All of this bodes well for the market in the near future.  If you want a great rate, grab it while it lasts.  I have a network of great lenders and would be happy to make an introduction.   When the coming wave of inflation hits, you’ll be glad to have locked in affordable long term financing and that you own a leveraged physical asset:  real estate.  Just remember to insist on a fixed rate, or you could be in for a rude awakening down the road when rates skyrocket.

Not so fast. Unfortunately, because so many of the affordable properties are attracting multiple offers and bidding wars, many agents in Los Angeles feel that making an offer on an REO or a short sale with FHA financing is unfortunately pretty much guaranteed to end up in the dust bin. Sometimes the anti-FHA bias is even explicit, as the National Mortgage News noted, “[t]housands of properties listed for sale on various Multiple Listing Services around the country say simply: ‘No FHA’ under the description of acceptable financing, lenders and mortgage brokers say.”

So why is there such a discrimination against FHA financing? The answer is pretty simple. As Raffi Tal, the chief operating officer at IShortSale Inc. in Woodland Hills, Calif., was quoted in the same article, “[w]hen a property goes to REO, the lender is really discounting the price, and if the buyer has an FHA loan, it takes longer, so that’s why they’re discriminating,” he said. “The guidelines on FHA are tougher, and if they get multiple offers they don’t need FHA.”

One of the main concerns invoked by the industry is the perception that due to FHA stricter guidelines, escrow takes longer (60 days instead of 45 days) and might not even go through at the very end. Additionally, the “FHA” buyer often thought to lack sufficient closing costs.

FHA buyers are not the only ones feeling left out in the cold. Even our veterans who want to use VA financing (up to 100%) are in an even worse position bargaining against a cash buyer. Again, the perception is — rightly or wrongly — that a buyer with no/little skin in the game is more likely to flake out before closing.

The answer for one of my buyers, who was sick and tired of being outbid by conventional or all cash offers, was to buy through an auction, where the playing field was leveled somewhat. He ended up with the property he wanted, and only 3.5% down. (I know this because I represented him at the auction.) Not many people can say that these days.

So we went to the auction,  after having made sure we had done all the preliminary requirements posted on the auction website (pre-registration; pre-viewing the properties, etc.)  Arriving at 8 a.m. at the LA convention center to the sound of some blaring pop music, there was a carnival-like atmosphere, missing only popcorn and pompom girls.  We took our seats and waited.  Under the terms of this particular auction, some properties are cash only, but most can be financed. The properties are flashed on a big screen.  You need to have a good strategy for the property you want to bid on: once you get the bid, you are generally “stuck” with the property or you’ll lose your earnest deposit.

Before the auction started, there was a quick rehearsal of the bidding process: a fast-paced process with the auctioneer raising the bids as fast as he can.  Once the highest bid is reached, the auctioneer will either acknowledge that the bid is accepted, “closed”; or “subject to”.  “Closed” means that since the bid didn’t meet the (hidden) reserve price, it is rejected.  “Subject to” is a kind of limbo — it means that the bid will be submitted to the seller who has up to two weeks to accept, reject, or counter the bid.

When our property came on the screen, we were both feeling a bit nervous; but my client was able to ultimately win the bidding war!  Better yet, the deal was accepted on the spot (and was not “subject to.”)  We were then ushered into a back room where we had to pass the approval process, and were able to consult with three different lenders on site.  At that particular auction, REDC wants you to take the conventional loan route, since the properties are foreclosures and might not pass the FHA inspection.  Additionally, the escrow has to close in 45 days, and there is a penalty of $150 each day for missing the closing escrow date.  Once we got the green light from the banking tables, we were rushed to the escrow table where you pretty much sign and initial paperwork until your hand is aching!  Forget about any contingencies (e.g., loan, inspection, etc.) and you have to pay many costs that a seller would normally pay for in a non-auction context.  Further, you are committed — no matter what — so make sure you have done all the prep work well in advance.

In the end, my buyer had to go to extreme measures to secure a property — the advantage to him of the REDC auction was that the property went to the highest bidder, and the trump card normally enjoyed by cash buyers disappeared.

Finally, the question on everyone’s lips: did my client score a “deal” at the auction?  In purely financial terms, the answer is “no”.   With all of the competition, he was forced to pay pretty much the market price.   (On top of the bid price buyers are subject to an additional 5% or $2,500, whichever is highest and the buyer is on the hook for all inspection costs and pretty much all closing costs!)  However, my buyer was able to compete on par with every other bidder, saved himself months of frustration, and scored his absolute no. 1 favorite property.  All in all, it was a good deal for him, under the circumstances.  Now he can move forward and start thinking about what furniture to buy with his tax credit!

Do you need a Realtor® to purchase a property at a REDC auction?  If you can find someone willing to help you (the commissions are razor thin), you will likely be better off, as your Realtor® will be able to provide with some comparative market analysis for each property you have in mind, and can help you devise a strategy so that you don’t get lost in the somewhat confusing process.   (In addition, should you chose to use a Realtor®, you will be entitled to the C.A.R. H.A.F. Mortgage Protection Program).

