Here are the towns gaining the most in real estate value. Look how many are in California.
With the low mortgage rates and super-low housing prices, many investors who have fled the crazy stock market would like to invest in real estate. Most of us think we know something about real estate and, really, we do. After all, everyone lives in real estate of one kind or another. Owning your own home and owning a rental-producing asset are two different things, however. Let’s assume you are looking to purchase rental property for the first time. Let’s also assume that you will have the 30% or 20% down to invest and want to leverage your money to best possible advantage. What would be the best use of your money?
Single-Family or Multi-Family?
Many first-time investors automatically gravitate towards single-family homes. That’s what most people know best, so it makes sense. But, is that the best use of the available money? I would say no. On the same amount of land and often for the same price, it’s possible to purchase a duplex, a triplex or a quadruplex. That means for the same money, you will get double, triple or quadruple the rent. It also means that if one renter does not pay, you still are receiving half the rent, two-thirds or three-quarters. This will make quite a difference because you have to pay the mortgage and the expenses of the property every month whether you have tenants or not.
Therefore, all things being equal, which they never are exactly, my preference is to purchase a multi-family dwelling instead of a single family one. A fourplex is probably the most units a first-timer can handle. Beyond the fourplex also more complicated loans apply. An investor can even purchase up to a four-unit building with an FHA loan which requires only about 3.5% down plus another 3 to 4% in closing costs. Using such a loan puts the investor at a significant advantage due to the gain in leverage from the smaller down payment. Fixer or Repaired?
Many first-time investors naturally tend to look at fixer properties because they are cheaper than properties in good condition. If the investor is an experienced rehabber or in the construction business, then it might make sense to buy a fixer. As long as the buyer has experience, knows the cost of the needed materials, and can either do the work himself or can get it done at a reasonable price, integrated into the purchase price, then a fixer can be an ideal asset.
For everyone else, though, it’s really not a good idea. During the rehab, the investor is paying the mortgage but receiving no rent. Sometimes repairs take longer than anticipated. As a rule of thumb, rehabbing a property always costs more than anticipated. Besides the loss of rent, the investor should take into consideration the wear and tear on his personal psyche. Searching out reliable contractors and overseeing their work can be exhausting. For someone with a full-time job, the time lost to the new property can never be recovered.
Fully-Occupied or Vacant?
Another issue that investors have to consider is whether they want a fully-occupied or a fully- or partially-vacant building. Often, sellers are trying to get rid of properties which they have saddled with bad tenants or tenants not paying market rents. Asking for the rent roll and checking it carefully will show if the existing tenants are paying or not. A smart investor also has a good idea what the rents for the proposed purchase property ought to be. The purchase price should usually be a multiple of the yearly rents. Thus, if the yearly gross rents amount to $26,000, then the purchase price should be about 10-12 times the rent, or $260,000- $312000, depending on the market. In some markets investors will find properties for significantly less.
In the MLS listings, frequently the would-be investor will encounter “pro-forma” rents alongside the actual rents of the property. This means the seller has failed to keep his rents at market, so the potential or “pro-forma” market rents are included. That’s fine as long as the price of the property is calibrated on the actual, not the pro-forma, rents. Of course, usually sellers want to base their price on the pro-forma rents.
But, think about it. The new investor will have to approach the existing tenants with a hefty rent increase as a first introduction, not a good start. Some of the tenants will leave rather than pay more. Others will have to be evicted. Whatever happens, it will cost time and money for the new investor. Reasonably, then, the investor should not pay pro-forma prices.
If the investor feels confident that the current renters are paying close to market rents and have a good history of on-time payment, that is the ideal situation. On the other hand, there are good reasons to purchase a vacant property as well. The new owner will be able to thoroughly investigate each and every unit, which is usually not possible with tenant-occupied, making any repairs or cosmetic updates required. Plus, the new owner will set the deposit amount, the rent amount and the qualifications for the renter. Don’t want dogs? Want to check credit and do a background check? Want to limit smokers? Any of these are possible with a vacant building.
