The Real Estate Detective's Blotter

Sorry, I can't give you a loan, but I can give one to your employee?

I was recently asked by a client to help find a lender who could offer them a home loan. They are the perfect clients who: own two successful businesses, are willing to put $250K down on a $750K home and have excellent credit. I figured this would be a slam-dunk. The first lender I approached informed me: "Sorry, I can't write them a loan, they are self employed- no more stated income or signature loans." "They are not paying themselves enough salary. It would be easier for me to write a loan for one of their employees."  Looking at it another way, the bank would not write the loan because my clients are self employed and are putting their extra earnings back into their business (you know-hiring more people, buying equipment- all things that improve the economy). I've spoken to several other lenders after that first rejection and am still looking for options.

All of this reminded me of my Grandfather who was a bank vice president in Northern Oklahoma.  In his time, they had the double whammy of the Oklahoma dust bowl (that almost destroyed family farming in the area) and the great depression to contend with. Through it all, the community bank he worked for kept writing loans; to small businesses, farmers and home buyers. I remember as a kid (this was long after he retired), folks walking up to my Grandfather on the street and thanking him for helping them keep their farms or homes. Once I asked him how he decided who would be a good "risk" for a loan. He said, "Always meet them face to face and take the measure of the person." He'd be appalled by our current system for loan approvals. We've all been reduced to a FICO score and a W-2.

Many of you may think that the plight of my client is an isolated incident. I propose that there are many middle class and upper middle class home buyers in the same boat. These self employed individuals are the people who tend to own the $700K and up homes. Let's face it, there aren't too many W-2 jobs that give you that kind of purchasing power. If home sales are restricted at this level, It will ultimately affect us all. With fewer people able to qualify for the next level of home, sales will continue to be anemic and values will continue to drop (or at best remain stagnant).

Almost every home owner I know has been touched by our current credit crisis. It's true that lending regulations were lax and contributed to the number of bad loans that were written. But, it's my opinion that the pendulum has swung too far towards over regulation. If a borrower who can afford to put down over 30% , has great credit and can prove cash flow to cover the payments, can't get a loan; there's something wrong with the system. Money lending will always carry some risk. That's why higher risk loans warrant a higher interest rate. Loans for the self employed must begin to flow again in order to sustain a recovery. Maybe we can even start taking "the measure of the person" into consideration (it worked under more difficult conditions).

David (Mack) MacReady is a Century 21 Village Realtor and team leader. His team is known as The Real Estate Detectives. Mackhe can be reached at 1-800-613-2180 or via email at mack@realmack.com.

FHA 203K Steamline- The Solution for the perfect home with the ugly kitchen.

 

As a buyer- how many times have you walked into a home that was perfect for you, but the carpet was old and you really wanted wood flooring. Or, you already own your home and love everything about it but those darn kitchen countertops. In the past, you would have to take out either a construction loan or a second mortgage to cover the costs. Two loans (possibly held by two different banks) at different interest rates. Whether you’re just buying a home or already own one, this can be a bit of a hassle.  The FHA 203(K) Streamline renovation loan may be the solution for your dilemma. A single 30 year fixed rate loan with the home improvements included.

The first rule for the FHA 203(K) is that the owner must intend to occupy the home (this loan is also approved for 1 to 4 units as long as the owner occupies one of the units). Here are a few of the program’s benefits:

· Improvement Loan amount: $5,000 (minimum) up to $35,000 (maximum).

· Down payment as low as 3.5%

· Family members may pay all of the borrower’s required down payment, closing costs.

· No HUD consultation necessary- this is a vast improvement on the old FHA loans, it really speeds up the process

· Loan limits in Los Angeles County

o   Single home- $ 729,750

o   Duplex- $934,200

o   3 Unit- $1,129,250

o   4 Unit- $1,403,400

 

Okay, so it sounds great, but what type of renovations are covered? This loan was designed for minor renovations not major ones. Some examples of allowed renovations are:

· Minor kitchen or bath remodels including new appliances

· Upgrades to the electrical or plumbing (very common in homes built before the 1970s)

· New paint, carpet or Hardwood floor installations

· New Air Conditioning or Heating

· Window replacement

Here are some of the things that are not covered:

· Major rehabilitation or structural repairs (things like relocating load bearing walls, room additions or new construction )

· Any repairs or upgrades that require architectural drawings

· Landscaping, pools, hot tubs or pool repair work.

