NAR Donates Half-Million to California Fire Relief; Invites Contributions

October 30th, 2007

The NATIONAL ASSOCIATION OF REALTORS® is donating a half-million dollars to aid the victims of the disastrous fires that have swept California and left hundreds of thousands of people homeless. REALTORS® have been early to respond to help victims of similar emergencies in the past, such as Hurricanes Katrina and Rita in 2005 and victims of the South Asian tsunami in 2004.

NAR is also calling on its 1.3 million REALTOR® members to contribute to the REALTORS® Relief Foundation, which distributes donations to these and other victims of natural disasters. The call was made today by NAR President Pat V. Combs of Grand Rapids, Mich., and by Martin Edwards, president of the REALTORS® Relief Foundation.

“Helping people experience the American Dream of homeownership and building our communities are what REALTORS® are all about,” said Combs. “We understand as REALTORS® how rewarding it is to own your own home, and we can sympathize how devastating it must be to see that home go up in flames. For so many people to lose their homes in Southern California is heartbreaking.”

Edwards, of Memphis, Tenn., and former NAR president, is encouraging REALTORS® across America to open their hearts and their pocketbooks to assist those who have lost their homes in California.

To mail a contribution, make the check payable to the REALTORS® Relief Foundation and mail it to: REALTORS® Relief Foundation, Attn: NAR Finance Division, 430 N. Michigan Ave., Chicago, IL 60611. Contributions are tax deductible.

The REALTORS® Relief Foundation was established to provide housing-related assistance to needy victims of disasters (including, but not limited to affected relief and rescue workers), and their families, and for other charitable purposes permitted under Section 501(c)(3) of the Internal Revenue Code. The Foundation may elect to provide assistance primarily or solely to victims who are members of the NATIONAL ASSOCIATION OF REALTORS®.

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The Real State of Real Estate

September 19th, 2007

The Real State of Real Estate

Presented by:

Gary Watts – Real Estate Economist, California Previews Retreat, Monterey, August 2007

Brief History of Real Estate

Historically, housing downturns average 27 months. We are in the 23rd month of the current downturn, so once we are past this financial over-reaction, things should improve.  The national median price of a resale home is 3.4% higher than a year ago and the pending sales index is moving back up. There may just be some light beginning to shine at the end of this tunnel!

1970 to 1980

Prior to my entering real estate in 1971, a quote appeared in Business Week (late 1969) due to an increase in housing prices:  “The goal of owning a home seems to be getting beyond the reach of more and more Americans.  The typical new house today costs about $28,000.  “In 1972, interest rates were 7% and it would take over 24 years before a home buyer could be able to obtain those low rates once again - today, we are in the low 6’s. In 1973, banks had a run on deposits and for a period of approximately 8 months there were no lenders who were in a position to make loans to home buyers.  This should have caused a collapse in the real estate market, but home prices continued to rise. In 1977, the National Business magazine stated:  “The median price of a home today is approaching $50,000.  Housing experts predict price rises in the future won’t be that great.”

1980 to 1990

At the end of the 70’s and into the 80’s, inflation hit 21.5% and home loans were reaching 18%! This was followed by a crash (and later bail out) of the savings & loans industry in America. Although large job losses were creating foreclosures, home prices continued to rise.  By 1985, Money Magazine made this prediction about home prices:  “The golden-age of risk free run-ups in home prices is gone.”With a build-up in defense spending and huge growth in manufacturing sector in the late 1980’s, increased job creation led to a boom in home construction and home prices continued to rise.  Then on November 11, 1989, a dramatic event took place:  the Berlin Wall came down!  With the Evil Empire (the Soviet Union) breaking up, things were going to change around the world and change quickly!

1990 to 2000

In early 1990, Congress began slashing funds for defense spending.  Within a very short period of time, a lot of highly paid workers in both defense and manufacturing had lost their jobs.  California home prices declined about 12% by 1996 when the San Francisco Examiner said: “A home is where the bad investment is.  “In the following 3 years, California home prices rose 19.7% wiping out all the losses of the early ’90’s and ended the decade with a net gain of 9.35%.  The median price in California has not declined since 1996.

The Media

Today’s media plays up bad economic news now more than ever, which leads to misconceptions about economic realty.  Our economy is extremely strong, profits are superb and the world economy is exploding.  All you read and hear is that real estate is going down, yet last month, prices in the U.S. rose 3.4% from a year ago and California is up almost 1%. The Bay Area prices have gained 4.1% over the last year and southern California median price is up 3.7%.  Foreclosures are supposed to be at a record high - but last year 98.83% or mortgages did not go to foreclosure.  Today, the Bay Area’s foreclosure rate is up only 1.5% over last year while southern California’s foreclosure rate is up 2%.  The media reported 53,942 notices of default for the 2nd Quarter - a near record high.  They are comparing it to the 1st Q. of ‘96 when 61,541 notices were filed but fail to mention that 2 million more home have been built in California since then!  What if the media’s headlines read:  99.2% of Mortgages are Not in Foreclosure?  The media and the financial markets have greatly over-reacted, to the real problems that have been revealed in the lending marketplace, which is typical.

