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You got to love when the media finally catches up to the state of the market – Washington Examiner reported today (January 17, 2013) that foreclosures in the D.C. area have “plunged over 2 years.”

Over two years? Forget that! They’ve plunged in the last year. Data gathered from the local multiple listing system (Metropolitan Regional Information Systems) shows that foreclosures and short sale listings are down 64.5% in January 2013 compared to the same type listings entering the market in 2012 at this time.

The Washington D.C. market has led the country throughout the recovery period and Northern Virginia has led D.C. While there are still many homes that are “under water,” the region has nearly recovered in the last few years its lost values. December 2007, the average price was $542,775 (the highest average price for December ever for the region). Last month, the average price was at $518,503, according to data from MRIS (see the data sheet here). That’s just $24,000 below the high average. Prices are on the rise and we can expect that many homeowners in the region who have been under water will recover sooner than later!

This year is standing to be a huge year for home sellers and buyers in the suburbs of D.C. Foreclosures are nearly off the market (there are only 5 available in the Northern Virginia MLS at this writing). Need more info or to talk with a professional? Leave a message here or call (703) 821-8300 to Weichert Realtors in McLean.

 

My company has listed or sold about 1,000 short sales in the last year just in the Washington, D.C. area. The biggest problem in dealing with these transactions is the lack of education and understanding on both the consumer’s and agent’s perspective.

For my agents, OF COURSE, they know exactly what a short sale is, what it isn’t and how to handle it! What’s most frustrating is how our colleagues WANT it to operate, versus the way it really should be according to the contract.

First – let’s start with just a couple facts of what Short Sales Are NOT –

  • The contract is NOT with the bank, but between the owner of the house and the buyer. Once they agree to terms, it is “ratified.”
  • Once the house is “ratified” (meaning, the buyer and seller have agreed on the terms of the contract), the house is NO longer AVAILABLE and should be registered as Under Contract, or Under Contract with contingency (depending on the practice in your area).
  • All other offers, while they should be presented to the SELLER, are supposed to be considered “back ups” to the primary offer.
  • A “back up” offer is not required to be brought to the bank for 3rd party approval when the contract is ALREADY ratified.

And now here’s what a short sale IS:

  • The owner owes more than what the house is worth AND cannot pay the deficit between those values AND the bank is willing to take less in payment than the mortgage amount.
  • While it may not be as bad as a foreclosure, it is a negative hit to your credit.
  • For a limited amount of time, those who go through a short sale MAY have some tax relief.

The Internal Revenue Service web site states:

“If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.”

“The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

“This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.” See more information from Publication 4681. http://www.irs.gov/pub/irs-pdf/p4681.pdf

If you’re thinking of short selling because your home has lost so much value – you have a limited amount of time to do so without carrying a heavy financial toll.

But understand that not all agents are created equal and the minority actually know what they are doing. While some associates are selling the majority of their short sales, the industry average in the mid-atlantic area is less than 50% actually making it to settlement.

Until next time…

The good thing about credit scores is that they are merely a snapshot of your credit at a given time. Missed payments, high credit vs. limits, too much credit, et. al., can all be corrected and cleaned up and your credit score return to a new high level.

Tim McLaughlin, senior vice president of Weichert Financial Services, answered a question from one a borrower about why all the good loans (low rates, low/zero point, and even product availability, seem to favor those with good credit 

Here’s his answer to the “five major dings” that affect your credit score:

There are five major “dings” that impact your DCS (Decision Credit Score, or FICO score) the most, some obvious, some not so obvious:

Maxed out credit cards: Doesn’t seem like a big deal in the grand scheme of things, right? Oh, it is: a maxed out credit card can reduce your DCS anywhere from 10 to 45 points, according to Fair Isaacs, a hefty price to pay for accumulating debt.

30 day late mortgage payment: In addition to the late fees, this occurrence adversely impacts your DCS by 60 to 110 points…a whopping impact for being late on your mortgage.

Debt settlement: Also known as debt arbitration or debt negotiation, it is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full. The downside, a 45 to 125 point drop in your DCS.

Foreclosure: Unfortunately, an occurrence we are seeing far too often as of late. In addition to the event, it will reduce your DCS 85 to 160 points.

Bankruptcy: The event that would have the single biggest negative impact on your DCS, reducing your score 130 to 240 points; an almost irreparable event.

In addition, there are dozens of more minor “dings” that could impact your credit score as well; stumble across enough of them and they will really add up, potentially costing you dearly.

For example, following a 30 day late mortgage payment, a consumer with a 720 original DCS could pay as much as $95 more each month on a home mortgage if they were looking to acquire or refinance a new loan (based on a $275K loan amount).”

Thanks Tim. For more information, Tim can be reached at www.weichertfinancial.com.

With all the stimulus packages being floated out there at costs of up to $5,000 per tax payer (per program), the question comes begging about the Homebuyer Tax Credit.

“At $8,000 for each first-time homebuyer and now $6,500 for move-up buyers – how much is that going to cost the American taxpayers?”

Good question. Not knowing how many people will be able to take advantage of it, we’ll have to start with some guestimates.

Keep in mind, first, that about 4.5 million existing home sold in 2008 altogether and we have been on track to sell roughly the same in 2009.

For 2009, the tax credit was  only for first-time buyers and up to $8,000 (10% of the sales price, not to exceed $8,000). So not everyone received the $8,000 if they purchased a house less than $80,000 – but let’s go ahead and say they did for argument sake.

If the stats hold true, and that is about half of all buyers are first-timers, then there were 2.25 million buyers that qualified (assuming they didn’t go beyond the income limits – which many did). But for simplicity, we’ll say they all qualified.

