I want to make sure that we’re doing everything possible to find you the right house.  I fully understand what it is you want and why you’re looking in certain areas.  It’s true, though, that what you’re looking for happens to coincide with what most people are looking for.  Namely a close-in house with soul (usually means a classic style) near cool amenities.  Unfortunately, the price to play in some of these neighborhoods is rather significant. 

Like we’ve talked about in the past, buying a house is always an exercise in compromise.  Whether it’s price or location or style or size, every buyer has to compromise on something.  That’s true at every price point, too, by the way.  The trick is to figure out what’s most important and try to limit the compromise to the other categories.  It might be worth your time to jot down a wants versus needs list.  It might seem elementary and a waste of time, but I’ve found that they can often be really helpful.  I have clients who want a fireplace, but need a larger yard (they have big dogs or do a lot of outdoor entertaining).  Others need a second bathroom, but want a garage.  Obviously it’s unique to each buyer. 

In your case, your needs list might be something like:

• Cool close-in location near bars, restaurants, etc
• 3 bedrooms minimum
• At least 1 ½ bathrooms
• Price range
• Near MAX or bus line
• Style and soul
• Space for brewing and a teaching studio
• Etc

Your wants might include:

• Formal dining room
• Garage or Basement
• Walking distance to a park
• View
• Etc.

Where the exercise becomes useful is when you really put some hard, honest thought into it and decide whether a dining room, for example, is more or less important than a fireplace.  Obviously your list won’t match up exactly with Laura’s, so part of the project is merging both your lists into a final master list that will guide our search.  Sometimes it helps to kind of refocus on what’s important.  The other thing it can help with is figuring out if you can actually find what you want at a given price.  If, for example, you decide that your need is actually even more focused than living in a cool close-in location with amenities and is actually more that you only want to live in Mississippi, Hawthorne or Alberta (again, for example), then that will determine your strategy going forward.  If you want a cool close-in location, then the strategy might be to figure out what that actually means and make a list of neighborhoods that fit the bill.  There might be some neighborhoods that you aren’t currently really familiar with that, with a little exploration, you find you really like.  If, on the other hand, it really is only a handful of neighborhoods, then the strategy might simply be to laser focus on those areas and just understand that it’s going to take some time and be ready to pounce when potential listings come online.  

Also, once you come up with a list like that I can actually run a search and see if any houses that match your criteria have sold in the past six months or so within your price range.  If a few dozen sold recently, then we know that all we have to do is keep an eye out and, sooner or later, the right one will pop up.  If only a handful have sold recently, then we’ll know that it might be a long wait, but that those houses do appear on the market occasionally.  If nothing that meets your criteria has sold in the past six months, then we’ll need to reassess the list and/or price range.

Credit Score:  A credit score numerically rates a borrower’s credit worthiness and risk to the lender of default.  There are actually a number of different credit scores, but FICO (Fair Isaac Corporation) is the most prominent.  Credit scores (FICO) ranges somewhere between 300 and 900 with a higher number being better.  Lenders often use credit scores to gauge a borrower’s worthiness and to determine interest rates.

Debt-to-income Ratio: A measure of a borrower’s total income as compared to total debt.  Lenders apply a debt-to-income ratio to gauge a borrower’s risk of default and to determine how much they qualify for.

Deed: the document that transfers ownership of a property.

Deed-in-lieu:  In certain situations, in order to avoid foreclosure, a bank will allow a borrower to give the bank the deed to the home in return for forgiveness of the debt.  In these cases the borrower needs to vacate the property, but they do avoid many of the negative impacts of foreclosure.

Default:  In mortgage terms, when a borrower fails to make the required monthly payments or adhere to the terms of the mortgage.

Down Payment:  The portion of the total purchase price that the buyer pays in cash.  Very few home buyers, especially after 2007, qualify for 100% financing.  In most cases the buyer/borrower is required to contribute a certain percentage of the purchase price as a down payment.  Down payments can range from 3.5% with many FHA programs to 20% or more.  Talk to your mortgage broker to understand down payment requirements for your specific situation.

Earnest Money:  Sometimes considered “good faith” money.  It’s the money put down by the buyer which is held in escrow as the seller’s safety net against the buyer’s default.  In Oregon, earnest money is held in escrow and becomes part of the down payment if the deal closes.  If the buyer terminates the purchase in adherence to the sales contract the earnest money is returned.  If the buyer fails to perform the sales contract, the earnest money is released to the seller.

Equity:  An owner’s financial interest in a property.  Put simply, equity is what remains if one subtracts what is owed on the mortgage from the property’s fair market value. 

Escrow:  Neutral third party.  In terms of a real estate transaction, escrow acts as a neutral and disinterested third party.  Earnest money and other funds, as well as all important documents are held with escrow until the sale is ready to be finalized.

Adjustable Rate Mortgage (ARM): A mortgage in which the interest rate fluctuates based on an associated index.  There is a distinction between true ARMs and fixed ARMs, but all ARMs are tied to an index.

