Tax Credits – They’re Not Just for 1st Time Buyers Anymore

While not yet officially passed, it seems increasingly likely that Congress will extend a new version of the home buyer tax credit.  In what is sure to be greeted as great news to current home owners looking to trade up, the new bill will likely include a credit for them as well. 

The current $8000 tax credit for first time buyers is set to expire November 30, meaning any first time buyer that is not already in contract has basically missed out.  While it is hard to measure the exact impact, most people agree that the tax credit has certainly buyoed the market. 

Possibly as early as next week we should see the new bill passed.  CNN’s Business Week reports the following details:

-First time buyers can continue to claim the $8000 tax credit, but now current home owners who have lived in the same residence for at least 5 years can enjoy up to a $6500 tax credit if they trade up to a more expensive primary residence. 

-Full credit limited to borrowers/buyers with an income less than $125,000 or or $225,000 for married couples.

-Home must be purchased for less than $800,000.

-Contracts must be signed by April 30, 2010 and sales must close by June 30, 2010.

As details are revealed I will happily provide them in this space.

Thank you CNN Business Week for story.

On Short Sales and Getting a “Good” Deal

Here is my reply to a client of mine regarding the hope of buying a short sale at an amazing 25% below market value.  I think there’s value in this reply for many potential buyers.  As always, feel free to call or email me with questions or comments.

I’ve been thinking about the best way to answer your question regarding short sales and finding a property significantly under the real market value.  Twenty-five percent under market value was the number you were floating as ideal.

Here’s the thing, short sales are not some type of silver bullet for real estate investors.  While it is true that there are often great deals to be had, in general short sales sell at or just below TODAY’s real market value.

A short sale is not a bank’s attempt to liquidate their property inventory.

It is simply a tool sellers use to enable them to sell a property for less than they owe.  From the bank’s perspective, a short sale represents an opportunity to take a minor and known loss now rather than potentially losing much more as the market deteriorates and the bank is forced to foreclose.  In certain really bad markets, say Phoenix or Las Vegas, short sales can often be had at monumental discounts.  Why?  Because those markets completely dropped out leaving owners with properties that are worth 50% less than the original purchase price.  In these markets, banks have far too much inventory to realistically foreclose.  If the banks were to foreclose on all those properties they’d flood the market with an over-abundance of cheap housing.  That amount of inventory would work against each other and further drive prices down.  In those cases banks find that taking extreme discounts on short sales preferable to potentially taking a monstrous loss down the road via foreclosure.

However, in the Portland market our prices have not dropped out significantly.  We’re down just over 10% from last year.  We also haven’t had the massive amounts of defaults and foreclosures.  In this market banks, by and large, are accepting short sale offers at TODAY’s market value.  It’s possible to get a discount off today’s appraised value, but probably not more than 5% or so.  It wouldn’t be in a bank’s best interest to discount as significantly as 25%.  At that point, they’d be better off foreclosing and selling the property themselves for a small discount, say 5%. 

Most of the short sales you see listed are priced at ALREADY discounted asking prices.  They do this in order to sell quickly.  For example, I just got offered a short sale listing on SE 72nd.  It is currently listed at $165,000 after originally going on the market at $185,000.  It’s priced fairly, but not at a discount.  The prior listing agent, in this case, didn’t really understand the short sale process and let the seller persuade her that he didn’t want to list too low.  Why not?  The seller isn’t realizing profit at any short sale price, so why not drop the price low enough to stimulate multiple offers…assuming the price is pre-cleared with the bank?  A well listed short sale should ALREADY be listed at or just below market value.  Most banks are looking at short sale offers between 5% and 10% below asking price.  The low ball offers are just getting returned with a “No!” or with no comment at all.

This article might shed some light.

Here is another article that discusses why the list price is often meaningless and that while buyers look at the list price and then offer BELOW asking price, the bank might only accept an offer OVER asking price.

Why?  Because most listing agents don’t know how to properly list a short sale.  If the bank has not already approved a list price or a potential sale price, the listing agent is ONLY trying to get as many offers as possible.

How?  By listing below market value.  That might stimulate offers, but the bank may or may not then accept those offers.  Banks do more than just look at the offer and say yes or no.  They require the listing agent to provide comparable sales, not just comparable listed properties.  Comparable closed sales tell the bank what today’s actual market value is.  They also often require Broker Price Opinions (BPO) where a real estate agent does a very detailed CMA for the bank.  Banks aren’t in the business of losing money.

They will push for the highest possible value, even though that value is still short of the debt owed on the original note.  Make sense?

