This is the million dollar question!

There are lots of reasons to own versus rent a house, but it depends on a variety of factors. To begin the thought process, I recommend that potential buyers consult with a mortgage broker to see how monthly rates offered by different loan programs compare to monthly rents. Currently, historically low mortgage rates and affordable housing prices make right now an opportune time to buy.

Buying a home largely depends on your lifestyle and current income. Qualifying for a loan and the down payment are oftentimes the two biggest hurdles that buyers face. The next question to ask is how long do you plan to live in the house? Given the difficult economic times, I recommend to buy and own a home for at least a 3-5 year period of time. The forecast is that the next few years will see slow growth. Transactional costs are expensive, real estate is not a liquid asset, and prices may appreciate or depreciate. Buying a home requires thoughtful contemplation.

Overall though home ownership’s benefits typically outweigh the option to rent:

• Tax Deductibility—You can deduct the cost of your mortgage loan interest from your state and federal income taxes. Since interest generally will account for most of your payment during the first half of your mortgage, the savings can be significant. Some of your costs at the time of closing (including prepaid mortgage interest) can be taken as deductions on that year’s income tax return, and points paid up front at the time of closing represent additional mortgage interest and may be taken as a deduction.
• Tax Deductibility of Property Taxes—You can deduct all of the property taxes you pay.
• Appreciation Potential—Real estate is considered a strong long-term investment because it usually appreciates in value. The effects of borrowing potential can increase as the value of the home appreciates.
• Capital Gains Exclusion—When it’s time to sell your home the amount of capital gains you have to pay is reduced. A homeowner can exclude up to $500,000 per couple if married and filing jointly, or $250,000 if single or filing separately for homes that have been the taxpayer’s principal residence for the previous two years.
• Capital Gain Treatment—Congress allows preferential tax treatment on gains from capital assets held for more than one year. This would be important for a homeowner who has gains in excess of the allowable exclusion.
• Principal Accumulation—Mortgages are designed to pay the interest for the time that the money has been used, as well as to retire the principal debt over a period of time. This payment plan means that part of the payment each month is for principal accumulation.
• Personal Enjoyment—Pride of ownership is a valid reason for wanting to own a home. You can personalize your home while enjoying the financial benefits. Usually a home provides a larger living indoor and outdoor space than renting with a limited use of space.

If you are thinking of buying a house this year, please contact me to discuss your options. I can also provide the name of a few mortgage brokers to you as well. Good luck and happy house hunting!

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The California Association of Realtor recently announced this forecast as of 10/20/2011:

Economic growth is expected to be no greater than 2 percent through the end of 2012 – a growth rate that makes the economy very vulnerable to any external shock that could trigger a downturn, according to Fannie Mae’s Economics & Mortgage Market Analysis Group.

External factors, coupled with uncertainty surrounding the degree of domestic fiscal austerity, including the scheduled expiration of various tax cuts and unemployment benefits, and the impact of forthcoming regulations, will determine how fast the economy will grow.

“There’s been a little seasonal cyclical pickup in housing activity recently, as spring and summer sales are generally stronger than fall and winter, but leading indicators point to housing sales bouncing near the bottom at least through the end of 2012,” said Fannie Mae Chief Economist Doug Duncan.

“Home prices are a key factor for any positive movement in the housing market, and the large inventory of distressed homes working their way through the market is putting downward pressure on prices. Now that we are entering a traditionally weak seasonal sales period, we expect home prices to show renewed declines after firming for several months,” Duncan stated.

For more information, click here.

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This is an insightful glimpse on the shortcomings of short sales (pun intended!) recently posted on Trulia.com.  Bottom line to buyers: keep your expectations in check on the long -not short- process of buying a short sale.

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Roughly forty percent of the homes for sale on today’s market are short sales and foreclosures! Distressed properties are well known for their value (a reputation which is sometimes accurate, and sometimes not), but they also have a reputation for causing buyers to become distressed, too!

Transactional snafus, last-minute surprises and long, drawn-out escrows that never close seem to be par for the course. Instead of avoiding these properties altogether, get educated about the most common dramas that go down in these deals, and how you can avoid falling victim.

1.  Run-on (and on, and on) escrows. When you’re buying a home (or selling one, for that matter), time is absolutely of the essence.  And buyers reasonably expect that the big time suck in real estate is in the house hunting process itself; seems like once you find a home you want to buy and the seller agrees to your price and terms, things should move pretty quickly, right?