The Sub-Prime Market

It may surprise you to know that sub-prime loans make-up only 5% of the U.S. total loan market and Alt - A loans (those with credit better than sub-prime but less than prime) total only 8% of all loans in the U.S.!

1. These exotic loans became a major influence in the early 2000’s, but anyone obtaining them up through 2004 had very few problems due to rapid equity growth.  Many with no-money-down purchases soon found they had 20% (+) equity within a year or two!

2. Most of the problems with sub-prime loans originated in the summer of2005 through 2006.  In California, 43% of all loans funded during that time were sub-prime loans.

3. Sub-prime loan investors that needed to sell their loans were liquidating their paper for $.96 on the dollar.  There has been no current data on sales since August 5th, but with the current turmoil in the financial markets, I am sure they are being “dumped” for less.

4. Here is a financial report on some of the banks that provided the sub-prime money:   Bear Stearns 2nd quarter revenue was $2.512 billion - a new record!  Merrill Lynch saw 2nd quarter profits rise 30.2% Morgan Stanley (holding $5.2 billion in sub-prime loans) had a 60% jump in earnings.   Goldman Saks earned $2.33 billion in the past year.  Bank of America (#2 U.S. bank), after putting aside $1.81 billion for potential credit losses, saw net income rise to $5.76 billion - up from $5.48 billion last year.

The media will still report about massive delinquencies and huge foreclosures in the sub-prime market, but those reports will not be accurate because they don’t explain the difference between a delinquent payment, a notice of default or a foreclosure. They tell us “Foreclosures at Record High!” but that is not accurate.

Source: Mortgage Bankers Association, National Homebuilders Association, Inside Mortgage Finance

Delinquencies vs. Notices of Default vs. Foreclosures

Delinquencies

Delinquencies cover any missed payment - even if it is just for one month, it is reported as a delinquency.

1. The delinquency rate on sub-prime loans was running at 13.77%, which is up 13.44% from the previous year. In the last quarter, the delinquency rate dropped to 12.4%!

2. The delinquency rate on Alt-A loans is only 2.69%, while prime loans are at 2.57%.

3. Combining the three rates with the loan volume gives you a delinquency rate for all loans in the U.S. of only 4.84%. The record low is 4.0%.

4. On jumbo mortgages (anything larger than $417,000) the delinquency rate is 0.37% 5. California’s delinquency rate is only 3.25%.

Notices of Default

Notices of Default are filed when lenders’ loans have been delinquent for a specific period of time.  These loans begin the foreclosure process.  The four states of California, Florida, Nevada and Arizona currently have the largest amount of loans in the foreclosure process.  Yet, in the 1st Quarter, 24 states saw a decline in foreclosure starts and 36 states saw a decline in the 2nd quarter!

1. Only 3.23% of all sub-prime loans have entered the foreclosure process, with most of the defaults occurring on loans from Jan. 2005 to June 2006.

2. Only 1.28% of all prime loans have entered the foreclosure process.

3. In California, the last quarter saw 53,943 notices filed, with most filings being on loans from the summer of 2005 to the summer of 2006.

4. The lowest number was 12,417 in the 3rd Quarter of 2004.

Foreclosures

Foreclosures occur when the buyer has been unsuccessful in curing the debt, and either a lender or an investor has acquired the property.  As of last month, there was 1 foreclosure filing for every 693 homes in America.

1. For sub-prime loans, 68% of the buyers are able to prevent the foreclosure by either refinancing the property or successfully selling their home.

2. For prime loans, the foreclosure rate is 0.86%.  Last year, the U.S. saw a combined foreclosure rate of only 1.09% while California’s rate was 1.17%!

3. California now ranks #4 in the nation in foreclosures - down from #1!

The media will try to scare you with numbers like $1 trillion in loans needs to be recast this year and that foreclosures could cost lenders as much as $2.3 billion dollars!  They never mention that there is $10.4 trillion of mortgages with $56 trillion dollars of equity in American households.  Add to that the wealth of the U.S. at $70 trillion, with the value of stocks between $15 and $20 trillion, while the bond market is even larger.  So these loses (should they occur) should not have any great effect on home prices.

A final note about foreclosures:  The #1 reason they occurred was due to fraud.  The #2 reason was unethical lending, followed by #3 - loss of job, and finally #4 was medical reasons.  By the way, mortgage insurers are in a good position to cover losses at these (high) levels.

