DEAN GRAZIOSI: DEAN GRAZIOSI REVIEW – REAL ESTATE FEED BY DEAN GRAZIOSI

Banks sometimes have REOs, otherwise known as Real Estate Owned, which come to them as a result of failed foreclosure auctions. The banks want to get the most out of these properties that they can, but they will also work with investors to complete sales as soon as possible. There are a few breaks that the bank will give you on REOs that you might or might not get otherwise.

Cleaning Up the Past

The first thing the bank will do with an REO property is to clear up all the obligations related to it. The bank will pay off Home Association dues, get tax liens removed by working with the IRS, and erase the mortgage. All these are just preliminary steps. They would usually have to be done anyway by any seller, but since the bank is doing them they are usually done rather quickly.

Repairs and Inspections

The bank may make repairs, at their discretion, if they feel that they will get better offers that way. It might not cost you a lot more to buy the home or property after repairs are completed, though. If the bank does not have other reasonable offers when you arrive, you will often still get the property at nearly the same price. The bonus is that you will have to do less work on it.

As far as inspections go, banks are not going to give you a great number of inspections on the property. However, you will be allowed to conduct your own inspections before buying an REO property if you pay for them yourself. However, the bank will nearly always agree to provide a pest certificate if you request it as a part of the deal.

Title Insurance

REOs generally come with a title insurance policy that is issued to you without extra charge. This is one way the bank cuts closing costs.

Financing

Banks will not always provide financing for an REO home. However, if you are looking for a home that needs quite a bit of work, the bank might be more willing to accommodate you in order to get the property off their books. If they do agree to finance you, they will often give you a lower rate of interest on an REO than they would on most other types of properties.

The Big Deal

The biggest reason to buy REO homes is that they are usually such a great deal. Banks do not want to give them away, but they do want to get them off their books as soon as possible. As long as these homes stay in their inventory, they are a liability rather than an asset. You can offer the bank a way to turn that negative into a positive.

If you make a bid on an REO home, you may not be alone. Sometimes as many as 20 or more bids come in for a single REO in a short time. Do not let this dissuade you. Someone has to get the bid. With the right research and a reasonable attitude, you may get the REO home and all the benefits the bank has to offer you.

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If you are in the process of purchasing a new home, the amount of money needed for a down payment may be more than you expected.  There are some ways in which you may be able to get assistance with your down payment.  If you are in need of assistance with your down payment, there are many programs that may be able to help.

If you are a first time home buyer, there are many programs that may help.  A first time home buyer is anyone who has not had ownership interest in a home within the last three years.  First time home buying programs are not only for those who are purchasing their first home, but can also be applied to anyone who may have had a foreclosure more than three years prior to buying a new home.  This improves your chances of qualifying for assistance greatly.

There are also state agencies that were designed to help buyers with their down payment.  These programs consist of buyers acquiring a loan from the agency in order to cover their down payment.  The buyer is then responsible for paying the money back to the agency on a monthly schedule.  The interest rates on these types of loans are usually lower than what a bank would offer.

You may also qualify for grants that are provided by the state you reside in.  These grants were designed to assist home buyers who are not able to come up with all of the required down payment.  There are certain requirements that must be met in order for anyone to qualify for these types of grants.  Consult your realtor or mortgage broker; they may be able to provide you with more information regarding grants.

If you are a veteran and you qualify for a VA loan, oftentimes there is no down payment required.  The VA loan covers the closing costs and down payment.  If you are a veteran and would like more information on acquiring a VA funded mortgage consult your local Veteran’s Administration office and they will be able to explain what is required.  Your mortgage broker may also be familiar with the requirements of a VA loan and can tell you if you qualify. 

Don’t let you inability to come up with a down payment hinder your dream of purchasing a new home.  There are many programs and agencies that were designed to help people in your situation.  With a little research and legwork, you may be able to qualify for a home loan and have the money required for the down payment.  Coming up with a down payment can be a stressful undertaking, but with the help of the agencies that were put in place to help, it has just gotten easier to buy a new home.

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In today’s market there are plenty of available homes for prospective buyers.  That combined with the low interest rates has many prospective buyers considering purchasing the home of their dreams.  But, there may be potential danger to their dream of home ownership down the road.  Along with worrying about their credit rating and income level, there are also five potential reasons that prospective lenders may decline your application for a home loan. 

