Friday, February 29, 2008
Thursday, February 28, 2008
“The most profound statements are often said in silence.” (Lynn Johnston) from Jack's Winning Words Blog.
Given the saying above, I suppose I was really profound yesterday, since I had no post here. Once again, it was due to being too busy with my real estate business. That’s a good problem to have and one that looks like it may be the case for a while.
All of a sudden I’ve got buyers and sellers coming out of the woodwork. I suspect that the cause is somewhat the same for both – pent up demand. Buyers who were setting on the sidelines out of fear – fear of losing a job or just fear about where the economy is going in
I’m starting to see the anticipated downsizing surge from aging baby boomers, as well as a down-scaling movement from people who are dealing with the economics of jobs that pay less and trying to get out before they get into financial trouble and foreclosure. One of the interesting challenges for both of those groups is that they are now competing with younger buyers, many of them first-time buyers for the smaller houses that they are all seeking. Unfortunately the builders haven’t been building many small houses for the past few years (decades), so they are harder to find, especially with the features that the downsizing boomers are looking for in a house.
These movements may reinforce the move of people back into more urban settings that I reported on last week, since that’s where lots of the well-kept older and smaller houses are located and that’s also where one can still find walkable communities. One interesting scenario locally is the thought that aging boomers may end up trading places with the up and coming Gen-Y set who bought and fixed up many of the smaller homes in trendy places like
For now, I’m just happy to be too busy to have too much time for posting to this blog. Got to run, it’s another busy day in real estate!
Tuesday, February 26, 2008
Yesterday was the first time in quite a while that I didn't make a post to this blog and the reason is perhaps more evidence of things turning around in real estate, or at least picking up significantly. I was just too darn busy! Over the weekend I sold two houses. Actually I helped a seller negotiate an acceptable offer on one of my listings and I wrote an offer that was accepted, after a counter, on another. So it was both busy and very good for me. Now the real work begins. Realtors tend to work their hardest between the time of the acceptance of an offer and closing. thee are just a myriad of details to be attended to during that time and the Realtors involved are usually in the thick of things.
I also have noticed many other signs that things might be picking up for Spring already. My cohorts in the office are all saying that they have gotten very busy and our office had it's best January EVER last month. As I was updating the statistics that I track I noticed a significant jump in sales last week, as well as a jump up in Median Sold Prices. The inventory also jumped up, which means that people are getting their houses on the market for spring already. With the increase in sales we stayed level on the time to sell, even though the inventory went up. The percentage of foreclosed houses that sold in the area that I track also fell dramatically from 71% down to 50%, which means that regular (non-foreclosure) homes are selling strongly again.
So the signs of a local real estate recovery, or at least an up tick, are all around us right now. I've written a number of "light at the end of the tunnel" and "the sun'll come out tomorrow" posts here, mostly out of hope that things were getting better. Now there's real proof that they are indeed improving. This just doesn't feel like the old saying "even a blind squirrel will find a nut sometimes." This feel real and it feels good.
Got to go! It's another busy day in real estate.
Sunday, February 24, 2008
As reported in the Feb 15 issue of The Detroit News, sales of existing homes int eh Metro area are dramatically up over last year - by 15% overall and by much higher numbers in several locations. The News reported that sales of single family homes and condos nearly doubled in January, 2008, when compared to January of 2007. Overall the southeastern Michigan region was up 15% according to figures from RealComp, our local Multi-List Service (MLS).
The City of Detroit lead the way with a gain of 45.4% in January over the same period last year. Many Realtors who deal mainly in Detroit properties reported their best sales ever in December and January. Sales of homes and condos was up 33.9% in December, too. No other areas in the Metro region came close to those increases. Area Realtors credited the recent price fall and low interest rates, along with a sell-off of foreclosed houses.
The good news continued when Realtors reported that they are also starting to see interest in non-foreclosure homes in the same areas. They credit the lower home prices, reduced interest rates and a renewed interest in urban areas for the up tick. Apparently buyers realize that it's a great time to buy.
Livingston and Wayne Counties also posted double-digit percentage year-over-year growth. Livingston sales jumped 32.6% and Wayne 24.1%.
Oakland County, usually the leader in residential real estate, lagged behind and has yet to experience this bounce in sales. The county was the lowest of the Metro area counties in January with only a 3.4% jump in sales (752 closings).
Macomb county registered a slight increase of 8.7% in sales with 436 closings.
Locally, I can report an up tick in activity in my market area, which has yet to result in many sales, but is a harbinger of things to come. I'm out looking at an awful lot of houses, many of them foreclosures, with more buyers than I've seen in the last year. Maybe we will have a Spring Thaw in the market in Michigan this year. Something to cheer about!
Saturday, February 23, 2008
A site-built house is constructed entirely at the building site. They conform to all state, local or regional codes where the house is located and are often called 'stick-built' houses. Site-built homes run all sizes and shapes and generally take anywhere from 2-3 months to well over a year to build, depending upon size and finish quality. A well-built, cared for site-built home generally increases in value over time, although its location plays a key role in value. Realtors are generally involved in the sale and re-sale of these homes.
Modular homes are built in sections at a factory. Modular homes are built to conform to all state, local or regional building codes at their destinations. Sections of the modular home are transported to the building site on truck beds, and then joined together by local contractors. The home may be placed upon a pre-poured basement or on a crawl space. Local building inspectors check to make sure a modular home's structure meets requirements and that all finish work is done properly. Modular homes are sometimes less expensive per square foot than site built houses. A well-built modular home should have the same longevity as its site-built counterpart, increasing in value over time.
In some countries, especially in Japan, this build technique is the preferred method. A licensed Realtor may sell a modular home. Most banks, appraisers, and insurance companies treat modular homes the same way they do site built homes--a house that's constructed entirely on your property. Ask the mortgage brokers and banks in your area to explain how they finance modular homes.
Manufactured homes were formerly referred to as mobile homes or trailers, but with many more style options than in the past. Manufactured houses are built in a factory. Manufactured homes conform to a Federal building code, called the HUD code, rather than to building codes at their destinations. One of the standards that is often referenced by local building codes to restrict where manufactured homes may be placed is the roof pitch. Manufactured homes generally have less pitched roofs than either modular or stick-built homes.
Manufactured homes are built on a non-removable steel chassis. Sections of the new "double-wide" or even newer “triple-wide” manufactured homes are transported to the building site on their own wheels and are joined at their destination. Segments are not always placed on a permanent foundation, making them more difficult to re-finance.
Manufactured home owners often take off the wheels and place the home on concrete blocks with "skirts" around the perimeter. Building inspectors check the work done locally (electric hook up, etc.) but are not required to approve the structure.
Manufactured housing is generally less expensive than site built and modular homes. Manufactured homes sometimes decrease in value over time. Realtors are not allowed to sell manufactured homes. They are sold by licensed manufactured homes sales reps and most often financed with special manufactured homes loans. Keep in mind that in order to live in a manufactured home you will have to place it in a manufactured homes park. These days, most communities will not allow you to place a manufactured home out on your own lot. Check with your Township building inspector for the rules on that.
What Do the Differences Mean to You?
Communities generally have no restrictions against traditional, site built homes, but they will have local building codes that must be followed. Many housing developments do set minimum size requirements and stipulate you must build a house that conforms to published restrictive covenants or be approved by an architectural review committee. Most communities and developments allow modular homes. Some do not, but in many of those cases the restrictions seem to have been imposed because of an ongoing confusion about the differences between modular homes and manufactured homes. Local building ordinances or the restrictive covenants and deed restrictions in a development often exclude manufactured homes. You should investigate the deed restrictions and local ordinances thoroughly before purchasing land for any type of new home.
More on Modular homes.
Modular homes are built in sections in a factory setting, indoors, where they are never subjected to adverse weather conditions. The sections move through the factory, with the company's quality control department checking them after every step. Finished modules are covered for protection, and then transported to your home site. They are placed on a pre-made foundation (either a basement or a crawl-space), joined, and completed by your local builder. How long it will take the manufacturer to build your order depends on your design and the manufacturer, but some modular homes can be built in the factory in as little as 1-2 weeks. And since modulars are built indoors, there's never a weather delay. It usually takes another 2-4 weeks for your local builder to complete the home once it's delivered to the building site.
Contrary to popular beliefs, not all modular homes look alike. In fact, unless you were there to see the house delivered and assembled, you might not guess it's a modular home. Modular home manufacturers use computer aided design programs to draw plans to your specifications, or to modify one of their standard plans to suit your needs, so nearly any home plan can be turned into a modular home. It's true that some modulars are very basic and resemble double-wide manufactured homes, but the two structures are still built in different ways. Each manufacturer is different, so be sure to ask questions about flexibility if you would like to design your own home. Today's modular homes come in both one and two story models, with Cape Cod styles being very popular.