Just Like The Lottery
Believe it or not, one bank has actually started offering automatic loan mods. No more reams of paperwork delving into intimate financial records of borrowers [treated more like beggars], no more waiting for six months, eight months and even more than a year to get an answer from the haughty banks. Finally, one bank, JP Morgan Chase, is automatically writing loan mod contracts for its underwater borrowers.
Yes, it’s true. Some Chase customers are getting loans mods, offering rate reductions, principal reductions or both–all without having to file the onerous paperwork. In one case cited by CNN Money, Chase surprised a Darrington, Wash. couple, who had tried, without success, to effect a loan mod with the very same bank, with a loan mod reducing their interest rate from 6.5% to 2.8% for five years and then a fixed 3.19% for the remaining 18 years of their loan, saving them $229 a month. For this couple, still suffering with job loss as well as an underwater house, it was just like winning the lottery.
Why Would Chase Offer Automatic Loan Mods?
Why would Chase be doing this? Is this a trick?
It’s not a trick. In fact, in accordance with the $25-billion mortgage settlement agreed to a few months ago by 49 out of 50 attorneys general, discussed in a previous post, Chase’s share of the payout burden is $4.2 billion. Because banks get “extra credit” for acting quickly and making their mods during the first year, Chase bit the bullet and decided to go ahead and make loan mod offers to thousands of underwater borrowers. In the past, contacting all these homeowners has proven difficult if not impossible. Many homeowners are so inundated with financial woes they no longer read their mail or answer the phone. Many underwater homeowners move out, anticipating a foreclosure.
Borrowers who receive the loan mod offers must, of course, sign the new contracts which typically would run for 5 years and then, most important, start making the new payments which are usually hundreds of dollars less than the previous amounts. Between March and June 2012, Chase claims that it has completed 3,086 loan mods, $359 million’s worth.
But, Isn’t The Housing Crisis Over By Now?
To understand how deep-seated this problem is despite the good news we’ve been hearing about home prices rising, look at what Chase, just one of the five major banks involved, says it still has to do: another 11,500 loan mods. I say, “Bravo,” to Chase for undertaking to honor the settlement. It is too bad, though, that the banks had to be forced by litigation to treat their borrowers like human beings. Makes you wonder what else we could get the banks to cough up if the federal government would just hold their feet to the fire just a teensy, weensy bit?
Housing Is On The Upswing
The Good News
The worst of housing times may be slowly working its way into a dim memory as home buyers are returning to the marketplace. The national housing stats are suggesting that the terrible pain of the last six years may, at last, be coming to an end. According to the National Association of Realtors [NAR], national home sales rose 3.4% in April for a total of 4.6 million homes sold and the median home price for the nation rose to $177,400, a full 10% over last year. Of course, the NAR has a vested interest in the health of the housing sector and its stats may be on the rosy side, as many commentators have pointed out. Still, 10% increase in value, even 5%, is terrific news.
For more good news, purchases of new homes rose almost 10% over last year. At the same time the purchase price of these new homes rose almost 5% to a national median of $235,700. Housing starts are up over 50% from their 2009 low. So, it does seem as if there is some ground for optimism. Finally, the combination of incredibly low mortgage rates and low home prices has begun to attract the public, still stunned from the worst economic downturn in decades.
Why Is This Happening?
For the millions still underwater and behind in outrageous payments, even thinking that the housing crisis may be on its way out is a cruel joke. Nevertheless, there are some solid reasons for an eventual and actual end to the housing crisis of the last few years. Our U.S, labor market has been improving over the last two years ever so gradually, diminishing the ranks of the unemployed slightly month by month. Add to that enticing mortgage rates which remain at historic lows and it makes sense that home buyers with the wherewithal would begin to have enough confidence in their future prospects to make that big home purchase.
Rent vs. Buy
Rental rates have been rising throughout the country and renting has many advantages over owning a home. Nevertheless, rental rates are still much higher than the cost of owning a home in great swaths of the country. This is based on purchasing a home with 20% down and owning the same home for at least 5 years Additionally,these stats take into consideration only the purchase price of the home, not the ongoing costs of maintaining it.
