Archive for August, 2006

What to do when appraisal doesn’t match purchase price

Monday, August 28th, 2006

Most home buyers need a mortgage to buy a home. Before a mortgage is approved, the lender or mortgage broker usually hires an appraiser to verify the market value of the property. Ideally, the appraised value matches the price the buyer has agreed to pay.

When a property appraises for less than the purchase price, the transaction can be in jeopardy. However, a low appraisal won’t necessarily stand in the way of the lender granting the loan if the borrowers are making a large cash down payment.

For example, let’s say you agree to pay $1 million for a property, and you have $300,000 for a down payment. The appraiser puts a $950,000 value on the property, which is less than you’ve agreed to pay. You’re a well-qualified buyer, so the lender is willing to give you a loan for 80 percent of the appraised value, or $760,000.

With a $300,000 cash down payment, you only need a $700,000 mortgage. So, the sale can proceed unless you have a problem buying a property that appraised for less than you agreed to pay.

Most buyers would rather have the property they’re buying appraise for the purchase price. But in some cases a house fits the buyers’ needs so perfectly that a low appraisal is irrelevant to them as long as they have the cash to close the sale.

A real problem develops when the buyer doesn’t have the additional cash to put down to make up the difference between the appraised value and the purchase price. This can easily happen if the buyers are making a low cash down payment in relationship to the purchase price or they are putting no cash down at all.

Low- and no-cash-down buyers often wonder why it should make a difference to the seller how much cash they put down if they are approved for the mortgage. It can make a big difference if the appraisal comes in lower that the purchase price and the buyers have no additional cash to put down.

HOUSE HUNTING: What can you do in this situation? One possibility is to ask for a second appraisal. There are a lot of new appraisers in the business today. Many don’t have much experience. Make sure you insist on an appraiser who is experienced and knowledgeable in the area where the property is located. .

Another option is to ask the sellers to renegotiate the purchase price. Although no seller is thrilled about accepting less than the negotiated price, this option may work if the seller’s prospects of getting a higher price are slim.

Some buyers recently made an offer in competition on a home in the Crocker Highlands section of Oakland, Calif. In the frenzy of the bidding contest, they offered a price that could not be substantiated by the recent comparable sales. The sellers, who had a good understanding of local market value, agreed to accept a lower price and the sale went through.

But if the seller had said no, and they backed out of the deal, their deposit could have been at risk unless the contract included an appraisal contingency that made the purchase subject to the property appraising for the purchase price.

Be aware that refinance appraisals don’t necessarily reflect market value. Sometimes a refinance appraisal comes in at a lower price than would be the case if the property was sold on the open market. When this happens it can prohibit a refinance from going through.

THE CLOSING: Refinance appraisals also come in on the high side, which gives homeowners unrealistic expectations of the market value of their home.

Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.

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Copyright 2006 Dian Hymer

Refinance not always best move for distressed homeowners

Monday, August 28th, 2006

“Two months ago I lost my job; I have since been late on my credit cards; most of them are maxed out; and I am two months late on my mortgage payments. I had a chance to refinance early on, but the rates were very high so I turned them down; now I can’t refinance at any rate. A friend of mine has offered to lend me the $30,000 I need on a second mortgage at 15 percent, plus I must pay all the fees, and I must repay him in full after three months. To repay him, I would have to refinance at that time. Should I?”

No! The only thing this deal can do for you is delay the inevitable for a few months, at the cost of a substantial amount of your remaining equity.

I assume you have equity in the house because your so-called friend knows that you won’t be able to repay him in three months. The only way he can get paid is from a foreclosure sale, or by purchasing the house from you. In either case, there must be enough equity in the house to cover the first mortgage balance and arrears plus the amount owed him by you.

There is no possibility that you will be able to refinance in three months. Your equity will be reduced by the second mortgage and your credit won’t be significantly different, even if you have paid off all your overdue credit cards. The process of rebuilding your credit will take years, not months.

Your best option now is to sell the house ASAP and retrieve as much as possible of the equity you have in it.

Can You Choose How Your Payment is Allocated?

“On my mortgage, I pay only part of the interest, with the unpaid portion added to the balance. If I have extra cash, how should I apply it, to the interest or to the principal?”

You don’t have that option; in fact, no mortgage borrower does. The allocation of a mortgage payment between interest and principal is determined mechanically from the definitions of “interest” and “principal.”

Interest is the amount the lender is due for the period covered, usually a month, and is calculated from the interest rate and the loan balance. For example, if the loan is for $100,000 and the rate is 6 percent, the monthly rate of .5 percent is multiplied by $100,000 to get $500 of interest due.

