what he or she is doing.  You have a great deal riding on the soundness of the decision you are about to make.

In the next blog entry, I will continue this discussion.  I will discuss things to look for, when you have access to the MLS system.  My web site, for example, integrates an MLS search of the entire Charlotte metropolitan area-- including York, Lancaster and Chester Counties in South Carolina-- that is completely accurate and up to date because I pay to keep it that way: http://www.EricDorerRealEstate.com.  But more about all this in the next blog entry before the end of July.

Buying a "Fixer" and Financing BOTH Purchase AND Renovation: FHA 203K “Streamlined” Financing Combines Purchase and Renovation Funding into a Single Mortgage Loan

As I discover what I consider to be some excellent opportunities week after week, one theme emerges more than most others: the need for updating and renovations. In this market, even a move-in ready home has to be aggressively priced in order to sell. Those homes that need anything from cosmetic updating to major renovations must be even more aggressively priced– sometimes discounted far in excess of what actual renovations may reasonably cost.

Many buyers might be put off by the need for renovations, especially when they are not capable of making the renovations themselves. In fact, no matter how “handy” a buyer may be, he or she is probably better advised to enlist the aid of a trained, licensed professional rather than do the job himself. After all, we have all heard the horror stories of good intentions turning into terrible renovation attempts, with the net result being a job that was even more expensive than it would have been if the homeowner had contracted to have the work done competently in the first place. But, of course, this raises the real issue: HOW IS THE BUYER GOING TO PAY FOR THE RENOVATIONS? Many buyers are strapped to come up with the 3.5% down payment required by the FHA, so they instinctively pass on homes that obviously need thousands of dollars in repairs or even cosmetic updating. BUT THERE IS A MUCH BETTER WAY: The FHA 203K “streamlined” program.

I focus on FHA financing because most buyers who are wading into the market are probably aware that FHA is by far the most common means of financing a purchase today. The most compelling reason for this is the FHA requires only 3.5% down. I was recently made aware by a lender I work with regularly of a truly fantastic FHA program called the 203K “streamlined” program. I had always been aware of the “standard” 203K program that provides renovation funds to buyers of homes. But, while that program can be very effective, it tends also to be complicated and time consuming. The 203K “streamlined” program, administered by a lender who knows what it’s doing, can be a reasonably quick and efficient way to provide up to $35,000 in funds for renovation– ABOVE AND BEYOND THE PURCHASE PRICE OF THE HOME. There are a number of parameters that have to be met, but none are extremely complicated or difficult. The bottom line is the home is appraised by the FHA appraiser at the value it will have AFTER the renovations have been completed, a licensed contractor is retained by the homeowner to do the work, and the cost of the work is rolled into the final mortgage on the home. Beware, however, that there are only two disbursements of a 203K Streamlined loan-- one draw in the beginning and one final draw after final inspections have been completed by the lender's inspector. So if the buyer's contractor is not willing to purchase materials and pay workers, then wait for reimbursement, the buyer may have to advance some funds and recover them from the final draw. Timing is something to be carefully considered here.

I find that most of the homes in need of TLC that I encounter can be rehabilitated for less than $35,000. A careful buyer and an honest, efficient contractor can complete an aweful lot of work for that sum. I’m not talking about custom gourmet kitchens with Sub-Zero appliances, of course. But I am talking about kitchens–even kitchens using “special order” cabinetry –and baths and flooring and windows and many of the other things that can take a tired, ugly house and make it into a home the buyer can be proud of. And this program can enable a buyer to take advantage of a great opportunity to buy a home in a great, established neighborhood-- an opportunity he or she might have otherwise been frightened away from by the condition of the home and the cost of bringing it up to a standard that he or she would find acceptable.