Source:  Mortgage Bankers Association, Federal Reserve, Federal Bureau of Investigation

Why the World Changed in 1979 Baby Boomers’ Impact

Never before in the history of the world has a generation accumulated so much wealth as the baby boomers.  The Internal Revenue Service will tell you that from 1945 to 1979, incomes increased at the same rate for all tax brackets.  By 1979, the early baby boomers had been in the workplace for over 10 years.  They were the most educated generation to enter the work force, and they had the skills for our changing world.  Today, the IRS tells us that, from 1979 to 2004, the median income in the U.S. rose 18%.  From 2004 to 2005, incomes grew 5.8%.

The number of taxpayers making more than $100,000 grew by 3.4 million and accounted for more than two-thirds of the growth vs. 2000!  Half of Americans make less than $30,000 and two-thirds make less than $50,000.

Those making more than $1 million grew by 26% and numbered 303,817 in 2005!  These individuals, who constitute less than a quarter of 1 percent of all taxpayers, reaped almost 47 percent of the total income gains in 2005.

The top 85% of the nation’s wealth resides with the richest 15% of Americans; the bottom 50% of Americans holds only 2.5% of the nation’s wealth.

Over the next decade, there will be a 25% increase in the population over 50 years of age. They have more money than any preceding generation, due to having dual incomes, equity growth, and record inheritances (60% goes to the top 40%)!  This age group is spending $2 trillion dollars annually!  Last year, 2.1 million boomers turned 60, with 25% planning on not retiring.

They found a way to mix leisure with work and are not ready to fully retire - they have money and income and they are still investing in real estate.

Article courtesy of: 

Karin Hamm

Loan Consultant

805-686-2321  Office

805-698-3289   Mobile

HYPERLINK “http://www.reloans.com/“www.RELoans.com

2445 Alamo Pintado Ave, Suite 203

PO Box 847, Los Olivos ,CA 93441-0847

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Mortgage Changes from Out of Left Field!

August 28th, 2007

Mortgage Changes from Out of Left Field!

by

David Brown and Don McMahon

In baseball you never know the outcome until the final out.  Today’s mortgage industry with its turmoil may be the same.  Some of the games details include the pre-game show, ejected players, a squeeze play, relief pitchers and extra innings.  Whether you’re a player or spectator in the game, see who wins and how to manage the mortgage team.

Pre-game warm up

Rewind to the refinance boom that ended in 2004, the Fed Funds rate was 1.0% and the appreciation rate of local real estate was over 15% annually.  At that time if you had financed a property that went up in value say $24,000 for the year and a loan balance that grew say $12,000 over the same period because of a negative amortizing loan, you still made money and had a viable exit plan of refinance or sale at the appreciated value. 

Squeeze Play

Since June of 2004 the Fed raised its Fed Funds Rate 17 times in as many meetings to the current 5.25% level where it has remained for the last 9 FOMC meetings and real estate has declined in value by nearly 10%.   Borrowers mortgage loans are adjusting to current rates influenced by the Fed Funds Rate which is up over 4% from when the mortgages were originated.  Further those loans are being recast to the current balance which is probably higher, and re-amortized for the balance of the loan term.  In many situations borrowers may see their minimum payment go up over 200%.  So why not refinance to a lower payment? The borrower may be blocked from this option.  As the balance of the debt grows and the value of the home declines the borrower is being squeezed as their equity is less than when they purchased or refinanced last and the loan to value is now outside of lender guidelines.  To refinance the borrower must come in with more cash/equity that they do not have.  They are now forced to either make the new payments or sell if alternative financing is unavailable.

Ejected Players

Only last week American Home Mortgage and its wholesale counterpart, American Brokers Conduit, became the latest casualty of the credit crisis.  Last year, this company closed over $58 billion in home loans and was ranked 10th largest US mortgage lender.  There was no management or corporate malfeasance, no cooked books and no signs of trouble.  However, market conditions forced them to file for bankruptcy, leaving a billion dollar pipeline unable to close.  Thousands of borrowers have now been left without financing as a result of companies like this going under.  In the last eight months over 100 national lenders have closed their doors either voluntarily or by creditors.  The issue is no longer limited to sub-prime or Alt-A lending.