Principal is the payment minus the interest, and it is also equal to the change in the loan balance. If the borrower pays $600, for example, then $500 is interest and $100 is principal. The balance is reduced by $100, which is called “amortization.” If the borrower pays $400, the principal is -$100, and the balance rises by $100, which is referred to as “negative amortization.”

In your case, the payment doesn’t cover the interest; let’s say it is $300, which means that the principal payment is -$200. If you find another $400 to add to the payment, it would raise the total payment to $700, of which $500 would go to interest and $200 to principal. There is no discretion involved. There never is.

Is the APR Reduced If the Home Seller Pays the Fees?

“My boss tells me that fees ordinarily included in the APR, such as points, when paid by the home seller, must nevertheless be included in the APR. I don’t understand this since I thought that the APR allows the consumer to compare the cost of doing business with one lender versus another lender? Since fees paid by the seller don’t affect the borrower’s cost, why should they be included in the APR?”

Strictly speaking, the APR, or annual percentage rate, measures not what the borrower is paying, but what the lender is charging. Who pays the charge is not relevant. The general presumption is that the borrower pays it, directly or indirectly. If the home seller pays it directly, the borrower pays it indirectly in the price of the house.

Involvement of a third party in the transaction does not affect the comparability of the APR in comparing the cost of borrowing at different lenders. The willingness of a seller to pay some specified amount of loan fees to get his/her home sold is not limited to a particular lender. If he/she pays it for lender A, he/she will also pay it for lender B. Hence, such payment does not affect the integrity of the APR as a measure of the cost of funds.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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Copyright 2006 Jack Guttentag

Home shoppers not deterred by credit, money issues

Friday, August 25th, 2006

“What is your credit score?” That was the question one of my best friends asked me at lunch a few weeks ago.

After the six of us at the table shared our FICO (Fair Isaac Corp.) scores, my friend proceeded to tell us how one of his former apartment tenants just bought a condo even though his FICO score is only about 600.

Purchase Bob Bruss reports online.

The rest of us were very surprised. Then we realized, today there is a home loan for virtually everybody who has a decent job and who wants to own a home, regardless of their credit.

CHECK YOUR CREDIT BEFORE SHOPPING FOR A HOME. As savvy home buyers and their real estate buyer’s agents know, it’s smart to check your credit reports before shopping for a home. Fix any errors before applying for a mortgage so you will get the best possible interest rate and terms.

Although you can obtain one free credit report each year from each of the three nationwide credit bureaus, Experian, Equifax and Trans Union, at www.annualcreditreport.com, that source will not provide your all-important FICO score, which most mortgage lenders use to qualify applicants.

Today’s mortgage lenders look primarily at your FICO score when qualifying borrowers. In fact, I’m told most mortgage underwriters don’t even read the applicant’s credit reports if the FICO score is at least 680.

FICO scores are based on (1) the length of your credit history (the longer the better), (2) the percentage of available total credit currently being used (try to stay below 50 percent), and (3) your on-time payment history. FICO scores do not consider your income, age, race, nationality, etc., assets, or cash down payment available.

The best place to obtain both your FICO score and all three credit reports is at www.myfico.com. For about $45, you can instantly receive this important information. Then study your credit reports and follow the instructions to correct any errors.

Each credit bureau has 30 days to “verify” any incorrect information. If the creditor doesn’t verify the information, such as a 30-day late payment, then it must be removed from your credit report. The result should be an improved FICO score. Ask each credit bureau to send you a corrected copy of your credit report after 30 days.

GET PRE-APPROVED FOR A MORTGAGE. After you’ve checked your credit reports, corrected any errors in those reports, and obtained your FICO score, it’s still not time yet to shop for a house or condo.

The next step is to get pre-approved in writing by an actual mortgage lender. If your FICO score is below 620, look for a mortgage lender specializing in subprime mortgages.

You may be surprised most major lenders offer these loans. To illustrate, I’m told that Wells Fargo Mortgage is not only the nation’s largest home loan lender, but also the nation’s largest subprime lender to home buyers with low FICO scores.

Be sure you obtain a pre-approval letter from an actual lender, not just a so-called “pre-qualification letter” from a mortgage broker. A pre-qualification letter means: “We think you can get a mortgage but we haven’t checked out your loan application yet.” If you have a low FICO score, a mortgage broker can obtain a pre-approval certificate from a lender who specializes in low FICO score mortgages.

Most mortgage lenders do not charge for pre-approval certificates. They know once you have their pre-approval, you aren’t likely to shop further for financing. But some lenders charge a modest fee, such as $200, which is applicable toward closing costs.

The reason it is so important to obtain mortgage pre-approval is then you know what price range home you can afford and the maximum mortgage available.

