2014-10-15-huff-thumb

Foreclosure Hurting Your Neighborhood and Home’s Value? — Buy It!

Foreclosure Hurting Your Neighborhood and Home’s Value? — Buy It!
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We’ve all heard many times the “making lemonade from lemons” quote. When life throws a negative at you, turn it around and make something good out of it. Of course, this isn’t possible in many cases, but it’s a nice thought and course of action if it works.

Recent news and data tells us that there are far fewer homes for sale in foreclosure than in recent months. In August 2014, foreclosure inventory plummeted 33 percent year over year. This marks the 34th consecutive month that this inventory has declined, and 19 straight months of 20 percent or greater declines. Home prices are improving, in part due to fewer price-depressing foreclosure sales.

All of this information is nice, unless you own a home in a neighborhood with a foreclosure in poor condition sitting there dragging down neighborhood home values. Actually, there is some lemonade to be made here. Of course, if there are a half-dozen of these foreclosures within a few blocks, this isn’t going to be a great opportunity. But, if there is one or maybe two, you can do your neighborhood a favor, help your home’s value, and generate some great cash flow in the process. You can help yourself and your neighbors as well, and make some money in the process.

Invest in Your Neighborhood for Profit

Why not buy that foreclosure and convert it to a rental? You’ll take it off the market as a deep discount property. You’ll improve the neighborhood when you fix it up. And, you can control not only its ownership but occupancy as well. After all, if an investor buys it, they may be less picky about renters, or discount the rent to keep it occupied. You, on the other hand, can control the rent, marketing for better quality tenants who can afford the home and will hopefully take better care of it.

Single family rental home investors will tell you that one of the things they must be disciplined about is checking their properties, at least with a drive-by, regularly. Making sure that your tenants aren’t violating exterior HOA rules and getting early warnings of problems are the goals. If the home is right there in your neighborhood, it’s almost a daily thing without any planning required. You may be driving by it every day to and from work.

There May be Help Out There

Some areas are aggressively working to avoid neighborhood blight by offering government-backed financing for distressed homes and/or repairs. Check your local tax assessor and city and county housing offices to see if there are programs to take foreclosures off the discount market and fill them with owners or tenants who will maintain the homes.

It’s a Great Investment

If you’re not upset with the tiny returns on your savings and certificate of deposit returns, that’s OK. But, with today’s miniscule savings rates and risky stock market investments, it’s nice to be able to generate double-digit ROI with special tax advantages as well. In most cases, you can deduct all expenses related to ownership of a rental property, as well as depreciation. You can wipe out a chunk of the tax liability, even while you’re enjoying depositing the rent income every month.

If your lemon these days is a foreclosure in the next block that’s vacant and losing ground on the curb appeal front, take action, squeeze that lemon, and sweeten the lemonade with some cash flow sugar.


Dean Graziosi

2014-10-13-tes-thumb

Attitudes Alone Can’t Buy Houses — But We Can Hope

Attitudes Alone Can’t Buy Houses — But We Can Hope
You can get opinions about Zillow.com ranging from extremely negative to rave reviews. The negative views are more weighted toward real estate professionals who view Zillow as a threat, while many consumers see a great online resource with lots of bells and whistles for real estate shoppers. It’s a little of both, and some of the data from Zillow can be off the mark when it comes to estimates of value.

One area in which Zillow seems to be gaining credibility is in surveys and housing study results. The Zillow Housing Confidence Index is an example. The index increased over the summer from 63.7 in January to 64.2 at the end of the summer. Housing confidence increased in 11 of the 20 metropolitan areas tracked. Anything over a 50 indicates positive sentiment. So, generally people are feeling better about housing overall.

Zillow’s data also indicates a cautious attitude about value appreciation moving forward. Zillow’s Home Value Forecast predicts only a 3.1 percent growth in value through next year, as compared to 6.6 percent over the previous year.