Self help is also frowned upon for this type of loan. For example, if you want to paint (and are not employed as a professional painter), the most you can expect to be reimbursed for are the paint and some supplies. If you hire a licensed painter to do the work, the contractor can be paid for both materials and labor. This brings up some other important points:

· The money flows from the bank directly to the contractors.

· The work has to begin within 30 days of purchase.

· The entire project must be completed within 90 days of closing.

· The contractors are paid in two payments one at the beginning of the project and the second at the end.

 These rules are in place to ensure that the work is professionally done, there are no misuse of funds, and that the proper lien releases are collected from the contractors once the work is complete.  Because of the nature of the work to be performed, you don’t have to have a general contractor or consultant and plans (always verify this with the City permit office where you live). You can deal directly with subcontractors as long as they hold valid licenses for the contracted work.

Mack’s Advice:

Here area few suggestions:

1.    If you are having more than one trade (type of contractor- plumbing, electrical or flooring for example), it’s my suggestion that you should hire a licensed general contractor. A general contractor can coordinate all product orders and subcontractor work.  Ask your realtor or friends to recommend someone.

2.    Always check to ensure that all contractors working in your home are hold a current license.  You can check the license by going to the California Gov. Contractors State License Board website   http://www.cslb.ca.gov/ and do an instant license check. Also ask for a copy of their insurance and call the company to ensure that the insurance is current.

3.    Before you and your Real Estate agent put in an offer, make sure that your lender will write this type of loan. Most do, but it is much better to know in advance.

4.    You will still need to qualify for the full amount. Let’s say that you qualify for a $300,000 home. If you put in an offer for a $300,000 and wanted to add $35,000 to the sell price, you would have to have your lender qualify you for the total $335,000 amount.

I always suggested to my clients that ultimately it is their responsibility to investigate on these types of issues on their own. But don’t be shy about asking professionals their opinions.  You lender, Realtor and accountant can offer important insight on the subject.

 David (Mack) MacReady is a Century 21 Village Realtor and team leader. His team is known as The Real Estate Detectives. Mack he can be reached at 1-800-613-2180 or via email at mack@realmack.com.

Is it too late for the 8 ?

The American Recovery and Reinvestment Act of 2009 provided for an $8,000 federal tax credit for first time home buyers (for purposes of this credit, a first time home buyer is defined as anyone who has not owned a home for the past three years).  The home has to close escrow before the last day of November 2009. The actual tax credit is equal to 10% of the purchase price with a maximum of $8,000 (which means the home has to have a sell price greater than or equal to $80,000 in value to claim the full credit). There’s been no definitive signal that this program will be extended. So, if you’re just hearing about this, have you waited too long? Possibly, it depends on which home you attempt to buy.

The typical escrow period for the purchase of a home in Southern California is thirty days for a sale between homeowners and buyers. It can be accomplished quicker if the lender, inspectors, title company and escrow company are all pulling together to make it happen. So you may be saying to yourself, it’s still September, I have plenty of time to take advantage of the tax credit. You may, but here are some thinks that might extend the escrow:

· You have to find a home that you want to buy and at a price you want to buy it for.

· The seller has to be willing and able to close within your requested escrow period (before November 30^th). Based upon my experience: here are things from the seller’s side that can affect your escrow period:

o     The Seller may need to find a new home (there are ways to negotiate a closing for a lease back-but the seller needs to be agreeable to this solution).

o     Who owns the home plays a key part in how long it will take to close.

§ If it’s the traditional Seller/Buyer sale it may still be possible to close by November 30^th but no one can “fumble the ball”. If the Buyer is using FHA or VA financing expect an additional one to three weeks depending on your lenders familiarity with the process for these types of loans. Still, a traditional owner sale still provides you the best chance of closing by November 30^th.

§ If it’s a bank-owned sale (REO), escrow closing can be accomplished within the same time period as a traditional sale but, it’s been my experience that it normally will take forty-five to sixty days. The seller is the bank in this instance.  If you go into contract within the next couple of weeks, you may be able to make this type of sale work for you.

§ If it’s a short sale and the package (sell price and conditions) has been approved by the bank (or banks), you should be able to complete the sale within forty-five to ninety days (again all parties need to cooperate). Everything would have to work perfectly for this to happen.

§ If it’s a short sale and the sell price has not been agreed upon by the bank, the escrow period could run three to four months depending on level of cooperation between the seller, bank and seller’s agent. This type of sale will probably not allow you time to take advantage of your tax credit.