Using technology in your Property Analysis… It’s Well Worth the Effort

“Solid analysis identifies great opportunities…” That’s true in all facets of life, but it is especially true in this uncertain real estate market. Sophisticated investors have long embraced technology as a means to assess potential investments and track investments they have already made. Highly specialized technological tools are now available at no charge to most people who open a stock trading account with an online brokerage firm like Scottrade or Charles Schwab, for example. Most real estate brokers have a vast array of technological tools at their disposal through their Multiple Listing Service (”MLS”) system; and any serious buyer giving thought to a purchase would be very well advised to ask their broker to provide a list of comparable sales and active comparable listings for the last 6 months or so in the subdivision or area in which he or she is interested. These “comps” can usually be reduced to a simple, manageable “Comparative Market Analysis” (”CMA”) Report, using the data kept in the MLS system. Such a report will give a buyer a much better idea of how active sales are in a particular community… whether prices are stabile or are trending downward… whether foreclosures or other types of “distress” sales have had a particular impact on a community… and so on. Investors have used this information– and much more– for years; and house hunters looking for a new home in this uncertain market would be well advised to enlist all resources available to them before making a decision.

There are other ways to put technology to work for you. Most people who have purchased a home computer in the last decade or so have had some exposure to computerized spreadsheets for financial analysis. Probably the most common of these programs is Microsoft Excel. It has come pre-loaded on PC’s for years– at least in trial form. It is also a part of the MS Office Suite of programs, and many people have it loaded on their computers, even though they never use it. If you are considering a home purchase… or you are a casual investor looking to take advantage of the enormous opportunities this current real estate market offers… I would strongly recommend that you take the time and make the effort to get to know at least the basics of MS Excel. It really is not as difficult or time-consuming as you might think. With the aid of a simple interactive tutorial program like Video Professor, you can learn everything you need to know on a Saturday afternoon.

Then what? Of course, the uses for such a program are limited only by your imagination and creativity. But I will give you one possible “template” to use in any type of analysis– that is, whether you are a house hunter looking for your prinicpal residence or you are an investor. I call it a “Target Price Calculator” spreadsheet, and it is really simpler than it may sound.

You have found a home that interests you. You like the idea of buying a “fixer” because you know you can get a good price in this market, and you have a contractor you trust to do the work you may need– or simply desire– to have done. (Perhaps you are uncomfortable with anything more than cosmetic updates– kitchen cabinets… flooring… bathroom tile… it really doesn’t matter for the purpose of this example.) Your realtor has pulled comparable sales and other active listings from the MLS system, and you have a simple CMA report for this property. Among other things, that report gives you the average sales price of comparable homes in this community over the last six months, the high sale price and the low sale price. You believe that in this market, you should be able to purchase a home at least 10% below what the average comparable price is in this neighborhood, giving you immediate equity on the day you close the purchase. This should cover you in the event prices continue to decline. But you also have the issue of repairs or renovation costs. There are probably several homes you are interested in. How does one compare to another with respect to meeting your goal of having at least 10% immediate equity on the day you close the purchase?

Using Excel or a similar spreadsheet program, you can set up a simple form into which you can plug the pertinent numbers, and have the spreadsheet finish the calculations for you. This will give you a simple, bottom-line analysis for each property you are considering. The template for this “Target Price Calculator” looks like this:

In the above example, your target offer price would be $203,000 for the subject home. Of course, the above is a simplification. There are other variables that investors, for example, might add. An expense line might be added for purchase closing costs (and many sellers will pay a portion of a buyer’s closing costs in this economic climate)… or a line might be added for investor carrying costs. Further, these calculations can be made manually using this general template without using Excel. But for those who are considering several properties, or for investors who are constantly looking for opportunities, the use of Excel to set up automatic calculation of pertinent amounts is easy, convenient and very useful.

This is really just the “tip of the iceberg” with respect to the spreadsheets that can be created and the data that can be gathered and analyzed using a spreadsheet program. I create and use spreadsheets to analyze HUD bids, for example, or to manage HUD bids successfully entered. The possibilities are only limited by your creativity and imagination, and the usefulness of spreadsheets in compiling, analyzing and managing information so that you can make truly informed decisions cannot be overstated.