If it’s all about finding a home at a deep discount, then you’re better off searching for actual foreclosures.  With a foreclosure the bank has already taken the loss of the borrower’s default and now must sell the property on the open market.  Banks will list their foreclosed properties at or near market value.  However, if the property does not sell banks will sometimes begin lowering the price until they find a buyer.  I have seen some impressive “deals” with foreclosures.  However, most foreclosures are snatched up by investors.  The vast majority of foreclosures never hit the listed open market.  They’re generally snatched up by savvy investors “at the court house steps.”  Foreclosure auctions are the best place to get truly amazing deals.  Unfortunately, foreclosure auctions are not set up for the average buyer.  They often require cash on delivery or, at very least, financing must be prearranged and ready to go.  It is not the same thing as buying a property the usual way with appraisals and inspections, etc.

Foreclosure auctions are not for the faint of heart and they are generally not for average residential buyers.  The small percentage of foreclosures that actually become listed properties can be bought in the normal fashion…with financing, inspections and all.  However, they’re few and far between.  There’s also usually a reason that they weren’t bought up at the original auction.

I apologize for the lengthy email, but I want to make sure you have as much information as possible. 

I understand that you want a good investment, we all do.  However, I do not consider you an “investor”.  You’re a residential home buyer looking to find a house to live in with your family.  The most important thing is to find the RIGHT house.  What makes it right?  The right size, location, style, condition and, yes, price.  To be considered a successful purchase, I wouldn’t worry so much about finding a deal below market value, but finding a home that you and your family will love for the foreseeable future that you’re able to purchase at today’s market value.  That’s what represents value for a residential home buyer.  Market value, by the way, is not set by the asking price.  Getting an accepted offer below the asking price has nothing to do with getting a good deal.  Often properties are over-priced significantly.  In that case, even if you get an accepted offer just below asking price, you have not necessarily done well.  Alternatively, if you pay full asking price for a well priced property, you have done exceedingly well.  The goal should not be getting a home at a certain percentage below asking price (I know you never suggested this, but as long as I’m on my soapbox…), but getting the home at or below market value as determined by comparable sales and a solid appraisal.

I hope that helps.

Let me know if you have questions.

Jesse

What IS a short sale, anyway?

As first time home buyers become larger percentage of the real estate market as a whole and a large majority of my clients personally, I’ve been bombarded with questions regarding short sales, foreclosures and bank owned properties. There is some serious confusion out there. Allow me the opportunity to clear up some of the misconceptions and misunderstandings.

Short sale:

Simply put, a short sale occurs when a property can only be sold for less than the remaining mortgage balance. Most properties are secured through mortgage financing. In exchange for lending a buyer funds to purchase a property, the lender puts a lien on the property guaranteeing the lien holder (the bank) certain privileges and securities. For example, if the buyer/home owner does not make the required mortgage payment, the lien holder (bank) has the right to foreclose. Similarly, with a short sale the bank has the security to decide whether to allow the home owner to sell short or not. That’s why short sale listings are required to disclose that “third party approval necessary” in order to close the sale.

Basically, when home prices decline quickly many home owners are forced to sell short. A potential buyer makes an offer which the seller accepts, rejects or counters. Once the buyer and seller come to terms, the deal is then forwarded on to lien holder’s loss mitigation department to decide whether they will accept, reject or modify the terms.

Why would a seller want to sell short and why would a bank allow a seller to sell short? There can be many reasons. From the seller perspective, a short sale is a way to avoid foreclosure. For a bank, a short sale is a tool used to recoup as much of the outstanding loan balance as possible without executing a foreclosure. Essentially, a bank will often allow a short sale if they feel it will result in a smaller financial loss than foreclosing.

The simple definition of a short sale, then, would be negotiating a less than 100% payoff on an outstanding loan balance.

Why would a buyer want to purchase a short sale? They think they can get a great deal. Whether this is the case or not depends on the specific property and the specific deal.

What are the potential pitfalls? For buyers, short sales can take a long time. Sometimes many months. There’s never a guarantee whether the deal will close or not, so many buyers feel like they’re investing a lot of time with no guarantee that they’ll end up with the house they want. During that time most buyers do not have the ability to make offers on other properties without first pulling their short sale offer. Also, most banks will not negotiate repairs. Repair credits might be had, but generally any repairs will have to be completed by the buyer after close of sale.

Is it worth it? It can be. I’ve seen some outstanding deals. Buyers just have to tread carefully and be prepared for a lengthy process. As always, having top notch representation will make the process easier and drastically increase the success rate.

Bank owned, REO, foreclosure discussion to follow in the coming days…