DON’T LET LACK OF CASH STOP YOUR HOME PURCHASE. If you are “cash challenged” without much down-payment cash, don’t let that stop you from buying a home. In today’s “buyer’s market” for houses and condos, meaning there are more residences listed for sale than there are qualified buyers, sellers and lenders are becoming very flexible in their quest to make sales.

Prospective home buyers who have good income and good credit, but little cash, should consider 100 percent “nothing down” mortgages. Some lenders even offer 103 and 107 percent mortgages to include closing costs in the mortgage amount. FHA and VA mortgages also offer low- and zero-down-payment alternatives.

However, the monthly payments on low-down-payment loans can be high. But home buyers who plan to fix up their home purchases to increase the market value might want to proceed anyway and then refinance in a year or two. Just be sure the mortgage doesn’t contain any prepayment penalty.

Whenever possible, low- or zero-down-payment home buyers should avoid PMI (private mortgage insurance) mortgages. PMI premiums, which cost $100 or more per month, protect the lender if the borrower defaults. But PMI premiums are not tax deductible.

A better alternative to PMI is to obtain a first mortgage of 80 percent or lower, and a seller carryback mortgage or a home equity loan for the 20 percent balance of the purchase price, thus avoiding PMI premiums.

ALTERNATIVES TO OBTAINING A NEW MORTGAGE. If you have really bad credit, or just don’t want to jump through a mortgage lender’s 100 flaming hoops, there are alternatives so you can still buy a house or condo, perhaps while you improve your income and credit situation.

My personal favorite (not that I have bad credit) is the lease with option to buy. I’ve used this method many times over the last 25 years to buy and sell houses, including my current personal residence.

Although a few lease-options are advertised in newspaper classified ads, most are created by asking a landlord, “If I lease this house (or condo), will you give me an option to buy it?” Because many landlords would prefer to sell, they will gladly agree to a lease-option with a partial rent credit, such as 33 percent, toward the purchase price.

Another alternative to obtaining a new mortgage is to offer to buy a home “subject to” its existing mortgage. Many of these residences are advertised as “assume existing mortgage” or “take over mortgage payments.” However, buyers should be careful that the home is not over-encumbered for more than its market value. That’s called an “upside down” home.

Still another alternative to obtaining a new mortgage is to ask the seller to carry back a first or second mortgage secured by the home. My experience has been retirees are especially eager to do this to provide secure retirement income. In today’s market, offering the home seller a 6 percent interest rate is a “good deal” for both the seller and the buyer.

SUMMARY: Even if you have bad credit, or are “cash challenged” for a down payment, there are many ways to buy a house or condo in today’s buyer’s market by following the recommendations above. More details are in my new special report, “Five Easy Ways to Buy Your Home and Investment Property for Nothing Down,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com.

(For more information on Bob Bruss publications, visit his Real Estate Center).

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Inman News

Moldings are spice of home-improvement life

Friday, August 25th, 2006

Moldings are one of those fun home-improvement projects than can really spice up a room makeover or help you achieve just the right feeling in your new home or remodel. From baseboards to crown moldings, door casings to window trim, there are enough sizes, styles, colors and material options available in stock and by special order to satisfy most homeowners.

But what if you still can’t seem to settle on the perfect look for your room, or you want something a little different from what the local home center carries? With a little creativity and maybe some woodworking prowess, you can have it.

COMBINING MOLDINGS

The first possibility to expand your horizons outside the norm is to combine stock molding patterns to create something different. With a little imagination, there are an endless number of combinations you might consider. Some basic suggestions include:

Mix and match: Take a standard piece of 1×3 or 1×4 hemlock or MDF (medium-density fiberboard, a common material for paint-grade moldings), top it with a decorative small-profile molding of the same material, and you’ve got a unique baseboard, or even a window or door casing. Another idea is to take two pieces of crown molding that you like and stack them against or on top of each other to make up a new, larger crown.

Mix and don’t match: You can also consider mixing moldings manufactured from different materials or simply from different colors. There are some striking combinations available by mixing a piece of maple molding with a piece of cherry for example, or combining stained oak moldings with a piece of paint-grade MDF.

Space ‘em out: There’s no rule that says molding combinations have to touch each other. You can achieve looks that range from the subtle to the striking by spacing two moldings apart a little, and then painting or wallpapering the area in between.

MAKE YOUR OWN

For the more ambitious, there’s the option of making your own moldings. You can alter existing moldings or start from scratch by working with solid lumber or MDF, and possibilities are limited by your imagination and your collection of woodworking tools. 

Sometimes there’s no reason to reinvent the wheel when you can just make it roll a little differently, so you might want to consider simply altering existing moldings. For example, you can start with a piece of standard flat molding or 1x lumber and add one or more grooves to the face by running it through a table saw. Alter the width, angle, or spacing of the grooves — or a combination of all of these — to achieve even more variety. You can also cut a groove in the face of a board and then glue in a piece of contrasting wood or molding to create some very unique moldings.