All types of homes have their places in the housing spectrum of any community. Manufactured homes have the appeal of relatively low cost, just as renting a house or apartment might appeal. Modular homes generally have lower construction costs than a stick-built home and may have other advantages in the areas of utilities (lower heating and cooling bills due to better insulation and better control of the build). Site-built homes offer the maximum in flexibility and the opportunity for increased craftsmanship (and well and the risk of a sloppy build).
Realtors are supposed to accurately identify a home as being a modular when they list it and that information should be on the MLS sheet, but some don’t always do that. If you believe that the home that you are looking at is a modular, but it is not identified that way, look in the basement (assuming that there is one) All modular homes have a fairly easy to identify “marriage line” running the full length of the sections that were transported to the site. Usually there will be support posts of a beam under this line, which always has two full length wooden beams or joists (usually 2 X 10’s) – one for each half of the house. That beam acts just like the sole plate around the rest of the outside perimeter of the each section of the house. Those sole plates will normally be bolted together at the marriage line.
Some home re-modelers are now using modular add-ons as a quick and less expensive way to add living space to homes. You can literally order a “room”, complete with it’s own roof, windows, electrical wiring in place and ready to set on the foundation that you add to the existing house. You could probably add a complete second story to an existing ranch house that way, assuming that the first story walls can bear the load. I've got one set of clients who like to think about what they would do to improve the houses that we've looked at and they constantly talk in terms of adding a box here or there, where the box is actually a modular room. They have done this in the past and understand both what's involved and what the costs are to remodel using that technique.
Thursday, February 21, 2008
One aspect of it being “real” is that various suburban neighborhoods, some of them quite “upscale” are now filled with abandoned homes that were lost to foreclosure. Many of those homes have been vandalized, stripped and in some cases marked up with graffiti,. Does that sound familiar? Does it sound like what comes to mind when someone uses the term slum? That’s the point of this article by Christopher Lienberger that first appeared on theAtlantic.com.
Christopher uses examples from North Carolina, California and Florida, but my recent experiences looking at mostly foreclosed house bears out his point. Many once affluent suburban neighborhoods are starting to look like inner-city slums or at least what we have an image in our minds that they would look like. Boarded up buildings, broken windows and doors, lots that are un-kept, and maybe graffiti on the walls. You can see all that out here in the ‘burbs now. Go inside some of these innocent looking McMansions and you’d swear that you’re in an inner-city crack house. Many have had the doors kicked in and have been stripped. I suspect that other crime in the area had gone up, too.
Leinberger makes the case in his article that the movement to suburbia, which he claims started after the Futurama display in the 1939-40 World’s Fair, may have played itself out and that a return to urban living has already begun. Leinberger relates the story of how the American population right after WWII was sold on the idea that the “Great American Dream” was a house out in the suburbs, with big lots and surrounded by strip malls and other shopping malls. Then he builds a case for the desire to return to urban living that is creeping back into our lives through TV shows like Seinfeld, Friend and Sex in the City. He even relates that to the “walkability” of more urban areas, which can include small town and village (like Milford) that still have a vibrant core business area.
Leinberger also reports on the shift in urban housing values (increasing) and resulting shortages in urban areas, verses the glut in the suburbs. He points to the new trend of “lifestyle centers” that are growing around the country as suburban areas try to create an urban center around which to build. We certainly have seen that locally in Walled Lake and Wixom and on a small scale in Highland Station. The new trend towards work-live buildings is even coming to Milford, even though we’ve had stores with lofts in which people can live in our downtown, basically ever since they buildings were built in the 1800’s.
Part and parcel with this movement back to urban living is the question of what then happens to the McMansions and so-called “big-lot” homes in the suburbs? That is where Leinberger posits that they may become the new suburban slums. Foreclosures and abandonment he believes will be more prevalent in the future in the ‘burbs and that will lead to this sorry state of affairs. I have certainly been in many neighborhoods lately where several houses were empty and starting to deteriorate. It’s amazing how fast they can go downhill when left un-maintained. Many of these are in “nice” subs, even upscale subs; but, then, that’s where a lot of the foreclosures are hitting these days. Leinberger makes an interesting case that modern homes are much more cheaply built and thus much less sturdy than the homes built before the 1940’s when the suburban movement began. He says that is why they go down hill and decay that much quicker.
In the end, Leinberger sees this movement as healthy, both literally, due to the increased walkability of the urban areas; and figuratively, due to the slow down or reversal of urban sprawl. He doesn’t predict the demise of suburbia. After all, it would hardly be possible to crowd everyone back into the cities at this point and there is just too much invested in the malls and infrastructure out there to abandon quickly. He just predicts a better balance between the lifestyle choices that people will make in the future, with a return to a more urban setting being a more viable choice, especially for the Millennials and their children, who already are used to “less is more” as a mantra. To read the entire article by Christopher Leinberger, click here.
Wednesday, February 20, 2008
OK, you’ve received your new property assessment and your taxes are going up again. And you thought that your taxes would go down with the market. What can you do? Like any fight with “City Hall”, fighting your tax assessment means doing your homework and being prepared. You should probably call your local City/Village/Township offices immediately to find out when the appeals process will be conducted in your area and to get yourself a reserved spot at the hearings. I certainly do not purport to be an expert on this area, so here’s some advice from a recent CNNMoney.com article on this topic (with my comments and extensions – ed.). As with all advice columns that are written somewhere else in the country, you should check out which of these tips really apply to your local laws and review/appeal procedures.
1. Learn your system (Always good advice before jumping into anything- ed.)
Taxing authorities use different methods to calculate home values. Some look at recent sales of similar homes. In rural areas where sales are few, they might estimate the cost to rebuild. Others use some combination of methods. Call your assessor's office and ask how it pegs values. In some locales your tax liability is based on a percentage of your property's estimated value. You'll want to know what that percentage is so you can figure out whether the actual value the assessor is assigning to your home is fair. Understand that in Michigan, while we have “capped” the rate of increase of the SEV of your home, we also have a second number – the “Taxable Value”; which can continue to increase by the rate of inflation or 5%, whichever is smaller, even while your SEV stands still or may even slide down. Homeowners who have owned their homes for longer than 5 years likely will see a difference between those two and may have a harder case to make if the Taxable Value is well below the SEV. For newer homeowners those two numbers are likely the same, so a separate Taxable Value may not even appear on your assessment notice.
2. Get your assessor's evidence
The assessor didn't pull his estimate out of a hat, even if it seems that way to you. Visit the tax man's office and ask for the evidence used to value your home. Get your home's property card, which lists basic details like lot size, square footage and number of bathrooms. Assessors are supposed to use the sales values on foreclosed houses this year, which means that the values of entire neighborhoods or subs may be coming down because of foreclosures that sold during the year. Find out what formulas the assessor used for putting values on the land and any buildings that are a part of the property.
3. Make sure the description is right
When municipalities or counties re-assess property values, they typically hire an outside contractor who looks at hundreds or thousands of homes in a tight time period. The appraiser has to come up with shortcuts. Three vent stacks on the roof? That must mean three full baths. Never mind that an upstairs laundry room could be the culprit. This can be a two-edged sword, if you have, in fact, made improvements without reporting them to the local building authorities (i.e. no permits for a major remodeling project). I find that the Public Records Database (PRD), which lists what the local government knows about your house, is often wrong because of unreported homeowner improvements. You may have to think twice about squawking too loudly about your taxes if that is the case.
4. Build your case
You won't have much time to file an appeal, generally 60 days or less from the time your annual tax assessment was mailed. (That just occurred within the last two weeks locally.) And you can't just march into an appeals board with a newspaper article showing price declines and expect to win. First you need to get an appointment for a review; otherwise you won’t get to march into anywhere with anything.
If the issue isn't a simple error on your property card, you'll need to arm yourself with recent comparable sales or assessments that show your house has been valued too high. You can look up your neighbors' home valuations at the assessor's office. Real estate agents are not allowed by Michigan law to do full comparative market analyses for homeowners for this purpose, only licensed appraisers are allowed to do that type of work. Most local papers also carry weekly lists of sold houses in their coverage areas, so you might look back through old issues to find data there. I keep track of sold houses in my little four-township market area – Milford, Highland, White Lake and Commerce Townships; so you can go look on my Web site TheMilfordTeam.com and click on Real Estate Statistics and then on What’s Sold Locally. I have monthly files going back 5 months now, so there should be some data there that could help you make your case.
If you're in a new community, she might find homes with an identical floor plan that sold for thousands under your appraised value. Your ideal comparable homes will be of the same square footage and age as yours and sit on almost the same size lot. To make your case you'll need at least five sales - 10 is better - from around the time of your assessment. Builders have been dumping unsold spec homes and condos, so there has likely bee a significant decrease in the prices of homes just like yours in any new sub or condo complex.