How does this happen to good companies and how deep is the problem?  Just like crime or politics, follow the money!  When your mortgage is funded at escrow the cash comes from the bank as a line of credit (warehouse line) issued to the mortgage company.  The mortgage company then packages your mortgage with hundreds of other mortgages into a pool and sells that pool to investors such as pension funds or hedge funds in the secondary market.  This allows the mortgage company to pay down their warehouse line and start over funding new mortgages.  Before we go too far I need to also tell you the difference between conforming and jumbo mortgages.  Most all conforming mortgages are purchased on the secondary market by Fannie Mae or Freddie Mac which are quasi governmental enterprises and the risk grade is well known.  Jumbo mortgage pools sold on the secondary market are not as homogeneous as to the risk and property type and each investor will underwrite the pool based upon their perceived risk.  What happened to American Home Mortgage was the pools they went to sell were discounted by the investors in the secondary market creating a loss to American Home Mortgage.  With the change in the value of the mortgage pools the banks served American Home Mortgage with margin calls on their warehouse lines of credit.  This created a liquidity noose that choked the American Home Mortgage into its current position, Chapter 11 Bankruptcy.  While conforming loans have enjoyed a modest decline in rates, jumbo mortgages have spiked up over 1/2% just on the news of American Home Mortgage.  The difference between conforming rates and jumbo rates are near an all time high with almost 1% spread.

Spit Ball

The media and politicians want you to blame mortgage brokers as the catalyst and scapegoat for the credit debacle.  We saw stockbrokers take their lumps as the scapegoat after the stock market correction in 2000 if they advised any client to purchase a dot com stock.  While every industry has a bad apple or two, you should not stereotype the whole barrel.  Previously I have illustrated that market forces and economics are the reasons for the present mortgage turmoil not misrepresentation by a whole industry.  To place the blame on mortgage planners and brokers of integrity and professional standards is just misplaced anger.  As a sidebar, had there been a continued appreciation of real estate nationwide of only 4% over the past 3 years we would not have any of these credit issues. 

Relief Pitcher

Lenders are modifying their guidelines even as you read this.  They are shoring up their products and underwriting to enhance the appetite of the secondary market for their loans.  Most will adjust their product by modifying the loan to value, credit score and of course price.  Stated income programs, if still available will become much more difficult to come by particularly if you are salaried.  Credit scores across the board will have a higher threshold.  As a borrower you will be providing much more documentation of assets, income, and job history to make the lenders file bullet proof if ever there is a future default.  Appraisals will require more comparables and analysis of sales versus listed property.  Marketing time for homes will also become a focal point that in the past was glanced over.  While exotic loans as they were called will still be available, they will be much more expensive and difficult to come by. 

Extra Innings

How can borrowers now position themselves to win when they are behind with few outs left? 

Don’t hesitate!  Like a batter’s 3 and 1 count, if you see a good pitch, knock it out of the park.  Likewise waiting in this market is foolish.  With decreases in home values and fewer available mortgage options, delaying longer could get significantly more expensive.

If you’re presently in the loan process, get all your data in now.  Minor delays can result in loan commitments and funds being yanked at the last minute.

Home sellers don’t hold out for the record price.  Pre-approved buyers may lose that status as lenders tighten parameters reducing the pool of available buyers.  Combine this with increase in housing inventory means holding out is not the best strategy.

Borrowers who have an adjustment or recast scheduled within the next 12 months should act now even if there is a pre-payment penalty.   There may not be a loan substitute program 4 months from now that is any better economically.

Make sure your credit is as good as it gets.  Fix anything that can reduce your score such as allocation of debt across your credit cards, and inaccurate data or small collections.

Seek out a professional mortgage coach.  As the industry contracts it is possible the lender you once used is no longer in the business.  Look for a mortgage planner to assist in providing a strategic plan that connects the dots with your other financial goals.   National Association of Mortgage Brokers is a professional trade group whose members adhere to professional code of ethics and standards that sets the bar for the industry.  You can search for a professional near you from their web site www.NAMB.org

Have your mortgage planner provide an annual review of your mortgage.  Keep up to date with trends, rates and personal goals for financial independence by active equity management.  Know your batting average.

Steal a base or two.  Foreclosures are up and values are attractive compared to two years ago.  You may wish to leverage up or cash out some equity and purchase more real estate.  The mortgage meltdown is only prevalent in the residential sector.  Commercial lenders for income properties are not experiencing the same volatility.  Turn the crisis into opportunity.

Final Score

Play to win.  The turmoil is that lenders are changing the rules while the game is being played.  They have no choice as investors in the secondary market modify their criteria for risk management and return on investment.  Over the play period you may no longer be eligible as guidelines change.  Accordingly, take advantage of the current market and rules as the next game may be called for bad weather.  Accept free agency with your new coach and team.  Work with a professional mortgage planner and be both willing and receptive of new concepts and ideas that integrate your mortgage with other wealth building concepts.  Finally, see the signals.  If you get the “bunt” sign or “hit and run”, do it.  The window of opportunity is closing fast.  If nothing else arrest the fall or potential deterioration by analyzing your present situation with today’s mortgage options.  Like a batting slump, this too is a cycle that will change over time.  The key is to secure a position that you know will get you through the end of the game and into the next.  “If you don’t know where you are going, you might wind up someplace else.”  Yogi Berra

About the co-authors:

David Brown is a Team Member and Broker of Residential Mortgage Corporation in Los Olivos, CA.  David is President of North Central Coast Chapter of CAMB.  With over two decades of real estate advisory and lending expertise David also has an MBA from Pepperdine University.  Mr. Brown volunteers as a certified umpire for the local Pony League and High School baseball.

