Why Pay Full Price?

No one wants to pay more than its value regardless of the product. When you buy anything at one store and see it for less at another store, it’s not the difference as much as it is about overpaying.  No one wants to overpay!

It seems like the natural way to start the negotiation process is to offer less than the asking price for the home, especially in today’s buyer’s market. However, instead of the price, a buyer could negotiate condition, timing or terms. A few thousand dollars off the price may not make much difference in the monthly payments but it might make a big difference if it was negotiated in one of the other areas.

A buyer who only has enough available funds for the down payment and closing costs will have to live in a home exactly the way it is for some time. They may not be able to make the changes that they desire until they’ve saved more money.

Let’s say you found a home that needed $5,000 worth of improvements and the seller would lower the price by that amount. Financing those improvements with a separate bank loan will result in higher payments due to a higher interest rate and shorter term than your mortgage (if you can even get that loan).  And, taking $5,000 off your asking price will not make as big a difference as might think (amortized over 30 years at today’s low interest rates)!!

Another idea might be to offer full price and negotiate with the seller to pay your closing costs so you’d have the cash to make the improvements.  You’ve already got diminished pricing and the lowest interest rates in quite some time!!!

Paying full price may cause the seller to consider concessions regarding condition or terms which can be balanced to affect the value of the property. Buyers can and should negotiate to acquire the home that meets their needs at the lowest possible cost of housing NOT just the lowest sales price!!!

Of course, all of this is idle chatter if the home is overpriced for the marketplace!  But, once buyers have been in the marketplace for even a short while, they are quickly educated to value.  Sellers: price to sell!  Buyers: offer to buy!

FHA lowered the loan limits in October, but has reconsidered and now the limits are back to previous levels.  Good till 12/12.  And, you wonder why no one can keep up with what’s happening in the mortgage world!!??

• Single Family Residence       –                417,000                       
• 2 Unit                                                  -                 533,850           
• 3 Unit                                                  -                 645,300                                   
• 4 Unit                                                  -                 801,950                       

 Remember, you can get into an FHA secured mortgage for as little as 3.5% down!

 VA  Same as above, however there is such a thing as a VA Jumbo loan.  A jumbo loan is a loan amount (after down-payment) of more than $417,000 on a single-family home in the Portland Metro area.

• Single Family Residence       –                417,000                       
• 2 Unit                                                  -                 533,850           
• 3 Unit                                                  -                 645,300                                   
• 4 Unit                                                  -                 801,950                                    

Many people have gone through a Short-Sale or Foreclosure in the past several years in the Portland Oregon area (as well as throughout the country) and are under a false impression that they have to wait a decade or longer to buy again.

Here’s the reality on waiting periods:

Foreclosure  -  3 years for FHA (Federal Housing Administration – a government backed loan) or Conventional financing, 2 years for VA  (Veterans Administration – a government backed loan).  There are some other benefits to FHA/VA financing that make these loans very attractive.  Read more!

Short Sale  -  2 years with 20% down or 3 years with minimum down FHA or Conventional financing.  VA loans require just a  2 year wait with zero down.

Bankruptcy Chapter 7  -  2 years after discharge

Bankruptcy Chapter 13  -  1 year after discharge
If you had “extenuating circumstances” (medical or other unusual one-time event that caused default) and can prove it, then the waiting period may be reduced.  All of above assumes that good credit has been re-established.  As always, speaking with a mortgage professional (rather than just “assuming” you can’t get financing) would be the first step!!

There’s a time for spontaneity, there’s a time for flexibility and there’s definitely a time for resilience!  But, there’s always room for future planning, especially when it comes to finances and real estate.  Thinking ahead can make you $$$$!  Thinking about your retirement when you are young, can make you an early retiree.  Thinking about the type of loan you secure for real estate can make your property more salable in certain markets (such as those with higher interest rates).  Just sayin……….

I am actually referring to FHA (Federal Housing Administration)  or VA (Veteran’s Administration) loans!  FHA & VA do not lend money, rather they both guarantee the loans.  I remember in the mid-80′s when I began my illustrious career and the mere mention of an underlying FHA or VA loan made a real estate agent swoon!  WHY???  Because FHA/VA loans are assumable at the interest rate of the existing loan (current rates, at that time, topped at 13%…OUCH!).  So, if the new buyer can come up with the difference between the existing underlying FHA loan and the current sales price (and can meet the qualifying standards), they can assume at the existing interest rate.

I know, I know!  It’s been a long time since interest rates were an issue.  But, when (not if) our economy makes a change, interest rates must go up.  They’ve been artificially low for some time.  But, to have attractive financing that could be assumed would add to the future sale-ability!

Consider getting a FHA or VA loan to purchase your home. The present advantages are that these loans are priced competitively and a little easier to qualify for than conventional loans. The future advantage is that FHA and VA loans are assumable at the original note rate for qualifying buyers.