When Buying REO’s and other Distressed Properties, Expect the Unexpected… and Prosper

So you’re looking for a bargain. This is certainly the best market in a generation in which to find value. While many buyers appear to recognize that opportunities abound, many also have little idea of what they may expect when they begin dealing with sellers of “distressed properties.” Most serious buyers have heard the horror stories increasingly associated with offers made on short sales– properties offered for sale by sellers who owe more than the home is worth. Since approval of the short sale must be obtained from the seller’s lender(s), these sales involve third parties who very often take ridiculous, unjustifiable amounts of time– often months– to approve or disapprove an offer. There are also those listing agents who advertise a short sale at a price well below what they know the lender will accept, in the hope of generating interest in the property. These agents have no respect for the prospective buyer’s time or emotions, and they have increasingly given the entire process a bad reputation because it is difficult for many buyers to know when they have fallen prey to this practice.

But I am not referring to short sales when I say “expect the unexpected.” I am referring more to REO ("real estate owned" by the lender after foreclosure) properties– distressed properties on which the foreclosure process has already been completed and which are now held in the inventory of banks and entities like Fannie Mae, Freddie Mac and HUD. One would expect uniformity in making an offer on a Fannie Mae home, for example. One would think that if one contract administrator accepts electronic signatures on contract documents (which are legally recognized in North Carolina and which can save everyone involved a great deal of time– especially in the case of offers by investors who may be located outside the area or the state), then all contract administrators for an entity would accept electronic signatures, for example. But one would be mistaken.

Most quasi-governmental entities like Fannie Mae and HUD now employ multiple contract administrators, even within a state or within a county. And while the purpose of this practice may have been to promote efficiency, it frequently has the opposite effect. Some contract administrators, and some listing agents, are far better than others. Some understand their role as facilitators of reasonable offers that move properties out of the bulging inventories of REO’s. Others seem to adopt the mentality of petty bureaucrats, taking the attitude that they are doing the buyer a favor by selling them a home. Decisions on whether the seller will pay any or all of the buyer’s closing costs… or how much of an earnest money deposit will be required… become more seemingly arbitrary than rational. And some contract administrators seem to view investors less as one of the market forces that will help absorb REO inventories and stabilize the market more quickly, and more as greedy opportunists who deserve to be thwarted. Indeed, Fannie Mae, Freddie Mac and HUD all have institutional owner-occupant preferences that many view as continued feeble efforts to elevate social engineering over market realities– and in so doing, only prolong the pain and suffering in the real estate market.

How can you know which type of contract administrator you will be dealing with? You really can’t. This really depends on the particular property you are interested in making an offer on. However, this is not a reason to avoid REO’s. In fact, Fannie Mae in particular has been offering some very attractive properties of late in the Charlotte metropolitan area. (See Fannie Mae’s website for a complete list of their inventory in a particular area: www.homepath.com .) It is a very compelling reason to enlist the assistance of a professional, though. “Solid analysis identifies great opportunities,” and after the opportunity has been identified, the offer needs to be moved through the process by someone who will not be intimidated, mystified or discouraged by the unexpected. Opportunities really do abound in this market. But expect the unexpected throughout the process. Be prepared– and prosper.

As always, the reader is invited to use the resources on my web site to research properties-- including distressed properties of all sorts-- and to search the entire MLS system free of charge at: http://edorer.wilkinsonandassociates.com.

Fannie Mae Homepath… a great resource for potential values and bargains in the Charlotte area

Whether you are a first time homebuyer researching the purchase your principal residence or you are a seasoned investor, educating yourself on market conditions and sources of home inventories is an ongoing process. Solid analysis identifies great opportunities, and there is no substitute for doing your homework. Case in point: Fannie Mae Homepath. In previous editions of this blog, I have devoted a fair amount of space to HUD homes and FHA financing. In 2009, Fannie Mae launched “Homepath” as its REO brand. (For those who haven’t read earlier editions of this blog, “REO” stands for “real estate owned” after foreclosure. It refers to homes held in the inventory of lenders who foreclosed mortgages.)

