CNBC did a piece yesterday during their Realty Check segment that talked about two things:

1. the oncoming wave of bank foreclosures that heretofore have been in the “shadow: and
2. the fact the the number of home buyers in the marketplace will remain low even with record low mortgage rates.

The “shadow” foreclosure market I’m referring to is the vast number of homes that the banks have already foreclosed on but haven’t released to the market for sale.  The thinking was not to glut the market with foreclosures since the idea is to get them sold.  Too many at any one time and they will sit and sit and sit on the market.  That’s not good for the banks.

However, the fact that more foreclosed homes are about to hit the market at fire sale prices cannot be good for the home owner with equity.  If a lot of the houses around you are selling for cheap, cheap, cheap that means appraisers are going to use them as comparables to your house when it come time to sell.  Not good.

Still Not Enough Buyers

The flip side  of that is that there is still not enough buyers in the marketplace to soak up all this housing inventory.  Even as mortgage interest rates continue to fall (now at or below 4.5%) there is hardly anyone buying homes.  Lots of people are trying to refinance but that will become even more and more difficult as home values decline due to the aforementioned foreclosure wave.

Throw in some uncertainty about the future of Fannie Mae and Freddie Mac and you have a humdinger of a dilemma for people who have been responsible home owners and mortgage payers all these years.  It’s beginning to look like the only people who will be able to sell there homes are the folks who bought before 1999 and did not refinance or take out home equity lines.

Today I visited one of the rare homes that is really beyond repair.  To be fair, I’m not a contractor nor have I ever been in the house building industry.  However, you don’t need to be the star of Holmes on Homes to know that this house needed to come down.  The foundation was badly cracked and the basement walls — all below grade — were already beginning to buckle.

That was just the beginning.

There was a question of whether the home was hooked up to the public water service or whether it might make use of a well that was clearly not function properly from the visual I was able to give it. Windows had been smashed out so that anyone could enter the house at any time.  There were holes in the wall.  I couldn’t really tell house good the roof was and although the addition that was built to enlarge the house with an extra bedroom and kitchen was done well enough but was obviously an afterthought to the house.

There was lots more wrong with the house…but you get the picture.

The real value in the house was not the house itself.  It was the land.  Almost an acre and a quarter in a prime part of Montgomery County.  The price is good and it should make some builder or real estate investor happy.  However, it’ll have to be a builder or real estate investor since it’s going to take time and money to tear down the existing structure plus a huge out building (something that was used as a work shed or garage) and re-build, from scratch, something new.

I have to say it was a real education for me.  I don’t see many homes that have been so totally neglected that they are essentially uninhabitable.  Trashed?  Gutted? Torn up?  Yes to all three but never where the structure itself was beyond help.

Recently I’ve been doing a little house hunting with a client that wants to buy a condo under $100,000.

I know. I know.  You’re thinking, “Is there such a place?”  Actually, there are a lot of places, it seems, that fall into that category.  A lot are short sales (no chance to get the tax credit because it’s too late in the game), some foreclosures and some “plain vanilla” sales.  The bank owned foreclosures and the “plain vanilla” are getting snapped up quick, quick, quick.

Two quick examples:

1. Bank owned foreclosure (a condo) in halfway decent shape with 2 bedrooms and 1 bath. Condo fee is kinda high but it covers all the utilities and the price of the condo is $79,900.  It had been on the market a little of 3 months and got snapped up.
2. One bedroom condo on the bottom  level of  a garden style condo community. It’s owned by a relocation company and it’s been on the market for over two years.  All of a sudden there are four offers on the place. Oh. The price is so low you can almost write a check to buy it.

I hear this is happening all over the place.  All the very low priced places are getting grabbed up by people who want to take advantage of the tax credit.  I guess they heard that Congress isn’t going to extend it, again.

There you have it.  Some activity in the housing market but probably not anything that helps people wanting to sell their home in the mid-tier or even upper-tier of the pricing levels.

