Purchase and Remodel a home with only 3.5% cash out of your pocket

Today I attended a class on the FHA 203 K loan.  It has always been one of those things that sounds really good but is practically impossible to get done.   But I met a team of peeps all working together and getting the FHA 203k loans closed and people into their beautiful homes.

One of the challenges in todays market is that so many of the homes (foreclosures and short sales) are in poor condition.  Having items and issues that need repair in order to get a loan on the property; and with both short sale and foreclosure properties being “As Is” transactions, and no repairs being completed by the seller, getting a loan approved, funded and closed can be like pulling teeth without any Novocain.

In comes the FHA 203K team!

Together, a lender who will complete this type of loan; the home inspector, termite inspector, general contractor, HUD inspector, and a handful of other people that together know what is required, are working in unison to help people purchase these distressed properties, make the needed repairs and do some remodeling and updating at the same time.

How does it work?

The home buyer finds out what they will qualify to purchase.  Working backwards from there, if you qualify for 200,000 and you are going to put 20-35,000 into repairs and remodeling; look for homes priced around 160,000.  At the same time you have the home inspection, also bring in the general contractor and maybe the HUD inspector too.  Find out the cost for what is needed to be repaired and what you would like to have remodeled.  The cost of repairs and remodeling are rolled into the final loan amount. At closing the general contractor gets in the house and makes the repairs and remodeling, a few weeks later the home owner gets to move into their beautiful newly re-done home.

This takes an experienced team, a well oiled machine and fantastic communication.  I am glad to know the players! and to have been invited to join the team and help a few more buyers get into their dream home.

Considering buying a Short Sale?

Anyone watching the active listings of homes will see the abundance of  “Short Sales” available.

So what are they?

  • A short sale is where the seller owes more on their home than the current value and they are asking the bank to be ‘shorted’ the funds due them.

And what’s the deal…

  • Any offer must also be accepted by the Bank(s) holding the loan(s) on the property
    • Banks are slow to respond (could be months and months)
    • Bank must determine if it is in their best interest to do a short sale (is there mortgage insurance on the existing loan?)
    • Bank will determine at what price/value they will accept an offer (could be an amount greater than the asking price)
    • Bank may choose foreclosure over short sale
  • It is an “as is” purchase – (no repairs will be done by the seller)
  • The seller is not allowed by the bank to contribute any expenses regarding the closing (to pay for a home warranty for example)
  • All parties must agree to the terms, buyer, seller, and bank(s)
    • If the seller does not agree with terms from bank – they can cancel
    • If the seller has excessive tax implications that they learn about – they can cancel
  • And many more items to consider

And yet they could be a good deal for the person who…

  • They sell for near foreclosure prices, and sometimes less
  • is not in a hurry with no time frame requirements to meet
  • Realizes the “list price” may not be the sales price and is prepared to raise their offer beyond the list price.
  • has the patience of Job

Foreclosures and the Adult Communites

Although there are no adult communities within McCormick Ranch, our initial website is focused on Active Adult Communities and we work with many 55+ buyers.   

We are seeing lots of numbers being published for the ratios of Bank Owned and Short Sale properties in the valley.   We are not seeing those same numbers in the Adult Communities.   Since it is a cold rainy day, I have been playing with numbers and really surprised myself with what I found!

Taking only single family detached homes in the entire MLS for the valley, a total of 41,832 this morning, 10,796 of them were Bank Owned and an additional 9,003 were Short Sales.  Those numbers round off to 25% of the single family homes on the general market are bank owned and another 21% are short sales.  

Current MLS Single Family Homes on the market, with Bank Owned and Short Sale

Current MLS Single Family Homes on the market, with Bank Owned and Short Sale

 

 

BUT when you look at the Active Adult Community 55+ single family homes, there are a total of 2819 on the market.  Of that 2819 only 52 are bank owned and 63 are short sales which works out to 2% of the homes are bank owned and another 2% are short sales.

Current active single family home listings in adult communities comparing bank owned/ foreclosure and short sale

Current active single family home listings in adult communities comparing bank owned/ foreclosure and short sale

 

 

HMMMM  kinda makes you wonder.    Our 55+ citizens have indeed saved for their retirement homes, their financing is minimal and their risk taking days are in the past.

There were very few zero down,  or investor homes sold in these communities in the 2005 and 2006 sales surge.    I believe it is the investors who did get in to these adult communities, that are making up the Bank Owned and Short Sale properties.

It’s a Buyers Market. Or is it?

With over 6 months of inventory (the number of homes on the market divided by the number of homes selling each month) we are in a buyers market.  But if you are out there buying you may think otherwise. 

We currently have 3 housing markets.  

The Short Sale market: made up of people looking to sell their home and have the bank take the loss; The short sale market is slow (months & months)  check out my other posts on Short Sales for the scoop.  The purchase will be "As Is" meaning you can inspect, but the seller will do no repairs.  The bank can only accept an offer, not counter.  So don’t expect to go back and forth.

The Foreclosure market, made up of bank owned properties already thru the foreclosure cycle. The foreclosure market is a bit quicker.  You will most likely get a response back in a week.  You are still purchasing "As Is" and many times, since these properties are put on the market at rock bottom there will be several offers going in from different buyers.  This means, if you love it, put in your best offer at the start.  You will most likely get a request for "highest and best" and that is their version of a counter offer. 

The last group;the Resale Home market, you know, the section of the market made up of people who didn’t over extend themselves, have owned the property long enough to have equity, and have pride of ownership.   Wow, I miss the regular resale transaction. 