Take a critical eye to the homes and make sure there aren't circumstances that an assessor could use to explain a huge difference. Is one of your comps next to the railroad tracks? Did you just replace the roof on your 25-year-old home or add a garage?
Put together a spreadsheet listing the addresses of the comparables, the sales prices and dates, the price per square foot and a description of what makes the homes similar to or different from yours. Finally, to complete your homework, drive out to the properties and take photographs of the exteriors.
If you can't find comparable homes that sold for at least 10% less than your property's assessed value, throw in the towel. Some areas require the valuation to be off by even more than that to win an appeal. Look for foreclosed houses that sold in the area, since they have often sold for dramatically lower prices and must be considered in assessment work beginning this year.
5. Try to meet the assessor informally
Go over the evidence you found in support of a lower value. This meeting might be hard to arrange in larger towns, but it's worth trying. It might be especially difficult to get to the assessors right now, due to the appeals process starting soon. If the assessor more or less agrees with you, the rest of the process will be a lot faster and smoother.
Attitude is important. You need to take a calm and logical approach to this process and not hurt your chances by putting the assessor or the review board on the defensive with an bad case of irate homeowner attitude. You're showing the assessor how his appraiser messed up. Don't add to his defensiveness by tossing verbal grenades like "I pay your salary." If the assessor won't budge, make him explain why. Take notes: He's handing you his battle plan for the formal appeal.
6. File the appeal
Usually this is with a Village, City or Township board. You may be able to just call into the local government offices to schedule a hearing slot, otherwise you should prepare a letter and hand deliver it and get a receipt or use certified mail. Within a couple of weeks you should get a notice acknowledging receipt. You must go through the local process before you can appeal to higher panels.
Most assessment appeals are heard over the course of a couple of weeks. Before your day arrives, attend a hearing to get accustomed to the proceedings. Certain board members might raise the same objections all the time. So make sure you're ready to answer those questions.
Prepare visuals with photos of your home and the comparable homes, then write out and rehearse your presentation. Keep it to eight minutes or less. Brevity will score you points and leave time for the board to ask questions.
7. You lost?
First, you'll likely appeal to a county or state review board. If that fails, you'll probably have to go to court, if that’s worthwhile. At this stage of the game you'll need help from a lawyer and probably an appraiser. That needn't cost a fortune. You can retain a lawyer for a contingency fee that varies based on your potential tax relief. An independent appraisal will cost $400 or so. If the potential saving was great enough for you to see this as a possibility, you probably should start by hiring an appraiser at the outset. You might want to make a quick attempt at a pre-trial settlement with the state and then re-examine your options and the potential costs and paybacks if this whole thin goes to a trial.
No one is ever happy about taxes and especially about tax increases; however, ranting and raging will accomplish nothing. Once you have vented on your family co-workers and friends, settle down and get logical about how to proceed with an appeal. The local authorities are expecting a deluge of appeals this year, so get your spot reserved early.
Tuesday, February 19, 2008
I keep track of quite a few statistics for the little area right around Milford, in which I do a majority of my business. I track sales and the active inventory numbers for Milford (Township and Village) and the Townships of Highland, Commerce, White Lake and West Bloomfield on a Days On Market (DOM) chart that is updated weekly. For Milford, Highland, White Lake and Commerce Townships I actually track what has sold each week and report the details on things like the % of the sold price vs. the asking price, the days on market for each house and the ratio of sold price to recorded SEV value, which for February is averaging about 1.3470. I also look at what percentage of the sales involved houses that were foreclosures - in February, so far, that is running at 71%.
My company - Real Estate One - tracks the whole five-county area of southeastern Michigan and reports out on sales activity by quarter for that area. The Q4 numbers for 2007 were just posted. That report shows the sales by $100,000 price bands for each Township. Also shown are the active inventory at the end of the report and a calculated number to represents how much time it might take to sell off that inventory at the then current rate of sales - I call that the Market Velocity. I have put all of those reports on my Web . site - themilfordteam.com.
You can go there to see the market statistics on Oakland, Macomb, Livingston, Wayne and Washtenaw Counties.
I'm not a statistics fanatic, but I do believe that you can spot trends in the statistics if you look at them over time. That's why, for 2008, I have a series of charts that is updated weekly that shows the number of houses that have sold, the median asking vs. sold prices, the active inventory and average days on market for that inventory and the projected number of months of inventory for the area that is covered by Milford, Highland, Commerce, White Lake and West Bloomfield Townships. As the year goes along we should be able to see what direction the market is taking, if any in those townships.
So visit any of my Web sites and there will be links there to these statistics. Hopefully that will just be a small part of what you find useful about the sites. I devote quite a bit of time keeping them up and trying to make the content meaningful for visitors. The entire real estate process for buying or selling is laid out in a Frequently Asked Questions (FAQ) section that is accessible from any of my sites. Then there are special sections to deal with things like foreclosures (from both a seller's and buyer's perspective), divorce and real estate, buying historic homes, and financing and insuring your new home and much more. My site MIHomeBuyer.com is oriented towards the first-time buyer and the specialty site MoveToMilford.com is just what it sounds like it would be - a site dedicated to information about Milford, Michigan, for those who might be moving into the area around our quaint little Village.
Visit all three and if you have suggestions for things that you’d like to see on a real estate site, let me know and I’ll see if I can add that to one or more of my sites.
Sunday, February 17, 2008
When it comes time to invest your disposable income there are a couple of tempting alternative pulling at you for attention. You can put money in real estate – buy a house - or you could take that money and buy stocks. Actually you couldn’t take all of that money for stocks, since you still need a place to live (there's an advantage to buying a house before we even get started here).
Admittedly I have a bias towards the real estate investment; but, here are five reasons why you get more for your money with a house than the stock market:
1. Leverage. With stocks, you put in all your money for a little piece of a company. With a house, you put in a little money to get the entire house. Wouldn’t it be great if you could put a few % of it’s value down and buy a whole company. I suppose a few savvy investors cold find a way to do that, by using the cash that the company already has, but the “few %” in the case of a company is likely to be several hundred million dollars. A house may be several thousand dollars. In fact, it is tougher, but still possible, to buy a house for zero down. In some cases you can actually get the seller to contribute your down payment. What company is going to pay you to buy their stock?
2. Tax benefits. Uncle Sam knows that owning a house is a big part of the American dream and he wants to encourage you to participate in the dream; that's why you get tax incentives. What other investment let you put in 5-10 percent of the cost of the asset, reap all the appreciation, and pay no capital gains? That's right: live in your home for at least two years, and you don’t have to pay capital gains tax on up to $250,000 in appreciation if you’re single and a combined $500,000 if you’re a married couple. And that's not all — consider the benefits of fixed-rate mortgages, property tax write-offs, interest rate deductions, and depreciation. Is this a great country or what?
3. Control. When you buy stocks, you're paying some CEO and a whole bunch of "company men" that you don’t even know huge salaries for unknown company performance that may end up driving your company (your investment) into bankruptcy and you won’t even have a say in things. With a home, you have control — what you buy, how much you pay, and where you live. You can improve the value with repairs and updates. Try comparing that to getting heard at the next shareholders' meeting! If you're into the environmental movement, you can make your house "green". Getting the big oil company that you have stock in to go "green" may be more a mission for Don Quixoti.
4. Lifestyle. Do you want to look out at a asphalt parking lot with a bunch of car ports or at your children playing in your own back yard? With a home, you're purchasing a lifestyle for yourself and your family. The neighborhood you want to be in, and the size and style of a home that fits your needs. If you want a pool in your back yard for the family, you can have that. If you want the best schools you can move to that area.
5. Value. Unlike some stocks, your house will seldom become worthless (a possibility that I am painfully aware of with 2-3 of my "holdings" and which I'm sure the shareholders of Enron can attest to with great pain). Barring a catastrophe, your home will retain a major portion of its value, even in the worst of times. So don't freak out about slight fluctuations in the value of your home in any given year. You'll make it up. Housing has lost value only a few years out of the last 35. It's more normal to beat inflation by 1 percent to 2 percent. It’s also an asset that you can insure against total loss, try that with your stock broker.
It’s all relative.
Try to keep things in perspective. You probably lost a greater percentage on the stock market this past year than if you owned a house. You lost more on your car. And you sure lost more on your iPhone. Almost everything material that you can buy, except your house, starts losing value the moment the cash register finishes the sale to you. Your house is one of the few appreciating assets that you will own and likely the only appreciating physical asset (unless you collect art, coins, stamps, collectible cars or some other rare collectibles).