Though for the most part in Southern California rental rates are still cheaper than owning a home, the allure of home ownership is still a strong pull both for the younger, first-time buyers as well as older, more experienced ones. The many young people who have returned to live with Mom and Dad or those who have rented with roommates for several years are now yearning to live free–in their own homes.
Is The Crisis Finally Over?
Millions of homes are still underwater. Millions of homeowners are still faced with foreclosure or the prospect of short sale. With that in mind, the housing crisis is certainly not over. Despite the modest recovery in the U.S., now our global trading partners are starting to slow down or even crash themselves, especially the EU and the BRIC countries [Brazil, Russia, India, China], which had been keeping the economic engine stoked. This country is recovering and we may manage to keep up the trend going mainly by satisfying pent-up internal demand, especially in housing.
Should I Buy Or Sell Now?
It seems clear that now and for the rest of this year, it’s a good time to buy a home. Prices are still very low and mortgage rates are very low. Both of these factors are likely to extend through the end of the year and into 2013.
For those thinking of selling, it’s a more mixed picture. For those deeply underwater, home prices are unlikely to spike in the next few years, so better to bite the bullet and sell now. For those who want to move up, this seems to be the ideal time to make the move. And, of course, many have little choice in the matter: whether it’s through marriage, divorce, new babies or new jobs, selling is really the only option.
You know the picture–rose-covered cottage, while picket fence, yard for frolicking dog and kids. Is this still what we want? More and more polls and surveys are saying-No, we’d rather rent. Does that mean for now or permanently? This is the question for which not only the public, but every segment of the real estate industry craves an answer.
Let’s take a look. Is it still worthwhile to own a home today? What are some of the advantages of home ownership?
- Having a home is a great tax deduction. Yeah, sure, but that’s a pretty boring reason to go to all the trouble of buying a house unless you’re an accountant. Next.
- Having a home saves money. This is what we were all led to believe. All the money spent on the mortgage, repairs, lawn care would all translate into increased equity. Not lately. Do you believe that in the long run home values will go up again? If so, then this could still be true. I, for one, do believe that, eventually, values will go up, but I don’t know when or by how much. This one is kind of shaky.
- Having a home is a creative outlet. Well, this one is definitely true. Need to remodel your kitchen or bathroom, do an addition or just paint a bedroom? If you own the home, you get to do it your way even if that includes purple ceilings and green and orange striped walls or no walls at all. Your way is the right way if you own the home. This can be really fun.
- Having a home is a learning experience. You got that one right, for sure. You will learn all about interesting things like unstopping a toilet, repairing a leaky roof, getting the doorbell to work, putting up ceiling fans, and installing drywall. This will make you a better, more well-rounded person to boot.
- Having a home confers prestige. Ever give your address in a store and the clerk asks you: is that an apartment of a house? How proud you will be to say-It’s a house! And, it’s yours.
- Having a home gives you freedom. Oh, I know you’re going to quibble and whine how you’re tied to a giant monkey on your back. But, really, now you can turn the TV or stereo up as loud as you want. You can cook kippers and not worry about the smell. You can smoke if you want. [I hope you don’t want.]
- Having a home is good for animals. So many times when you were renting, you couldn’t have a dog or even a cat, sometimes even Iggy the Iguana was persona non grata. Now, you can have a dog or even two dogs, plus a cat(s), rabbits,chickens, snakes, lizards and a whole menagerie as long as you care for them properly. It’s all up to you.
- Having a home allows vegetable and flower gardens. For many, this is a huge plus. If you don’t have your own yard, you have to pay through the nose for organic produce which you can raise at home for peanuts. Plus, roses are beautiful.
Notice how this one is a double-edged sword, of course, just like many of the reasons for owning a home. Raising flowers or vegetables is a lot of back-breaking work. You have to try it to find out how satisfying it is. Training a dog takes time and attention. Caring for animals costs money and takes time. Most of us find the rewards are worth it kind of like raising kids. Often, the work involved in owning a home is as back-breaking as gardening. You have to want it. Apparently, we still do as 7 out of 10 renters say they are looking forward to buying a house someday.
