Second Wave of Option ARM's About to Hit

Option ARMs Put Recovery at Risk


Option ARMs, which accounted for $750 billion in mortgages issued between 2004 and 2007, according to Inside Mortgage Finance, are at serious risk with at least 50 percent already in default.
Resets on option ARMS have doubled the payments for many holders.

“Everyone’s been focused on subprime, but we’re more concerned about this,” says Todd Jadlos, managing director of LPS Applied Analytics, which analyzes data for the financial industry. “By the time subprime defaults had increased 200 percent, in June and July of 2007, option ARMs had gone up 400 percent. People just didn’t notice because the overall numbers weren’t as high.”

Lenders have stopped offering option ARMS, but there are about 600,000 held by borrowers, three-quarters of whom are paying interest only. When the cap is reached – for most after they have held the loan for five years – they’ll face drastic increases.

Barclays Capital estimates that banks will lose $112 billion on option ARMs. Some banks are aggressively refinancing these loans, Barclays says.

Source: The New York Times, John Leland (08/26/2009)

Chance of a Lifetime: Tips for First-Time Buyers

While the burst real estate bubble might be bad news for the economy, it could be good news for first-time homebuyers. In fact, now might just be the best buying opportunity of a lifetime.

Follow these steps to determine where to begin:

Establish a Realistic Budget. Owning a home involves more costs than meet the eye. In addition to mortgage, taxes and insurance, wise homebuyers set aside a little savings toward maintenance and unexpected emergencies. Remember, you will eventually need to repair or replace many items in the home.

Buy What You Need. While real estate is often considered an excellent investment, it’s important to only purchase as much home as you actually need. Bigger isn’t always better; sometimes it’s simply more expensive. Higher taxes, bigger insurance bills and more maintenance can eat away at even the best budgets. So buy what you need, unless it’s wise for you to…

Plan for Growth. First-time buyers can also be too modest when it comes to purchasing their first homes. If you intend to begin a family, you may quickly outgrow the home. Plan for growth to ensure you will be as happy in the home tomorrow as you are today.

Understand Appreciation. Although you don’t want to base the purchase of your home solely upon appreciation, it’s important to understand how the future value of your home is likely to impact your ability to move up later in life. When the time comes to sell, rent or exchange the current property, a home with long-term appreciation provides greater buying options in the future. Search for neighborhoods expected to rise in value over time.

Work with a Reputable Agent. A great real estate agent or broker is often worth his or her weight in gold, which is why you will typically find that investors would never think of going it alone. Unfortunately, many first-time buyers are under the mistaken impression they can save money by helping the seller eliminate or reduce the commission. Research shows this is rarely the case. Most agents help negotiate a lower sales price and ensure that funding, necessary paperwork and other important legal considerations are all taken care of.

Buyers: What Makes a Good-Value Home Today

August 3rd, 2009 ·

Thanks in part to changing demographics combined with the economic downturn, a major move to get back to the basics is a hot trend in today’s real estate market.
For those seeking maximum value at a minimum price, keep these essentials in mind.

Bigger Isn’t Better: Bigger spaces are associated with higher utility bills, increased property taxes, expensive insurance and even more maintenance concerns. Instead of picking the largest house you can afford, search for the one with the amenities that your family will truly use.

Good Neighbors in Great Hoods: Friends, family and wonderful neighborhoods are major attractions. In fact, research shows that homes located in top-rated school districts routinely fetch 10% or more than do similar-sized homes in less desirable districts. Family-oriented neighborhoods with parks and other amenities are highly desirable, while empty-nesters can save thousands by searching for similar homes outside of popular school districts.
Fruit Trees and Gardening Are a Big Trend: Throughout the nation, high-maintenance lawns are giving way to eco-friendly (and budget-happy) gardens, fruit trees and other down-to-earth activities. Ask about HOA restrictions and the cost of water bills prior to buying with the intent of starting a garden.

Going Green Is Bigger Than Ever: From energy-efficient appliances to environmentally friendly building materials, green is not only “in” but bigger and better than ever. Save thousands of dollars by searching for homes that have already implemented upgrades like LED lighting and Energy Star appliances.

Entertaining: As the economic excess of recent years continues to drive down the market, people are interested in entertaining, exercising and even eating at home more. Focus on properties that support your interests and lifestyle for today and tomorrow. Remember, the average person remains in a home for seven years, so buy right to make sure that your next house truly feels like home.