Your home is also likely to be an asset that is more readily able to be liquidated that many other assets. You ever try to sell a piece of art? The market may be slow right now, but it is still there and people are still out there buying houses.
But what about real estate as an investment vehicle?
So, should you sell all of your stocks and buy a bunch of houses? No, that’s not what I’m saying, although there are people who have put most of their investment savings into real estate investments and they’re doing quite well, thank you very much. Like many things in life, a balance and moderation are the keys to success here. However, there’s an old saying much favored by entrepreneurs – “You don’t get rich by working for someone else.” The same could be applied to investing. Putting your money into someone else’s hands, i.e. in a stock, is like working for someone else; the people who get rich doing that are the ones with the wherewithal to buy the entire company. About as close to that as most of us can get is to buy an entire house – invest in real estate.
I know several older real estate investors who have amassed impressive portfolios of properties and who, on paper at least, are worth several million dollars. I know a few younger investors who are planning to invest in as many properties as they can safely leverage while the market is down. Are they both at risk? Certainly, but if they proceed with caution and with due diligence in their real estate investments, they are likely at no more risk than the millions of people in the stock market and perhaps at much less risk that the folks who invested in the exotic, mortgage-backed derivatives that Wall Street was so up about a year or so back. At least the people who bought real estate have a physical asset. All those people who bought derivatives have is a few lines of bad news printed on a report from their broker.
Give me a call and we’ll help you get started by finding you a home for yourself to invest in as the first step. Then spend some time on my Web site http://www.themilfordteam.com/ and read what’s there about real estate investing (look in the FAQ section). A lot of the information is contained in articles with warnings and scary stuff, but it’s best to get that out in the open up front. Map out the mine fields of real estate investing before you go into it and maybe you can avoid stepping on a few of them. Also avoid all of those TV "get rich quick" real estate investing shows. They are mostly about higher risk strategies that should be reserved for the pros who can stand to lose on those risks. After you've studied the landscape of real estate investing, call me and we can go look at the foreclosure opportunities that are out there for the investor today.
Saturday, February 16, 2008
Take that California! The Detroit area, hit hard by the double-whammy of unemployment and a slumping housing market, had the highest foreclosure rate in the nation last year, with several cities in California ranked close behind, an analysis of foreclosure activity in the country’s largest 100 metropolitan areas shows. Oh yeah! Oh, yeah! We’re number One!
As reported in the CNNMoney Real Estate News feed that I get every day, Detroit lead the nation in foreclosures in 2007. Some 4.9 percent of the households in the Detroit metro area were in some stage of foreclosure in 2007 — 4.8 times the national average, according to the study being released Wednesday by mortgage research company RealtyTrac Inc.
Stockton, Calif., ranked second with about 4.8 percent of its households in some stage of foreclosure, while the Las Vegas metro area was third with a 4.2 percent rate. Irvine, Calif.-based RealtyTrac determines the ranking by comparing the number of households in a metro area with the number of foreclosure filings, which include notices of default, auction sale notices or bank repossessions.
In all, 72,616 filings on 41,273 properties were reported in the Detroit metro area, which includes Livonia and Dearborn. The foreclosure rate represents a 68 percent jump from 2006, RealtyTrac said. Michigan has been in a protracted economic downturn and has led the nation in unemployment, a combination that has caused many homeowners to fall behind on mortgage payments. Another Michigan metro area comprising Warren, Farmington Hills and Troy was ranked 17th, with 2.1 percent of its households facing foreclosure.
The housing slump has been steepest in inland regions that experienced a run-up in home prices and new construction toward the end of the housing boom, so it’s not surprising that several of the six cities in the state that ended up ranked among the top 20 metro areas are located in the Central Valley and inland counties in Southern California.
In Stockton, 22,184 foreclosure filings were reported on 10,608 properties last year, up 271 percent from 2006, RealtyTrac said. The Riverside-San Bernardino metro area east of Los Angeles was ranked fourth, with 102,506 filings on 51,739 homes, a rate of 3.8 percent. Sacramento was ranked fifth, with 3.1 percent of its households reporting late payments. The other California metropolitan areas in the top 20 were Bakersfield, ranked seventh; Fresno, ranked 14th; and Oakland at 16th.
The Las Vegas metro area, which also includes Paradise, Nev., reported a total of 59,983 foreclosure filings on 30,375 properties in 2007.
Ohio, which has also been wracked by high unemployment, had four metro areas among the top 20, including Akron at 12th, Dayton at 15th and Toledo at 19th. The metro area comprising Cleveland, Lorain, Elyria and Mentor was ranked sixth, with some 2.9 percent of all households in some stage of foreclosure, RealtyTrac said.
Miami ranked eighth with a 2.7 percent rate, the highest among all metro areas in Florida. Fort Lauderdale was 10th and Orlando was 20th.
The other areas in the top 20 were Denver-Aurora, Colo., at No. 9; Atlanta-Sandy Springs-Marietta, Ga., at No. 11; Memphis, Tenn., at No. 13.; and Indianapolis at No. 18.
The story that slips through the cracks and goes untold, in all of these reports of how bad things are, is where the people went who lived in those houses. Where did the 41,273 Michigan families go, once their homes were foreclosed? What has become of the 70-80-90,000 people (or more) who were living in those homes? How many gave up on Michigan and left? How many are living in cardboard boxes under overpasses tonight? And what happened to the houses? I can tell you that many are still setting out there – sad, stripped or vandalized hulks that will likely never be lived in again - candidates for tear down. In the City of Detroit there are now areas that are classified as urban prairies; because they are just stretches of empty land where houses used to stand, in which nature has reclaimed the land with weeds, bushes and trees.
There is a story of human tragedy bubbling up underneath these articles that deal with the statistics of foreclosures and it will eventually burst to the surface. It will end up being much bigger than the tragedy of Hurricane Katrina and the long-term consequences may be looked back upon as a “sea change” in America’s history. As I reported in this blog a couple of days ago, the dream of homeownership is now out of reach for many in the so-called “middle class.” The foreclosure mess is just the latest and most visible sign that America has left the era of excess and plenty defined by the Baby Boomer Generation and entered into a new phase in its evolution, which may take “less is better” as its motto.
I'm already seeing articles about builders finally catching on and starting to plan to build smaller, more affordable houses in tract subs, similar to those build in the 50's. The Iconoculture updates that I get for the various identified generational groups also has identified that the so-called Millennials - the younger generation that is just now entering adulthood - have accepted the fact that they are not going to have things bigger and better than their parents and have adopted a more downscale lifestyle. We’ll see in the next 2-3 years how America deals with these fundamental changes to our collective lifestyles and expectations.
Whoa, dude! I got a little heavy there for a moment. For now let’s all just waive our foam rubber “We’re Number One” fingers around and celebrate. We’ beat out California in something!
Friday, February 15, 2008
Some of my clients are in the unfortunate position of facing the prospect of foreclosure, as so many are right now in Michigan. Some have asked me what the options are for them and I’ve had a discussion about doing a short sale with them. For those not familiar with short sales, here’s a quick tutorial.
A short sale is an arrangement with your lender in which it allows you to sell the property for less than you owe. This is a method of disposing of your home without having the lender foreclose on you. Not all lenders will agree to short sales, so you’ll need to check with yours. Unfortunately, most lenders won’t agree to a short sale unless you’re already in the pre-foreclosure process – you have missed payments and received notices from the lender that you are in default and that they are about to begin foreclosure proceedings. While that seems like waiting until the horses are out to shut the barn door, lenders don’t want to offer short sale deals to those who still appear to have the wherewithal to pay.
Here’s an example: Joe and Robin both worked at good paying jobs and bought a house three years ago for $400,000, foolishly taking advantage of the mortgage broker's sales pitch and obtaining a 100 percent loan. Joe lost his job with one of the big three auto makers ands now works at a supplier for about half what he used to make. Joe and Robin cannot afford to continue with the monthly mortgage payments on their new, combined salary. With what has happened in the market, the house is now only worth only $350,000, so they’ve discovered that they can’t even refinance. They are, unfortunately, what lenders call "upside down."
They have hired a good Realtor and have discussed the situation with their financial advisor and maybe even their lawyer and understand the risks involved and the impact upon their credit rating if they do a short sale verses a foreclosure (about 50 points off their credit score for a short sale vs. 200 points off for a foreclosure). Recent changes in tax law (or policy) have removed one stopping point for many people, when the IRS said it would no longer tax as ordinary income any difference between what was owed and what the sale price is. Now it’s time to ask the bank to participate in a short sale.