Not so much, when it comes to some distressed property sales. I’ve heard tell of the occasional, swiftly-moving escrow on an REO (real estate owned – by the bank). But for the most part, these transactions take anywhere from a few days to a few weeks longer than “regular” sales, because of the extra signatures, supervisor-level approvals and even investor involvement required to seal the deal.  Banks don’t have the same sense of urgency individual home sellers do, and it’s not uncommon for the people who need to sign on the dotted line to be on vacation or scattered across the country, adding days’ or weeks’ worth of time to the escrow.

And short sales are also an entirely different animal when it comes to escrow timelines. While a standard sale from an individual seller to an individual buyer might take 45 days from contract to closing, a short sale can take anywhere from 45 days to 6 or 8 months (!) to get the deal closed, after the seller has accepted the contract.

Avoid the drama by: expecting your escrow to run long, and being pleasantly surprised if it doesn’t.  Expectation management is everything. Make sure you take these extended timelines into account when you’re working with your mortgage broker on the issue of when to lock your interest rate, and how long your rate locks will last. You might even need to plan on and/or set aside an allowance for the cost of extending your low interest rate, if rates are rising rapidly during the time you’re waiting for the deal to be done.

2.  Bank won’t take lowball offer.  If I had a dollar for every time I’ve received a question from an outraged reader to the effect that a buyer has had their short sale or REO offer rejected on grounds that it was too low, even though the bank has no other offers, I could buy a foreclosure myself (admittedly, it’d be one of those $150 foreclosures in some blighted town with tax liens and no plumbing, but still).

Banks owe their shareholders and investors a duty to get as much as they can for these properties. Just because you see it’s on the market and listed as a short sale or a foreclosure doesn’t mean they’re going to give it to you for a fraction of its worth. The bank’s goal is to get a purchase price as close as possible to the home’s fair market value, as determined by the recent sales prices of similar, nearby homes, with some adjustments made for the property’s condition.  Fact is, many banks would rather see the listing agent reduce the price by a moderate amount, and wait to see what offers come in, than to accept an offer 30 percent below the asking price just because there are no other offers on the table.

Avoid the drama by:  working with your agent to make a realistic offer, based on recent comparable sales in the neighborhood, not just on what you think you can get away with.  You can waste a lot of time, spin a lot of wheels and lose out on a lot of properties making lowball offer after lowball offer on distressed homes. Sit down with your broker or agent, review the ‘comps’ and make a smart offer that reflects a good value for you, is within your budget and is not bizarrely out of the realm of the fair market value of the property.

3.  Last minute postponements/cancellations. These transactions have an uncanny way of being delayed at the last minute – or never going through at all, through no fault of the wanna-be buyer. You signed docs yesterday, put your dog in the crate this morning and just hopped in the moving truck, only to get a text from your broker that the deal didn’t close because the escrow company which was selected by the bank flubbed the checkboxes on a single sheet of paper (it happens). Or, you’ve been in contract (with the seller) on a short sale for four months, and the bank refuses the sale entirely because the seller refuses to kick even $1 of their own cash into the deal, despite having a flush savings account.

Avoid the drama by:  staying as flexible as possible with your moving plans as long as possible.  Best practice is to plan on some overlap between the time you can be in your last place and your scheduled move-in date.  Also, if you’re in contract on a short sale, you should take the point of view that you don’t have a firm deal until you get the bank’s approval of the transaction. So don’t even think about starting to make moving plans or paying for home inspections and appraisals until you know the bank has green lit the deal and that the purchase price and terms they’ve approved work for both you and the seller.

4.  The bank’s black box. Make an offer on a normal home and you’re likely to know what the outcome will be within a few hours or a few days, at the outside. If things take longer because the seller is out of town or some such, the listing agent tells you that, and you at least know what’s going on.

Make an offer on a bank-owned property or a short sale?  It’s a crap shoot – could be days, but could also, easily, be weeks or months before you know what’s going on.  And no amount of calling, pleading, prodding or nudging is likely to get you much information on how your offer or the seller’s short sale application is being handled or what (if any) progress is being made.  And that “black box” into which your offer disappears at the bank level is very frustrating.

