Pocket Listings

March 22, 2012 By Jon Griffith Leave a Comment

Sometimes a home owner will hire a real estate agent to sell a house as a pocket listing. This means that the home won’t be advertised on the MLS. It happens when an agent may have a buyer for a home before the property needs any marketing, and ultimately saves time and effort which equates to savings.

In a market like today’s market, if I have a buyer who is eager to buy and a seller who hasn’t yet listed their home with me, I might connect them together, take the listing, and then facilitate the transaction, never having to publish the property on the MLS. In some cases, the nature of the pocket listing (it’s called a pocket listing because the brokerage has it in their back pocket, so to speak) is such that it remains off the MLS for a specific period of time before being published. These details are all negotiated at the time that the listing employment contract is created.

Often the house is added to the MLS while there is already interest in it, and sometimes offers have already been written for the property based on the connections that the listing agent had prior to publishing the house for sale.

When this happens the house goes on the market, but can, regardless of the showing instructions (such as 48 hours notice for tenants) already be under contract before anyone gets to see it. Ultimately it’s in the best interest of the seller to expose the property to as many people as possible to generate backup interest.

Today, this can be frustrating, because new listings don’t seem to be all that new.

Filed Under: Buying A Home Tagged With: home, house, MLS, property

Bonkers

March 22, 2012 By Jon Griffith Leave a Comment

Here we go again. The market is going bonkers, today…not 2 months from now, not 2 months ago…today. Right now. It’s bonkers so much that I’m having an extremely difficult time competing against multiple offers for the clients that I have who are looking to buy.

What’s It Going to Take to Buy A Home in Today’s Market?

That’s the billion dollar question, isn’t it. Here are some statistics updated today at 11:13 AM that might give you an idea of the state of the real estate market in Phoenix and surrounding ares.

There are 14,772 homes on the market. That includes ALL listings in ALL areas covered by the Arizona Regional Multiple Listing Service (ARMLS). In 2005, when bananas were falling out of the sky, we had about 5,000 on the market. In 2009 or so, there were 85,000 homes on the market.

If you know anything about supply and demand you’ll easily be able to identify that we are nowhere near a buyers market. We’re in a seller’s market where the seller calls the shots through the negotiation process for price and repairs.

Of those 14,772 homes, only 11,449 are single family detached homes leaving 3325 condos, town homes, apartment style homes, gemini, etc.

Of the 11,449 single family detached homes, 1,250 require short sale approval, 82 are what some people call “pre-approved” short sales, 1,255 are owned by a bank, 71 are HUD owned homes, leaving a grand total of 8,791 homes for sale.

So what IS it going to take to buy a home?

In a market like this, if you’re serious about buying a home, you’re going to have to let go. Let go of your ideal location. Let go of your ideal criteria. Let go of everything you have in your mind that determines what you will or won’t accept in the house of your dreams. Why? Because you simply don’t have much to choose from right now. There are far more than 11,449 buyers out hunting for a property, and word is spreading fast regarding scarcity. When this happens, there’s no longer a need to create urgency…it creates itself. The moment the national media breaks the news that “you’d better get out there and buy” it will be too late.

You’re going to have to be on the computer night and day waiting for new listings to show up, and when they do, you don’t have the luxury of waiting until the weekend. You’ll find yourself taking paid days off, sick days, or simply skipping out for lunch to hopefully see a home that just came on the market. And for those agents who once had a life? Leave it behind for the time being. You’ll be writing contracts and submitting them at 11PM at night or 2AM in the morning…whatever it takes to get your offer in front of the seller before they accept another.

Money!

If you don’t have your financing in order, forget it. You’ll need to come in with a strong offer, a large earnest deposit, down-payment, and a completed Pre-Qualification form. Got cash? Even better! Can you close quickly? Awesome!

If you’re lucky enough to open escrow on a property, don’t expect the sellers to do any repairs. After all, the ball is in their court. They have a line of people just waiting at the chance to purchase the house with cash, as is, waiving the appraisal and the inspection.

Man This Sounds Great, Should I Sell?

Filed Under: Buying A Home Tagged With: buyers, home, market, property

What Would an $80,000 House Really Cost?