The first red flag for potential lenders is if you are currently in the middle of a divorce.  Many lenders refuse to approve a loan for couples who are in the process of getting divorced.  The primary reason that lenders tend to deny these applications is that they are worried that a one person income would affect the potential buyer’s ability to make payments.  It is also important that any person who is applying for a home loan and is in the process of becoming divorced not hide the fact from prospective lenders.  The truth will come out when the lender performs a background check on the individual; if the fact that you’re getting a divorce comes out after a background check is performed, you can kiss your loan goodbye.  The prospective buyer could also face charges of mortgage fraud for lying in their mortgage application.

Another area where lenders may have a problem with a potential buyer is if they have recently switched careers.  A potential buyer who has had a change of careers within the last two years prior to applying for a mortgage may find it difficult to be approved for a mortgage.  Lenders tend to be wary when approving buyers who are not established in their careers, even if their income has increased with the new position.  If you are considering changing careers you should probably wait until after you have secured your home loan. 

If you are involved in a lawsuit at the time of your mortgage application, you may find it difficult to secure a loan.  This is true whether you are a defendant or a plaintiff.  If you are a defendant lenders may feel that you may be hit with a large settlement that may affect your ability to make payments on a loan.  If you happen to be a plaintiff in a lawsuit, lenders may fear that if you happen to lose your case you will be burdened with high attorney fees that need to be paid.  If that is the case, lenders may feel that on top of the attorney fees you will have a difficult time repaying your loan.

Making repairs on your current residence is also something that lenders look at when deciding whether to approve your loan.  Lenders feel that repairs being made on a home should be completed before the application process has been started.  Lenders would prefer that any home repairs be completed prior to buyers applying for a new mortgage.

New debt can be a mortgage approval problem.  Lenders look at the borrower’s debt to income ratio and do not like borrower’s ratios at more than 43 percent of their monthly income.  Acquiring new debt, such as a car loan or high balance on a new credit card may put many borrowers over that 43 percent limit.  It is recommended that borrowers not acquire any new debt until after a mortgage has been secured.

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With the real estate market the lowest it’s been in years and the market being flooded daily with foreclosed properties, now may be the perfect time to pick up a home at a large discount.  Although, many foreclosed homes come with their own set of issues, there are some diamonds in the rough that can be found for a fraction of what they are really worth.

Foreclosed homes sell significantly lower than their actual value.  This is due to the fact that the properties are now owned by the bank.  Because banks tend not to have a need for vacant homes that are costing them money to insure and keep in decent shape, they are looking to get rid of them as fast as they can.  What this means for you, is that you may be able to find a home that needs minimal work to make it look like new again. 

There are two ways in which you can purchase a foreclosed home from the bank.  One is dealing directly with the bank and submitting your offer to them, the other is to purchase homes at a bank held auction where bidders determine the selling cost.  If you choose to deal directly with the bank, you may be able to negotiate a better deal than if you were to involve a third party.  The benefit of purchasing a home at auction is that you may be the only person interested in the property and be able to purchase for a lower price than the bank was initially asking.

There are some challenges with purchasing a foreclosed property as well as benefits.  Once all the paperwork has been signed and you are in possession of the property you may discover problems that you weren’t aware of before the purchase was finalized.  To avoid finding yourself in this situation, you may want to have an inspection done on the property so that you are aware of any problems before you close on the property.  An inspection is relatively inexpensive compared to what you may have to pay in order to make the property livable.

You may have heard horror stories about the problems that come from buying foreclosed properties, while some are in dire need of repair there are some out there that are in nearly perfect shape.  One of the most important things you need to do before purchasing a foreclosed property is to do a bit of homework.  By doing some research into any problems the neighbors may have had with plumbing or flooding issues, you will get more information from a friendly neighbor than the bank might offer.  Research is the key to finding a foreclosed property that will need minimal work to become your dream home.

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Homeowner’s Insurance is an inexpensive way to protect one of your largest investments. If you have mortgage, your lender will require you to purchase a Homeowner’s Insurance Policy. 

Homeowner’s Insurance is a contract between the owner and the insurance company.  In exchange for paying the premiums, the insurance company will pay the owner for damages caused by natural disasters or by human error.

Owners have protection against natural disasters like fire, lightning, wind or winter storms.  Damages caused by humans like theft and vandalism are also covered.  Most homeowner policies include liability coverage for persons that incur injuries on the property. The cost of legal defense in these instances is usually included in the coverage.

Homeowner Policies do not include coverage against floods or earthquakes.  If the property is located in an area where these natural disasters are common, the lending institution may insist that the owner acquire flood and/or earthquake insurance.  The cost of this coverage is more expensive than typical homeowners insurance.

