Congratulations, you have an accepted offer and are in escrow. Escrow can last from 21 days to 60 days with 45 being average. This is the period where things get serious and your real estate agent really earns their money. It is also the most stressful time in a real estate transaction. But it doesn’t have to be if you are prepared and have written an offer that meets your needs and capabilities. By that I mean what you can afford to spend on repairs if needed and still make sure your lender approves your funding to close.
To avoid delays in the escrow or even the possibility of the contract being cancelled you must know what your lender requires to get you the funds to close. If your loan is an FHA, Freddie Mac or Fannie MAE type loan the lender is going to want the property to be safe and free of health hazards. That means if you had a pest inspection you will need to have a clear report – free of any section 1 items (Termites, termite damage, fungus, wood rot, etc.). To avoid hassles and further negotiations regarding repairs make sure when you are writing your contrat to purchase the property that you include language that dictates who is responsible for the repairs. If you get this settled up front then your escrow will be a lot smoother and less stressful.
Just read this from the California Association of Realtors: On average, inventories of California homes priced less than $300,000—the most-popular price point for foreclosure buyers—have shrunk from a nearly 10-month supply a year ago, to less than a three and a half-month supply in July, according to the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.).
Instead of holding onto homes in hope for the best offer and in the process incur additional expenses like property taxes, maintenance and utilities costs, the banks are selling these homes as quick as possible.
What’s ahead – more foreclosures and an increase in inventory. I don’t anticipate a glut of properties coming on the market as in 2007 and 2008. Rather to keep prices from dropping they will gradually release them. As we know, the lower the inventory the more it becomes a sellers market. And a sellers market means that prices generally go up.
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Wow how a few months can change things. At the start of this year we had a high inventory and prices were dropping weekly. Then something happened and everything changed. What happened was the banks took a moratorium – meaning they stopped putting the properties they had foreclosed on the market and they stopped foreclosing on properties. I don’t think they completely stopped the foreclosures but they sure did stop putting houses on the market. This created a shortage of housing inventory. And with interest rates being so low there are literally more buyers than houses right now. So today’s current market conditions are very different than when we started the year. With a shortage of inventory and a large number of buyers – mostly first time buyers and investors – every property that is in somewhat decent shape is getting multiple offers and selling for over the asking price. This is good news for homeowners but creates a tough market for buyers – kind of what it was like in 2004 and 2005 only prices are much lower.
I am told that the banks are going to start releasing the properties they have in their portfolio but at a slow pace so as not to flood the market. This will keep prices from dropping too fast if at all and may increase prices. So if you are keeping up with the news about the housing market and have seen where prices have started to climb a bit it can be explained by the lack of inventory.
Does this mean you should buy right away? That depends on each persons individual situation. Certainly investors are buying. Most are buying to hold and rent the property thinking we have hit near the bottom of the market. As for individuals, you should consult a real estate professional and if you have one, a tax professional. But one rule is still holding true – buy for the long term if you are going to buy.
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Are you nervous in this market? We are flooded these days with so many opinions from so many different directions that it not only causes us to be nervous but also to be confused. And I feel that confusion is where the nervousness comes from. We have prognosticators and naysayers, people that are saying that things are going to get worse. And then we have the more “upbeat”, positive people. It really is a case of – is your glass half full or half empty?
Let’s talk about the media. First of all good news does not sell as well as bad news so the majority of what you read, whether it is in the newspaper or on the internet, is going to be negative. It just sells better and after all the companies that write and produce these messages are not in the business to inform as much as they are in the business to make money. When there are so much “negative” messages is it any wonder we are in a downward spiral? I am not saying it is the media’s fault that the economy is in the shape it’s in. I am just saying that what you focus on is what you get. If we continue to focus on the negative our chances are pretty good that is what we are going to get.