July 5, 2011 By Jon Griffith Leave a Comment

There are no simple answers to this question. When you buy a house, you incur all types of costs depending on your particular circumstances.

Some of those costs could be loan origination fees, title insurance, home warranty, escrow fees, document fees, HOA transfer fees, etc. These are all up-front costs, some of which can be rolled into your loan, some of which cannot.

If you pay cash for your $80,000 home, you’ll still be paying a small amount above $80,000.

Now, if you think of cost in the way that you should be thinking of cost, you’ll be considering the actual cost of owning the home, which would include not only out of pocket expenses, but also long term costs, recurring costs, and opportunity costs.

Long Term Costs

If you’re purchasing on a loan, then you need to look at an amortization schedule which shows you the total amount of interest paid to the bank. Add that to $80,000. Now, project a potential increase in property value over time (which cannot accurately be predicted) and combine all of the numbers to see if you break even, or if you’re ahead of the game.

Recurring Costs

Deferred maintenance is a part of life. You WILL need to replace expensive parts of your house over the life of the home. You’ll need a new roof, new fascia boards, a new water heater, new appliances, air conditioner, you name it.

Opportunity Costs

This is probably the hardest to calculate. Opportunity costs are the losses you would incur had you done something else with your time or money. This can really only be measured after the fact, or loosely projected up front.

As you can see, the question asked is much more difficult to answer than one would expect, especially if you’re used to considering only what the monthly payment will be.

Filed Under: Buying A Home, Real Estate Finances Tagged With: cost, home, house, opportunity

My Credit Will Be Affected for How Long?

June 22, 2011 By Jon Griffith Leave a Comment

When you’re asking yourself the question, “how long will my credit be affected if I do X” it’s important to put the question in context of the product (home loan) that you are inquiring about. Did you go through a short sale, foreclosure, or deed in lieu? Were you late on any payments during this time period? There are many factors to think about.

The following table should give you a clear idea of how long it’s going to take before you can buy a home again, under various products and circumstances.

Derogatory Item	Waiting Period
CONVENTIONAL LENDING (DETERMINED BY DATE OF APPLICATION)
Foreclosure	Home was given back to the bank, no participation from homeowner. 7 Years from the date the foreclosure completed and transferred back to the bank if they had NO extenuating circumstances. 3 years from the date foreclosure completed and transferred back to the bank with acceptable extenuating circumstances and 10% downpayment. Primary home purchase and rate/term refinance only. Non-owner and 2nd homes not allowed.
Short Sale -or- Deed in Lieu of Foreclosure	Short sale: Home sold, but sales price didn’t cover amount owed. Deed in Lieu: Home returned to lender in exchange for canceling the loan. 7 years from date sale closed and transferred to new owner or transferred back to bank for less than 10% down payment. 4 years from date sale closed and transferred to new owner or transferred back to bank with 10% down payment. 2 years from date sale closed and transferred to new owner or transferred back to bank with 20% down payment. 2 years from date sale closed and transferred to new owner or transferred back to bank possible with acceptable extenuating circumstance and 10% down payment.
Bankruptcy Chapter 7	Debts are discharged through BK, client does not pay any debts owing. 4 years from discharge date. 2 years from discharge date possible with acceptable extenuating circumstance.
Bankruptcy Chapter 13	Debts are paid back on a monthly scheduled payment plan by client 2 years from discharged date. 4 years from dismissal date
FHA (DETERMINED BY DATE OF CREDIT APPROVAL)