Because of the remaining time constraint to take advantage of the tax credit, I’ve noticed a rush by buyers to put in offers for owner occupied and bank-owned properties. Our clients have been experiencing multiple-offer situations for these homes. This sounds like a good deal for the seller, but the tendency in a multiple offer situation is to drive up the selling price on the home. A problem can occur if the property does not appraise for enough to cover the mortgage. In this situation, the buyer would either have to put in more out-of-pocket monies to cover the difference between the appraised value and sell price or the buyer and seller would have to negotiate a new lower sell price. Either option takes time. If the buyer is willing to spend over appraised value for a home that they really want, the question becomes: Is the amount overpaid worth it in order to secure your tax credit?

Mack’s Advice:

There are two things that you can try that will improve your chances of closing before the end of November.

1.    If you have been on the losing end of multiple offer situations, there is a classification of home currently on the market that does not appear to be pulling in multiple offers. Traditional or bank-owned, tenant occupied homes.  A tenant occupied home is a little bit more complicated than a traditional sale (because the buyer is obligated to allow the tenant to live out their lease) and they are normally more difficult to view (you need to give the tenant notice to show). Because of these obstacles, many buyers shy away from considering them. In most cases, the sellers can accommodate a quick close (unless they are doing a 1031 exchange which is normally stated upfront)

2.    Some buyers I know have found good success using private banks and credit unions for their loans. In most cases, larger lending institutions have more departments that need to be involved. It’s been my experience that the smaller private lending institutions are usually more willing to expedite the process.

Finding a good agent, lender and escrow company are all your best bets for closing within this shortened time-line. With any luck, either the tax rebate will be extended and/or re-written to benefit all buyers.- Mack

A buyer's agent who feels the First Time Homebuyer Tax credit should not be extended past December 1,2009

It's true that I am a buyer's agent and, as the title indicates, it is also true that I do not feel that the First Time Home buyers Tax credit should be extended past December 1st. Here's why. 

 Laurence Yun, the Chief Economist for the National Association of Realtors (NAR), raised the following points (among others) yesterday in his Daily forecast. His comments are in defense of extending the First Time Home buyer Tax credit. Here's some of what he stated: 

• "Home buyers will naturally become hesitant to buy if they view (rightly or wrongly) that home values will continue to fall. That buyer hesitancy can lead to self-fulfilling prophesy of rising inventory and falling home values. Falling home values will in turn push the economy back into recession. Consumer spending will be weaker as homeowners continue to experience destruction in housing wealth. Bank balance sheet will turn for the worse and possibly lead to another round of severe credit crunch."
• "To offset that pessimism the stimulus money needs to be put on the table for home buyers. As more buyers enter, inventory will be trimmed and home values will stabilize. From that point onward, no further stimulus will be needed. But we are not there yet."
• "The home buyer tax credit extension could cost the government about $10 billion more or less depending upon how long it is extended. That is a rather reasonable sum to stimulate the economy compared to the $700 billion in TARP funds that went to Wall Street and the $787 billion broader economic stimulus bill that was passed early in the year. The tax credit benefits main street consumers. Homeowners indirectly benefit as well, as housing equity no longer gets destroyed."
• "The resulting economic growth and job creation will automatically lead to a rise in federal tax revenue, thereby easily covering the cost of tax credit. The upcoming GDP forecast could easily get raised to 4% to 5% if the tax credit is extended."

I don't disagree with any of Mr. Yun's points. So why am I apposed to extending the tax rebate? The program has been a fabulous success during a very difficult economic period. It's the source of the money that concerns me, the fact that it's viewed as a tax credit. Additionally I don't like the fact that it only benefits a small portion of the public, first time home buyers. Isn't it just as important to aid people buying their second or third homes? People who have growing families, or down-sizing or relocating.

Here's an alternative approach for your consideration: 

I feel that the plan should not be a tax credit at all; but instead should be a stimulus that comes directly out of the seller's proceeds from the sale of their home. Currently a seller is allowed to pay certain closing costs (in an amount not to exceed 3% of the sell price-could be as high as 6% for FHA) at close of escrow. Why not extend this percentage to allow the seller to include up to 2% additional monies with a cap at $10,000.00 (this maximum amount equates to the first $500,000 of home value). In other words 5% of the sales proceeds could be used for buyer closing costs and down payment- with the down payment portion fixed- not to exceed 2% of the sales price- with a maximum of $10,000. Just as with closing costs, there should be no gift taxes associated with this transaction. Additionally the first time home buyer restriction should be removed from the program. If we want a stimulus for sales across the board, why not make it available for anyone buying a home?