If you already have a table saw and want to try your hand at making your moldings from scratch, you can consider purchasing a molding cutter. A molding cutter is simply a round wheel that slips over the table saw’s arbor shaft in place of the saw blade. There are slots in the wheel — typically three of them — and small, matched molding knives can be locked into the slots. The height of the molding cutter is adjusted so that it is just above the saw’s table, and the wood is run face down against the molding to cut a pattern into the wood’s face. A variety of different profiles can be achieved by altering the depth of the cuts, the combination of molding cutters and the distance between the saw fence and the molding cutter.

The next tool in the molding cutting arsenal is the router. Routers utilize cutting bits of different profiles rotating at very high speed to cut all kinds of very cool edges on raw wood, or even on stock moldings to alter their appearance. You can hand-hold the router to cut a profile on the edge of a piece of wood, but for greater versatility, accuracy and safety, mount your router into a table that is equipped with fence.

If you have a lot of molding to make — or you’ve equipped your shop with just about every other tool and need another place to spend your tool budget — you can consider purchasing a dedicated molder. Molders look just like thickness planers and utilize a set of three equally spaced cutters mounted horizontally in a cutter head located within the machine. Feed rollers feed the raw stock into the machine, and the cutters produce crisp and accurate patterns on the face and even the edges of the wood.

Remodeling and repair questions? E-mail Paul at paul2887@hughes.net.

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Inman News

Big Florida houses exude soul, comfort

Friday, August 25th, 2006

In recent years, architects and media alike have denounced big houses. These behemoths, they say, are ugly, vacuous and without soul; in short, “there’s no there there.”

While such criticisms certainly characterize some big houses out there, they do not describe every big house built today. Many are well designed, with soul oozing from every corner.

This truism came to mind as I toured six large furnished models at the Founder’s Club, a new subdivision in Sarasota, Fla. The houses had 4,700 to 7,500 square feet of “conditioned space,” plus another 1,000 square feet of shaded outdoor living space around a swimming pool and 800 to 1,500 square feet of patio around the pool itself. The shaded area, called a lanai, is a common feature in Florida houses. In most households, it is a center of activity for all but the hottest months of the year. Large lanais like the ones in these houses have outdoor kitchens, fireplaces, sitting areas with inviting spots to enjoy an afternoon siesta, and space to entertain 25 to 50 people.

As is often case in new-home communities with several builders competing for the same market, there are many similarities in the models. Each one has a U-shaped footprint that wraps around the lanai and pool area. The formal entry is centered in the “bottom” of the U, where it opens onto formal living and dining areas. Turn towards one side of the house, and you’re heading for the master suite; turn towards the other and you’ll be in the eat-in kitchen and family room area.

The guest suites, a necessity when you live in a climate that beckons relatives and friends from November to April, are discreetly placed at some distance from the master suite, usually on a second floor. Each house also has a bonus game room for those few summer months when the weather during the day is insufferable, and the three largest houses have home theaters.

The price of the furnished models, including lot cost, optional upgrades and furnishings, ranged from $2.65 million to $5.9 million. As one might expect, luxury abounds, along with a few over-the-top details. My favorite was the Powder Pakistani Green onyx bathroom, which had a spacious, eight-sided shower with four windows opening onto a private courtyard. There is also informal elegance, as exemplified by the classiest “memory point” merchandising I have ever seen — a kitchen island with a mahogany butcher-block counter. The same house also features high-tech bells and whistles: The three exterior window walls of the family room completely retract, turning the space into an extension of the lanai.
Architects offer thoughts on designing large houses

Many people who decide to build a large house have quite specific ideas about the style and look that they want to achieve, but Boston architect Jeremiah Eck said they fail to realize that what works well on a small house can be a disaster on a big one. Eck, who has been designing large houses in a variety of styles for almost 30 years, said that the spareness of modernism can look terrible on a big house, even in the hand of a master like Richard Neutra, one of the great American architects of the last century. Neutra’s 14,500-square-foot Windshield House, built on Fisher’s Island, N.Y., in 1938, “frankly looked ugly,” Eck said. (The house was destroyed by fire in 1973).

Eck added that no client had ever asked him to design a large modernist house and that most clients shun this style for any sized house because they associate it with institutional and commercial buildings. Eck himself disliked Neutra’s large house because it looked like a factory and not a home. 

For Bill Sutton, an architect in Vienna, Va., even some traditional styles don’t work at a large scale. The sheltering roof of an English country house can be very appealing, he said, but the second floor can’t accommodate all the spaces that a person building a 5,000-square-foot house wants to put there.