Avoid the drama by:  continuing your house hunt until you have an answer back.  Maniacally pestering the listing agent for answers or harassing your buyer’s broker into spending hours on hold with the bank is highly unlikely to get you any insight. (With that said, it does make sense for your agent to check in regularly – sometimes even daily –  with a short sale or REO listing agent to stay updated on any developments with the property and to make sure your offer/transaction stays in the front of their mind.)

Most of the angst in these situations arises when a buyer feels they passed on properties that would have really worked for them when they pinned their hopes on a distressed home.  You can only control your efforts and activities, not the bank’s.  So, consult with your own broker or agent about staying proactive in viewing and even pursuing other properties until you have a firm “yes” from the bank on your short sale or REO offer.  Until that time, and usually for a short time after you get the bank’s approval, you have the right to back out of the transaction if you need to (make sure your broker briefs you on precisely when you’re right to rescind your offer or exercise contingencies – i.e., bail – will expire).

5.  Double standards. In a “regular” equity sale with no bank involvement, both buyer and seller are obligated to meet various timelines.  Seller has to provide disclosures by X date, open the property to inspections – with utilities on – by Y, and close and move out by Z.  REO and short sale buyers, on the other hand, are often dismayed to find that even though the bank might take weeks or months to sign or handle its deliverables, the bank will insist that the buyer show up, sign or send a check quick-like.

Avoid the drama by: chalking it up to the (admittedly irritating) way things are – the price you pay to buy from the bank.  Realize that working with the bank on the bank’s terms is unavoidable when you buy a distressed property. Then, go into the deal with realistic expectations – including the expectation that the bank will drag its feet, despite expecting you to keep every deadline – and you’ll be less frustrated, and less likely to make poor decisions out of frustration.

Also, make sure you do respond in a timely manner to the bank’s requests and your obligations under the contract.  I’ve seen banks capitalize on buyer delays in returning signatures and removing contingencies to accept higher offers they received in the interim.  Don’t lose your home on a technicality because you assume that the bank’s lackadaisical timelines apply to you as well.

Author: Tara Nicholle Nelson, writer for Trulia.com

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If the buyer isn’t ready to buy, he or she can consider a lease option or a lease purchase agreement. This article in the Wall Street Journal outlines what these options mean. 

Test-Driving Homeownership

When buyers–or their banks–aren’t quite ready to commit, rent-to-own can be the answer.

In October 2008 Ashley and Jason Repaal packed up their rental home near Detroit and made the 250-mile trip to East Jordan, a small town in Northwest Michigan where Ms. Repaal was slated to work as a contractor for a news distribution company.

Prior to the move, they found a three-bedroom, two-story house and made an offer for $80,000. The seller accepted and even agreed to let them move in before the sale was final. But just days before the couple was scheduled to close, the bank had second thoughts. The bank learned that Mr. Repaal, 28 years old, had just left his post with the Coast Guard, planning to help with his wife’s business and stay home with couple’s son, Adam, now 4. Until Ms. Repaal, age 24, who is an independent contractor, had two years of work under her belt, the bank said it couldn’t approve the loan.

The Repaals needed a backup plan; their real-estate agent suggested renting the house with an option to buy. The Repaals would pay $750 per month in rent on a two-year lease and put down $8,000 in good faith money–which would be used for their deposit if they closed on the house within two years. “If they walked away they would be out the $8,000 deposit,” says John McNabb, an agent with Coldwell Banker Schmidt Great Lakes who worked with the couple.

Because lease-to-own deals like these are sealed with handshakes and legal contracts, they’re virtually impossible to track. Yet, as the housing downturn wears on the popularity of rent-to-own seems to be growing. Buyers who want to test-drive a house before buying or need extra time to patch up their finances, are asking agents to find sellers willing to entertain such offers. “We’re seeing more requests for them here, and I don’t have any doubt there are parts of the country where they’re happening more,” says Fritzi Barbour, a broker with Coldwell Banker Caine in Greenville, S.C.

These deals are most common in hard-hit markets where foreclosures have driven down home prices and sellers can’t or don’t want to come down anymore on the asking price. “If the house isn’t occupied it’s an opportunity to create some revenue,” says Tony Hettler, a broker with John L. Scott in Des Moines, Wash.

But while sellers seem more likely to consider lease-to-buy arrangements, most won’t advertise that point. Of the 7,293 houses recently listed in the Greenville MLS, for example, only 194 were marked as available for lease purchase. In fact, many agents are reluctant to recommend any such agreement, as it delays their commission. There are also risks for the homeowners and renter-buyers, says Ms. Barbour, who recommends that each party work with an attorney.