Foreclosure or Deed in Lieu of Foreclosure	Foreclosure: Home was given back to the bank – No owner participation. Deed in Lieu: Home returned to lender in exchange for canceling loan. 3 years from date foreclosure completed and transferred back to bank. Less than 2 years, but not less than 12 months from date foreclosure completed and transferred back to bank may be acceptable if the result of acceptable extenuating circumstances.
Short Sale	Short Sale: home sold but sales price didnt’ cover amount owed 3 years from date sale closed and transferred to new owner. No waiting period if borrower had no late payments on any mortgages and consumer debts within the 12 month period preceding the short sale AND they are not taking advantage of declining market conditions.
Bankruptcy Chapter 7	Debts are discharged through BK, client does not pay any debts owing 2 years from date of discharge with re-established credit paid as agreed or no new credit obligations incurred. Less than 2 years, but not less than 12 months from date of discharge may be acceptable if the bankruptcy was caused by acceptable extenuating circumstances and borrower has since exhibited a documented ability to manage financial affairs in a responsible manner.
Bankruptcy Chapter 13	Debts are paid back on a monthly scheduled payment plan by client 1 year payout period under bankruptcy has elapsed and the borrower’s payment performance has been satisfactory and all required payments made on time.
Examples of acceptable extenuating circumstances (circumstances must be verified and documented): Conventional: nonrecurring events that are beyond the borrower’s control that result in a sudden significant, and prolonged reduction in income or a catastrophic increase in financial obligations. FHA: Serious illness or death of a wage earner. Divorce and the inability to sell a property due to a job transfer or relocation to another area DOES NOT qualify as an acceptable extenuating circumstance.

Filed Under: Buying A Home Tagged With: Bankruptcy Chapter, Deed, discharge, foreclosure

Paid By The Seller

June 15, 2011 By Jon Griffith Leave a Comment

Yet another quick article that outlines one of the basics in buying a home.

When you buy a car, you also pay tax, license fees, document fees, and registration. These are all one-time costs. Some of them are paid up front, and some can be rolled into your loan.

The same goes for a house. When you purchase a home, the following out of pocket costs are the most common:

Downpayment – how much you can bring to the table to reduce the total loan amount.
Mortgage Insurance – a premium required when financing through an FHA loan paid up front.
Title Insurance – to insure your home has clear title when you purchase it. You don’t want some strange problem with the property down the line. Title makes sure that there are no cloudy issues to cause future problems.
Home Warranty – a policy that helps cover potential repairs on specific parts of your house.
Loan closing costs
HOA Transfer Fees
etc., etc.

The bottom line is this. When you buy property, you have to have something on hand to cover some of these costs. BUT, some of these costs can be covered by the seller.

In order to reduce the cash-out-of-pocket-burden, sometimes some of these costs can be paid for at closing out of the money that the seller is receiving. A typical transaction may include a percentage of the sales price towards closing costs. For instance, you could be purchasing an $80,000 condo with an FHA loan which requires only 3.5% down ($2,800) and you might ask for 3% of the purchase price to be paid towards closing costs by the seller.

It’s a negotiable component of the contract and it’s not always going to be acceptable by the seller, but at least it’s worth a shot. Either way, you should probably have the amount you’re asking for tucked away just in case the seller doesn’t agree.

Filed Under: Buying A Home Tagged With: FHA, home, house, property

When Can I Jump Back Into Homeownership Following a Distressed Sale?

May 24, 2011 By John Coats Leave a Comment

Have you lost your home to foreclosure or a short sale? If so, you may be wondering how long you have to wait to get back into homeownership. It all depends on a number of factors. First and foremost, it depends on how the property was lost.

If through a foreclosure, FHA and VA will provide financing once 3 years have passed provided credit has been re-established. Underwriters like to see 3 items of credit with 24 months of good payment history.

Conventional loans fall into 2 categories: Fannie Mae and Freddie Mac. Fannie Mae recently moved their waiting period following a foreclosure to 7 years! Freddie Mac’s required waiting period to finance a home following a foreclosure remains at 5 years.

If the home was sold through a short sale, the waiting period is only 2 years with Fannie Mae and Freddie Mac if there is a 20% down payment (4 years with a 10% down payment).

Now here is where it gets interesting. If there were extenuating circumstances that forced the short sale, FHA will finance directly after a short sale! If there are not extenuation circumstances, the waiting period for FHA reverts to the same 3 year waiting period as a foreclosure sale.

What is the definition of “extenuating circumstances”? The answer very subjective. The explanation must prove that there was no choice. For example, a person loses their job and they work in a specialized field. The only available job is in another city without a reasonable commute. The borrower is forced to sell while deeply underwater.

There are many cases where a borrower can qualify for a new mortgage while underwater on their existing loan. They must have a compelling reason for vacating the home. In addition, they must be able to qualify for both payments and have some cash reserves after the purchase. But it is a viable option for many.