Sutton added that clients who want big houses can be shocked to discover how big a 5,000-square-foot house can be, and how it will impact the local landscape. The first time he visits a site with clients, he always walks down the street to the spot where the house will first come into view. In the leafy Washington suburbs, it can be 300 feet away (the length of a football field). As the clients look back and forth between the spot and their lot, they start to realize that their new house will not sit unobtrusively behind a stand of pine trees, it will definitely be “out there.”

On the other hand, in many parts of the country, a big house will not stand out, even if you’re standing in the next block. Rather, it will be one of many in a new subdivision where it will have neither a commanding view nor a large lot. Dennis Danahy, a principal with Scheurer Architects in Newport Beach, Calif., said that his firm has designed 4,000-square-foot houses for 60-by-120-foot lots, a common size in many parts of the country now. With this lot size, the distance between houses can be as little as 10 feet on the sides and 40 feet at the back (each house is 20 feet from its rear lot line). To create views and privacy, Danahy designs these houses around interior courtyards. To keep them from overwhelming both the neighborhood and the neighbors, the rooms closest to the street and to the rear lot line tend to be one story, and the central portion two stories.

When his clients want to build a big, fancy house, Santa Barbara, Calif., architect Barry Berkus, who has been designing houses of all sizes for nearly 50 years, urges them to get beyond resale and luxury and seize the opportunity to have features and spaces for things they really care about, such as art, books, china, paperweights and even colored glass bottles. Instead of displaying their treasures in a haphazard fashion or never even unpacking them because there’s no place to put them, owners of a big house have room to organize and display all their cherished pieces and make them a part of everyday life.

Berkus said a big house is also an opportunity to incorporate “memory spaces,” his phrase for alcoves off bigger rooms or window seats where grandparents and grandkids can read together, build Lego castles, make a witches brew with every thing in the spice cabinet and all those other silly things that create enduring memories for the next generation. When clients have young children themselves, Berkus encourages them to add spaces and features that their children’s friends are unlikely to have so that the house can become a favorite hangout, and all the parents in the neighborhood will know where their children are.
 

Each house overlooks great views, both near and far. The pool, lanai and artfully selected drought-resistant landscaping are up close and personal; a bit farther out, each lot adjoins a 150-acre, 18-hole golf course dotted with ponds, small lakes and huge, 150- to 200-year-old live oak trees.

For many buyers, the critical differentiating factor between these houses will be the price. For this architectural writer, however, the standout “lives small.” That is, it can accommodate a huge gathering of 100 to 200 people for that Super Bowl extravaganza, but when the party’s over, the two or three people who live there will not feel like they are living in a museum with huge empty rooms, an oft-heard complaint from people who live in large houses.

The house, called The Elanora, was designed by the builder himself, John Cannon, a self-described “architect wannabe” who has been building houses in the Sarasota area for more than 25 years.

Stylistically, Cannon’s 6,160-square-foot, $3.6 million house, with its stuccoed exterior, columned portico and tiled roof can be loosely characterized as “neoclassical Mediterranean.” A look that’s favored in Florida and the southwestern United States, it lends itself particularly well to big houses.

A tour starts with the expected luxurious foyer, replete with columns and an inlaid marble floor. As in the other houses, the formal interior spaces that overlook the pool area and the golf course greenery in the distance are straight ahead. But start to look around and things get interesting. To one side, you can see through the shared living areas to the sunlit windows of the bonus room at the far end, and you know the house is big. And, as you head towards those distant windows (they are actually 93 feet away), clever design details emerge.

The “museum feel” was avoided by giving each room a hexagon shape (when a room has more than four corners, or is round or elliptical, most people cannot accurately determine its overall size). This illusion of smallness is heightened by trim details and ceiling heights. In each major area, the ceiling is higher in the center of the space than at the edges, and the trimwork is oversized but appropriately scaled — the wall bases are 1 foot high and a two-piece crown molding extends down 1 foot from the ceiling.

Every ceiling treatment is different, and all but two of the hexagon-shaped rooms have irregular configurations. The two rooms with eight equally sized walls are so different in character, most visitors will only realize the similarity when looking at the floorplan in the sales brochure. The bonus room at the far end of the shared living area is 26 feet wide, and the exposed, tongue-in-groove cypress ceiling reaches a peak of 16 feet. The intimate sitting room off the master bedroom is only 14 feet wide and has a 13-foot, stepped ceiling.

As befits a large house that starts with a view and slowly reveals its secrets, this one incorporates a measured pace. Narrow passageways with lower, vaulted ceilings separate each major living area, providing a quiet moment as a visitor passes from one grand space to another. 

Queries or questions? Katherine Salant can be contacted at www.katherinesalant.com.