The renter-buyer could back out of the deal. For that reason, it’s important for home sellers to understand the difference between a lease option–where the renter simply has the option to buy down the road–and a lease purchase agreement, which requires that the renter put down anywhere from .5% to 2% of the sale price in earnest money or pay a monthly rent premium with a share of the rent going toward the purchase price. The sale price and timeline are also spelled out in the contract.

If the renter flakes, the homeowner gets to keep the earnest money, some consolation when it’s time to put the house back on the market. That’s assuming the seller can get the renter to move out.

Ms. Barbour recalls a case where would-be buyers relocating from Chicago asked the sellers of a relatively new $200,000 home in Greenville to consider rent-to-own. “The owner was leery but needed some cash-flow against their mortgage,” says Ms. Barbour. Under the terms of the 12-month agreement the buyers paid $5,000 in good faith money and agreed to close on the new home within five days of selling their house in Chicago. Yet, when their home in Chicago came under contract about five months later they said they were opting out of the purchase agreement but would continue to “rent” the home through the duration of their agreement. (Turns out they were building a house on the other side of town.) “The sellers were livid and wanted them to vacate the property immediately,” says Ms. Barbour. But their attorney advised them that the only way to make them leave was to sue–a time-and money-consuming process that offered little gain.

Of course, there are caveats for renter-buyers, too. They may change their mind about the house or may not see their financial situation improve as quickly as planned. Either way, if they don’t buy they’re out earnest money, unless they convince a homeowner to do a lease option with no strings attached. In that case, they need to ask themselves why the homeowner is so desperate to begin with. “You’re probably not getting the cream of the crop of houses,” Ms. Barbour adds.

Another risk: The homeowner stops paying the mortgage. If the homeowner is foreclosed on, buyers still have a claim against them, but will have to get in line behind other creditors.

Obviously, it pays to do some due diligence on the homeowner, says Pierre Debbas, a real estate attorney in New York. At a minimum, ask for proof that they’re current on their mortgage, he says, though depending on the dollars at stake it may also be worth paying for a title search.

Foreclosure was one risk the Repaals didn’t need to worry about. After renting the East Jordan home for a year and a half, the couple qualified for a loan, closed at the end of July and snagged the $8,000 first-time home-buyer credit to boot. And while they had plenty of time to second guess their decision, in the end their original choice turned out to be the right choice. “During that time we looked at a lot of houses around the same price range,” says Ms. Repaal. “The other options just weren’t that great.”

Source: Wall Street Journal by Sarah Max on December 2, 2010

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Here’s an insightful excerpt on understanding what thoughts are running through the minds of sellers and buyers after an offer is accepted.

Buying or selling a home is a funny endeavor (but not ha-ha funny – puzzling funny!).  It’s your biggest purchase ever, but unlike many smaller purchases, making an offer on a home can feel like pulling numbers out of a hat.  And selling’s no easier – the stakes are so high, and the market’s so tough that you want to take any offer you can get, but at the same time, it’s difficult to know whether you’re leaving money on the table when you do finally sign on the dotted line.

Buyer’s remorse often arises as soon as you get the contract back with the seller’s signature on it – that desperate hope that your offer will be accepted instantly plummets into an “oh no – they took it – I must have offered too much!  I’ll bet I could have gotten it for $X thousand less!”  If you’ve experienced this, rest assured that the same evening, the sellers were feeling the same thing: “Oh no, if I’d held out, I bet I could have gotten more!”

The best way to manage the emotional freak-out of both buyer’s and seller’s remorse is with information;  here’s how to know whether or not you’re getting a good deal when you buy or sell your home.

1.  Know what ‘good deal’ means TO YOU:  Is a good deal getting the home of your dreams, over multiple offers, at a price you can afford? Is it buying a home for 30% less than its current owner paid for it?  Is it getting a bargain, meaning you get a discount off what the home is worth on the open market?  That’s what people call having instant equity, and is possible when the seller’s situation, the property’s condition, your shrewd negotiating skills or your exceptionally good looks (!) enable you to get a home for a price lower than the price similar properties in the area are selling for or lower than it appraises for (the latter of these is less frequent, as many appraisers simply do not make a practice of appraising homes for much more than the purchase price agreed to by the buyer and seller in the transaction.  Oh, and btw, you won’t know what it appraises for until you agree to a price and get into contract!)