Let’s back up for a moment to learn some basics about Fannie Mae. This will give us some context and a better feel for the scope of Fannie Mae’s REO holdings. Fannie Mae is a government-sponsored entity, chartered by Congress and overseen by the U.S. Department of the Treasury. Banks create loans secured against real property by mortgages. Many banks often sell their loans to investors. This can generate a profit of the bank, and provide the bank with more cash with which to loan more money. Fannie Mae and Freddie Mac are essentially investors in mortgages. (I will devote another edition of this blog to a discussion of Freddie Mac.) Their purpose is to purchase mortgages so that banks are provided with more cash– greater “liquidity”– to write and fund more mortgages. The Congressional intention in creating these entities was provide a mechanism by which more mortgages would be written, and more people could become homeowners.

Have you ever heard the saying: “Be careful what you wish for… because you might get it”? To a large degree, that saying applies to Fannie Mae because it has been the subject of increased criticism in recent years for encouraging the creation of too many mortgages for people who really couldn’t afford to own a home. Unless you live in a cave on another continent, you must be well aware of the recent mortgage market “meltdown.” Many critics place a portion of the responsibility for this market condition on Fannie Mae.

I was quite surprised to read in Fannie Mae’s literature that Fannie Mae currently owns over one-half of all mortgages written in 2010, and it owns one-third of all outstanding mortgages. Of course, Fannie Mae is therefore huge. And an inevitable by-product of mortgage ownership is mortgage foreclosure. As much as Fannie Mae purports to have the goal of assisting homeowners in foreclosure avoidance, there are certainly times when this goal cannot be accomplished. Fannie Mae states that it owns 13% of all delinquent mortgages, and it owns about the same percentage of all foreclosed properties. This is an enormous inventory of REO properties to be resold, and an equally huge potential source of value and bargains for both owner-occupants and investors.

Although Fannie Mae Homepath homes are sold “as is,” and each contract for a Homepath home must include a Fannie Mae “as is” addendum, unlike HUD, Fannie Mae will make certain repairs or renovations to a home. Whether it does this, and the extent to which it will do this, depends on how marketable it believes a property in its inventory is. Fannie Mae relies on BPO’s (”Broker Price Opinions”) and prior appraisals to set values for the properties in its inventory. If Fannie Mae is given to believe that new carpeting, for example, will render the property more marketable, it may replace the carpeting throughout the home. Then the home is listed for sale with a listing broker and placed in the mulitple listing service (the “MLS”), like most other properties offered for sale by other owners.

For the first 15 days a Fannie Mae Homepath home is listed for sale, it is offered only to owner-occupants. Thereafter, it is made available to investors as well. However, unlike HUD homes, investors who buy a Homepath home are subject to a deed restriction. Investors cannot resell the home for more than 120% of its purchase price within the first 90 days of ownership. Fannie Mae says its purpose in this restriction is to maintain neighborhood property values, but one might find it difficult to reason how a restriction on selling a home for a HIGHER price can maintain neighborhood property values. (Does that sound like more misguided social engineering by bureaucrats who never had to worry about making a sound investment?) I am just reporting the guidelines, not justifying the policy. But in this market, investors should probably plan to hold a property more than 90 days after acquisition anyway. In fact, those investors who purchase with the intention of buying, holding and renting or lease-optioning properties are probably operating under a more sound business model in our current economic climate than the old-time “fast flippers” anway.

Fannie Mae also provides Homepath financing. Owner-occupants can qualify to purchase with only a 3% downpayment. (FHA requires 3.5%.) Also, there is no private mortgage insurance (”PMI”), as there is with FHA loans of more than 80% loan-to-value, and this can reduce a homeowner’s monthly payment significantly. Moreover, Homepath financing is also made available to investors with as little as 10% down (90% loan-to-value loans), and that can be a big incentive to an investor in a market where most lenders require at least 20% down on investment properties.

Like the FHA 203K program (scroll back to an earlier edition of this blog for a discussion of 203K), Homepath also will provide repair and renovation funding for owner-occupants. This will even allow for upgrades and improvements like new kitchen cabinets, or hardwood floors, for example. Like 203K, acquisition and renovation financing are approved as a single mortgage. The only requirement is that the improvements must add value to the property.