 
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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Katherine Salant

 

Economy allays fears of huge home-price declines

Friday, August 25th, 2006

Mortgages are stuck in a happy place, near 6.5 percent for the low-fee deals, the 10-year T-note’s decline to 4.79 percent not enough to move the mortgage market.

At the moment, this whole six-week decline in rates rests on the assumption that the housing market is in a progressive collapse that will soon take the whole economy with it. The bond-betting housing bubblers have one big risk: the only bubble may be in the froth on their own Kool-Aid. Housing is slowing, steadily and a lot (sales of existing homes down another 4.1 percent in July, unsold inventories to a 7.3-month supply, last seen in 1993), but slowing in the real economy is undetectable.

July orders for durable goods rose a modest .5 percent, but on the heels of a big upward revision to June — so strong that second-quarter GDP growth may be revised from mid-2 percent to 3 percent. The leading indicator for employment is new claims for unemployment insurance, and there is not the slightest upward flicker.

Yes, we’re 17 Fed rate hikes deep, but from an emergency low, and now at a rate level at which the economy thrived in the 1990s. The big growth engine is global trade, growing so fast and in so many new ways (electrons!) that economic models and measurement can’t keep up, let alone predict.

So, all chips on a housing take-down…How’s it supposed to happen?

The first scenario is the only one with good empirical support: the Fed thinks that it knows with some precision the net increase in consumer spending resulting from net extraction and spending of home equity. Absent outsized extraction spending, GDP growth in the last five years might have been suppressed by a percent or two, or perhaps enough to have kept the economy from crawling out of the 2002-2003 incipiently deflationary hole.

However, the economy is now out of that hole, growing nicely on its own momentum…maybe. Turns out that despite higher fixed mortgage rates and ARM rates, equity extraction continues, and nobody really knows why, or how stimulative the ongoing extraction is. My hunch is that extraction to date is only a small fraction of overall equity gain, 2001-2006, and may run for a long while after prices stabilize.

Credible but immeasurable theories involve the wealth effect: if my home stops rising in value, it will stop saving money for me, and then I must cut consumption in order to save. Americans have been such poor savers but superb accumulators of wealth that there may be something here, or nothing. Alternately, if I think the value of my home is going down, I may choke off spending. Maybe.

From there, housing bubble “analysis” is just a bunch of campfire horror stories, all involving abrupt and substantial declines in home prices, abetted by waves of foreclosures due to bad underwriting and aggressive lending. We will get some declines in price, no doubt; the last arrivals to a regional or local housing party always have a hard time re-selling at the prices paid in the last year of a big run. However, a big run generates so much equity for earlier buyers that a price “decline” is just a give-back of a little inauthentic appreciation.

Pain, economic and otherwise, comes when large numbers of people can’t get back the money that they paid into a house; severe pain sets in when large numbers of people can’t get any money out; deep trouble arrives when the mortgage balances are larger than the sales prices.

Can that last happen to large numbers of Americans? Sure — but it has not except in times of job loss and general economic distress. Keep the cart and horse straight, here: without economic distress from some other sector, housing in the used-to-be red-hot coastal zones and Southwestern desert is likely to enter a long, long flat spot, but not a crater. A drag on the economy, but not a killer.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Lou Barnes

One Steamboat Place

Thursday, August 24th, 2006

After receiving approval from the Steamboat Springs City Council on Tuesday, the developers of One Steamboat Place are making plans to get started on the project which will be located adjacent to the Gondola building at the base of the ski mountain. 

One Steamboat Place is the second of several new projects slated for construction over the next several years as part of the transformation of the base area.

Oldtown Steamboat will also see significant redevelopment over the next several years with 5 mxed use projects in various stages of discussion, approval and demolition.

Looks like Steamboat Springs is starting to see some exciting changes.

Rescue defaulting borrower at pre-foreclosure, save a bundle

Thursday, August 24th, 2006

(This is Part 1 of a three-part series.)

PROFIT OPPORTUNITY #1 — BUY DIRECT FROM THE DEFAULTING BORROWER DURING THE PRE-FORECLOSURE REINSTATEMENT PERIOD.

Finding the defaulting borrower can be a major challenge because many don’t live in the property, which is in foreclosure. I used to send letters to these folks, but the response rate was very low. Then I learned why. One day I visited a house where the owner had phoned me about my offer to loan him funds to cure the default. As I sat down on the sofa and looked at his coffee table full of unopened letters, mostly from lenders wanting to refinance, or from bankruptcy attorneys, he explained he was too depressed to open them.

That’s why I switched to sending postcards instead of sealed letters. For just 24 cents your postcard is almost sure to be read. But DON’T say, “Sorry to hear you are in foreclosure. If you want to sell your home to avoid losing it, give me a call.” A postcard like that is sure to get an angry response from the defaulting borrower who doesn’t want the mail carrier, spouse and kids to know about the pending foreclosure.