Selling condos is not exactly the same as selling a townhouse of single family home.  For one thing, lenders take the condo fee into consideration when qualifying a potential buyer/borrower for a mortgage. The buyer must not only be able to repay the mortgage amount, they must be able to repay the monthly mortgage payment plus the condo fee.

Another real concern is whether or not the condo development qualifies under Fannie Mae/Freddie Mac guidelines. The most troublesome of these guidelines is the ratio Fannie Mae and Freddie Mac allows for investors-to-owners and the condo fee delinquency rate. You may have heard, there is a lot of short sales and foreclosures going on. This directly affects the condo fee delinquency rate. Condo owners that are in severe mortgage distress usually don’t pay the condo fee.  Even owners that are just feeling a pinch may be delinquent on their condo fee.  This affects the ability for buyers to purchase condos and sellers — even those with plenty of equity — to sell.

If the delinquency rate is too high or the investor-to-owner ratio is too high, the entire condo development may actually be ineligible for Fannie Mae/Freddie Mac backed loans.

An individual condo’s saleability really depends on whether a real estate investor is attempting the purchase or if the potential condo buyer will be using it as his/her principle residence.  Principle residences can be financed through FHA and the guidelines are a lot more flexible.

The bottom line for condo owners and potential condo buyers is that the financial terms agreed upon by the seller and buyer is not the end of the story.  The general financial health of the condo association is also considered.

Realtors and other real estate professionals have known about this for at least a year.  It’s been written about in the real estate blogosphere for months. Now the mainstream press is starting to pick up on it.  Here is the headline in the Washington Post: Foreclosure Wave Threatens Stability of Hosing Market (note: the Washington Post website will archive this article after today and require registration to read it.  Registration is free!).

This story is not buried in the back pages. It is at the top of the newspaper on the front page.  The Washington Post thinks it’s that important.

You should really read the article for yourself but here’s the gist:

• Many, many more home owners are becoming seriously delinquent with their mortgages.
• Banks have been working through the foreclosure process which can take as long as a year.
• Once this “shadow” foreclosure market oozes out into the market these foreclosed homes will further depress home prices
• This foreclosure mess is not short term.  It is expected to take at least three years for the homes to be released to the market and then bought by other home buyers

It’s a mess.  We can wring our hands, worry and fret. However, we cannot change reality and when the mainstream press starts to pick up on this stuff and give it prominent coverage, we would be well advised to sit up and take notice.  The Washington Post is not some rogue blogger sounding alarmist.

Here’s Part of the Solution

If you are a home seller with equity in your home, take note.  If you are a home seller with compelling plans to move — job relocation, retirement, assisted living, etc. — take note.  You cannot and will not be able to price your home at a level where it will not sell. Home sellers with equity in their homes will be “taking a hit” on their equity. This is sad.  It’s not fair.  It is reality.  Pricing a home above market levels is a recipe for a prolonged home sale (months and months and months of sitting on the market without an offer to purchase).

The sad reality of the current economic situation with increased unemployment combined with this coming foreclosure wave combined with extremely strict mortgage guidelines (i.e., a tight credit market) is that home prices will continue to feel substantial downward pressure for a long time to come.  In other words, at this point in time — Spring 2010 — we are probably at the top of a housing market that will continue to falter.

Many a year ago, there was no such thing as Virtual Tours or multiple interior and exterior photos of homes on the Internet.  Of course, many a year ago there was no such thing as the Internet.  When people wanted to buy a house, they contacted a Realtor who would help them look for homes that matched their criteria.  They would get in the Realtor’s car and go a callin’.  That’s how people decided about which home they would buy.

Fast forward to today.  Now, if a house doesn’t have multiple photos of every room in the house and lots of photos of all the angles of the exterior of the house and a few pictures of the neighborhood it might get crossed off the list.  I’ve had lots of clients tell me that if a house didn’t have photos they could look at on the Internet, they didn’t go any farther.  It wasn’t even considered.

What About Houses in Bad Shape?

There are a lot of foreclosed homes and short sales in the marketplace today.  Most of those homes do not have more than one exterior photo showing the front of the house.  Why?