The bomb has already exploded and suburbia has been left childless. Suddenly, it’s not just rural areas and the Rust Belt that’s losing population. Even, Beaver Cleaver’s neighborhood has no kids. That’s what’s contained in the 2010 Census. Very few of the 3143 American counties report any growth in population and many [58.6%] report steep declines. Children used to make up 25.7% of the population, even a scant 10 years ago. Now, children are 24% and still declining. In only 49 counties did the kid population increase, most in suburbs around mid-sized cities like Charlotte, NC.
Los Angeles County, as reported in the L.A. Times, is losing children at a rapid rate due to the high cost of housing and the high unemployment rate. Too, hard times have led many new immigrants, many illegal, to return to their home countries, rather than tough it out here. That group had among the highest birthrates.
Time was when new schools were popping up all the time to accommodate the burgeoning baby boom. Now, even the youngest boomers are into advanced middle age. And, they have not produced children like their parents. As a result, the archetypal American neighborhood, Suburbia, USA, is increasingly childless. This fact is having massive impact in those communities. As in L.A. Unified, schools are closing, pools and recreation areas are shutting down. All the activities we associate with child-rearing are diminishing or eliminated altogether–youth sports, music and dance classes, martial arts, swimming, skiing, birthday parties.
With the vanishing children goes the need for the 3-bedroom, 2-bath home with yard. Perhaps, too, the whole concept of suburbia is fading as newer communities insist on walkability, proximity to shops and public transportation.
Who Will Be Future Home Buyers?
During the real estate boom, as home values moved inexorably upward, buyers spread out to purchase a second or even third home. Will this trend accelerate? It’s possible, yet, given the moribund state of housing right now, it doesn’t seem too likely. What does seem likely is that the buyers will increasingly be singles, childless couples, older singles and couples.
Where will they want to live? That, too, is not really known as yet. Many young singles spend their twenties in urban areas like San Francisco and Manhattan or Brooklyn, Boston or Miami. They are marrying later and putting off child-rearing to their thirties. Many of these want to stay in the urban core. With only one or, possibly, two children, that’s what they are doing. The childless couples are doing the same thing. They like the amenities so close by–public transportation, great shopping, wonderful restaurants. Why move?
The Baby Boomers, many of whom were themselves raised in Suburbia, also raised their own children there. But, the kids are long gone for the oldest boomers and going for the younger ones as now even they are in advanced middle age. No longer tied to school districts or commutes, many of the still-huge boomer generation are likely to leave the suburbs where they brought up their children in search of new horizons.
Effect On Today’s Housing Market
None of this is terrifically good news for today’s market of foreclosures, short sales and underwater property. If the kids are grown, why would a couple hang on to the four bedroom home on which they owe twice as much as it’s worth? They would be better off short selling the house and finding something smaller. On the other hand, if they were counting on sellling the home to move to a cheaper, slower-paced area, that option is closing fast as well. Not only has their equity dropped like a stone, but who is going to buy that big house? Who’s going to be rushing to the suburbs to buy anything?
Sales in Southern California counties are slowing. While this is normal for this time of year as most of the population is occupied with holiday preparations and parties, the amount of real estate inventory continues to grow. The rise in inventory will, in turn, lead to a further decline in home values as home sellers, including banks, attempt to price their properties competitively.
This is the latest real estate info for Southern California counties. Compare to one month ago here. Time on the market is lengthening and prices are dropping–again…
Bank of America, largest holder of US home mortgages, has declared a moratorium on foreclosures. Other large lenders, GMAC, Chase, have stopped foreclosures in 23 states, but all large lenders are expected to follow suit shortly and declare a total moratorium across the country. Initially, California was not involved, though immediately Jerry Brown the attorney general who is also running for governor of the state, pledged to scrutinize the banks’ foreclosure processes.
The reason for the moratorium is the revelation of the “robo-signing” of foreclosure affidavits without even looking at the contents. This has opened the banks to claims of massive fraud.
What does this mean for my home? Will the auction go through?