There’s more to sell than the home itself when you have an assumable loan. The mortgage payment could lower the cost of housing significantly.  A buyer may easily be willing to pay more for the home due to the attractive financing, especially if it helps their equity grow faster.

I never liked roller coaster rides, even as a child! So, I find the current stock market VERY unsettling! The market is down xxx amount (I can’t keep up with it) in the last few days. I could take my savings out of the stock market and mutual funds and stick it in a sock drawer but I’m not sure that’s the answer either??? I’d probably inadvertently put my socks through the wash…and then what?

Preservation of capital is probably today’s most important investment consideration (especially for boomers nearing retirement) and making a profit would definitely be a bonus. Of all the conventional investment alternatives like stocks, bonds, mutual funds, gold, commodities, CDs and annuities, housing is an asset class to consider, in my humble opinion.

Real Estate has had a 30% to 40% price correction in the past four years, making the affordability factor very attractive. Mortgage rates are at near all-time low with 30 year loans available for investors. Rents have increased significantly over the past two years while vacancy rates have decreased. People will always need a place to live.

Five year certificates of deposits earn a little over 2% but rental properties are yielding much more than that. Income properties are tangible assets that have benefitted dramatically in inflationary times. Cash assets can be devastated by inflation and diversifying into income properties could provide some protection.

Investment properties offer investors the opportunity to borrow large loan-to-value mortgages at fixed rates for long terms on (hopefully/eventually) appreciating assets with tax advantages and reasonable control. Your tenants pay off the mortgage (principal, interest, taxes and insurance) while you enjoy whatever immediate cash flow is available.  Thus, even without appreciation you are gaining equity through principal reduction!

Financing investment properties is a bit more of a “song & dance” these days, but it can be done!  You can read some of my “tales of woe” from recent personal experience or fume with me on recent “highway robbery“!

I have a program developed by Hector Ariceago of First American Title that I have permission to share with interested investors, please e-mail me at jj@janeesejackson.com and I would be happy to send it to you.  It helps determine yield on potential investment properties.  I would be happy to sit down and brainstorm with you on a plan/strategy for including some investment real estate in your overall financial plan!

I continually write (or is it whine) about the constant changes and new restraints regarding real estate mortgages.  It seems that banks don’t REALLY want to lend money?  I know this is whiplash from the years of unrestrained lending practices, but they are often punishing the wrong people.  I also constantly mention that real estate can be a great addition to any financial portfolio!  It’s all about diversification!!

There are new rules and guidelines from Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) for financing investment real estate.  If you feel you are ready or want to prepare to add real estate to your overall financial strategy, it’s worth brainstorming with a real estate, mortgage and tax professional to get your “ducks in a row”!  Some of the new guidelines include:

• minimum 20% down (better interest rate with 25% down)
• No gift funds can be used
• the seller can pay up to 2% towards closing costs
• the borrower can have no more than 4 mortgages total (including your primary residence).  5-10 investment properties have additional rules)
• must have 6 months PITI (principal, interest, taxes, insurance) for the subject property plus 2 months PITI reserves on all other properties
• if the buyer has no history of property management covering two years, must qualify for full PITI regardless of expected rental income
• there is NO loan program for investment property purchases under FHA and VA (though you can do an FHA streamline refinance on a rental with a current FHA loan)

If this is your first rental purchase, there are certain special requirements.  Be sure and document all cash for the down payment and reserves.  You must qualify for the purchase with no allowed rental income.  Rent loss insurance is required.  One of the hottest programs is homepath.com where you can put 10% down with no mortgage insurance and no appraisal required.  Lenders offer the loan and Fannie Mae backs the terms.

What if you already have 4 mortgages or more?  Fannie Mae has a program for financing up to 10 mortgages but few lenders participate and their individual terms can vary and those lenders may add their own restrictions.  You could consider refinancing your primary home or other investment properties to pull cash out to purchase new properties.  I attended a class where the mortgage broker then “apportioned” a percentage of the loan amount used for the rental on the schedule E and the remainder on your primary home.  You would definitely want to discuss with your tax professional to confirm.  Obviously, any refinancing would be for the seasoned investor who had meticulously “run the numbers” for their personal financial situation!

The absolute beauty of holding real estate as part of a financial strategy is that you purchase the property leveraged with other people’s money, the tenant makes the PITI payment, you pocket the cash flow, you enjoy the tax incentives.  As time goes by, your equity has increased through the tenants paying down the principal, rents generally increase thus increasing your passive income.  Then you either allow the rental income to supplement your regular or retirement income OR you sell with your initial investment increased both by increased equity and whatever natural appreciation may have happened in your marketplace!

What will they think up next?   Did you know that you could set up your bridal registry at the bank and use the funds for the FHA down payment on a home?  This could be perfect for people getting married who already have their household items and really need help getting into a home.