The reader can search for Homepath homes on his or her own by going to the Fannie Mae website: www.homepath.com . You can search Homepath inventory by location… or price… or size… or a wide variety of other criteria. Information on Homepath financing is also available at this site. And more information on Fannie Mae in general is available it its main website: www.fanniemae.com .  Of course, the reader is always invited to search thousands of homes in the entire Charlotte area MLS system free on my web site: http://edorer.wilkinsonandassociates.com.

Lease Purchase... Rent to Own... Lease Option Agreements -- An Alternative for Those With Credit Issues; But Beware

The Charlotte area real estate market appears to be stabilizing in 2012, as foreclosures continue to be absorbed into the market at a faster rate than they are replaced. In spite of that, qualifying for mortgage financing continues to be a difficult task for many buyers. One of the fundamental elements of the American Dream has always been the aspiration of home ownership, and the notion of being a renter into the foreseeable future is not something many people are content to settle for. Most people still desire to establish a home for themselves and their family, let their children settle into schools and neighborhoods and become stakeholders in their communities.

For many of these people, the Lease Option or Lease Purchase Agreement can be an alternative to renting in perpetuity. A Lease Purchase Agreement is really a "rent to own" arrangement whereby the seller and buyer agree to the terms of a purchase and sale of a property, but allow the buyer one or more years to rent the home while they address the credit issues which have disabled them from securing mortgage financing today. In the absence of the sub-prime mortgage market, a Lease Purchase Agreement can be the next best thing to home ownership. But beware. There can be serious risks.

First, in North Carolina, there is no "standard" Lease Purchase Agreement. Unlike many of the commonly used documents in a lease or a purchase situation, realtors have not been given a standard NC Bar or NC Realtor Association approved form to complete for a Lease Purchase agreement. For that reason, many realtors are at a loss in dealing with the possibility, and the parties must retain an attorney or attorneys to prepare the documents.

Secondly, and much more importantly as a practical matter, some despirate sellers have taken to agreeing to lease purchase or lease option arrangements, but do not follow through on their obligations to pay their own mortgage(s), taxes, homeowners' association and other expenses associated with ownership of the property. Instead, some simply "pocket" the monthly payments made by the lessee/buyer. The mortgage(s) go into default, foreclosure is filed. And while it is possible to check the public records where the property is located, the lessee/buyer often has no way of knowing this is going on until he or she receives a notice of foreclosure or notice to vacate the premises. This may happen five or more months into the Lease Purchase Agreement.

Then what? What recourse does the lessee/buyer have in this situation? Sure; he can sue the lessor/seller for breach of contract, and he will probably get a judgment. But what good is a judgment if the seller is essentially bankrupt and unable to pay the judgment? It isn't moral, or ethical, or fair; but it happens more often than may people entering into a Lease Purchase arrangement realize.

So the buyer is well advised to be wary of the Lease Purchase or Lease Option arrangement. Unless he knows the seller personally or is otherwise in a position to verify that the seller is making all required payments during the term of the Lease Purchase agreement, it is often much less risky to simply rent until the buyer has resolved his or her credit issues and can purchase the next home outright.

Are We There Yet? With Foreclosures Down, Charlotte Real Estate Prices Have Probably Reached Bottom

With mortgage defaults and foreclosure filings declining nationally, and in the Charlotte, NC area, could it be that real estate prices have reached bottom? As more foreclosed homes are absorbed into the market and fewer bank owned homes replace them, the downward pressure on real estate prices may be subsiding. This appears to be particularly true in Uptown Charlotte, where the glut of luxury highrise condos appears to finally see signs of price stabilization. There simply are fewer Fannie Mae and Freddie Mac foreclosures entering the market to replace the ones that have been sold. A simple search of the Charlotte Mecklenburg multiple listing service for these areas confirms this.