One very important consideration: a short sale on a property in default 90 days or more is underwritten as a foreclosure!

The smart Realtor who is truly concerned for the seller takes into consideration the waiting period to finance again.

Filed Under: Buying A Home Tagged With: FHA, foreclosure, home, short sale

Guess What!? It’s a Seller’s Market…

May 9, 2011 By Jon Griffith Leave a Comment

You may have heard the terms “Seller’s Market” and “Buyers Market.” Over the past few years, we’ve heard the term “Buyer’s Market” far more than we have the other. These terms are basically how we describe who has more power to control the price of the home. It’s simple supply and demand.

When it’s a Buyer’s Market, the buyer has more control because there are more homes, or a surplus of homes on the market. It usually results in homes dropping in price to meet the buyer’s expectations.

When we’re in a Seller’s market, it means that the supply has been reduced and there are more buyers than there are homes for sale. When this happens, homes tend to sell faster, and buyers tend to find themselves competing for properties.

Absorption rate plays a huge role in the type of market we’re in. Absorption rate is calculated by dividing the number of homes sold in the past 30 days into the number of homes on the market. When the absorption rate falls between 3 and 6 months, the market is fairly balanced between buyers and sellers. If this number goes over 6, we’ll find ourselves in a buyer’s market, and when it’s below 3, a seller’s market.

Today is May 9th, 2011. In the past 30 days, 7,600 single family detached homes have been sold as evidenced by the Arizona MLS data. There are currently 20,970 on the market. So, today the absorption rate is roughly 2.75 months.

In other words, it’s a Seller’s Market.

Filed Under: Buying A Home Tagged With: absorption, buyer, buyers, market

Is That Investment Profitable?

April 29, 2011 By Jon Griffith Leave a Comment

I was poking through some of the properties in the Historic Phoenix Districts and I came across one that caught my attention, much like it would many people.

Aside from owning your primary residence free and clear and reaping the increasing valuation over time, there are two ways that I can think of off the top of my head in which you can invest in a single family home. In both instances, the purchase price of the home determines the ultimate return on your investment.

Method 1 – The Flip

The goal in the flip is fast turnaround. You need to know what to buy, where to buy it, when to buy it, for how much, and the cost of reconditioning. You also need a lot of cash on hand. It’s a venture that requires that you spend time doing your due diligence to ensure that when you sell the house, you actually make money. Don’t be too quick to purchase a $40,000 home thinking you can turn around and sell it for $140,000 (it’s happened dozens of times in the Coronado District) and walk away with $100,000 in pure profit. You’ll be spending quite a bit of money and time reconditioning, remodeling, and marketing the property. Sales commissions alone could run you nearly $10,000, and you’ll need to have a great team of contractors who do honest, quick work at a fair price.

Method 2 – The Rental

This is my preferred method. My real estate philosophy is to own as many paid-for homes as possible to generate passive income, and increased property value over time.

The rental is also a tricky beast. One might think the following:

“I’ll buy a house that needs minor repair for $50,000. I’ll put $10,000 into repairs, and then rent it for $600.00/month.”

Obviously location is going to play a part in how much you can charge for rent. Now, let’s make a mistake in calculation. Based on the above numbers, I could make the mistake of dividing my total cost ($60,000) by the monthly rent ($600.00). If I do this, logic would tell me that it will take 100 months, or 8.3 years to get my $60,000 back.

That’s nice, but not true, because we’re working with something called “Net Operating Income” which is what you’re left with after you pay your expenses, which you MUST consider before you go crazy buying that property.

So what are the operating expenses?

If you pay cash for the property, your expenses will be less, and you’ll also be able to choose your tenants wisely, because you won’t make desperate decisions under the pressure of a mortgage payment.

The First Expense will be property taxes. When you own your house free and clear, you still have to pay annual property taxes. They are never the same year after year, and as the value of the house goes up, so does the tax bill. I’ve looked up the tax bill on a property in Phoenix with an approximate value of $50,000, and the total for the year is about $1090, give or take.