• listing agents for the banks that owned the foreclosed homes don’t have the time based on the quantity of homes they list
• listing agents for sellers of short sales don’t want to be bothered
• the home may be in such disrepair that showing a photo may actually deter someone from looking at the house in person

There are even homes that are not short sales or foreclosures that simply don’t look that great.  People who have been living in a home for decades may not have made any upgrades.  Lots of people are really not that tidy.  People die and the house is just filled to the brim with collected artifacts and knick knacks.  The kids (or the Estate of the deceased owner) need to sell the house but they have no strong interest in making it look like a picture from a magazine.

The Written Description

The truth is that many Realtors will write descriptive text about a home as if you might be buying the Taj Mahal.  When you get there you wonder what planet the Realtor was on when they wrote it.  We all know the  “code”.

• Cozy = cramped.
• Lots of potential = massive fixer upper.
• Near schools = the elementary school playground is right next door.
• Golf Course view = make sure you have safety plate glass windows to deflect the flying golf balls

Yet, when some Realtors really lay it on the line and talk about the need for TLC or major rehab, people  don’t want to believe it.  That’s where some photos might come in handy.  However, I can’t help but think it would be doing a disservice to the home seller to expose a home in a state of major disrepair simply for the convenience of the Internet home shopper.

What do you think?  Pictures….or no pictures with an honest written description?

You may have heard that the October 2009 existing home sales numbers shot up, once again, this time by a staggering 10.1%.  That’s a big number.

You can read more about the details at this article by the National Association of Realtors.  The big take away for me in this article is that even the chief economist for the NAR, Lawrence Yun, admits that the increase was driven by the $8,000 first time home buyer tax credit.  If you remember, at the time, the tax credit was due to expire on November 30th. All the first time home buyers that could possibly qualify for a mortgage were scurrying around looking for a home to buy.

Many people, who are paid to think the deep thoughts about this, said that a lot of this “pent up demand” was encouraged or “stimulated”  by the tax credit and that these folks would have bought a home anyway.  Ya think?

Few Homes Does Not Equal Higher Prices…Yet

The article also talked about how home inventories — the number of homes available for sale — continue to decrease.  That’s a good thing.  It means that as less homes are available for buyers to choose from prices may stabilize and keep from falling even more.  However, a great many of the home sales are in the bank owned, foreclosure category.  In other words, it is the bargain basement, low priced homes that are getting snatched up.

The purchase of these low priced bargains create a lower priced threshold for comparable sales in the neighborhood. So, even if you are not in any kind of mortgage distress, the fact that three of your neighbors went into foreclosure affect the price of your home.  It’s sad but true.  No matter how much you try to rationalize how great your home is and how much equity you have, the surrounding neighborhood home sales affects the selling price of your home.

The Metro DC Market

One of the interesting things from the NAR article about existing home sales was this quote from 2010 NAR President, Vickie Cox Golder:

“In parts of the country, especially in Southwestern states but also in Florida and suburban Washington, D.C. (emphasis mine), we’ve been getting many reports of multiple bids in the lower price ranges with foreclosed properties getting absorbed quickly,” she said.

It’s true.  There have been multiple offers on the foreclosed homes in the area.  This is especially true for homes that are in some disrepair but not totally trashed and gutted.  However, suburban Washington, D.C. is a big geographic area and this buying frenzy is localized even within the area.

Tax Credit Extended

More to the point, the tax credit has been extended and expanded.  It now covers the first time home buyer, like before, and home owners that currently own homes. (Click Here for a great chart of the tax credit requirements and restrictions)

Since no one needs to be under contract until April 30th, potential home buyers can sit back and relax until the Spring.  In the words of Lawrence Yun, the NAR chief economist:

“Many buyers have been rushing to beat the deadline for the first-time buyer tax credit that was scheduled to expire at the end of this month, and similarly robust sales may be occurring in November,” he said. “With such a sale spike, a measurable decline should be anticipated in December and early next year (emphasis mine) before another surge in spring and early summer.”