Actually, FHA has had this little known program that allows cash gifts since 1996 and I’ve been in the biz since 1985 and had never heard of it!  But, I love the idea!!  Sellers, builders, real estate agents or anyone with a financial interest are restricted fom making a gift contribution.  It’s not difficult to set up and it’s available with any FHA lender.  FHA loans have a lot of other advantages as well.  Check them out!

1. Inform your mortgage professional early of your intention to obtain all or part of your down payment from gifts to the FHA homeowner bridal registry.
2. Open a savings account at your bank named “bridal registry account”
3. Friends and family are given account deposit information

You hear the term ”Cash is King” thrown around these days.  Having a certain amount of liquidity with your savings, mutual funds, money markets, etc is one example.  Paying cash for real estate is another case in point.  Sometimes a cash offer will most certainly prevail in a real estate situation with multiple offers.  The sellers don’t have to worry about stumbling blocks such as low appraisals or last minute credit glitches with the borrowers’ loan or the appraiser insisting on repairs after the property inspection has already been negotiated.  These are rare occurrences, but when they happen they can unravel a real estate transaction!  Cash will usually be preferred in a short-sale situation or bank-owned property for obvious reasons.  They have already repossessed the home once and want to be rid of it!!

So, you might think that a person who pays cash doesn’t have many concerns.  Somewhere around 9% of people paid cash for their home last year with a considerably higher percentage paying cash this year.

Are there any downsides to paying cash???  On the surface, paying cash certainly seems simple but it may have consequences later.  Paying cash may affect your ability to deduct the interest on a mortgage placed on the home at a later date.  So, you need to decide if you might put a loan on the home in the future.  Currently, a homeowner may deduct the interest on up to $1 million of acquisition debt.  Paying cash for a home establishes acquisition debt a $0.  At that point, the only deductible interest would be home equity debt which is limited to $100,000 over acquisition debt.  You can get more information abut this from IRS Publication 936.

There is also the benefit of leveraging or using other people’s money to strengthen the return on an investment property.  It’s worth taking a moment to discuss the pros and cons with a financial consultant, tax adviser and/or both!

June 2011 Portland Metro Real Estate Update!

So, do you want to hear the “good news” or the “bad news” first???  Despite the recent bout of less-than-stellar economic news, the momentum in real estate sales in the Portland Metro area continues.  Short-sales and foreclosures continue to put pressure on pricing and there is no denying that those prices are determining market value!  As always, every neighborhood is affected differently.  But, I am still seeing well-priced investment properties and aggressively priced homes/condos in good condition sell quickly and even experience multiple offer situations!  Pricing correctly is still the challenge.  No one wants to leave $$$ on the table, but over-pricing will stall the sales process.  Year over year, closed sales were down, but inventory hit the lowest level since October 2009!  However, year-over-year, the average sales price fell 7.3%, but we are now down to 6.8 months of inventory!! I believe this market is fueled by a “crisis of confidence”  for the consumer and the lending institutions.

BUYERS: What does this mean for buyers?  Mortgage rates have leveled off at 2011 lows to date!  Low mortgage interest rates definitely benefit the first-time buyer, investors and repeat buyers (if they can sell their home).  If something is priced right, “priced-to-sell” or under-market, you may be forced to quickly view the property and make your very best offer!  That could even mean an over-sales-price offer.  I have this theory that “winning” in real estate is getting what you want (within reason, of course).  I always tell everyone (that will listen) that I have paid full price or OVER asking price (due to multiple offers) on every piece of real estate I’ve ever purchased!  When you know what you want and why you want it (and you know you can afford it), you don’t quibble over minutia!  Just one gal’s theory…..

SELLERS: What does this mean for sellers?  Buyers are in the market and they want to buy.  Cosmetically and structurally challenged properties have a narrower market, especially in some areas.  But, you still have to be careful not to over-do renovations for marketing, as you may or may not recoup the money.  So, it’s a fine line.  Pricing is tough!  Real Estate Brokers are experiencing issues with appraisals NOT coming in at value on properties under contract and/or demanding more $$$ down or higher interest rates on investment properties.  This makes competitive pricing not only necessary to attract buyers, but indispensable when it comes to getting the mortgage approved!  Perhaps offering incentives such as seller paid closing costs (very typical in the first-time buyer market) or interest rate buy-downs could entice a buyer to make a move?

INVESTORS: What does this mean for investors?  Again, decent properties that offer cash-flow (or the potential for getting the rents up to market), location and appeal are being “snapped up” by investors with the means to get financing.  Again, mortgage requirements for investors are getting more and more stringent, especially if you own more than four total properties.  Perseverance is key, be ready to make a larger down-payment and/or higher interest rate and steady yourself for rejection with the resiliency to keep trying!  I love that you use a smaller amount of your money + a larger sum of someone else’s money to purchase an investment and, then, the tenant pays the borrowed amount.  Remember “leverage” is not a dirty word!