There is no crystal ball when it comes to real estate or the economy, but I think if you allow yourself to step back from your own circumstance and take a good look at it you will find calm and vision. First take a look at your long and short term goals. Are they the same goals you started out with? Goals can change and it is good to do an inventory of where you are and where you want to go. So if the goals you created 5 years, 1 year or 6 months ago don’t necessarily fit where you want to go now don’t be afraid to change them. But most importantly, we need to check our progress occasionally to make sure we are headed in the direction we want to be. By checking in on ourselves and being realistic about our own circumstances we can get “grounded”. When we are grounded we become calmer and see things more clearly and in the end lose that nervousness.
I will leave you with a few things to keep in mind about real estate that I hope will help. First of all be responsible with your money. Money is really cheap right now with interest rates hovering around 5%. It’s a great time to buy. But just because it’s a great time to buy doesn’t mean you should. If you are buying or considering buying make sure you know what your goals are and that you are comfortable with the payments (debt) you are getting into. In other words – don’t get in over your head. My mother, who grew up in the depression always said “It’s not really a bargain unless you need it”.
Feel free to leave any comments. Thanks for reading!
This week I would like to address the current market conditions. So far the previous discussion hve been about REO (bank owned) properties. With the number of REO properties that have come on the market and sold in the last 2 years it has changed the landscape of the market. Some would say for the better and others would say for the worse. It depends on your situation. If you are a home owner you have seen the value drop significantly. If you didn’t or don’t own a home than the market is starting to look pretty good. It has become a buyers market like we haven’t seen in some time.
With the value of homes dropping it has opened up home ownership possibilities to some that never thought they would own a home in California, especially the Bay Area. No matter which part of the Bay Area you are in we haven’t seen prices like this in some time. That combined with truly historically low interest rates it is almost like a perfect storm.
Between the beginning of 2007 and the end of 2008 the number of REO properties has grown on a monthly basis. But somethings have happened lately that have changed that. First of all the banks were asked by the government to stop foreclosing on houses for 3 months. On top of that, with the mergers between the large banks and the banks that got into trouble, there was an additional 3 month moritorium. The result of that has lead to a lower than normal inventory. When inventory gets low it becomes a sellers market. So what I am currently seeing is multiple offers on a lot of properties. The competition between first time home buyers and investors is strong. So strong in fact that with the multiple offers the prices appear to be moving up for the first time since 2005. Most of this activity is taking place in the lower priced homes but that will eventually push into the homes price above that.
I am afraid that this will not last very long. The reason for this is that the banks are still sitting on a large amount of foreclosed homes that they have not released to the market. Once this happens the inventory will move higher and we should see the market swing back to the buyers favor.
So if you have been thinking about buying your first home or investing I believe the time is right. Interest rates will have to move up sooner or later. My recommnedation is to take advantage of this perfect storm.
First of all let me start by saying you aren’t actually writing an offer. What your intent should be is to enter into a legal binding contract. Because that really is what you are doing.
With that said I’ll talk a bit about putting forth a good “offer”. In my last two blogs I talked about REO properties and how repairs and FHA lender required repairs are handled. With that knowledge it is easier to know how to prepare the purchase contract. First of all, don’t try to buy anything you can’t really afford, are uncomfortable with the payments or don’t have the capability to repair. So lets start with a hypothetical situation. There is a house on the market priced at $200,000. It needs some TLC – carpet, paint, window coverings and landscaping. The fair market value for this property in good condition is $210,000. Obviously you would like to get this for less than the asking price as it needs repairs and we are still in a declining market. If you want to pay $190,000 for this property you will want to write your purchase contract for around $170,000. The banks are not afraid to negotiate but they are looking for serious buyers. So if you want to “bottom feed” this blog is not for you. In order for someone to purchase a house at 5 – 8 percent below market value you will need to start your negotiations at 10 – 12 percent below market value.