South Charlotte and Matthews have also seen some real estate price stabilization in recent months. Foreclosure filings are down in these areas as well. And historic lows in mortgage interest rates create the "perfect storm" for buyers. Lenders' underwriting guidelines are still difficult, but for those who have the ability to purchase a home, great opportunities abound.

For those who regularly read my blog, you know that my motto is "Solid analysis identifies great opportunities." As I have said before, the simple fact that a Charlotte area home is bank owned after foreclosure is not an automatic indication of great value. This is even more true in the case of short sales. There is no substitute for doing your homework. And whether you are researching Charlotte area short sales, foreclosures, Fannie Mae, Freddie Mac, HUD homes or simple resales, there is no substitute for having the right tools at your disposal, and a solid understanding of how to analyze the data those tools unveil.

What Exactly Is a Short Sale? A Little Clarity on Issues Surrounding Distressed Properties

Solid analysis identifies great opportunities, and wading into the troubled waters surrounding “distressed” properties certainly provides no exception to this maxim. In fact, the need for careful market research and realistic planning and preparation are even more compelling when a buyer considers purchasing a distressed property. Let’s begin with a couple of definitions:

What is a Short Sale? A short sale occurs when the net proceeds from the sale of a property are not sufficient to pay the total mortgage(s) secured against the property, together with costs and commissions, and the seller is unable or unwilling to pay the deficiency. This is very different from a “foreclosure” or “REO” (”Real Estate Owned” by a bank or other lender after foreclosure) because, in a short sale, the original homeowner still holds the title to the home and is still directly involved in negotiations with buyers for the sale of his or her home. After an agreement is reached between this seller/homeowner and buyer, the contract is submitted to the lender(s)/mortgage holder(s) for approval. Why do the seller’s lenders/mortgage holders need to approve the contract? The answer is that, if the sale is completed, the lenders will receive some amount LESS than what they are actually owed on their mortgage(s)– sometimes significantly less. If the lender(s) do not approve the transaction and agree to release their mortgage(s) against the property, the contract cannot close because good, clear title to the property cannot be conveyed to the buyer.

What is a foreclosure? A foreclosure is the legal process that results in the lender/mortgage holder (usually a bank) taking legal title to, and possession of, a property. This occurs when a homeowner is in default of the mortgage loan. After the legal foreclosure process has been completed and title to the property has been transferred to the lender, the property becomes an “REO” or “real estate owned” by the lender/bank. (It also can be a significant liability of the lender, requiring upkeep and insurance, at a minimum.) In this case, the buyer negotiates directly with the bank for the purchase of the property because the former homeowner’s ownership interest in the property has been legally “foreclosed” or extinguished.

Why would a lender/bank entertain a short sale offer, rather than simply filing mortgage foreclosure proceedings and taking title to the property itself? The simple answer is “cost.” A short sale is a “short sale” because market conditions have affected the value of a property negatively. The property is worth less now than it was when the lender approved the loan for the purchase of the property by the original owner. No matter what the the homeowner owes on paper under the mortgage, the property is no longer worth enough to fully satisfy the mortgage. No amount of threatening or wishful thinking can change that market reality, and the lender knows this. Since the property itself is the “security” for repayment of the loan, if it is now worth less than what is necessary to satisfy the loan, the lender has to make a hard decision. Should it go to the additional time and expense of resorting to the legal process to “take” the property in foreclosure, or would it actually be less expensive for the lender to agree to release its mortgage(s) for less than the full amount it owed? Very frequently, the lender decides a short sale is “the lesser of two evils,” by comparison to foreclosure. Either way, the home seller and the lender lose money, but in a short sale, the lender may lose less, and the homeowner’s credit will be damaged less, than in a foreclosure.

Having said that, it is very important to note that NOT ALL SHORT SALES REPRESENT GOOD OPPORTUNITIES TO BUYERS. The same market conditions that caused the property value to decline may not have subsided– the property may still be declining in value. Further, short sales can be time consuming and frustrating for the buyer. It is not uncommon for a short sale to take anywhere from one to seven months and more to be accepted by the lender/mortgage holder. And during that time, the buyer may be missing even better opportunities.