So it’s not time to pull out the champagne quite yet.  Sellers of mid-range to upper-tier homes are still struggling to get their pricing right in order to sell their homes.  The stimulus may be helping but, like the Cash for Clunkers program for cars, this Cash for Cul-de-Sacs may just be a temporary response to Government stimulus.

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Fact:  There are a huge number of foreclosures on the market
Fact:  Many/most of these foreclosures need a lot of work
Fact:  If you’re not well-versed on the “ins and outs” of the FHA 203(k) program, now is the time to get started on that learning process.

• An FHA 203(k) is a normal, traditional 30-year fixed-rate loan.
• The interest rate runs about ½% higher than a normal FHA loan,
• The same qualifying guidelines apply to a 203(k) as apply to a normal FHA loan:
• Seller help up to 6% of the sales price
• 620 minimum credit score
• Gift money is OK for some or all of the needed cash

Which FHA 203(k) Mortgage?

There are two categories of FHA 203(k) loans…

1. a streamline FHA 203(k) and
2. a full FHA 203(k) loan

A streamline FHA 203(k) is simply where the total cost of the repairs runs from $5,000 up to $35,000…it is called a streamline because there is no need for a “HUD consultant” (see below).  The cost of the repairs is an agreed-upon price between the buyer and their contractor.

On a full FHA 203(k) mortgage, the repairs run more than $35,000…here, a HUD consultant goes out and tells the buyer and the bank what a reasonable cost should be for the repairs.  The buyer then has to find a contractor willing and able to do the specified repairs for that total cost.

The contractor must be a licensed contractor in the State where the property is located.  The mortgage company cannot allow Uncle Bob or your best buddy at work to do the job…unless they happen to have a valid contractor’s license.  The buyer chooses their own contractor.  The bank must approve the contractor, along with the buyer.  The mortgage company is  going to run his credit report…the mortgage company is going to check with his past clients and suppliers…and the mortgage company is  going to check to see how he has done on any previous FHA 203(k)  mortgages the mortgage company have done with him.

Foreclosure, Short Sale or “Plain Vanilla”

The property does not have to be a foreclosure…any house that needs work can use a FHA 203(k) to put the house back on its’ feet.

You can use the FHA 203(k) with the highly-popular Prince George’s County, MD Neighborhood Stabilization Program (also known as Down Payment on Your Dream).

If you use a direct lender you can count on 45 days for loan approval.  However, if you are combining a FHA 203(k) mortgage with the Prince George’s County, MD Neighborhood Stabilization Program, you had better count on 60-75 days, even with a direct lender.

The down-payment is 3.5% of the total cost of the job…not just 3.5% of the sale price.  For instance, if the house costs $150,000 and needs $50,000 in work, the buyer needs a down payment equal to 3.5% of the $200,000 total cost.

The beauty of the FHA 203(k) program is:

• The buyer picks out their own paint and carpeting and flooring.
• The buyer picks out their own cabinets, appliances and counter tops.
• They renovate that home to their tastes and preferences.

In addition to the required items, the buyer can choose to have some additional work included in the FHA 203(k) mortgage.  For instance, the appliances might be OK, but they would like new, energy-efficient ones.  The counter tops aren’t bad or damaged, but the buyer would love some snazzy granite ones.  As long as the buyer qualifies for these extra items, and as long as the property will appraise OK with these extra items, include them in the plan.  After all, every $10,000 in repairs only adds about $60/month to the payment.

The appraisal is based on the “after-improved” value of the home…the appraiser will know what repairs will be done, and will base the appraised value on what the house will be worth once the repairs are completed.  As long as that appraised value is more than the total of the sales price plus repairs, we are OK.  This is what is so cool about FHA 203(k) loans, the sales price might be $140,000…the house needs $40,000 in work…so you have a total of $180,000…but the house will be worth $225,000 when you’re done!

All This and the Home Buyer Tax Credit, Too

Another thing that makes the FHA 203(k) attractive is that you can use this mortgage and still qualify for the $8,000 first-time home buyer tax credit or the $6,500 existing home owner tax credit.

• The first time home buyer cannot have owned a home within the past three years and there are some are some other requirements.
• The existing home owner must have lived in their home for the past five consecutive years and there are some additional requirements for the existing home owner as well.