As the mortgage company typically has a significant amount invested in the home, which is often more than the owner’s insurance, they will want their investment protected to the maximum amount.  Proof of this insurance will be required before the property will close.  Many mortgage companies will charge the homeowner for the insurance and then pay the premium themselves.

The premiums, like the real estate taxes, will be paid from the homeowner’s escrow account.  Proof of payment and coverage will be forwarded to the homeowner each year.  If the lender does not require premiums to be held in escrow, the mortgage company will send notice to the owner each year requiring a cop of the new coverage.

If the home s sold, the homeowner will receive a refund for the unused portion of the policy.  The same practice applies to unused real estate taxes that have been prepaid. 

Homeowner Insurance is provided at a reasonable rate.  The homeowner is free to seek competitive proposals for the insurance. The homeowner should make sure the coverage meets all the lender’s requirements and serves their best interests as well.

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The mortgage industry has undergone regulatory reform.  The recession took a heavy toll on the creative lending practices.  Subprime lending and exotic subprime mortgage products are a thing of the past.  Here are some of the reforms that have been implemented by the Mortgage Reform Act of 2009 and subsequent legislation.

·                     More documentation – The low documentation loans and no documentation loans that characterized the subprime lending practices are no longer permissible.  Today’s mortgage applications require more paperwork than ever before.  Lenders must substantiate and verify all income and debt.  Borrowers should expect to provide lenders with pay stubs, bank statements, retirement account information, income tax returns and brokerage accounts and debt statements.

·                     Refinancing delays – The banking industry, like many recession industries, has undergone massive layoffs.  Requests for refinancing can now take up to 60 days to process.

·                     New appraisal practices – The new Home Valuation Code of Conduct has overhauled the appraisal profession.  The new code discourages contact between real estate sales people and appraisers.  Only lenders can work directly with appraisers and even that practice is diminishing.  Most appraisers are retained through the use of an independent third party.  These changes have led to some confusion but Realtors have asked Congress to suspend the new rules.

·                     Credit evaluation – In the past a Fair Isaac Company (FICO) score of 740 would entitle the borrower to lower interest rates.  The new favored credit standard is 760.  If your credit score is 760, you may want to consider refinancing.

·                     More Truth in Lending – As of July 2009, lenders must disclose earlier in the application process how much a loan will actually cost.  The purpose of this early disclosure is to allow the prospective borrower more time to consider the mortgage offer.  After the borrower receives the new disclosure, the borrower has even days to confirm the selection.

·                     Longer Closing Dates – It now takes more time to close mortgages.  Part of delay is caused by the extended decision time and part of the delay is caused by the simple fact that foreclosure departments are busier than lending departments.

The most aggressive mortgage lender is now the FHA.  More than 60% of mortgages issued by the FHA in 2009 have been issued to first time homebuyers.  The Federal Housing Administration has lowered their down payment requirement to 3.5% and has increased the acceptable debt to income ratios.

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Given that there are terrific buying opportunities in today’s real estate market, the experienced real estate investor learns how to buy at the best price.  Real estate investors leave the emotion at the door and replace that emotion with facts, figures and budgets.  Quite simply, there is no other way to invest today.

So, now we need to build a reliable checklist that will eliminate surprises and lead us to the bottom line.  To build this list, we break expenses into three basic categories.

Purchase expenses – depending on the type property, the investor’s credit history and the lender’s requirements, there can be some variation to the cash requirements at time of closing.

·    Down payment
·    Attorney fees
·    Taxes in escrow
·    Recording fees
·    Survey costs if necessary
·    Title insurance
·    Pre-paid reimbursements to seller

Income & expenses – with most investment property, current and projected income and operating expenses affect the property’s value.  The buyer should understand:

·    Net heating and cooling costs
·    Net tax obligations
·    Net management fees
·    Annual maintenance expense
·    Cleaning or janitorial expenses
·    Lawn and landscape costs
·    Mortgage expense
·    Income

Each property presents unique income and expense opportunities.  When it comes to gathering this information, more is better than less.  Gather as much info as possible.

Immediate Cash Requirements – every property can be improved.  Some improvements are superficial while others can represent major expenses.  Again, the investor eliminates surprises. Check the following systems thoroughly and be safe rather than sorry by calling in experts for structural inspections.

·    Roofing
·    Basement
·    Heating and cooling
·    Exterior
·    Windows
·    Plumbing
·    Pest control
·    Asbestos mitigation
·    Elevator
·    Electrical

The successful investor will expand these basic lists.  Get behind the numbers to repair or upgrade these systems and use structural experts to help clarify the property’s true, not emotional value.  Your due diligence to these building systems could well determine the success of your investment.

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