When 10,000 questionnaires were returned, there was a distinct differentiation of attitudes based on age group as to whether the respondents were confident they would be able to afford a home someday. The percentages were:
• 18 to 34 age group – 82% confident
• 35 to 49 age group – 64% confident
• 50 to 64 age group – 48% confident

It’s nice to see that the younger generation is generally positive about the economy and I suppose about their job prospects. It’s hard to see why, when the percentage of working age adults actually holding a job in this country has been steadily declining. Perhaps there is an enthusiasm in youth that looks forward to better times. Or, maybe there is just a burned-out attitude that accelerates with age, accounting for the dropping confidence.

The value appreciation question is of crucial importance. The chart below is from the St. Louis Federal Reserve Bank, and shows that price appreciation of existing homes may be peaking. A chart of median new home sales prices looks very similar, with multiple tops and a move downward in the latest data.

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This is an important trend to watch, as many home buyers currently own a home and are unable to move or upsize unless they can see some more appreciation. They’re still either underwater on their mortgage or they don’t have enough equity to sell and take any cash away from the closing table to use for another home.

So, what does the future hold?

Renting is still the lifestyle of the younger generation, but they seem to believe they’ll move from tenant to owner status at some point. An interesting quote from Stan Humphries, Zillow’s Chief Economist:

“It’s heartening to see younger renters express so much confidence in their ability to buy a home in coming years, because today’s renters by necessity are tomorrow’s buyers. Cynics might argue that these results represent no more than youthful exuberance, or perhaps some naiveté, but that’s missing the point. We need this generation to be confident and wanting to buy, regardless of the difficulties they face.”

Actually, the same Zillow survey showed that fully a third of the youngest age group expected home prices to rise by 6 percent per year over the next decade. That’s a pretty upbeat attitude, but if they are trying to buy, they’re shooting at a moving target. And, if wages don’t begin to improve more or if inflation worsens, they’re fighting on two fronts. So being confident and wanting to buy is nice, but there still has to be a down payment, affordable mortgage payments, and a sustainable job to pay them.

We’ll just have to wait and see, but my thoughts are that renting is going to continue to dominate the younger generation’s lifestyle. For investors big and small, buying and properly managing rental properties is still a good strategy. After all, if the younger generations do begin to buy into the market, investors have an asset that’s grown in value and they can always take their profits with a sale.


Dean Graziosi

Self Defense for Your Next Home Purchase

Self Defense for Your Next Home Purchase
I’ll start by saying that the tactics I’m suggesting in this article are definitely not for every future home buyer. However, the few who use them properly will emerge with instant equity and solid protection against reasonable market fluctuations to the downside.

It’s now eight years after the housing and mortgage crash that began in 2006, and a lot of media attention is on increasing prices and even bidding wars for homes in many areas. However, there are also analysts who fear that this is a “mini-bubble” that can’t last. Much of the activity is still cash buying by small and institutional investors buying up foreclosures and distressed properties.

A couple of major problems are contributing to pessimism in the current market. First-time homebuyers are just no longer in the market much at all. Many are living at home with their parents, unable to qualify for a purchase, burdened with student debt, or short an acceptable down payment. Even if they can buy, the second reason we’re not really in a major recovery comes into play.

Not only first time homebuyers, but would-be buyers in general as well, are fearful of the stability of market improvements. The American Dream has been tarnished, and many people are afraid to commit and buy when they aren’t sure about future appreciation. They’re also concerned about an economy that’s not supporting new job creation or wage increases.

The techniques I’m going to suggest in this article, if you choose to use them, are based on solid strategies used by investors to “buy right,” locking in a profit at the closing table. They aren’t used by the normal retail consumer buyer because they aren’t easy, nor are any of the lenders or new home builders really terribly interested in bringing them to your attention. In fact, you aren’t going to be using them for any new home purchases. This is all about distressed existing homes.

Generally the retail buyer isn’t getting in on the down-and-dirty foreclosure buying action because the homes are not in livable/financeable condition when purchased, so lenders will not approve a mortgage. They want all repairs and renovation completed to secure the long-term mortgage.

First make a decision to buy at a deep discount to the ARV, After Repair Value, of the home in the current market. Get help to determine what the home you like would be worth if it was ready to live in. Then you go to a lender who will be happy to help you with a FHA 203k home loan. This is really a combination of two loans, one for the repairs. Then that loan is rolled into a long-term mortgage.