Don McMahon is a Team Member of Residential Mortgage Corporation in their Santa Barbara, CA office.  Don has over 20 years of institutional banking and lending experience.  Don is active in many civic and non-profit organizations helping with their fundraising.  Don is also the creator of HRFS (Human Resources Financial Solutions).

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RISK MANAGEMENT = A THOROUGH HOME INSPECTION

August 17th, 2007

A thorough home inspection is good for everyone.  When we perform our due diligence to discover all that we can about the property being sold, there is far less chance of an unpleasant surprise in the future.  Repairs done in a timely manner can avoid more costly problems in the future. Buildings degrade with age and use.  Sometimes the process is so slow that the occupants hardly notice.  Although the inspection is not a substitute for disclosure, it can serve to remind the seller of forgotten or ignored conditions.  With few exceptions, every inspection reveals things that are a surprise to the seller.  
  By encouraging clients to find the most qualified and thorough inspector, real estate agents are protecting the clients, themselves and the transaction.  Risk management is most effective when performed early in the process.  The sooner a defect can be revealed, the sooner it can be dealt with or simply noted.  We all have learned from the political arena that the appearance of a cover-up can be more devastating than the actual condition.  An unbiased home inspection can help to uncover the true condition of the home.  With more knowledge, differences can more effectively be negotiated.  In the end we accomplish peace of mind knowing that the transaction was fair and just.
 

What does it mean to be certified?  Home inspectors are not licensed in California.  Some “certifications” are bogus.  With a few hundred dollars and someone to take the online test, anyone could be a “certified home inspector” tomorrow!  Obviously, only a certification from a reputable source such as ICC or CREIA is significant.
 

The International Code Council (www.iccsafe.org) is the organization that writes the building codes.  They offer proctored certification exams to verify knowledge of the codes and how buildings are built.  Residential construction is covered by building, mechanical, electrical and plumbing exams.  Successful completion of all of these exams earns the inspector the Residential Combination certification.
 

The California Real Estate Inspection Association (www.creia.org) is a non profit corporation, founded in 1976, to provide education, training and support services to the real estate inspection profession and to the public. The CREIA Standards of Practice are considered by the legal community to be the standard of care in California and help protect consumers from erroneous or misleading inspection reports.  A Certified CREIA Inspector (CCI) has passed a comprehensive exam and completes at least 30 continuing education credits each year.
 

Is it built to code? A home inspection is not a “code compliance” inspection.  The codes are subject to the interpretation of the authority having jurisdiction (city or county building department).  Only they can determine “code compliance”.  However, it is a combination of knowledge of the codes and construction experience that the home inspector relies on when inspecting the residence.
 

How long does a thorough home inspection take?  The old adage in the industry is “the more you know, the longer it takes”.  An average home can take several hours to inspect.  Newer homes don’t usually take as long but require greater vigilance because a construction defect may not have exhibited telltale signs like moisture stains or cracking.  Add some time if there has been some remodeling or if it’s an older home.


 Courtesy of:
 John McGibbon
 John McGibbon Real Estate Inspections (805) 685-2425
 www.JMinspections.com
  

 

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Title Insurance Can Be Tricky

August 10th, 2007

Title Insurance can be tricky at times.  Even Title Officers with many years experience are sometimes stumped and scrambling to find the answers.  Below, please find samples of actual situations that have presented themselves through our offices.

TOP TEN TALES

Future Forgeries
Criminal forgery ring finds property that has a lot of equity in it.  They forge a deed from the real homeowner to one of the forgers.  They then go to a lender to get a home equity loan for $300,000.  Forgers close home equity loan and take off for parts unknown with proceeds.  Homeowner notices posting on his property for the foreclosure of loan he knows nothing about.

Forced Removal of Structure with No Building Permit*
Prior owner built garage without permits.  This was not disclosed to Buyer and escrow closes.  Buyer goes to city to get approval for new bathroom addition plans.  City Inspector red-tags garage and orders it removed.

Future Encroachments
Years after close, Neighbor attempts to build a garage on land Homeowner knows extends onto her own property.  Neighbor disputes that Homeowner owns that land and proceeds with building.