 This is a better solution for the following reasons.

• There would be no need to wait for your tax return (or a bridge loan), so you could use the money at closing.
• The program would be voluntary for the seller and it would be up to the buyer to negotiate it into their offer.
• It aids both parties equally. It's both a tool to help the seller sell their home and the buyer to qualify to buy.
• An FHA loan requires at least 3% down thus the 2% does not cover 100% of closing costs. Buyers would still have to come up with at least 1% out of pocket. So the buyer would still have some skin-in-the-game.
• Sales would be stimulated on a very local basis and would be self-regulating. If homes in a neighborhood are "selling-like-hotcakes" then there would be no reason for a seller to offer any monies back at closing.
• Home values would not be pumped up, since they would still have to be appraised for the total sell price including any monies back from the seller. It would all be properly accounted for on the closing statement.
• The result of this approach would be greater price stability. Buyers seeking money back at closing are much less likely to want to low-ball an offer.

So, these are my thoughts on the issue, what do you think?

Mack

Has Technology Made Real Estate Agents Lazy?

I bought my first home long before it ever dawned on me to become a Realtor. At our first meeting, my first Realtor  sat me down in a conference room and grilled me mercilessly for about an hour to determine my wants and desires in a home. She then brought in a copy of the “Book”. It contained information on all of the  properties that were for sale in the general vicinity of her office. With great patience she guided me in reviewing all of the homes that fell within my limited budget. I recall that there were very few pictures and my Realtor appeared to know everything about every home in the book. We then selected seven properties that fit my needs best and off we went. We must have looked at 20 to 25 homes over the next few weeks, each time narrowing the search a little more. Her selections were always spot on. To this day I’m sure that she must have previewed every property before showing them to me.

Flash forward about 20 years, now I’m the Realtor…gone is the “book” replaced with a web-based Multiple Listing Service (MLS) which is accessible from laptop, notebook or phone; anywhere and at any time. Before you ever meet the client, they have spent countless hours on web searches using sites like: Realtor.com, Zillow, or agent/brokerage sites. They carefully scrutinize each picture in an effort to interpret the distorted images compliments of a fish-eye lens.  The human brain is a marvelous god-given tool that somehow, empowers home buyers with the ability to construct images in their imagination of what the home should look like (believe me when I say that rarely do these images even remotely resemble the real thing).

About three years ago, I found myself in my office, frantically searching the MLS for homes that matched my client’s wish-list. We had gone out before so I had a pretty good idea of what they wanted.  Their wish list read: at least three bedrooms, two full baths, not a corner lot, with a big backyard and dual sinks in the master bath. Piece-of-cake. I have mad computer skills so this would be a snap. The printer spit out my seven home fliers just at the moment my clients arrived.  After a quick hello, off we went to the first home. It was a corner lot on a postage sized lot with only one sink in the master bathroom. Each home in succession failed in at least two categories (What are the odds I thought). At the end of our home search, both clients just stood there kind of stunned. Finally the husband said, “Didn’t you listen to anything we said when we went out the first time?” The words stung. I felt bad all the way home. It bothered me tremendously because I really wanted to help that young couple find their dream home. They fired me the next day and found a new agent.  Who could blame them? I had become a lazy agent.

But I now know that it is imperative to preview as many properties as time allows. I’ve found this particularly important in light of the large quantity of short-sales and foreclosures on the market. Some are in very rough condition. If a client is not looking for a fixer, I could think of nothing worse than dragging them from one disaster to another. My team and I now try to use technology to foster better communication, not just as a short cut. After discussing what our client’s goals are in a home, we use a product called Listingbook to send them the latest information on available homes. The program works like a private twitter service, allowing us to tweet back and forth about specific properties. These tweets are in the form of private notes.  My goal is to not try to decide what will appeal to the client (if a client wants to view every property that we do-that’s fine), but instead; it’s an attempt to provide them with factual first-hand information to support their choice.

No, technology did not make all agents lazy, just me for a little while. But what are your thoughts. Is the preview approach over-kill or do you think it is productive? Is it “old-school” or “new school” with a twist?- Mack