Lease-to-Own: Today's Real Estate Sweet Spot

Looking to jump-start sales in a slow market? You might want to consider rent-to-own transactions. Here's how they work.

By Robert Freedman
September 2009

Banks are looking for more money down and better credit scores—exactly the opposite of what many households are capable of bringing to the table because of the struggling economy.

That puts real estate practitioners who are familiar with rent-to-own transactions in the perfect position, two specialists say.

"How do you put together deals when homes aren't selling and buyers aren't qualified?" asks Wendy Patton, a real estate broker in Clarkston, Mich., and a lease-to-own trainer. "You make it possible for the two of them to meet in the middle."

Patton defines that middle ground as the rent-to-own option, because many households who today can't afford to buy would nevertheless jump at the chance to become a buyer down the road by applying some of their rent to their eventual purchase of the property.

Exploring the Rent-to-Own Option

In fact, Brett Furniss had so much success structuring rent-to-own transactions as a real estate investor several years ago in Charlotte, N.C., that he launched a brokerage that specializes in the deals. Today, his niche matches nicely with the tough economic picture, he says.

"Rent-to-own is what the market looks like now," says Furniss, broker-owner of BDF Realty in Charlotte. "Banks are looking for more money down and higher credit scores, yet the reality is that households have lower credit scores and less money to put down."

The secret to rent-to-own success is to introduce the idea to your sellers and buyers rather than wait for them to bring it up, because few will do so, Patton says.

On the seller side, "you have many willing to do this but you don't have a clue that they are" until you bring it up, she says.

For many practitioners, the alternative for their seller clients who can’t find a qualified buyer is to rent the house until the market improves, but that's not a solution anyone is excited about, Patton says. The sales associate gets a small rental fee, the seller very likely can’t get a rental rate sufficient to cover the entire mortgage, and the buyer accumulates nothing that can help make future homeownership more likely.

What to Keep in Mind About These Transactions

Yet for all its attractiveness in today's tough climate, the rent-to-own transaction isn't something to be jumped into lightly. Structuring a deal in a way that benefits all parties takes patience and an understanding of arcane details, including realizing that:

1. Not all sellers are good candidates for rent-to-sell. For example, sellers who are in financial trouble and facing a good chance of defaulting on their mortgage are not ideal candidates. If they should default and go into foreclosure, what happens to the rent-to-own buyer?

2. Not all properties are good candidates. The governing associations of some condos, for instance, have rental caps. In such cases, structuring a deal in which the buyer comes in as a renter for the first year or two won’t fly.

Also, you'll want to consider the following questions when you work on rent-to-own transactions:

● How many ways can you structure these deals? For example, how long should the terms of a rent-to-own contract extend? How much of the monthly payment should go to the purchase? What safeguards do you put in place to make sure payments are allocated appropriately each month?

● What are the different ways practitioners can get paid? How much should practitioners ask for up front, how much each month, and how much once the property finally changes hands?

●What are wholesale options all about in the lease-to-own niche?

● Can a deal be made to work when the monthly rental rate generates negative cash flow? Can such a deal be made to work with the help of a money partner? What's the role of such a partner?

Notwithstanding issues like these, the niche opens up a large swath of the market that would otherwise be limited to rental transactions, so it makes sense to at least try to understand whether the transactions can work for you, Furniss and Patton say.

The Proper Way to Insure a Home

Orignally written and posted by Matt Broyles - agent with Metrobrokers GMAC:


I remember speaking to a group of real estate agents in Douglasville back in 2006 on a caravan. We were in a beautiful home in a subdivision with lots at least1.5 acres. Keep in mind, this was back when the market was still excellent for sellers and property values were at their peak. This particular home where the caravan was meeting sat on 5 acres. The features of the home were as follows:*2 Story custom-built all brick home* 6 Bedrooms, 6 full baths* 5 Car garage* Over 10,000 square feet of living area* Fully finished basement with complete in-law quarters, including full stainless kitchen with all granite counter tops….in the basement!* And more…

There was nothing in this home that was not the top of the line, from the Berber carpet, genuine hardwood floors, appliances, bath fixtures, 6 inch wood crown molding, and genuine cherry wood cabinets in the main kitchen as well as the basement kitchen.

The listing agent was in the meeting and I was explaining how to properly insure a home.Out of curiosity, I asked what the listed price was for this home.Keep in mind, there was not another home like this one in the subdivision, nor anywhere near the area. While the other homes in the subdivision were nice as well, none were like this one. This was the Mac-Daddy! The home was listed at $750,000, what a deal!