Simple math puts the tax credits at $18 billion for 2009 – that doesn’t have to be paid back. For all the money that’s being floated out there to stimulate the economy, this is probably the best plan in play.

Now, before all my conservative friends blow a vein behind their eyeballs that are now popping – here’s what happens when a homeowner purchases a house (vs., say when someone buys a car or some other depreciating asset). They spend money on it. Lots of money.

The foreclosures/short sales that have made up most of the market for the last 2 years are mostly in paltry condition and need paint, carpet, appliances, countertops, cabinets, windows, landscaping, rot replacement, sump pumps, mold remediation, heat pumps, etc.

Unless you saw these houses, you just wouldn’t understand. I’m not talking “updating” homes that would otherwise be in good living condition, but making them inhabitable altogether. In fact, regular home buyers like you and me can’t even finance many of these houses because of the condition they’re in.

People get into a tizzy about home flippers swooping in and making “all this money” by flipping a house. Let me tell you – without the flippers some of these houses would completely fall apart. Remember, that lenders WON’T LEND MONEY on a house without complete bathrooms, that are mold invested, lack certain appliances, etc. And the REO banks WON’T fix them up to sell them. They just let them deteriorate while they wait for a buyer.

Enter the investor/rehabber who purchases the house with either cash or off-line financing, then fixes it up to pristine condition, sells it at a fair price and moves on to the next project. They are providing a much-needed service to even make the houses salable, much less inhabitable.

Now, as the market turns around in city after city (that’s what the increase in  pending sales is all about across the country), we’ll see an increase in sales and a use of the home buyer tax credit to fix up the housing pool.

The tax credit for home buyers has played its role and now it will go away April 30, 2010. The question for consumers is will they recognize and act on a good deal when they see it?

Periodically I hear from readers who want to make $1 million in real estate — quickly and with no money down. Usually they want to know more about real estate foreclosures — how to buy them and how to profit from such homes. I’ve participated in a couple of these deals, and I’m now working on my second million — I gave up on the first.

Foreclosure properties can be a good place to invest for exponential growth (or loss). There are some deals out there for little or no money down, but potential investors should take precautions because foreclosed properties can involve significant risks.

There are various ways to invest in foreclosure properties. The first and probably most popular is to purchase a property, fix it up and then rent it out, hopefully creating a positive monthly cash flow. The investor then becomes a landlord, with all the responsibility of an investment property owner.

The second way to invest is to seek out foreclosures or “handyman” specials, buy them, invest more money to fix them up and then sell them, taking — hopefully — a profit once the house is sold.

A third approach is to purchase a foreclosure that is underpriced and selling it immediately at a higher value.

One way to sell homes for a higher value is to take back a mortgage. For example, let’s say a house worth $100,000 is sold at a foreclosure to an investor for $50,000. The investor may put down 10 percent and assume or create a new mortgage for $45,000. The investor then advertises the property at a discount, say $80,000, offering 100-percent seller financing (remember, we’re figuring that like houses are worth $100,000).

The owner hopes to create a sense of urgency by underpricing the house and pulling in buyers.
If successful, the investor takes a promissory note from the new purchaser for $80,000. He has now created a $35,000 note for himself (The difference between the $80,000 sale price and the original $45,000 mortgage). The new buyer makes payments to the investor for an $80,000 loan and the investor makes payments on the original loan for $45,000. In real numbers, here’s what it would look like.

If the original loan is for $45,000 at 8 percent over 30 years, the principal and interest is $366.88. When the second buyer takes a note for $80,000, the investor may charge a bit higher interest since he’s offering 100 percent financing.

Let’s say he offers an $80,000 loan, 9.5 percent over 30 years. The monthly payment is $672.68, creating a positive cash flow of about $306 per month.

If the borrower stays in the house for 30 years, the investor will make $88,295 in interest and $30,000 in capital gains after he’s paid his own interest on the first note for a total return of $118,295. Not a bad return on a $5,000 downpayment.

Keep in mind that not all mortgages allow an owner to “wrap” a second mortgage onto original loan. Most loans today contain a “due-on-sale” clause, meaning if the property is sold, the first trust must be paid off immediately. Wraparound financing is popular when investors purchase foreclosed Veterans Affairs (VA) properties as the VA allows wrap-around loans in such cases.
Before you go out, checkbook in hand and ready to bid away, take some advice first.
If you’re deciding to invest in foreclosure properties with a spouse or with other investors, be sure that everyone understands this form of investing. You are about to enter a world of high finance, property management, calls in the night from tenants and other risks that regular homeowners never experience.

Second, get educated. Reading this column does not constitute preparing the first-time investor to start bidding on properties. There are plenty of real estate agents and auctioneers who do this on a daily basis and would be happy to educate you in the world of foreclosure properties. Also, visit the bookstore for guides by reputable authors who know investment intricacies.

  • Third, be realistic.
  • Not all foreclosures are good deals.
  • Not all foreclosed properties are available at discount.
  • If you take back a loan your buyer could default.
  • Most loans today prohibit wraparound financing.
  • Repairs might be far more than you expect.
  • Not all tenants pay their rent on time — or at all.
  • Some renters damage property.
  • Changing interest rates could impact your bottom line.
  • It may not be possible to re-sell the property without extensive — and costly — repairs.
  • Not every deal yields a profit.
  • If you have a profit you may face taxes.
  • If you only look at foreclosures you may miss other investment opportunities.

The list of potential downers goes on…and on and on…. Think of it this way: If making money with foreclosures was both easy and a sure bet every time, no one would bother with IPOs — or jobs.

Fourth, get professional help from brokers, lenders, attorneys, accountants, home inspectors, and others.

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