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.


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

‘Fix & Stay’ Your Way into a New Home

‘Fix & Stay’ Your Way into a New Home
We read about it everywhere, and millions watch the reality TV shows on multiple networks about fix & flip real estate investing. It’s fun to see an investor turn an ugly duckling home into a swan and make a profit doing it. As with any “reality” television show, there are some behind-the-scenes things going on that help them in their profitability, such as getting material discounts for mentioning where the materials were purchased. But, fix & flip is still a viable real estate investment opportunity, even if you’re not a TV star.

But, it’s getting a little more difficult these days, as foreclosure inventories are shrinking and prices are rising. The investor must sharpen their pencil, cut the very best purchase deal they can, and then really “work the numbers” in the rehab part of the job. Some are backing away from fix & flip and moving into rental property investing or other real estate opportunities. There is a big opening here for the retail buyer to use a “fix & stay” strategy to move into a home that’s customized for their needs and a bargain buy as well.

You’re going to become a self-investing home buyer by locating the right foreclosure or distressed home that needs work. You’ll be choosing a home in an area you like and with the basic features you want, but it is in need of significant work to make it a livable home. Regular mortgage lenders won’t finance homes unless they’re already repaired and ready for move-in, so you’ll need to take a different approach.

Funding with the FHA 203k Loan

First, you need to know that when you find the right home with the characteristics you want and in a neighborhood you like that you have a funding resource ready. The FHA 203k loan is designed for the home buyer who will live in the home, but they need to have some work done before the long term mortgage is funded. In other words, the repairs and rehab must be a part of the loan and the work done before move-in. The 203k is for this specific purpose and the details can be found at www.hud.gov. There are two levels of funding depending on the amount of work the home needs:

• Streamlined 203k: The amount available for repairs is between $ 0 and $ 35,000, and the process for application is more streamlined due to the lower repair loan amount in relationship to the overall value of the home.
• Full 203k: This loan has a minimum amount of $ 5,000 and no maximum limitation. So, the home that needs a lot more work is probably going to fall into this more detailed lending process.

There are plenty of details; after all it does involve the government. But, you can locate a home that other retail buyers cannot buy, have it rehabilitated to move-in condition, and end up with the purchase price and the renovation and repairs all wrapped up into one neat mortgage. The total of the purchase and the repairs loans will of course have to meet LTV, Loan-to-Value, requirements. There is some flexibility in this stage, as you can select materials and change specifications as necessary to bring the rehab costs into line with what the lender wants.

What you’re doing is getting a contractor involved in the early stages to provide not just estimates but hard bids for the work. The process requires that no payments be made as the work progresses until it is inspected and completed as specified. You’re getting the benefit of these inspections and quality controls because the lender wants to be certain that their investment is covered.

The Buying Competition

Research the 203k loan, get some of the pre-approval process out of the way, and you can start shopping in a market with no retail buying competition. You will be competing with local real estate investors, but you have an advantage. The fix & flip investor must buy at a price that allows them a nice profit for the rehab work and for their time and effort. They’re usually selling to another investor, many times a rental property buyer. That investor buyer doesn’t want to pay full ARV (After Repair Value) for the home. The discount that buyer wants, when added to the profit the fix & flip investor wants, must be subtracted from the After Repair Value to come up with the price the fix & flip investor can pay for the unrepaired home.

This means that you can pay more for the home than the fix & flip investor because their profit isn’t a part of the picture, and you can work with full value, not a discounted value the rental property buyer wants to pay. Your lender will be looking at ARV for the final loan total calculations. If you want to jump through a few hoops and take a couple to four months to go through a purchase and rehab process, a Fix & Stay purchase might be perfect for you.

Dean Graziosi

Is There More of a Role for Investors in a Real Estate Recovery?

Is There More of a Role for Investors in a Real Estate Recovery?
It’s been a rough ride for homeowners and many investors since 2006 when it seemed that the good times would never end. But they did. The millions of foreclosures have done a lot to put a damper on the American Dream. The younger generations are no longer set on buying that first home. Many of them are living with their parents because they can’t even afford rent.

Investors have stepped up over the past six or more years, accounting annually for more than 30 percent of all home purchases. Some of that buying has been in blocks of hundreds or thousands of homes by major investors like the Blackstone Group. One recent headline tells us that the percentage of purchases by investors rose to 42 percent in one month. As long as the foreclosures keep coming there will be investor participation, but the competition for good houses has heated up. That competition is bringing higher prices, thus the media articles about a “market recovery.”

It’s weak, even if we can call it a recovery at all. There is still a large hole which the first time buyers used to fill. Just tracking prices isn’t working like it has in past markets. This is a new situation, and old statistical models may be misleading. The multiple strategies used by investors have all worked really well over the past few years:

Wholesaling: Investors use location and negotiation skills to locate properties at deep discounts and then quickly sell them to other investors who wouldn’t have found them on their own. The sale can also be to a retail buyer, but there’s far less of that activity in current markets.
Fix & Flip: The investor buys a distressed property and does renovation and repairs, many times selling them within three months or so to a rental property investor or possibly a retail customer.
Rental Investors: These people buy homes with the long-term goal of renting them out for positive monthly cash flow over expenses, and a profit from appreciation at sale in the future.

All of these strategies are still working, but they’re mostly just contributing to the movement of Americans from homeownership to tenant status. This may be the future, at least for the next five to ten years until the economy has a chance to improve and unemployment decreases. It’s been a nice ride for real estate investors, and it’s not over. However, if we consider the dream of homeownership wounded but not dead, things will turn around at some point and buyers will be back. However, they may want to buy but still be hampered by their credit, lack of down payment cash, employment uncertainty, or student debt.

Even long-term rental property investors must have an exit strategy, and it’s in that exit strategy that investors may be able to help renters move back to ownership. The goals of both parties are aligned, as the buyers will be taking the home off the books of the investor when they want to liquidate the investment. Perhaps there’s a way to increase the number of potential buyers for that investment property by making it easier for them to buy.

Rent-to-own or lease-purchase arrangements have been around for a long time. A buyer who may not be ready to purchase but would like to do so can lease the home with an option to buy at some point in the future. They may need to build a down payment, or improve their credit. There are a number of benefits for the investor in this type of arrangement:

1. The tenant buyer really wants to own the home, so they’ll take better care of it.
2. The lease agreement may be structured with the tenant buyer paying some of the repairs and maintenance, definitely not part of a regular lease.
3. In many cases the tenant buyer will pay a higher rent, increasing cash flow.

A rental home investor with a plan to sell a home five to eight years in the future, perhaps to buy a more expensive rental or invest elsewhere, normally would just follow their plan and list it for sale. They’re already marketing the home for tenants, but now could take a different approach. How about helping a strapped tenant who wants to own but has a few hurdles to jump? Instead of just marketing for a tenant, changing the marketing approach to locating tenants who want to own could work for both sides.

The investor gets a three to five-year lease-purchase agreement providing the tenant with the option to buy on or before the lease expires. The timing of the expiration is when the investor wants to sell. The price is set to provide the desired profit for the investor. The tenant buyer has a plan with a due date, and they can begin to move toward ownership, taking great care of the home. It’s really no big change for the investor, just a different marketing approach. Should the tenant not exercise their option to buy, the investor is just fine, as they can list the home for sale as they would have anyway. It’s a win-win and may help bring back the dream.
Dean Graziosi