Reversion Coverage
When Homeowner purchased property, the title policy reflected a restriction in a deed from 1926 stating that the property must be used for religious purposes or title would revert to the original Grantor.  Sometime after that the property was converted to residential use.   Homeowner gets into an unrelated dispute with Neighbor who does a little property research and finds the restriction.  Neighbor tracks down the descendant of the original grantor and sues Homeowner for violation of the restrictions. Subdivision Law Violation Coverage*
Homeowner purchases house anticipating adding a living room.  When she approaches the city for the addition permits, it is discovered that their lot is the result of an illegal lot split some time back.  For this reason the City denies issuing a building permit.

Broader CCR Enforcement Coverage*
Previous owner landscaped the property in violation of the CC&R’s.  Homeowner gets a notice from the association to scrape and re-landscape to comply.  Total Bill:  $20,000.

Broader CC&R Violation Coverage
Previous owner built a deck that violates CC&R’s.  In the course of reselling the home,  Homeowner finds out about the violation and dutifully discloses it to New Buyer.  New buyer refuses to purchase because of the violation.

Map Coverage
When Homeowner purchases property, Title Company attached a parcel map showing lot dimensions that Homeowner relied on.  When Homeowner goes to get permit for addition plans, he finds out there was a subsequent map correcting a clerical error on the first map.  As a result the legal description is the same but the lot is smaller than thought.  The permit is denied because the lot is not large enough for the addition.


Graduated Liability Coverage
Homeowner purchased property 6 years ago for $300,000.  Is currently in contract to sell property for $450,000.  In the course of the sale Homeowner finds out this his title was based on a forged deed and therefore does not belong to him.  He recovers $450,000 from Title Company.
Transfer into Trust
Homeowner purchases property then transfers into her family trust without obtaining new title insurance.  After this a title claim arises.  She is covered.
 

*Subject to a deductible and maximum liability amount.
 

FIRST AMERICAN TITLE COMPANY

Linda Ruegsegger, Certified Senior Escrow Officer, Assistant Vice President

Bridget Foss, Certified Escrow Officer

Tessi Martinez, Business Development

 

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The Power of Leverage

July 24th, 2007

The Power of Leverage
Buying a home can be a great investment. However, the wealthy buy homes with as little of their own money as possible, leaving the majority of their cash in other investments where it’s liquid, safe and earning a rate of return.
One of the biggest misconceptions homeowners have is that their home is the best investment they ever made. The reality is that financing your home was the best investment decision you ever made. If you purchased a home in 1990 for $250,000 and sold it in June of 2003 for $600,000, that represents a gain of 140%. During the same period, the Dow Jones grew from 2590 to 9188, a gain of 255%. When you purchased the home, you only put $50,000 down, which produced a profit of $350,000. That is a total return of 600%, far outpacing the measly 255% earned by the stock market.
The Cost of Not Borrowing (Employment Cost vs. Opportunity Cost)
When homeowners separate equity to reposition it in a liquid, safe side account, a mortgage payment is created. The mortgage payment is considered the “employment cost.” What many people don’t understand is when we leave equity trapped in our home we incur the same cost, but we call it a lost “opportunity cost.” The money that’s parked in your home doing nothing could be put to work earning you something. Let’s say you had $100,000 of equity in your home that could be separated. Current mortgage interest is 6.25%, so the cost of that money would be $6,250 per year (100% tax-deductible). Rather than bury the $100,000 in the backyard and give up the “opportunity” to earn a rate of return on our money, we are going to put it to work, or “employ” it. By separating the equity, we give it new life. Assuming a 28% tax bracket, the net employment cost is not 6.25% but only 4.5%, or $4,500 per year after taxes. It’s not too difficult to find tax-free or tax-deferred investments earning more than 4.5%. Using the tax benefits of a mortgage, you can borrow at one rate and earn investment returns at a slightly higher rate, just like banks and credit unions borrow our money at 2-3% and then loan it back to us at 6- 8%. It’s what makes millionaires, millionaires! By using these principles, you can amass a substantial nest egg.
How to Create an Extra Million Dollars for Retirement
By repositioning $200,000 into an equity  management account, you can achieve a net gain of $1 million over 30 years. Assume you separate $200,000 of home equity using a mortgage with a 6% interest rate. If the $200,000 grows at a conservative rate of 6.75% per year, it will be worth $1,506,649 in 30 years. After deducting the $232,000 in interest payments and the $200,000 mortgage, you still have $1,074,649 left in your account—a net gain of over $1 million! Imagine how the numbers grow for individuals who reposition their home equity every 5 years as their home continues to appreciate. This is how the wealthy continually increase their net worth. Conversely, if the same $200,000 were left to sit idle in the home for 30 years, it would not have earned a dime! The home appreciates based on market conditions, regardless of the amount of equity in the home. Whether that $200,000 is sitting idle in the home, or whether it’s conservatively invested outside the home will have no effect on the appreciation rate of the home. Home equity is the equivalent of stashing money under your mattress or buried in a tin can in your backyard. It’s clear to us neither of these are efficient uses of money, as they are not earning anything but more likely actually losing value due to inflation. However, if you would not stash $10,000 under your mattress, why would you want to keep $200,000 sitting idle and dormant in the form of home equity?!?
Consult a Professional Mortgage Planner
Utilizing interest only and deferred interest mortgages can be powerful tools to create wealth when used correctly. However, often times homeowners use these loans incorrectly and for the wrong reasons. Consult a mortgage planner to find out what type of financing is right for you.
Courtesy of:
Karin Hamm
Certified Mortgage Planner
Residential Mortgage Corporation
805-686-2321

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Which Refinancing Option Is Best For You?