Something that is really working, especially to get first time buyers in the door, is to ask for credits for closing costs. It is not unheard of to ask for 4% in closing costs. Keep in mind that if you do this you should be prepared to pay close to asking price. But if you can get the 4% or even 3% it will help pay for your escrow fees and could even buy down your interest rate which would lower your monthly payments. And you can do this and still ask for repairs.
So, if you want this hypothetical house for $190,000 you need to start by offering lower and negotiate up. But if you happen to get into a multiple offer situation all bets are off. Once that happens the seller gains more leverage and the price is usually driven up. This generally happens with a property that is in good condition, priced right and is in a desirable location.
Another way to save money is to offer to pay for the little things that the seller would normally have to pay. For example, if you are trying to buy the house for 10% below the asking price offer to pay for the home warranty, Natural Hazard Disclosure Report, Transfer Tax fees, etc. These would total about $1,000 on a $200,000 home. But by offering to pay for these you take the sting out of having your offer being for 10% below the asking price. You are essentially paying $1,000 to save $20,000.
Again, this all depends on market conditions and that is what I will write about in my next blog.
Thanks for reading!
Welcome back to my weekly blog. This week I want to talk about FHA financing and buying REO properties. First of all FHA financing is way for buyers to purchase a property without having a lot of money to put down. It requires a minimum 3.5% downpayment and the loan is backed by the government. Its a great way to buy a house for a first time buyer however there are some restrictions. FHA guidelines require that the property be in safe liveable conditions. That means all electrical and water must be working properly, the house must have a clean pest report, no broken windows or doors and if the kitchen has a spot for a stove/oven and or dishwasher then they need to be installed and working. The roof needs to be in good condition and leak free.
That brings me to buying an REO with FHA financing. As I said in my last blog most REO properties are in some sort of disrepair and are sold AS-IS. Getting the banks to agree to bring the house up to FHA standards isn’t easy but not impossible. Once a property has had inspections and some sort of damage or defects has been found it must be disclosed to any future buyers and it is in the best interest of the seller to agree to do the repairs or agree to credit for the repairs with their current buyer. Now if you are using FHA financing, repairs would have to be done in order for the transaction to be completed. Another issue with FHA financing is that there is a case or file # attached to any property in which a buyer is using FHA. That file # stays with the property even if the buyer doesn’t purchase the house. So another reason for the seller to agree to repairs.
So in short, FHA financing is possible with REO properties. Not easy but possible. Knowing these things are benificial when negotiating your purchase of an REO or any other property and I’ll go into that in my next blog.
Thanks for reading!
First of all if you are reading this, thank you. Also, if you ARE reading this you probably know what an REO is. REO stands for Real Estate Owned – property owned by a bank after foreclosure. I am not here to tell you about which REO’s to buy but rather how to buy the REO you want. This is the first blog on this topic.
REO’s are good values as long as you do your homework. A lot of these properties are in disrepair and need some kind of work to make them a nice home. The banks like to sell these properties AS-IS. In other words they do not want to do any repairs. That doesn’t mean they won’t do any repairs, it just means they don’t want to. So don’t be afraid to ask for repairs. Legally, once something is discovered on a property, like a leaky roof or faulty windows or even foundation issues or termite damage, it has to be disclosed. Whatever the condition is it has to be disclosed to you the current buyer or the next buyer. So once the problem is discovered the seller has to deal with it one way or another. They can agree to do the repairs, agree to split the repair costs, agree to credit for the repairs (this is the most common way for the bank) or they can do nothing at all and leave it up to the buyer to take the property as is. Depending on the amount of the repair cost and the type of loan most buyers won’t take the property as is. This leaves the seller in a precarious position because if they lose this buyer the condition is still there and has to be disclosed to the next potential buyer and any that come after that. And in this market with home values still dropping the seller is probably better off agreeing to repairs as long as they have a strong and committed buyer. So don’t be afraid to ask for repairs even if the property is marketed AS-IS. This is even more pertinent if you are using FHA financing. But that is for another blog.
Thanks for reading!