You get hard quotes from contractors to do all of the necessary work to make the home livable and make the lender happy. The 203k loan is structured in two parts, the first to get the repairs done. The lender controls release of the funds to the contractor(s) as the work is completed and approved. An appraiser has already given the lender the ARV of the home, so the goal is to get the combination of purchase price and repairs to a level below that value.

A recent real life example was a buyer who found a foreclosure with a negotiated purchase price of $ 125,000, then received contractor written bids of $ 42,000 for all repairs and renovation to make it a nice home again. The ARV of the home according to the appraiser would be $ 192,000. Since the total of the repairs and the purchase was $ 167,000, this buyer locked in equity and profit of approximately $ 25,000 at the closing table.

That’s a comfortable 13 percent equity from the first day of ownership. Sure, it took a bit longer to make this deal a completed reality, but it was well worth it in the end. And, there were no retail competitors bidding for this home. This buyer was able to locate a home in a neighborhood they liked, and they could visualize it in totally restored condition.

The key is to do the due diligence and get your own reliable estimates of the value of the home once it’s repaired. Then get some preliminary quotes from contractors for the obvious work. If you can pad that some and get the right purchase price to guarantee instant equity, you’re on the right track. This self-defense strategy for buying your next home will give you a nice cushion for market gyrations and a comfortable feeling of control of your financial future.


Dean Graziosi

Challenges to the American Dream

Challenges to the American Dream
Our grandparents and the baby boomer generation have enjoyed the American Dream of homeownership, and they’ve by and large been rewarded with increasing values and the forced savings of mortgage payments. That’s at least until 2007 or so. However, even then, if homes were owned for a number of years prior, they’re now seeing some improvement in a recovering market.

What is the future for the dream of homeownership these days? Actually, it may not be the fact that the dream is alive but unattainable. It may be more that the dream isn’t as big a deal to the younger generation. There are divergent opinions, and it’s probably a bit of both. Many younger Americans living at home with parents would love to own a home but can’t due to rising student loan debt and lack of a down payment.

Owning a home may be desired, but the younger generations have some harsh economic realities to overcome. Gone for most are the days of getting a job with a large company, working for 20 years and retiring with a nice pension. The loyalty of company-to-employee and vice versa just isn’t there anymore. Along with shorter employment duration comes shorter residence in the area in many cases. People are moving more often and farther away for work.

Recent surveys are yielding some interesting responses from the younger generation when they’re asked about renting versus owning. Right now, with lower prices and interest rates, rent-versus-own ratios in most areas show that it’s cheaper to own than to rent. Even so, younger workers and professionals are renting anyway. Even those who can afford to buy and have a down payment aren’t doing so. When asked, their attitudes revolve around:

1. Little confidence in their long term employment prospects.
2. They anticipate that they may have to move away if their job or employer changes.
3. Even if home values are rising, it can take at least five to eight years in many cases to recoup the costs of sale through equity appreciation.
4. If they rent, they can upsize for family or other reasons every year. If they buy, they would probably oversize their home selection to anticipate future needs due to item 3.

While lenders are loosening up a bit, there are still plenty of unanswered questions about the future of Fannie Mae and Freddie Mac. The role government will have in mortgage guarantees going forward is unknown. Mortgage lending is a competitive business, though with far fewer major players than before. However, without some guarantees to cover losses due to default, lenders will raise the barriers to getting a mortgage and/or increase interest rates to offset risk. All of this uncertainty is helping to depress desire for home purchases.

There has been increased interest in lease purchase of homes, mostly spurred by the ability of real estate investors to do “sandwich leases.” They can take control of a home from a motivated seller and place a tenant buyer in it for a monthly cash flow profit and a profit if both purchase options are exercised. The investor has no obligation to buy, so they aren’t at risk if their tenant buyer decides not to do so. If more consumers learn of lease purchase options, there could be an increase in demand from buyers. They can enter into a lease purchase, usually for three to five years, an acceptable window in today’s uncertain employment world. They have the option to purchase at or before the end of the lease, but not the obligation to do so.

The American Dream may not be dead, but it’s ill and needs some TLC from the economy. If the economy begins to improve and buyers perceive it to be sustainable, they may just start dreaming of homeownership seriously again.
Dean Graziosi