July 10th, 2007

Which Refinancing Option Is Best For You?

By Eric Christianson, Owner, Christianson Financial Services, In. 

There aren’t quite as many loan programs as there are borrowers, but it seems like it sometimes! We’ll work with you to qualify you for the best loan program to fit your needs. But there are some general considerations you can have in mind in advance. Are you refinancing primarily to lower your rate and monthly payments? Then your best option might be a low fixed-rate loan. Maybe you have a fixed-rate mortgage now with a higher rate, or maybe you have an ARM — adjustable rate mortgage — where the interest rate varies. Even if it’s low now, unlike your ARM, when you qualify for a fixed-rate mortgage you lock that low rate in for the life of your loan. This is especially a good idea if you don’t think you’ll be moving within the next five years or so. On the other hand, if you do see yourself moving within the next few years, an ARM with a low initial rate might be the best way to lower your monthly payment. Are you refinancing primarily to cash out some home equity? Maybe you want to pay for home improvements, pay your child’s college tuition bill, or take your dream vacation. Then you’ll want to qualify for a loan for more than the balance remaining on your current mortgage. If you’ve had your current mortgage for a number of years and/or have a mortgage whose interest rate is higher, you may be able to do this without increasing your monthly payment. You want to cash out some equity to consolidate other debt? Good idea! If you have the equity in your home to make it work, paying off other debt with higher interest rates than the interest rate on your mortgage — for example, credit cards, home equity loans, car loans, some student loans — means you can save possibly hundreds of dollars a month. Do you want to build up home equity more quickly, and pay off your mortgage sooner? Consider refinancing with a shorter-term loan, such as a 15-year mortgage. Your payments will be higher than with a longer-term loan, but in exchange, you will pay substantially less interest and will build up equity more quickly. If you have had your current 30-year mortgage for a number of years and the loan balance is relatively low, you may be able to do this without increasing your monthly payment — you may even be able to save! For example, let’s say years ago you took out a $150,000 30-year mortgage at eight percent. Your payment is about $1,100, exclusive of taxes, insurance and so on. If your balance today is down to $130,000, you might take out a 15-year mortgage at six percent and have an almost identical monthly payment. This is a great option for people whose main goal is not to save money on their monthly payment but rather want to build up equity and pay off their home more quickly. 

We are here to listen to yours and your client’s needs and as we said up front, we’ll work with you to qualify you for the best loan program to fit your needs. 

Please feel free to blog me with your scenarios and I’ll respond, but understand, much like you we are not attorneys or CPA’s.       

   

 

 

 

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PRE-LISTING OR PRE-SALE HOME INSPECTIONS

June 26th, 2007

PRE-LISTING OR PRE-SALE HOME INSPECTIONS

In part as seen in USA TODAY 02/02/06

Routinely, we are finding agents are wasting a lot of time and money trying to sell a home that are in need of many repairs some major some minor. After spending months marketing a home, endless hours and money spent on marketing materials and ads, a buyer makes an offer, brings in their home inspector and the siding is shot and needs replacement.   Has this happened to you? Quite often home owners are under the impression that their home is in “perfect” condition and want you, the Realtor, to get top dollar for their home.

It is for this reason; we recommend that you have a full home inspection prior to getting into contract with a buyer.  This will allow you as the listing agent and or seller to set the price accordingly or better yet have the seller repair items of concern.

A prelisting inspection is a great selling tool for Realtors and sellers alike.  Imagine the drama of the “deal killer” gone.  Listing agents and sellers can keep the negotiating “ball” in your court.   No surprises and no last minute deals falling through because of an “unknown” issue with the home.

Eventually, your buyers are going to conduct an inspection. You may as well know what they are going to find by getting there first. A prelisting inspection allows the seller to see the home through the eyes of a third-party and it helps you and your client set the price of the home more realistically. Most importantly, it permits the seller to make repairs ahead of time so that defects won’t become a negotiating stumbling block. This process can actually save the seller money by allowing them to seek out reasonably priced contractors to do the work or perform the work themselves,(if qualified). Overall the prelisting inspection has proven to relieve the prospect’s concerns and suspicions about the home they are considering to purchase and homes that have been pre-inspected have tend to sell for thousands more and even up to 30% faster than there comps

In this market climate, Realtors across the country are trying innovative ways of promoting and moving their listings.  We encourage you to consider adding the prelisting inspection process into your listing marketing plan.