If you with a BofA or Countrywide loan were expecting an auction any day now, that auction has been postponed indefinitely. As mentioned here previously, from start to foreclosure, the process has been taking over one year due to the slow pace set by the banks. Now, add to that an indefinite moratorium period. The consensus seems to be the time will be 60 to 90 days. I would bet that most, if not all, foreclosures will begin again only in the new year.
How long will I be able to stay in my property without paying the mortgage?
At this point, no one knows what is going to happen next. Most likely, BofA for now and perhaps other banks will use the period of the moratorium, no matter how long it lasts, to clear out their huge,clogged pipelines of homes which have already been foreclosed upon and remain in some part of the sale or pre-sale process. With the pipeline cleared, once the moratorium is lifted, foreclosures should resume at a brisk clip.
I haven’t paid my mortgage on my home for 6 months and I have a Notice of Default. Does this mean I won’t get a foreclosure on my record?
No, this means that, if you have just done nothing so far, the BofA moratorium is allowing you time to do a short sale and avoid the worst result for your credit. If you have an NOD, that means the process has started and the clock is ticking. Once the moratorium is lifted, whenever that is, you are just that much closer to foreclosure. You may be one of the first foreclosures after the moratorium.
For help deciding or doing a short sale, call me at 626-641-0346 or email Diane.
I haven’t paid, but I don’t have a Notice of Default. What about me?
It’s unclear at this point whether or not the banks will continue to issue NODs during the moratorium. No matter because at some point the moratorium will be over and the foreclosures will continue. During this lull in the foreclosure activity, you have time to get going on a short sale.
How did all this happen?
As indicated in another post, really the incredible speed and complexity of the modern mortgage system are at the root of the issue. As explained in a Washington Post article, the situation is further complicated by the various reactions and legal opinions coming from many states. Some states which have not been especially hard hit appear to have adopted either more scrupulous attention to detail or some have even passed laws making it easier for banks to foreclose. Other states, especially the Big Four Foreclosure States, Florida, California, Arizona and Nevada, faced with entire neighborhoods shuttered and communities gutted of population, have tried to stem the tide.
What is going to be the outcome?
BofA has already said it will resume foreclosures once its internal investigation is complete and has further stated that, so far, its internal investigation has revealed no irregularities.Banks are notoriously self-serving, though, so no one is relying too much on a self-test. Rumors are that Congress wants to hold hearings on the topic to see exactly what the banks are doing to validate the foreclosure process.
It’s evident that massive lawsuits may follow any hint of wrongdoing which could throw the entire real estate and financial sector into chaos. Bad as the foreclosures are, the spectre of another TARP to bail out the banks again is just too horrible to contemplate. Let’s hope against hope the banks have been following the proper procedures.
For help deciding or doing a short sale, call me at 626-641-0346 or email Diane.
Home Values Are Up
Here’s what’s happening in housing, according to the most recent reports from NAR [National Association of Realtors] and CAR [California Association of Realtors]. Nationally, the number of home sales declines, but in California home sales rose 14% in May 2010 over the previous month and were up a bit over 1% compared to last year. Of course, last year was a terrible year. This shows, though, that things are getting a bit better, though not by much.
California’s median home price also rose 23% compared to last year, May 2009. Last year the median price was $263,440 and this year the new median for May 2010 is $324,430, almost 6% higher than the previous month of April 2010. This may seem to be a big jump in one month, so, naturally, we might ask the reason. And, the reason appears to be the federal government’s $8000 tax credit which is set to expire at the end of June 2010. It’s very likely sales volume and possibly the median home price will sink back once the buying frenzy has run its course. New home buying has already snapped back to the doldrums after a busy couple of months.
Will California Home Prices Rise Soon?
Does this mean we’re coming out of it and should see rising prices from now on? It’s possible that prices will continue to inch up in California, but more likely they will either decline or stay flat for quite some time. Here are several reasons. One is that a record number of foreclosures is slated to hit the market this summer and into the fall. This is the famous “shadow inventory” that banks have purportedly been holding off the market to prevent a steep slide in values. That strategy works only so long then it gets old fast because neighborhoods and municipalities have to deal with the consequences of many vacant properties. It’s better to sell them than leave them open to vandals, meth-heads and squatters.