Click Here for a great chart of the benefits and requirements of the home buyer tax credit program

Many thanks to Dick Harbin of Monarch Mortgage located in Greenbelt, MD for providing the information used in this blog post.

I’ve written before on how appraisals can affect the sale of your home.

In yesterday’s Real Estate section of the Washington Post, Renae Merle writes an interesting article about the new appraisal rules entitled, In the Eye of the Appraiser.  In this article, Renae details how many home sellers and home buyers are thrown off course by appraisals that come in under the contract price — the price agreed upon by the home buyer and home seller — and even, in some cases over the contract price.  It seems that no matter what the home seller and home buyer agreed upon, it is the appraiser that will determine the true market value of the house.  This value, in turn, is used by the bank or mortgage company to determine the amount of money it will lend to a home buyer trying to purchase a home.

These values can vary widely depending on the area and how many short sales and foreclosures are in the area.  A particular home can be in pristine condition with lots of improvements and still have it’s value depressed by the home prices in the surrounding neighborhood.  To add insult to injury, there is very little the home seller, the home buyer or the bank can do to challenge appraisals that are wildly off the mark.

The article is worth a read.

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In the current housing environment, there  are lots of home buyers, especially first-time home buyers, that are looking for bargains.  They’ve been told by the media that foreclosures are at record highs and that house prices have fallen to pre-boom levels.  What the media doesn’t tell us is that, in addition to all the foreclosures, there are lots and lots of  “short” sales.  These homes have not been fully foreclosed upon and the bank does not fully own them.  The home seller can sometimes get back on track, pay their mortgage up-to-date, and keep their home.  Other times mortgage companies will work through a loan modification that will help the home owner stay in their home.

Both instances are rare. Generally speaking, when a home owner realizes they cannot keep up with their mortgage payment they know it is just a matter of time before the bank comes with the sheriff to evict them.  However, many home sellers try to sell their home prior to foreclosure in order to prolong the foreclosure process.  Sometimes home owners think that selling their home before their home is fully foreclosed upon will help with their credit score.

Why Banks Take So Long Approving Short Sales

The bottom line is this: the home owner cannot sell their home for anywhere near what they owe for the mortgage.  They are “short”. That’s why it’s called a “short” sale.  In fact, “short” sales take a very long time because the bank must approve the sale. In order for the bank to give their blessing, they will:

• Determine if there is true hardship on the behalf of the home seller
• Determine the true market value of the home based on area sales of similar homes
• Determine the condition of the home
• Determine if applicable State and County laws are being followed as they relate to foreclosures
• Determine how long it might take to actually foreclose on the home
• Review any offer from any buyers and determine if the buyer has the financial ability for the purchase and if the price and other terms are in the best interest of the bank.

Multiply all those steps by the huge numbers of home sellers that are trying to sell their homes for some amount “short” of what they owe on their mortgage and you might have an idea of why it takes anywhere from six to eight to twelve months or more to get a bank to approve a “short” sale.

No Guarantee The Bank Will Approve The Short Sale

Many times, a bank will determine it is in their best interest to foreclose on a house. However, this takes time since there are various waiting periods and notification periods mandated by State and County laws and regulations.  So the property will sit until all the hoops have been jumped through, the auction has been completed and the bank can take possession and ownership of the house.

It’s also important to understand that both “short” sales and foreclosures are sold in total and complete “as is” condition. No repairs are going to be made by anyone.  If the roof leaks, that’s the way you get the house.  If there is fuzzy, black mold crawling up the walls and along the baseboards, that’s the way you get the house.  Cracked windows, gutted kitchens, debris in the basement or garage?  It’s yours.

So long story, short:

• The process takes a long time. (count on a minimum of 6 months)
• There are no guarantees that the bank will even approve a home buyers offer.
• The house comes exactly how you see it.

Check out the Market Trends for up to 10 zip codes in the MD Suburbs of DC by simply filling in the form over to the right or click here. You will get a totally FREE report e-mailed to you. No phone calls, no spam. I promise.