Amortization Schedule: In real estate related terms, amortization is the process of how a mortgage loan is paid off.  The amortization schedule shows what portion of each loan payment goes towards paying off interest and principal.  In the early years, much of each loan payment goes towards interest.  As the years go on more and more of each payment goes towards principal reduction.  Here’s a sample amortization schedule.

Annual Percentage Rate (APR): I’m going to go ahead and refer you to Vince Kingston, my trusted mortgage broker associate.  The APR can be confusing and I’d like you to understand it completely.

Appraisal: The valuation of a property as assessed by a licensed appraiser.  Appraisals generally compare the property in question with other comparable properties (comps) that have sold recently.  The appraisal sets the value that the bank will lend on.

Appraised Value: The price decided from the appraisal.

Appraiser: The licensed professional hired to complete an appraisal and to set the appraised value.

Appreciation: The increase of a property’s value over time.

Assessed Value: The property value as determined by the local tax assessor and used for the purposes of figuring property taxes.

Broker: The term “broker” can have many meanings in terms of real estate.  The real estate broker, often called the real estate agent or Realtor, represents buyers and sellers in the sale of real property.  Real estate agents work under the supervision of Principal Brokers, who are often to referred to simply as brokers.  Mortgage brokers work with buyers/borrowers to find the right financing for the home purchase.  Mortgage brokers do not actually lend money, but broker the loans to lending institutions such as banks.

Chain of Title: A list showing each transfer of title for a property over the years.

Closing: Closing is another terms that gets used for many things.  In Oregon, though, closing occurs when the new deed showing the new home owner is recorded with the county.  Keys can be released to the buyer only after this recording, closing, happens (unless negotiated otherwise).

Closing Costs: There are costs other than the purchase price associated with closing a sale.  These costs, some paid by buyer, some by seller, are called closing costs.  There are different categories of closing costs, some are considered “non-recurring” and some are “prepaids”.  Non-recurring closing costs include such items loan origination fee, document prep fee, courier services, title insurance, etc.  Prepaids refer to items such as prepaid interest, taxes, etc.

MLS – A Multiple Listing Service is an aggregator of real estate agent listed homes for sale.  Member agents, most Realtors, share information on each listing and agree to participate with cooperating brokers.

RMLS - The Portland regional MLS

Glossary is a work in progress and is by no means meant as an exhaustive list. 

At the moment, the proposal is specifically aimed at energy efficient appliances and insulation.  Details are unclear at this time, but the leaked news mentions up to $12,000 in rebates.  That’s a tidy little sum, no?

The program would be a two-pronged approach with money going to homeowners on the one side and renewable energy and efficiency businesses on the other.  The plan would create a program where private contractors could conduct home energy audits and then install the necessary upgrades.

Most likely items such as furnaces, air conditioners, windows, washing machines, refrigerators, stoves and insulation would be covered.

Again, this is simply a proposal at the moment and the specifics have not been completely written out yet.  There is no guarantee that the proposal will ever go into effect, but it is interesting to see the current thinking in Washington.

I will provide details as they emerge.

Incredible opportunity for an immaculately cared for 1906 remodeled bungalow.

Move-in ready!

Click here to view my video on the housing recovery and interest rates.

Check out that inventory!  6.5 months?  You could make an argument that we’ve reached that elusive “balanced market”.  Personally, I would like to see a inventory figure between 4 and 6 or so for a few consecutive months before I deem Portland a balanced market (as opposed to a buyers’ or sellers’), but it certainly looks like we’re well on our way. 

Pending and closed sales are WAY up versus October 2008.  When I say way up, I MEAN way up.  Pending sales were up 64%, which is the largest same month increase since February 1996, also known as Winter Quarter of my senior year at UCSB.  Yeah, it’s been awhile.  Closed sales were up a ridiculous 37% versus October last year.

The month-to-month figures aren’t quite as staggering, but they’re fairly impressive nonetheless.  Closed sales increased 11% compared to September 2009. 

Why all the activity?  I think we can safely assume that the first time buyer tax credit’s, then, expected expiration drove many buyers into making quick decisions.  It’s definitely possible that the tax credit extension will actually slow sales back down, but we won’t really know for another month or two.

In the meantime, remember that it is still an incredible time to be a home buyer.  $8000 tax credit for first time buyers.  $6500 tax credit for many current home owners.  Extremely low mortgage interest rates.  Etc.

Most likely attributable to the first time buyer tax credit, the number of signed sales contracts (nationally) rose for the eighth straight month.  In fact, the pending sales index reached its highest point since December 2006.

Industry experts expected a modest increase, but the substantial jump came as a welcome surprise to industry enthusiasts.

Much of the increase can be attributed to the first time buyer tax credit that has been responsible for between 200,000 and 400,000 home sales.  September was particularly strong due in large part to eager first time buyers rushing to get in contract before the tax credit expired in November.  Fortunately, as previously reported, the tax credit has been extended (and expanded) through June 2010.

In addition, experts expect the increased sales and pending sales trend to continue, as the market is perfectly suited for many buyers.  Prices have fallen sharply and mortgage interest rates remain at historically low levels, meaning now is an opportune time for savvy buyers to enter the market.

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.

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