The Second Expense we’ll take into account, is property insurance. We must insure the home. We don’t insure the tenant’s belongings, we only insure the home for the cost to rebuild it. In our current market, we can buy homes for less than it costs to build them, so determining this number is going to be dependent upon a long interview with your insurance company, and it will be affected by your credit profile, as insurance companies definitely take this into account. Let’s say, for gits and shiggles, that your annual insurance bill is $350.00 for $100,000 in coverage.

The Third Expense you’ll need to consider is your annual repair bill. If you think you can get away with renting your house out without expected repairs and deferred maintenance, then you’re delusional. You WILL have repairs. A roof WILL need to be replaced. A water heater WILL go out. Set aside 10% of your annual rental income to cover expenses. That’s $720.00. It may be conservative, but I feel better that way. One would rather err on the side of safe, than not. If it’s not all spent, put the difference in a reserve account and save it for larger repairs and emergencies. I don’t typically endorse a home warranty, but if you want to calculate it into your expenses, add $350 per year. That rounds out to $1070. With a warranty, the annual repair bill could be lower, as some of the repairs will be covered by the warranty.

Quick recap. We’ve racked up 3 expenses now:

Taxes – $1090 +/- per year.
Insurance – $350 +/- per year.
Repairs – let’s call it $1000.00.

On to the rest…

The Fourth Expense will be the vacancy rate and it will vary depending on the health of the rental market and the location of the property, condition of the neighborhood, etc. Vacancy must be calculated because you WILL have months in which you have no tenants. Calculate 5 to 10 percent of the annual gross rental income. In this case it will be $360 – $720 per year. This may not become a realized expense, or it may be larger one year over another. It truly depends on the performance of your rental.

The Fifth Expense will be property management. If you choose to have a property management company handle the acquisition of tenants, collection of payments, and facilitation of repairs, you can expect to pay somewhere in the area of 10% of your gross rental income. That’s another $720 per year.

So lets do the math on all of these costs:

Income – $600/month = $7200.00/year.

Expenses (annual)

Taxes – $1090
Insurance $350
Repairs – $1000
Vacancy – $720 on the high side.
Property Management – $720+

Total annual expenses: $3880.00 +/-

Are you starting to see how this works? And these are very rough estimates. So how do we calculate a) the amount of net operating income we’ll have at the end of the first year, b) the time it will take to recover our initial investment, and c) the annual return as a percentage.

The NOI (Net Operating Income)

Simply subtract from the gross rental income ($7200.00) the annual expenses ($3,880.00) and you’re left with $3,320.00.

The Time It Will Take to Recover the Initial Investment

Divide your initial investment by your NOI. $60,000 divided by $3,320 = 18 years.

The Annual Rate of Return

Divide your NOI by the total investment. $3,320 divided by $60,000 = 5.53%, not including increased property value.

As you can see, what appeared to be a really cheap way to get into the market to invest in a rental could suddenly not be worth the time and effort. You could cut corners to maximize your annual return, but that may come at a greater cost to you in other frustrating areas, like having to market the rental yourself, deal with bad tenants, evictions, etc. Blech!

The real value I hope that you take away from this article is how important it is to do your research before pulling the trigger on that real estate investment, or any other investment. It’s never a good idea to get into something until you know exactly what it is that you’re getting yourself into, and as you can see, there are many factors to consider.

I’m not discouraging you from investing in rental properties, as it is a fantastic long term solution to building long term wealth. In fact, after 18 years, you may have a house that’s worth $100,000 generating $3,320 in passive income every year, but if you really think about it, $100,000 in value returning only 3.32% annually isn’t such a great investment. You’d want to keep hunting for something better.

For instance, if the original cost of the home was only $30,000 (and they exist), you recoup your cash in 9 years and your rate of return is now 11%. Much better. Or if your $60,000 home had a rental rate of $900.00/month, then your NOI would increase from $3,320 to $7,420 yielding an 8 year return at 12.3%.

Over all, the original scenario isn’t that great. You’d probably be better of putting $60,000 in a growth stock mutual fund for 18 years at an average of 8-10% per year. At the end of 18 years of compounding growth you’d have about $650,000 – $1,200,000 socked away. There aren’t many, if any $600.00 rentals that will appreciate from $60,000 to $650,000 in 18 years.

Filed Under: Buying A Home, Real Estate Finances Tagged With: house, investment, property, rental