Joe and Robin must make sure to ask, should the lender approve the short sale, if they will still be obligated to make up this difference, which is called a deficiency. Unfortunately, most lenders will not put their agreement in writing, so your legal advisers will have to satisfy themselves -- and you -- on this matter. In fact, many lenders have been known to use this "forgiveness of debt" issue to dissuade their borrowers from pursuing a short sale. It is possible that their lender will accept a short sale and then turn over the deficiency balance to a debt collection agency to hound them for that difference. Make sure that you understand the position of your bank on this issue before proceeding.
After Joe and Robin are satisfied that they understand the concept and are prepared to move forward, then they should contact their lender. They should ask to speak to the manager of the short-sale department. Typically, a lender has a "loss remediation" department that handles these matters. The lender will need a letter of authorization for their real estate agent to work on their behalf. Privacy laws prohibit lenders from discussing personal and financial information with a third party without such written permission. This letter will include their name, property address and loan number. And it will clearly identify the Realtor who will be representing them in the process.
Then Joe and Robin, working with their agent, should prepare a comprehensive letter explaining why they are requesting the short sale. They should emphasize the hardship, without turning it into a sob story. A market analysis by the Realtor showing what houses in your area are selling for will also help. Finally, they should spell out the request in detail: the price they are asking the lender to approve, the commission the real estate agent can accept and the closing costs associated with the settlement. Keep in mind that in Michigan, there are recording fees and transfer taxes, which are typically paid by the seller, in addition to the commission and the owners title insurance policy. Their Realtor can help with detailing all of that.
The proposal should be as specific as possible, including in this case a letter supporting the loss of Joe’s job. The more documentation they can provide the lender, the faster the decision will be. However, lenders are swamped with these requests; Joe and Robin aren’t the only one facing a possible foreclosure. The earlier one can start the process, the better the chance of getting the short sale approved.
But the lender's approval to proceed with a short sale does not end the process. The listing must include a notice that the transaction is “Subject to Bank Approval” and when the real estate agent finds a prospective buyer, the Purchase Agreement must also state that it is contingent on lender's approval. They’ll have to send the contract to the lender; it would help to include an accounting of all expenses that they will have to pay at settlement, as well as the final number that the lender would receive at settlement.
A HUD-1 settlement statement would expedite the process. The lender will then review the documentation and may reject certain expenses. For example, if the contract provides that Joe and Robin will give the buyer money toward closing costs, or that they’ll pay some items that are traditionally the buyer's obligation, such as title search and survey, the lender may not allow such payments. Joe and Robin will want to go to settlement knowing all of the terms and conditions on which the lender will accept the short sale, including whether they’ll have to come up with money at the settlement table.
The short-sale process works; but is complicated, time-consuming and uncertain. If you can start before you are in default, you will be ahead of the game. The key to success is getting help from people who can guide your through the process – a good Realtor and you lawyer. Taking the smaller hit to your credit score from a short sale will make it much easier to get back into a home, once things stabilize in your life.
Portions of this post were taken from, or inspired by, an article by Benny L. Kass that first appeared in August, 2007. Since that time the IRS view of the taxability of the deficiency on a short sale have changed, so the example was updated to reflect those changes.
Tuesday, February 12, 2008
Sure, now is a great time to refinance - that is, if you can still qualify. Here is what lenders are looking for. Portions of this post were taken from a story by Les Christie, CNNMoney.com staff writer that was published on Feb 8, 2008.
The borrowers who need to refinance the most - because their adjustable rate mortgages (ARMs) are resetting to higher interest rates - are among those having the most trouble winning approvals. During the boom years, lenders approved most anyone with a pulse. Not so today. Mortgage brokers recognize this and are now being very selective about the clients whose applications they choose to submit to the likes of Wells Fargo (WFC, Fortune 500) or Bank of America (BAC, Fortune 500. There’s still money out there, but it’s definitely harder to qualify and the days of the 100% financing are over.
The make-or-break metric for anyone looking to do a conventional refinance right now is home equity - the difference between what is owed on a house and what the house is worth. But with home prices down, many homeowners have little of that precious commodity left. "If you have an 80% loan, with a 10% home equity loan, you may not be able to refinance," said Peter Grabel, a mortgage broker in Connecticut - especially in down markets. I'm actually seeing lots of this locally. There was a story in this mornings Free Press abut a local lady who cajoled her mortgage company into restructuring her mortgages to get out from under this problem - at least temporarily.
The bar has also been raised for credit scores when it comes to refinancing, according to Grabel. And sometimes, it's not a matter of whether someone can get refinancing but at what price. "Those with high credit scores are getting very good rates, but the lenders have heightened the requirements to qualify," said Grabel. Instead of a score of 680 for the best rate, a borrower might need 700 now. The whole FICA score thing has recently been called into question by many lenders and others, who now doubt that the Fair Issacs credit scoring system correctly evaluates mortgage risks. There is a new FICO scoring system being phased in later this year that Fair Issacs promises will do a better job of spotting risky borrowers.
Appraisals are another tool that lenders are using to eliminate unqualified applicants. Lenders are scrutinizing them to a degree unheard of during the boom. They don't want to lend $160,000 on an appraised value of $200,000 unless they're sure the house is truly worth that. Ted Grose, a past president of the California Association of Mortgage Brokers, said lenders now often conduct what he called "bench reviews" of appraisals. "They have an experienced, independent third-party go over the appraisal to make sure the numbers are accurate," he said. Grose called many of the applicants he sees "very challenging, mostly because of high loan-to-value ratios." Some companies use an automated system for underwriting reviews, but even those have been recently reprogrammed to be more thorough and tougher. And, we are in what has been classified as a “declining values” market locally, so appraisers have been instructed to be very conservative about any appreciation forecasts.
I hit clients all the time who did the 80-20 loans a few years back (an 80% first mortgage and the 20% balance on a second mortgage, so that they could finance 100%). Now they are finding that they still owe 79-19 on the house, but it is only worth 80-85% of what they paid for it, so they are upside-down and can’t refinance. There are many calls being made to the First National Bank of Mom And Dad these days, as borrowers look for ways to take those second mortgages and equity lines of credit off the books.
There was one bit of good news for homeowners last week: The stimulus bill passed by Congress late Thursday will raise the size of the loans that Fannie Mae and Freddie Mac can buy from $417,000 to nearly $730,000 in some high-cost markets. Lenders are much more willing to make loans that can be sold to these two entities in the secondary market, which will make it easier for some people to refinance. Additionally, these so-called 'conforming' loans have interest rates a percentage point or more lower than 'jumbo' loans. But even for those who'll benefit from the new legislation, refinancing will never be as easy as it used to be.
Give me a call and I’ll hook you up with Agnes Miesch, our John Adams Mortgage rep. If anyone can you find you a loan or do a refi for you, she can.
Monday, February 11, 2008
Is the growing pool of foreclosed houses on the market becoming like a black hole, sucking all other houses down into a pricing abyss? It sure feels that way. Foreclosed homes make up only about 1% of the total housing market, but they can be 15-20% of a local market of listed homes and that’s enough to have a big negative impact on pricing. That's especially true if they are the houses that are actually selling. In the little, four-township area around Milford that I statistically track, foreclosed houses make up over 50% of the houses that have sold so far in February (Note: For the month of January, 2008, foreclosures represented 1/3 of the sold homes). So, they are having a heavy impact on the average and median sold price statistics.
I do a lot of Comparative Market Analysis (CMA) work for potential home sellers and lately the foreclosed homes have had an inordinate negative impact on the recommended prices that result. After all, the market doesn’t do a lot of detailed analysis; it’s mainly oriented to “what houses have sold recently and for what average price” and “what houses are active right now for what average price.” There’s just no way to evaluate “condition” in any of the widely used CMA programs. Programs used by pricing web sites like Zillow are really blind to condition and any other local factors, so they are almost always low on price. That's why I always ask the owners to allow me to visit the home before I can give them a valid price recommendation - I need to see the condition to be able to position the house relative to the active market.
Once you throw in 20-30-40% of the houses in either the sold or active category that are (were) priced to dump by the banks that own them, all of a sudden you’ve got buyer expectations being set that are well below what the non-distressed home seller wants for his/her house. But, the fact is, what they can get for their house is largely being dictated by this foreclosure market. Almost everyone who bought in Michigan in the last 3-4 years is upside-down on their houses right now (they owe more on their mortgage than the house is worth on the market today).
A couple of years ago you could take the SEV value that is on the books in almost any area and double it to get close to what the market would bear for the house. Lately, as I’ve been tracking this figure in the little five township area that I focus upon the SEV multiplier is not anywhere near 2. It is more likely to be about 1.3 or 1.4 and in some cases lately is creeping down towards 1.0. We see stories in the news about homes in this area losing up to 25% of their value, but I see homes selling for just a little over ½ of the “value” that is on the books – most of them foreclosure houses. I've even recorded some that sold for under their SEV values. Likely they were "stripped and trashed" foreclosure houses.