With multiple offers, banks taking their time to approve sales, and no option for repairs and many of the properties needing LOTS of work.  It feels like a sellers market. 

Understand the differences, know what you are looking for in the purchase, are you ok doing repairs, do you have the cash to get the repairs completed or is sweat equity enough to get the job done. 

Or are you looking for a home that has been maintained where the sellers are cooperative, and you move in and enjoy…

Foreclosures part 2

Yesterday I wrote about Foreclosures and a few thing to help understand the banks.  Today I am going to share a bit more. 

One of the things to be aware of is with every foreclosure, the bank has the buyer sign an addendum stating if the buyer delays the closing, the buyer will pay a per day per diem for each day the closing is delayed.  That per diem fee could be waved, if you use the bank that is selling to get your loan.  Here is their caveat – if they are the cause for the delayed closing, there is no compensation to the buyer.  So if there are delays in getting title (the most common reason for the seller to delay closing with foreclosures), you the buyer have to wait, no compensation or consideration given.   If you are doing a loan, not with the sellers bank, be sure to get your documents signed REALLY early, they have to be sent off and reviewed prior to funding, so be on top of it!

Some of the banks are on the ball, and get a home from the courthouse steps to the listing agent and on the MLS in hours, others take months.  So that house you have been looking at could take a while before it is back on the market.  Better to make your move when you find the right place and go thru the fun of a short sale. 

Foreclosures and your HOA

I have been thinking of writing about how foreclosures in a community hurt the HOA, and yesterday the paper had an article on the same subject.  Couldn’t find it today on their site. 

When a community has foreclosures, the home owner has stopped paying their mortgage, and their HOA. Some times the HOA has not been paid for months before the homeowner is late on their mortgage.  Think about it, if you were running short on money, would you pay your electric bill or your HOA bill?  You get my picture. 

So many times the homeowner has not paid their HOA fees in months, and months, when the property does get foreclosed on, one of the last to be reimbursed thru the sale of the property is the HOA.  Making many HOA’s hit hard by the reduction of income.  The community I live in has had to raise the HOA fees, to cover all of their costs.  Some HOA’s have cut back on what services they are offering.

The Arizona Republic article talked about how some of the HOA’s are negotiating with the landscapers, pest control services, pool companies etc.  The Leadership Center at Chandler-Gilbert Community College is bringing in legal and financial experts for a special public session “Preserving Your Neighborhood in a Challenging Economy“. 

One more thing to consider when purchasing a home.

Mortgage Forgiveness Debt Relief Act of 2007

The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007. 

Normally if you do a short sale, or if you foreclose on a home, you would receive a 1099 for the amount of debt you have not had to repay. Then you would be required to pay the taxes on the amount as income to you.

The Mortgage Forgiveness Debt Relief Act of 2007 made it so many people having financial challenges from 2007 till 2009 who sell their home in a short sale situation or have their home foreclosed upon will not have to have the burden of being taxed on the amounts of the debt.

The catch is, not everyone is exempt from getting the 1099.

If the home was a second home or an investment property, you will still receive the 1099 and have to pay taxes on the debt.  If you refinanced, pulled money out of your home, and it was used for anything other than adding to the value of your home, you will be gettting a 1099 and paying the taxes.

Check out the IRS information on this Act as you consider your options.

Short Sales – What Sellers should know

Read what you sign.  The Short Sale Addendum (one of the forms that gets to be included in any contract that is a short sale) covers the seller if the bank should come back with an acceptance of short sale conditional on the balance being paid off.

Some times in a short sale the bank will want the seller to pay the difference the bank is being shorted. 

When a seller applies for a short sale with the bank they have to fill out a package similar to a loan package.  With all of the financial data; that means your 401K could look mighty nice to the bank. 

The Short Sale Addendum in Arizona allows for all parties to be satisfied with the final conditions.  If the bank agrees to the sale and the seller once they have the final agreement letter does not like the terms there is no contract.

Be sure to read these other posts as well:
Short Sales, info for the Buyer
Mortgage Forgiveness Debt Relief Act of 2007

Short Sales, info for the Buyer

There is a lot of talk these days about short sales.  My first words of advice; if something looks too good to be true, it usually is.  Short sales have snags all over them.  If you are considering putting an offer in here are a few things to find out first.

Does the seller have one loan or two on the home?  If the seller has 2 loans the likely hood of getting approval from both banks is slim.

Is the seller in a hardship? With out seller hardship the bank will not easily approve a short sale.  Hardship could be death, divorce, health issues, and loss of job.

Does the loan have PMI? If it does, just forget about a short sale, the loan is insured and there is no reason for them to take less money.

Is the seller late; or rather how late is the seller on their mortgage?  Has the foreclosure process begun?  If the seller is on time with their loan payments, what incentive does the bank have for accepting a short sale? 

Are the sellers investors? Or was the property a primary residence?  The banks are more forgiving to personal residences than investors.

Does the seller have a big 401k or other investments?  If so the bank may want it to pay off the difference rather than being shorted, and our short sale addendum allows for the seller step out of the contract.

Each of these items could mean no contract for the buyer, so it is important to know as much as you can, before you take up months waiting to hear if your offer has been accepted.Be sure to read these other post as well:
Mortgage Forgiveness Debt Relief Act of 2007
Short Sales – What Sellers should know
Short Sales – “If something looks to good to be true it usually is”