Now, if the new purchaser of this super deal came to me for an insurance quote and expected to have it insured for the purchase price and I wrote a policy for $750,000 to “protect their investment”, how surprised, no shocked, are we all going to be when the home is destroyed and a claim is filed. Let’s do the math…

$750,000 divided by 10,000 Square Feet = $75 per square foot to rebuild this home. $75 per square foot would barely rebuild a basic home on a slab with 4 sides vinyl siding! There is no way it would rebuild the home.

As a matter of fact, this home with all of its custom features would cost around $185 per square foot to rebuild. Do the math on that and the house should be insured for $1,850,000!

This was a rare case back in 2006, because at that time in the vast majority of the cases, it did cost less to rebuild a home than the purchase price.Then the insurance agent fought the battle with the mortgage company because the insurance policy was not written for 100% of the loan value. The appraised value or market value also included the value of the land, which has no bearing on the insurance policy. The insurance policy does not reimburse for damage to the land, only the home, personal property, loss of use, etc.

Insurance companies provide insurance agents with a computer estimating software from Marshall, Swift and Boeckh that is zip code specific so, we can plug the features of the home in, such as square feet of living area, type of home, exterior construction, type of garaging, etc., to come up with the “best guess” on the rebuild cost of the home. Many insurance companies will also send out their own inspectors to verify the insurance value is proper and would rebuild the home in the event of a total loss.

Especially in today’s market, people do not understand why they are paying $150,000 for a home that has to be insured for $280,000. The reason is the insurance policy owes to rebuild the home at today’s cost, not what the market says it is worth.
Make sure you are educating your buyer in every aspect of the transaction to avoid any surprises. The more you can educate them, the more credibility you bring to the table.

Pricing Strategies For a Successful Sale

Price your home “right” from the START!

This is not the market to test the waters. Price your home using recent comparable sales (within the last three months if possible) and avoid comparing it to the active competition.
Better price from the start is offense which leads to positive momentum, shorter time on market, more activity, and closer to asking price sale, more control and fewer headaches. An unrealistic price leads to negative momentum which sets you up for playing defense which means longer time on market, price reductions, fewer showings, more frustration, low ending sale price. Be in control and play offense!

Resist the temptation of letting recent positive economy media reports affect your list price
There have been some recent encouraging news reports. We all truly hope they continue and ultimately lead us to a more prosperous future. Hopefully, this may indicate we are approaching the bottom. Nothing out there suggests that you can sell your home for more money just because the nation may be losing jobs at a slower rate or banks have been unloading foreclosures at a higher rate. Also, homeowners that are having financial issues gambling that prices will be higher in six months are using in a potentially risky and dangerous strategy. Keep your price down and let the reports motivate the buyers.

Don’t be afraid to price you home with zero wiggle room

In years past, many prices would be derived from a formula for instance: what we paid, what we spent, what we want, commission, and wiggle room. Many times in the past, in an appreciating market that actually worked. Sooner or later your home would appreciate to the level of asking price and your home would sell. It wasn’t really logical then, but lucky market conditions made it work. Take the wiggle room out. Worst case is that you may get some low ball offers that can’t be worked out. That is better than no offers and if your property is truly priced correctly it will sell at your price.

Don’t inflate the price with incentives or offer disincentives

If you can offer cars, vacations, furniture, include a pool or other upgrades at list price then you have the price inflated to reflect these perks and incentives.
Today’s buyers want real value and a DEAL. They are also very savvy and in the event you are lucky enough to get an offer, they will come in even lower knowing that you are including all of this fluff and extra items included in the price. You also don’t want to have disincentives like low unappealing selling agent commissions or situations where the buyer finishes the home himself if it can be avoided.

Posted by Tom Hicks, Realtor and Associate Broker

6 Reasons Why Some Homes Sell

Why do some houses sell and others don’t?There’s no ultimate answer to this question, but Tribune Media Services columnist Ilyce Glink has a theory. Here are her six top reasons properties linger on the market:

• Lousy pictures on the Web.
• Priced too high for the neighborhood.
• Blah interior; ho-hum landscaping.
• Little online marketing and hard-to-find MLS listings.
• Low commissions. Practitioners make sure their customers see properties that offer a payoff.
• Miserable maintenance, including ceiling stains, leaky faucets, and ancient furnaces.

Source: Tribune Media Services, Ilyce Glink (08/02/2009)