So, I guess, to answer my own question; yes, foreclosures are acting like a giant black hole for real estate and they are pulling down everything with them. What can you do if you’re selling? For one, get as competitive as you can on price. And, two, beat the foreclosure houses by offering a better product for the money. Fix-up, de-clutter and clean your house so that someone who looks at your place and 2-3 foreclosed homes can clearly see why your home is really the better buy. Most foreclosed homes have issues – many have been stripped and most were left in (or have deteriorated into) a dirty condition (some even have gone all the way into nasty condition). If your home is to justify the $10-15-20K or more than the foreclosures houses prices, then it has to be “move-in-ready.” That’s the edge that you need to give your house in order to compete.
Foreclosures are a black hole in our market, but they needn’t drag you and your house into the abyss. Call me and I’ll help you with advice on what you need to do to position your home to compete in today’s market.
Sunday, February 10, 2008
There was an article on the front page of today’s Oakland Press about an unfortunate woman in Lyon Township, Michigan, who is about to lose her house. She is a single mom with two teenagers and an Iraq war vet, so it was initially easy to feel sympathy for her, because one sensed that she might have just gotten caught up and swept away in the current sub-prime mortgage mess.
As I read further, it became obvious that this woman could be the poster child about how not to buy a house. It was obvious that she did not use a Realtor in the process. She says that she realizes now that she should have read the contract she was signing for the mortgage and that she should have had a home inspection done before buying the place. Well, duh! Any Realtor would have been able to steer her better than she did on her own, so perhaps the first thing she should have done was to get a buyer agent.
She ended up with a house that had major problems. “It started raining in the living room”, she said, the first time it rained outside. There were also problems with a furnace, drafty windows, sinking floors in the living room and bathroom, a deteriorating front porch and problems with the electrical and plumbing systems. It almost sounds like she bought the house without ever going inside.
And, her mortgage contained terms that she admits not even reading that allowed the company to reset the interest rate every few months with a 20% cap. Her payments quickly went from $1,000 a month to $3,000 a month now and she slipped into default and has been foreclosed. She is now in the 6 month redemption period and will likely lose the house.
She said “I was a first-time home buyer and thought my interests were taken care of, but I went into this alone and did not know what questions to ask or what to expect.” When you feel like that, get help. Get someone working for you in the deal. Get a Realtor as your Buyer Agent. If you don't have a buyer agent, then assume that no one is looking out for your interests, because everyone else in the deal is working for someone else or for themselves.
It’s hard not to empathize with someone who is about to lose their house; however, there is also a part of me that says that there has to be some sense of personal responsibility here. If she was flim-flamed by some fast talking sleazy mortgage guy, then that company and agent should be exposed and maybe prosecuted. If she was duped into buying a lemon by some dishonest real estate listing agent who told her that an inspection wasn’t required, then that should be investigated and that agent disciplined. It doesn’t say in the article whether or not she ever saw a Seller’s Disclosure on the house; but if she did and it was falsified, then the previous owner should be sued.
If, however, she was given all of the information that is normally required by law and practice in both the real estate and the mortgage transactions and she made the decision not to read anything and not to get an inspection and not to understand what she was committing to in the transaction, then she is getting just what she signed up for. There really is no excuse, other than ignorance, in the highly regulated world that we live in for anyone to get themselves in her position.
Many of the people who are in foreclosure today got themselves into that mess by conscientiously overreaching on houses that they could ill afford. That’s different. Each and every mistake that she made could have been (and likely would have been) avoided, if she had been represented by a competent buyer agent. At a minimum, the agent would have advised her to get the house inspected and to have the purchase documents reviewed by a lawyer (we’re required by real estate law to advice the legal review). The agent would have also asked questions about the mortgage and talked to the mortgage agent. Likely the agent would have asked to see a Good Faith Estimate from the mortgage agent, to see what charges were likelyto show up at closing (and perhaps advise the client on whether the charges and mortgage terms seemed OK).
The lady in the story might still have ended up with an ARM mortgage that blew up on her and caused a default (especially since she also lost her job during the time covered by the story); but at least she would have had a saleable house to try to market. As it is, she has a house that nobody would buy and no way out of her mortgage mess. I’m sure that she did not set out to become an object lesson in the Sunday newspaper, but that’s what has resulted. The headline over the story was “DASHED DREAMS”; however it could just as well have been “DON”T DO THIS”.
So, learn from her misfortune; especially if you are a first-time buyer, and get a good buyer agent to help you through the process. Shop around and get more than one mortgage proposal and ask for and READ the Good Faith Estimates from each company and the details of the type of mortgage that they are proposing. Buying your first home should be, and can be, a very happy time. Don’t be a headline in some future paper, unless they want to write an article about happy homeowners. Go to my Web site - http://www.mihomebuyer.com- and read the information that is there for first-time buyers. You'll be glad you did.
Saturday, February 9, 2008
From a recent article in one of the real estate news feeds that I get, there was advice about reducing the stress that some couples feel when buying a home. I can certainly attest to this phenomenon. Buying a home is stressful for many couples and may have affects that impact their relationship. Not only are they making decisions that will affect their lives for years to come, they also are being asked to make them under less-than-perfect circumstances – like an uncertain housing market and a shaky economy. I’ve actually had couples come close to divorces due to the stress of home buying – it’s rare but it does happen. As a Realtor I try to take as much of the stress out of the process as possible, but explaining it as we go along. However, here’s some good advice from a professional on stress management.
Psychologist Linda Sapadin offers three stress minimizers to home-buying couples:
1) Don't turn on each other. "Recognize that this is a stressful process, and if you blame the other person, then what you usually get is counter-blame," she says. "So it's much better to put the blame on the process." (But not on your Realtor, I hasten to add). Don’t be afraid to ask questions about the process as you go along about anything that you don’t understand. There are lots of arcane terms in real estate and no one knows what they all mean, so ask. For young, engaged coules going out home shopping may be the first (and sometimes surprising) big decision-making experience for them. Things come out during the process that may reveal much about how a marriage might feel later. You have to work through the issues here, just like you'll have to work through other issues later in your life together.
2) Don't expect perfection. "You want to assume that things are not going to go perfectly, that there's going to be some unexpected difficulties, expenses, problems to solve," Sapadin says, "so just know that up-front." You actually increase this problem if you are looking at foreclosure homes, because they are full of issues or problems for you to disagree about. I’m sure that in his later years the ubiquitous Murphy, of Murphy’s Law fame, must have turned his attention to real estate, because his famous first law – if it can go wrong it will – certainly seems to apply there. Again, a good Realtor will be able to anticipate and deal with any real estate issues that come up in the process, but he/she is going to have to step aside and let the two of you work out the other issues that arise.
3) Speak to supporters before you speak to your critics. "There could be one relative who says, 'What?! You're spending that much money?' or 'You're moving there?' Don't tell that person until you and your partner are united," Sapadin says. "If there's some part of you that is uncertain, you don't want to undermine that uncertainty by speaking to your critics." I watched a young lady almost come to tears when her mother, a very critical lady indeed, kept berating everything about the house we were in that the young lady loved. It was apparent that the mother could not be supportive because she was still trying to be in control of her daughter’s life. In that case her fiancé was along and got a not-so-good taste of what life might be like later. I don't know what happened to them later, but they didn't buy that house.
Going home shopping should be a happy thing, not something to be dreaded. Get a good Realtor to take care of the process, so that you can concentrate on finding the right house in which to make a home. You can get ahead of the game a bit by going to my Web site - MIHomeBuyer.com - and reading through the information for first time buyers and the FAQ section for buyers. Like many other thngs that you'll face in life, being prepared and knowledgeable about this process will empower you to deal with most issues. Then, give me a call and let me take the stress out of your next real estate deal.
Friday, February 8, 2008
It’s not bad enough that we have to put up with all of the local, Detroit political scandals and bad news about plant layoffs and closings in Michigan’s automotive industry; now we have to walk around with a big red “L” on our heads – “LOSER”. We live in a “Scarlet Letter” zone. "Scarlet letter" refers to the growing number of local market areas now designated by major lenders and Fannie Mae as "soft" or "declining." Guess who is leading that pack.
Under a policy that went into effect last month, mortgages on properties in any of hundreds of counties and Zip codes around the U.S. now require an extra 5 percent up front in equity investment. For many leverage-conscious buyers and small investors, that sort of additional money out of pocket can be a deal killer -- or could send them back to the negotiating table to demand a lower price or concessions from the seller. I’ve hit that response on several deals now. Just about all of the southeastern Michigan zip codes are likely on that list (with the exception of the Ann Arbor area).