If you’re selling your home, know what your own top priority is – is it to move your home quickly, so you can buy at today’s bargain basement prices and interest rates?  Is it to get every single dollar you can out of the house?  Is it just to divest of the home and get closure as soon as possible, because you’re struggling to keep up with the payments? 

What is a great deal to one buyer or seller may not be to another, because real estate is about life – and whether YOUR real estate outcomes are good or bad is about YOUR life!  So, the first step to knowing whether you’re getting a good deal is to know what your own personal priorities for the transaction are.

2. Do the math – compare “your” price to other benchmarks.  The price you agree to pay or accept for a home is meaningless in a vacuum; to understand whether it’s a “good” price, you’ve got to compare it with a few pricing  benchmarks. 

The most important of these benchmarks is also the most difficult to get a handle on: the market value of the home.  The definition of ‘market value’ is the price a qualified buyer is willing to pay for the property in an arms-length, open-market transaction; the best way to estimate market value is to look at what similar homes in the area have recently sold for. (The more similar, the more nearby and the more recent – the better.)  To compare the price you’ve negotiated with the fair market value of the home, check out recently sold, similar homes on Trulia. 

Also, ask your real estate broker or agent for what’s called a Comparative Market Analysis on the home you’re making an offer on (if you’re a buyer), or an updated CMA using recent neighborhood sales (if you’re a seller).  If you’re buying, the ideal situation is for your negotiated purchase price to be at or below the home’s value as indiciated by the comparables and the CMA; if you’re a seller, your goal is to receive a price at or above the market value.  (To be sure, if you’re a seller on today’s market, it’s an equally worthy goal to get your home sold – at all! – in many markets.  So don’t get hung up if you’re not getting right around – or even slightly below – what you think your home is worth.)

Many buyers try to compare the end price of their home to (a) the list price, or (b) the price per square foot.  Comparing your negotiated price to the list price is interesting, but a big gap could indicate a number of things:  you could be getting a great deal, you (or your agent) could be a great negotiator, or the seller could be very unrealistic or motivated. Same on the seller’s side – an over-asking price usually indicates an aggressively low list price and multiple offers from buyers.  If the list price is wildly different from the market value of the home, the list price-to-sale price gap may have nothing to do with getting a good deal, on either side. 

Price-per-square-foot can be overly sensitive when you look at it on homes that are much smaller than larger than the homes to which you are comparing it.   A home could be 20 percent smaller than neighboring homes, but that doesn’t mean it will – or should – be worth 20 percent less; it’s still in the same neighborhood and may be in better condition.  Unless you’re comparing very similar homes that are in very similar condition, price-per-square-foot can provide a misleading picture of a home’s value.

3. Factor in the specifics of your situation: seasonality, market dynamics, affordability and the competition.  If you’re buying a home in Wisconsin in the winter, buyers should expect to get a better “deal” than in the summertime.  When market dynamics indicate prices are trending upward in your neighborhood, what seems like an ‘okay’ deal based on yesterday’s prices may actually be even better than you thought – search Trulia’s Stats and Trends pages for your area for up-to-the-minute price trends in your neighborhood, or even zip code!

If you’re buying a home at a trough in prices for the last five years, with a 4.5 percent loan, that home will be much more affordable to you than it would have been in another time. If you’re a seller of a home where every other home on your block is for sale, and half of them are dirt-cheap foreclosures, that should cause you to upgrade your opinion of a slightly-below-asking offer! Buyers: if you best a dozen other offers, even an above-asking sale price can be a great price, assuming the home appraises at the purchase price and you can afford it!

4. Don’t forget any extra “bang” you’re getting for your buck.  Buyers: if the seller is paying some or all of your closing costs, HOA dues, throwing in extra furniture/appliances, or otherwise sweetening the pot, keep that in mind.  Sellers:  if the buyer has agreed to a fast or slow close, at your request, or even came up a few thousand on their offer price to empower you to pay all your mortgages and liens off, don’t forget that, either.

In today’s real estate market, where sellers are constrained by their upside down mortgages and buyers are constrained by what many see as too-conservative appraisal standards, sometimes a “good deal” is simply one where the other side gives, even a little, to get you something that you want or need to make the deal work for you. 

By Tara-Nicholle Nelson on Trulia.com, November 3, 2010

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