Purchase Bob Bruss reports online.

A far better postcard approach is sending a sincere, “I would like to buy a house in your neighborhood. Do you know of any owner who wants to sell direct and save the sales commission? Fast closing. Call Bob at 555-555-5555.” Be sure to include your area code and your return address (not your home address, but a post office box works fine).

It is very important to include the magic words under your return address on the front of the postcard “Address Service Requested.” Then, if the owner has moved but left a forwarding address with the local post office, your postcard will be forwarded and you will receive the forwarding address. The extra cost to you is only 70 cents, paid when you receive the forwarding address.

Although the exact reinstatement period varies by state, it is typically three to six months before the foreclosure auction will be held to sell the property. Remember, in Texas it can be as short as 21 days! So don’t waste time. Contact the defaulting owner as soon as possible after the lender recorded either a lis pendens to start the foreclosure lawsuit or a Notice of Default. However, because of the “do not call” telephone registry rules and penalties, you might want to avoid phoning the defaulting borrower if you operate a real estate brokerage or foreclosure business.

Please understand only about 5 percent of homes in default ever go all the way to a foreclosure auction. The other 95 percent are sold, refinanced or the owner borrows the money to cure the default. If the encumbrances on the home leave at least 25 percent equity, there is a good chance you can acquire that house before the foreclosure auction.

What is the least amount of cash you can take for your equity? During the pre-foreclosure reinstatement period, you should have two goals: (a) meet the defaulting borrower at the home so you can inspect it and (b) either buy the house before the sale or wait until the auction to buy (especially if the house has too many loans and not enough equity).

It took me a long time to learn to ask (presuming I want to buy the house), “What is the least amount of cash you can take for your equity?” I used to ask, “How much do you want for your house?” Wrong question! Also, never use the word “home.” When a defaulting borrower is selling, it has become a “house.”

EXAMPLE: I learned this technique from one of my College of San Mateo law students. The evening we discussed foreclosures, Hiram told us how he bought a house in foreclosure for just $500 cash. He said the house was worth about $150,000 and had a $72,000 first mortgage, which was in default. When he knocked on the front door, in his “uniform” of overalls and sloppy flannel shirt, he politely asked if the lady might be interested in selling her house. Then he asked her what was the least amount of cash she would take for her equity. She replied, “Oh, it will probably cost me about $500 to move back to Louisiana.” Hiram quickly agreed $500 was a fair price for her equity. He also agreed to pay the title insurance and other transfer costs. Hiram just happened to have the purchase forms in his car parked nearby. Six days later, Hiram and the seller met at a nearby title insurance office, exchanged the deed for the $500, and parted as friends. It was win-win for both, especially Hiram who made sure there were no undisclosed encumbrances on that house and obtained title insurance on his purchase.

Watch out for California’s Five-Day Right of Rescission Law. If you are buying an owner-occupied one- to four-unit residential property in California, be sure your purchase offer is on a form giving the seller a five-day written right of rescission and you do not pay the seller even $1 deposit money during those five days. Hiram told us how he uses this five-day period to his advantage to have his title insurer check for any undisclosed liens the seller might have forgotten to disclose. Then, on the sixth day after the sales agreement was signed, meet the seller to receive the deed and pay the agreed cash (which is usually a lot more than $500 by the way!). I’ve bought pre-foreclosure houses for $5,000 to more than $20,000 cash paid to the defaulting owners.

When buying during the pre-foreclosure reinstatement period, do not give the defaulting borrower an option to buy the house back. In several states, including California, that will be considered to be a loan, rather than a property sale. Personally, I’ve rented back to the defaulting borrower without any problems, but some of my colleagues say that is not a good policy.

(For more information on Bob Bruss publications, visit his Real Estate Center).

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Robert Bruss

Can judge force a real estate partnership buyout?

Thursday, August 24th, 2006

DEAR BOB: About two years ago, my brother and I inherited some farmland from our late father. The property is leased to a neighbor, but that lease expires after this year’s crop is harvested. My brother wants me to buy him out. But I want to continue with the present arrangement, as the neighbor farmer wants to continue leasing the land. Can my brother force me to buy him out? –Danny D.

DEAR DANNY: No. Presuming there is no partnership contract with a buyout agreement, I am not aware how a court could force you to buy out your brother’s half of the property.

Purchase Bob Bruss reports online.

However, either of you can bring a court partition lawsuit to force the sale of the land with the sales proceeds divided between the two owners. If you think your brother might bring a partition lawsuit to force the sale of the property, you might want to consider buying him out now on a voluntary basis if you want to keep the land. For more details, please consult a local real estate attorney.