In late January, Countrywide Bank informed its national network of brokers that properties located in approximately 100 counties rated by Countrywide as higher-risk -- "Category 5's and 4's" on a five-level scale -- now require an extra 5 percent down up front. Another 975 counties are rated Categories 1 through 3, and may require 5 percent bigger down payments if a local appraiser rates the area as "declining," or if properties are taking more than six months on average to sell (note: we are averaging well above six months locally). This sounds a lot like how the weathermen rate storms (hurricanes and tornadoes), with the higher numbers being the worse storms.
Among the areas immediately affected are dozens of prime rental and vacation areas in Florida -- Miami-Dade, Naples-Marco Island, Sarasota and Broward (Ft. Lauderdale). In Arizona, all the counties in the Phoenix-Scottsdale-Mesa area are rated highest risk. The same is the case for all of Las Vegas and Reno, Nevada. We’ve actually been in this class for some time, so this is not new for us.
Other large lenders have instituted similar systems-some using letter designations for elevated risk such as "C" and "D" -- and rating every Zip code in the U.S. One lender, giant GMAC-ResCap, even created a dedicated website allowing brokers to type in a Zip anywhere and get an immediate letter designation rating local risk, and requiring a 5 percent higher down payment.
All of the designations were prompted by Fannie Mae, which mandated the 5 percent rule for all loan types. If you had figured on leveraging your property purchase with a 5 percent down payment program, now you'll need to double that if the area has a high risk rating. The upshot: Even if you're intentionally buying real estate in a soft market because prices have dropped and look attractive for the long term, you may have to pay a new penalty -- 5 percent more up front -- just to get into the game. For conventional mortgage buyers, this may mean a longer wait, while you save for that increased down payment.
This is also increasing the use of FHA backed mortgages, since the FHA doesn’t look at the declining market rating to make its decisions. FHA loans are not risk-based, as are those of conventional mortgage companies. We expect the FHA market to boom this year locally, especially if the FHA Modernization Act gets passed into law and the FHA limits are raised to be more in line with Fannie Mae and Freddie Mac limits.
If you’re a first-time buyer, you don’t need to walk around with a big scarlet “L” on your head if you’re ready to buy. Let’s get out there and find some good “Scarlet letter” houses. The prices are great and I can hook you up with an FHA mortgage. With an FHA backed mortgage you can get by with as little as a 3% down payment and there are even some programs to help with that.
Thursday, February 7, 2008
Most people understand that apartment dwellers must have a different kind of insurance policy that a homeowner – they basically need a policy that covers their personal possessions and nothing else, since they don’t own anything else.
Condominium owners also have a few special items to consider when purchasing insurance protection. The Insurance Information Institute recommends that condo owners have two policies to protect the condominium lifestyle. The condo owner, remember, “owns” everything inside the physical building, starting, in theory at the inner surface of the walls. So the condo owner needs an individual owner's policy to protect all the contents of a dwelling, as well as structural improvements on the interior of the unit and coverage for fire, theft or other disasters covered in the policy. The Condo Association will have a policy that covers the physical building structure and exterior.
The condominium association should also have a master policy that covers all the common areas the condo dweller shares with fellow owners, such as the roof, sidewalks, common walls and the like. Each condo owner contributes to the cost of that policy, which covers liability for those areas, as well as damage to anything that might need to be replaced, perhaps a common area gazebo or park benches or even the condo sign out front. The association may also have liability coverage for the association board and its officers.
In addition, condo owners should ask about a few extras on the policy that single-family homeowners may not have to be concerned about, such as unit assessment coverage. For example, if there's a fire in the lobby of the condo dwelling, you, as an owner, may be levied an assessment to take care of the damage. Unit assessment coverage would cover such a surprise expense so that you have no money out of your pocket. The condo buyer might also ask his/her insurance agnet whether excess liability coverage might be advised as further protection against any shared liability from the common areas. The agent would have to analysis the association's policy to advise on that.
Other items to consider with your insurance agent would include water backup (into your unit), umbrella liability, flood or earthquake, and a rider to cover expensive items such as jewelry or furs. There are lots of areas of life that the condo lifestyle makes easier by taking those worries out of the picture for owners, but insurance isn’t one of them. Make sure that you understand all of the special needs of the condo dweller, if you are considering a move into a condo complex. For more on insurance needs for condos or any dwelling go to iii.org or you could just email my InsuranceOne partner Eric Chase and tell him that Norm sent you. He's got great condo coverage policies.
Wednesday, February 6, 2008
I read recently about another disturbing secondary affect of the housing meltdown – abandoned pets. I quite often go to houses that have abandonment notices on the door, which are the legal notices that must be posted to go along with the letters that the courts also send to the foreclosed homeowners when abandonment is suspected. Abandonment occurs when the foreclosed owner just gets up and leaves, usually taking all of his possessions with him, but occasionally leaving stuff behind – including pets.
I’ve seen pictures of some pathetic looking cats and dogs that were left locked up in abandoned houses. I think I’d probably lose it, if I stumbled upon one of these forlorn pets. Certainly they did nothing to deserve that fate and ex-owners should be caught and prosecuted to the full extend of whatever laws exist on animal cruelty. No matter how bad things are; it is just inhumane to leave a dog or cat to die of starvation or dehydration in an abandoned house.
It might be OK to leave a pet in the house for a day, while getting situated in a new place, but there is no excuse for locking up a poor dumb animal in a house for days, even if you leave food and water. So, if you live next door to someone whom you think might have abandoned the place, check to see if you can spot any pets that might have been left behind. If you see any, call the local humane society or the local police and alert them to the situation. Check also if you see a pet tied out for more than a day with no food or water. The owners may have tied them up and then left.
Tuesday, February 5, 2008
Wood Destroying Pest Inspection.
This could be thought of as an extension to the home inspection process. In many areas termites or powder post beetles are a problem and should be looked for by a qualified pest inspector. The addendum should specify who will pay for the pest inspection and whether outbuildings or garages are covered in the inspection. This clause may also require written notification to the Seller and specify a response time from him. Sometimes the home inspection will uncover evidence of a possible infestation which then may require this separate inspection to be done. The issue of who would pay for any repairs may be handled separately; however this contingency, like all others, should specify what happens if the Buyer is dissatisfied with the results and what requirements there will be for a Seller response. Also needed here and in all of the addendums below is a statement about the Buyers right to declare the contract to be void, should agreement on resolving any issues not be reached.
Some home inspectors will not walk on a roof due to possibility of damage and / or liability if the roof is damaged. Most home inspectors can tell, even from the ground, if there are issues that warrant further inspection. Some buyers hire a roofing company to conduct a roof inspection. A good home inspector should be able to cover this issue. At issue here may be more than just the age of the roof, since there have been roofing materials recalls that could impact even a newer roof.
Septic or Sewer Inspection.
Sewers can get clogged from tree roots or deteriorate over time. Plumbing companies can insert a camera into the sewer line to check for damage during a sewer inspection. Septic fields too may become saturated or the field tiles become clogged. Septic inspections usually require that the tank be pumped and that core samples be taken at various points in the field to test its condition. In our area, the Seller normally pays for this test and the water test (see below), but not always. In houses with septic fields, this is potentially the most expensive issue that an inspection can uncover; since replacing a septic field, especially an “engineered field,” can run much more than $10,000.
Private Well Inspections.
If the home is not connected to city water -- on a private well, buyers may want assurance that the water is potable and meets acceptable health standards. This is a test that involves taking a sample at the house and sending it out for analysis, usually to a county health office. It can take several days to get results. A high arsenic level in the water is a common issue, as is high bacteria counts. The bacteria issue is relatively easy to treat; but, the arsenic issue or other toxins in the water may be a show-stopper.
Radon, Mold or Asbestos Inspections.
Depending upon the area the home is located in or as a result of the visual inspection, home inspectors sometimes will recommend additional inspections by licensed entities to check for special situations such as radon gas, mold or asbestos. A good home inspector will be able to do these tests and have the necessary equipment to do them, but at an added cost. The mold test requires that samples be taken in the house and be sent out to a lab for testing, to identify the mold type. Most molds are not the dreaded “black mold” that yo may read about, but even the more common types may need remediation by professionals. Radon is a naturally occurring radioactive gas in the soil that can bubble up and enter the house through the basement. Radon in the number 2 or 3 cause of lung cancer in the United States and is fairly common in areas of the country that were once covered by glaciers (like Michigan). If the basement is to be used for anything other than just storage, getting a Radon test is advised. The radon test requires that an instrument be left in place in the lowest level of the house for 48 hours to record radon levels hour by hour. Asbestos was once used extensively within homes to insulate pipes and even as a siding material. Now considered to be a dangerous carcinogen, it is a good idea to at least know where any asbestos is in your home. The inspector will be able to see most asbestos issues. If the asbestos is “sealed” by being wrapped with tape and painted over (as most pipe insulation installations were) you may choose to just leave it alone. The same is true with asbestos siding; however, any and all of these issues are grounds for the Buyer to ask for professional remediation or to back out of the deal. More sales are canceled because of mold issues or radon issues than most other causes. Asbestos is still out there but is less of an issue and not an issue at all in newer-build homes.