Courtesy of:

Bill & Lillie Shelly

The BrickKicker Home Inspection

(805) 686-0703

www.brickkicker.com/santabarbara

Disclaimer: The information above has not been verified by the Santa Ynez Valley Association of REALTORS and should not be relied upon without further investigation

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Do Mortgage Buy-Downs make sense?

June 19th, 2007

Do Mortgage Buy-Downs make sense?

The answer is a qualified yes. Buying down a mortgage can be a benefit in a few ways.
 

The obvious one is to lower your monthly mortgage payment. The important thing to ask is how long will you keep the mortgage, not how long you plan on being in the home.
 

An example (based on today’s rates – 6/14/07):
Purchase Price                         $900,000
Loan Amount (80%)                $720,000
10 Year ARM Interest Only, fixed for 10 years
 

0 points             rate is 6.625%                          monthly payment is $3,975
 

The same purchase and loan with a 3-point buy down, at a cost of $24,000
 

            3 points             rate is 5.625%             monthly payment is $3,375
 

Here’s what the savings would be for:
 

1 month = $600       1 year = $7,200    3 years = $21,600        5 years = $36,000        10 years = $72,000
 

The time it takes to recover the buy down in this scenario is 40 months. If you keep the mortgage for longer than 40 months you will recover the cost of the buy down and you will be ahead. As you can see, the longer you keep the loan the more you will save. If however you will need to refinance or sell the property in less then 40 months a buy-down would not be a wise move. A mortgage should be treated as any other investment, analyzing the costs and benefits. Before making a final decision you should consult your accountant.
 

Another way to use a buy down is to qualify for a more expensive home. Using the example above, if the mortgage payment is $3,375 on a loan with 0 points, the loan amount would only be $620,000. At 80% that’s a purchase price of $775,000. With a buy down of 3 points, $24,000, the buyer can purchase a home for $900,000. For the same monthly payment of $3,375 a buyer can go from a purchase price of $775,000 to $900,000. Either the buyer or the seller can pay these points. A buyer can make an offer asking the seller to pay the points so they can qualify for the more expensive home. Or a seller can counter a buyer’s low offer by offering to pay the points thereby lowering the buyer monthly payments instead of accepting the lower price. A win-win for buyer and seller.
 

If you have any questions, please call Marty Greenman at 693-1401.

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Making The Most of Your Internet Advertising

June 12th, 2007

Making The Most of Your Internet Advertising

As a Real Estate Photographer, I see the exceptional efforts made by Real Estate Professionals to ensure their clients are well represented. They work hard to build trust and meet each clients’ needs. These efforts lay the foundation for a successful transaction. A Virtual Tour that incorporates high quality images is a powerful marketing tool. Real Estate Agents can increase traffic to their listings by linking a Virtual Tour to their own Website as well as numerous commercial sites designed for Real Estate Listings promotion. Virtual Tours are at work 24 hours a day helping Agents get the most from their advertising campaigns. Use of these simple tips can help Agents and their clients prepare a property for a successful Virtual Tour Photo Shoot.

Use of these simple tips can help Agents and their clients prepare a property for a successful Virtual Tour Photo Shoot.Liz McDermott
At First Glance Virtual Tours
(805) 451-8774
liz@firstglancetours.com
www.atfirstglancetours.com

Tips for your virtual tour shoot:
1. Remove the clutter
          Remove all papers and clutter from all surfaces, the refrigerator,
          counters, desk, tables, bathrooms, and other rooms. Get rid of or hide
          those magazines and mail lying around.

          Remove as much as you can from your kitchen and bathroom
          counters. Hide those lotions, tooth brushes, sponges, and dishes.
          Clutter in a small room can make it look even smaller. Clearing the
          counters will give the room more space.

2. Simplify
          Sometimes moving a few small pieces of furniture out of the room can
          make the room feel larger. When you simplify a room it gives your
          visitors a chance to imagine their things in that space.

          Make sure your yard is in order. Arrange your patio furniture and
          plants. Hide your garbage cans and tools.

          Don’t be afraid to stage. Put some flowers in a vase, set the table, a
          candle here or there. These are nice details as long as they are kept simple.

 3. Forgive the photographer
          When we enter your home it is the first time we’ve been there and our
          eye may see nice features you have become accustomed to. We may
          want to rearrange a small thing or two so we can bring attention to
          these details. This allows us to be sure your home is represented in its
          finest form.

          Keep in mind that simplifying and removing clutter are the most
          important steps in getting ready for a photo shoot. This can really make                     the most difference in a photograph!

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