FORECLOSURE SALE USUALLY WIPES OUT JUNIOR LIENS

DEAR BOB: I was the high bidder at a foreclosure sale and got title to a house from the foreclosing bank. However, a judgment lienholder against the previous owner says I owe her the $123,000 amount of her judgment. Isn’t it true that when you buy at a foreclosure sale, all other liens are wiped out? –Nancy R.

DEAR NANCY: The general rule is when you buy at a foreclosure sale, any junior liens (except property taxes) are wiped out. Priority is determined by the date of recording.

For example, if you bought at a foreclosure sale held by a lender who recorded his mortgage in 2000, that sale generally wipes out any junior liens recorded later. However, if the judgment was recorded in 1999 against the prior owner, then you bought “subject to” that judgment and are obligated to pay it. For details, please consult a local real estate attorney.

NO EASY WAY TO CANCEL F.H.A. MORTGAGE INSURANCE

DEAR BOB: My home has a FHA mortgage for about 50 percent of its market value. Although the FHA loan is very safe for the lender, every month I have to pay a mortgage insurance premium along with my regular mortgage payment. When I inquired of FHA about canceling the mortgage insurance, which obviously is not needed by the lender, I was told the lender can cancel the premium at the lender’s discretion. But my lender refuses to cancel my mortgage insurance. What can I do? –Bernice W.

DEAR BERNICE: Sorry, there is nothing you can do to force your FHA lender to cancel your unnecessary monthly mortgage insurance premium if the lender refuses to do so. Of course, you can refinance with another non-FHA lender.

The new Robert Bruss special report, “Five Easy Ways to Buy Your Home and Investment Property for Nothing Down,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his Real Estate Center).

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Inman News

Seller carryback mortgage ripe with benefits

Wednesday, August 23rd, 2006

DEAR BOB: What is a seller carryback mortgage, which you often mention? –Mary J.

DEAR MARY: When you buy a property and the seller finances all or part of your purchase price, acting like a mortgage lender, that is called a seller carryback mortgage.

Purchase Bob Bruss reports online.

Sellers often carry back mortgages to facilitate the sale, earn interest income on the unpaid balance, and create a safe investment secured by a mortgage or deed of trust on the property they just sold.

Many retirees especially enjoy carrying back mortgages for their buyers because the retiree then has safe retirement income at a higher interest rate than usually can be earned elsewhere.

In today’s home sales market, for example, if you buy a free-and-clear house with a 10 percent cash down payment, the seller could then carry back a 90 percent first mortgage. If you offer the seller a 6 percent interest rate, that’s a “good deal” for both you and the seller.

Should you default, the seller can then foreclose and either get paid in full by a bidder at the foreclosure sale or, if there are no bidders, get the property back to sell for a second profit.

USE OF RENTAL PROPERTY SALE CASH HAS NO EFFECT ON TAXES

DEAR BOB: I own rental property that I plan to sell, as I will be retiring in the next year or two. I would like to use the profits to help my son buy a home. Most likely I will need to be part of the purchase as he will need my credit and income to qualify for a mortgage. What is the best way to avoid tax on my rental property sale? –Evelyn E.

DEAR EVELYN: The only way to avoid tax on the sale of your rental property is to make an Internal Revenue Code 1031 tax-deferred exchange for another business or rental property of equal cost and equity. That doesn’t sound like what you want to do.

If you sell the rental property to raise cash to help your son buy a home, your capital gain will be taxed at the federal 15 percent tax maximum tax rate, plus the special 25 percent depreciation recapture tax rate, plus applicable state tax.

What you do with the cash, such as helping your son buy a home, is irrelevant. For details, please consult your tax adviser.

IS A HOME EQUITY LOAN BETTER THAN A REVERSE MORTGAGE?

DEAR BOB: I am a 74-year-old homeowner, still working because I can’t afford to retire. Also, I enjoy my job. My house is free and clear. But it needs a new roof, and I need a new car. My banker suggests a home equity loan. However, a co-worker suggests a reverse mortgage. What do you suggest? –Herb W.

DEAR HERB: If you take out a home equity loan, you will have monthly payments to make. However, if you instead obtain a reverse mortgage and use part of your entitlement for a new roof and a new car, you won’t have any repayments as long as you continue living in your home.

When you decide to retire, you can use the balance of your reverse mortgage for lifetime monthly income, a credit line (except in Texas), lump sums as you need cash, or any combination. I suggest you listen to your friend and investigate a reverse mortgage.

The new Robert Bruss special report, “Five Easy Ways to Buy Your Home and Investment Property for Nothing Down,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his Real Estate Center).

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What’s your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2006 Inman News