Early Occupancy Agreements.
Contracts can be contingent upon the buyer and seller entering into a written agreement that allows the buyer to rent the property prior to close of escrow. This is known as early buyer possession. This is fairly rare in our area and most lawyers would advise Sellers not to accept this contingency. This contingency may just end up being a completely separate contract.
Homeowner Association Documents & Private Road Agreements.
Buyers should obtain for approval a copy of all homeowner association documents, including meeting minutes, if applicable. There is usually a timeframe specified for the review of the Master Deed and HOA By-Laws, after which the Buyer has to object or agree to proceed (which he/she will by default if they don’t bring up issues during the timeframe). Most of these HOA review contingencies also include a provision for taking a look at the HOA budget and financial statements to make sure that the HOA is solvent and capable of meeting it’s obligations without resorting to “special assessments.” Homes that are on private roads (which includes almost all “site condo” developments) should also make available a copy of a written Private Road Agreement (unless that is covered already in the Association By-Laws), which is signed by all of the homeowners on the road and specifies how the road will be maintained and how the cost will be split. Many mortgage companies now require a copy of the Private Road Agreement before granting a mortgage. Unfortunately, many private roads were created and developed without these agreements. Just saying, “Old Bob at the end of the road just takes care of it” won’t meet the requirements of most mortgage companies and it can become a major, last-minute hassle to try to get everyone on a private road to sign up in the midst of a sale.
Contingent upon Selling Existing Home or Contingent upon Closing the Sale.
Buyers who have an existing home might want to buy before selling and make the contract contingent on selling their home. Sellers who accept contingent offers like this often give the buyer a certain number of days to perform. If the buyer cannot perform, the seller retains the option to cancel the contract. These contingencies essentially give the Buyer the “first right of refusal” on any other sales offers that come in, usually granting the original buyer 48 or 72 hours to remove the contingency or lose the house. A variation on this theme is where the Buyer's home has been sold but has not yet closed. The Buyer may make the Purchase Agreement for his new house contingent upon that sale actually getting through closing. Sellers in the today’s market aren’t likely to accept a Contingent upon Sale addendum, because they know that it might take the buyer over a year to sell his house; however, the Contingent upon Close Addendum is fairly common.
Contingent upon Whatever.There are likely many more potential contingencies that I’ve missed here. The point is that the two parties can agree upon making almost anything a contingency. They just have to state clearly what the contingency is and what the consequences are if that contingency is not met prior to the closing. Other things might include that the sale is contingent upon a land split being finalized or a re-zoning of the property being approved or any number of local legal issues or home condition issues being resolved. The contingency clause is like the "If-Then-Else" statement in computer programming and needs to be just as unambiguous. IF the Seller does this, THEN the buyer will proceed to closing, ELSE something other than a closing happens.
Most of the contingencies that we’ve discussed will have some provisions for notifying the Seller, should issues be uncovered that need to be resolved. Usually there will be a timeframe specified (3 days seems normal) to provide that written notification to the Seller and a timeframe specified for a response from the Seller (again 3 days seems normal). Those documents do not necessarily become a part of the contract; however, once some agreement is reached between the Buyer and Seller, that agreement should be documented in an Amendment to the PA; which specifies what the Seller has agreement to do – make the repair or offer some amount of money off the purchase price as a concession to the Buyer. If a repair is to be made, there is normally some re-inspection clause in that agreement, which becomes a new contingency (the Buyer must now be satisfied with the repair or may still walk away).
In general, it is a good idea to have another document, sometimes labeled as an Amendment, to remove each contingency as they are satisfied. Most contingencies have some deadline stated right in their wording; however, just letting that deadline pass may not automatically remove the contingency. It is best to create a document that says that the contingency has been resolved to the satisfaction of both parties and have both the Buyers and Sellers sign it. It is important to have a “paper trail” for every aspect of the contract and removal of the contingencies just wraps things up nicely.
Monday, February 4, 2008
This is the first of a two-part posting dealing with the contingencies that might show up in the purchase agreement for a real estate sale
In almost every offer that a buyer makes there are contingencies specified. These may be buried in the standard contract wording (most Mortgage and Inspection Contingencies are there these days) or they may be spelled out in one or more separate documents that are attached to the Purchase Agreement (PA). These are clauses that usually specify that the whole offer is contingent upon whatever this clause is about being satisfied prior to closing. If the contingency is not satisfied and later removed, the clause usually specifies that the buyer may walk away from the deal and get his/her earnest money deposit (EMD) back.
Here are the common ones that are likely to be a part of every deal and most likely are in the Purchase Agreement document itself.
Even though a buyer may hold a loan pre-approval letter, further investigations concerning the property or the borrower could result in a loan denial. Usually the buyer is required to apply for the actual mortgage within some number of days (7 to 10 is typical) and provide proof that he/she has done so (another letter from the mortgage company will normally do). Usually the contingency also specifies that the buyer has 30-45 days to get the mortgage approved. If the buyer hasn’t procured a mortgage commitment by then the Seller may either extend the contingency deadline or declare the deal dead and walk away. This is almost always in the main body of the PA.
This contingency is usually waived, if the home is not in an area designated as a flood plain. However, it is usually in the PA and gives the buyer the right to seek a Floodplain Certification (an official document that will specify whether or not the house is in a flood plain) within a specified amount of time (usually 10-14 days). If the home is designated to be in a Flood Plain the buyer must notify the seller and may declare the deal to be null and void and get his/her EMD back.
Buyers have the right to hire a home inspector and conduct a complete inspection of the home. This is normally a paragraph in most Purchase Agreements these days and usually specifies that the inspection must be accomplished fairly quickly (usually 7-10 days) after everybody signs the PA. This clause also normally specifies a requirement for the Buyer to notify the Seller in writing (a document usually called the Results of Inspection) within days (normally 3 days in this area) of any dissatisfaction with the inspection results. The clause may specify that the Seller must respond to the Buyers Inspection Results within days (3 is normal again) and either specify what he/she will do to take care of the buyers dissatisfaction – either by offering to fix whatever the inspector found to be wrong or by offering the Buyer some monetary concession of he’ll take the house “as is.” The Buyer may accept the Sellers answer or may decide to just walk away from the deal and get back his/her EMD.
Federal laws gives all buyers 10 days to inspect for lead-based paint. Many homes built before 1978 contain lead-based paint. This contingency also normally offers the Buyer the opportunity to have the property tested (at the buyers expense) for the presence of dangerous lead levels, within that 10-day period. It provides for notification to the Seller of the test results, if lead is found and gives the Seller time to respond with a remediation plan. If the buyer doesn’t like the sellers' response, he/she may walk away and get back their EMD.
The Seller is usually required to provide a copy of the Owner's Title Insurance policy, which will contain information about any easements and/or "blemishes" on the title that may affect the ability of the owner to pass a clean title. Most local PA’s specify that this preliminary title search must be done and he results given to the Buyer within 10-14 days of the agreement date If the buyer sees easements that are onerous to him or liens that might hold up closing, he/she can ask the Seller to clear those up before proceeding or could even declare the deal to be dead.
Some local government jurisdictions (Detroit, Taylor and Dearborn are examples in our area)require "city inspections" of houses that are being sold. Those inspections are done to make sure that the house is up to current building codes, prior to being sold. The Seller will be required to make any repairs or updates and to get a city issued Certificate of Occupancy prior to closing on the house. Most of these municipalities require the buyer to come in to city hall to pick up the certificate. If the Seller can't or doesn't do the repairs, some cities will allow the posting of a bond by either party to insure that the repairs are made later.
Seller Statutory Disclosures.
Sellers are required in Michigan to disclose all known material facts, including preparing and delivering a SELLER’S Disclosure document. This isn’t really a contingency document like the rest of these, but it is a document that the Buyer should review and if there have been any false statements made by the Seller this document would be grounds for canceling the deal or for later law suits. The buyer may cancel the deal and get his/her EMD back right up to the date of closing, if the Seller has not supplied a valid Seller's Disclosure. It should be noted that this document may be missing or say nothing, if the property is a foreclosure. The banks who own those houses often have their own, very lengthy documents that essentially say that they never lived in the house and know nothing about its condition - I call it the Sgt. Schultz Addendum.
Tomorrow we'll look at the contingencies that are more likely to be in documents that are attached to the standard PA as part of a deal. Those can vary greatly by region of the country, so we'll be looking only at those in use locally in Michigan.