Another reason we most likely will not see a brisk rise in home values in California anytime soon concerns our ongoing budget crisis which does not instill confidence in the state. But, the most important impediment is our stubbornly high unemployment rate. A government in crisis cannot hire new people in the public sector to help the situation. Unemployed people cannot buy homes and, in fact, may be on track to lose the homes they’ve been hanging onto. Long-term unemployed who may have been making it on unemployment benefits are now about to lose that lifeline as Congress has failed to renew extra benefits.
What Does This Mean To Home Sellers/Buyers?
The bottom line is–if you are underwater and hoping that the equity in your home will increase substantially in the next year or so, you will probably still be substantially underwater one year from today. If you have equity, but are waiting to sell until the prices “come back”, you will most likely be waiting for a number of years.
If you are a buyer, things are looking good. The new affordable median prices mean that a healthy 66% of first-time time buyers can afford the median-priced home. This is a good sign.
I, personally, have faith in the long-term health of the Golden State. Yet, it seems clear to me that all Californians have a lot of work to do before we return to the “good times” when we had good schools, fine universities, excellent local and state governments and rising home values–all with low taxes and little effort on our part.
It’s no secret that plunging home prices still make home-buying out of reach for many. The reason? Lenders have become tough and tougher. It’s the old shutting the barn door after the horse has run out gambit. Lenders were so profligate with their money before that now in reaction they’ve become regular Scrooges. Today, many of the best deals, the REOs and properly-priced properties, go to those with 20%, 30% or more down payments and A+ credit. Gone are the no-money-down loans, the no-PMI second mortgages and the no documented income loans…Gone, gone, gone.
So, what to do if your credit isn’t quite good enough right now? Or, you want to buy now, but haven’t yet gotten that down payment together? One possible scenario is to bring back the lease-option contract, fallen out of favor lo these many years of booming home prices.
What, exactly, is a lease-option? A lease-option is a legal contract between buyer and seller in which the buyer agrees to rent for a specified period of time at a specific rent and has the option to purchase the home at a specified time in the future at a pre-determined price. The details can vary wildly…
Often, the buyer/renter pays an “option fee” up-front, sometimes pays more than market rent for the property, both predicated on the seller agreeing to apply part or all of the option fee and the extra rent to an eventual down-payment on the property. So, if I want to purchase a $300,000 home, I might pay $5000 in option fee to the seller and $2500 a month in rent, instead of $2000, applying the extra rent and half, say, of the option fee to the down-payment. At the end of a year, I’d have $8500 or a good chunk of my down-payment. If, at the end of that year, I wanted to exercise the contract, I’d buy the house. If not, then I’d forfeit the option money and the extra rent.
Bear in mind that the details of the agreement are totally up to the buyer/renter and seller/landlord. The contract could say the buyer gets to apply the whole $5000 or the rent is $2300 with $500 applied or the period is 18 months or the purchase price is $320,000 or whatever the two parties can negotiate between themselves.
The good part about this is that sellers get up-front money for their rental properties with a good chance at selling in the future at a fair price to a qualified buyer. They also get a renter who is more likely to take good care of his property. Renters get to become buyers over time instead of all at once. They get to know the property intimately before buying it outright. As always, renters get to walk if the deal no longer appeals to them. And, sellers get to keep their option money or part of it, depending on the agreement, if they do.
But, there are a few downsides. Buyers must beware as sellers still control the property and may take out more loans or have liens placed as a consequence of court judgments, or, may have already done so. Potential renter/buyers should protect themselves by checking with a title company or a real estate lawyer. Buyer/renters should also make their interest in the property public by recording their legal contract with the County Recorder. That way, everyone is aware of the contract.
This type of agreement is potentially a great deal, especially for the buyer/renter. The seller is locked in for the duration, but the buyer/renter can continue to look at other properties and can always decide to buy another property when the time comes.