I recently was helping a first time home buyer looking for an affordable condo in the San Fernando Valley.  My buyer had a FICO score over 750, steady employment, no loans (!), and downpayment money in the bank; he is technically the perfect candidate the Government had in mind when they allowed FHA loans for be written with as little as 3.5% down.
While the tax credit and FHA financing news is good, the reality on the ground is grim for first time homebuyers.  My buyer was stymied in his initial attempts to secure a property using FHA financing for several reasons:

- As noted, most of the REO properties he wrote an offer on ended up selling to cash buyers, or at least those with substantial down payments.
- The FHA guidelines are pretty strict when it comes to appraising the property.  The property has to be in decent shape, and, for instance, an illegally converted garage is a big “no-no”.
- Due to recently changed appraisal guidelines, appraisals are tending to be the conservative side, which means if you bid high (with multiple offers, you pretty much have to) and your offer is accepted (lucky you!), deals can fall by the wayside.

At the end of the day, my buyer had to go to an REDC auction.  More about that adventure in my next post.

California is a very desirable place to live — but it is also the 47th lowest state in homeownership with a rate of only 56.9% according to the US Census Bureau. Since the last recession ended in the 1990s, it became increasingly difficult to afford to buy a property in California and, in particular, in Los Angeles. The recent real estate and financial market crash has had a silver lining — real estate is now more accessible then it has been in a long time.

In Woodland Hills, from the beginning of this year up to 7-26-09, a 3 bedroom 2 bath house with about 1315 square feet averaged just over $400,000. This translates to a monthly payment of less than $2,250.00 with 3.5% down payment (FHA) and a hypothetical interest rate of 5.6%. By comparison, it would likely cost you $2,300.00 to rent the equivalent place, a rent payment that is very likely to increase over the next thirty years. What you gain by owning vs. renting is the interest tax deduction, and up to $8,000.00 in the form of a tax CREDIT provided you qualify and close escrow in time. (Do keep in mind that there are other costs, taxes, insurance etc. — but also intangible benefits to homeownership. Plus, if you get a fixed rate mortgage, as we advocate, your investment will be sheltered from inflation.)

If you find yourself overwhelmed by the buying process (from getting pre-approved to selecting your property), please let me guide you so that the process is as smooth as possible — perhaps you will find yourself in a new home in time for the holidays.

But, even more interestingly, we are now looking at only two months of inventory for single family houses! This figure shows that how little inventory there is to meet demand, potentially contributing to a surge in prices. Much of the current inventory is REO or short sales. However, the real inventory may be even higher: the published figures don’t take into consideration what is referred as “shadow inventory,” where banks are either delaying putting their inventory on the market, or are delaying foreclosure, meaning that some “zombie” properties are not being taken back . . . yet.

If you are interested in finding out how your particular area is doing, please email me and I will be happy to forward it to you.

That might be enough to make you sick to your stomach, and at least,  to swear off financial pundits forever.  Unfortunately, real estate punditry is not much better.   While real estate tends to move in much slower cycles than the stock market, and is therefore somewhat easier to predict, no one will know when the bottom has been hit.   Everyone wants to buy at the bottom, to have something to brag about over the water cooler if for no other reason.  While there have been some “green shoots” on display recently, many are bracing for the next wave of foreclosures and layoffs.   However, as real estate broker and blogger Frank Borges Llosa put it in his blog, the exact correct day to buy is simply “the day you stop caring about the bottom of the market and you decide you are ready to live in a place for 5-10+ years and enjoy life.”

Of course, even Frank’s sound advice falls a bit short if you are looking for an investment property, like a duplex, triplex or fourplex.   However, there are some rules of thumb I like to consider.  How close is the cost to the replacement cost?  What is the potential appreciation?  Since the San Fernando Valley is pretty much built out, they are not making any more land around here.  (The same cannot be said for some other areas, such as Riverside or San Bernardino.)  Given that construction costs are likely to go up with increasing regulations and costs of materials, the closer you can get to buying something  at or below replacement cost, the less risky the investment — presuming it is in an area where the rental demand will remain relatively stable.  Can I make money off it — if not right now, when?   What is the job climate like?  Admittedly, Los Angeles is not as economically healthy as it has been in the past, but there are some things that will always make this area desirable to many — the climate, beaches, entertainment business, etc.    Finally, real estate is an illiquid investment and one in which the market is still quite inefficient — which can be a good thing if you are a buyer and can score a property for significantly below market value, you can protect yourself against some further declines in the market.   (Good luck trying to buy a stock below market value!)

In conclusion:  I still love real estate as an investment — the long term fundamentals are hard to beat, notwithstanding the day-to-day uncertainties of the market.   Just make sure to buy the right property and lock in your fixed rate financing.  How can you find a great deal?  You’ve got to work at it, I’m afraid.  But I can help:  send me an email and I’ll get you started with daily MLS search information tailored to your particular wishes.  Then I’ll help you sort through the choices.  Also, I may already know of a suitable property:  don’t be afraid to call me anytime.

“The policy change means home buyers, who use FHA-backed financing, can get a short-term loan to help buy a home. The loan is repaid a few months later, after the buyer files an amended tax return and receives the credit.”

The government’s rather heroic attempt to pump a bit of air into the deflating housing bubble appears to be having a major influence on first time homebuyers. I’ve heard of parents buying properties for their college students to take advantage of the tax credit. Perhaps you should ask yourself: Do I want Uncle Sam to make my down payment?