Wednesday, June 24, 2009

Rent to own - or rent to survive?

The “rent to own” scenario I have been preaching about for the past year has finally been gaining in strength, yet I continue to have some real estate professionals express concern to me about the negatives.

The above link is to still another story about how builders have begun to enter the foray. They see the same things I do. There are a number of potential buyers out there that have enough for a down payment and to handle a reasonable monthly mortgage, but do not have enough credit to get a mortgage or perhaps need a few more months to reach that point. But they would “own” now if not for those conditions.

Sellers have reasons to “rent to own”. Not only would a “tenant” cover their mortgage cost, but one with the desire and strong possibility of buying the property is going to take much better care of it on a day-to-day basis. In most cases, it frees up the seller to move elsewhere, whether a move up, down, or laterally.

Yes, I understand there are some risks on both sides. A “tenant” could suffer a job loss or a severe strain in this economic climate and have to vacate, thus resulting in the major expense of the current owner. An owner could suffer a similar economic blow and force a tenant out. Several realty agents I have discussed this with feel that these possibilities make a rent-to-own scenario too risky for them. I can understand that, even though the concern is really that the realty agent does not want this to reflect on their services if things go wrong. Yet, these same realty agents seem unwilling to negotiate an exit strategy into a contract.

If a rent-to-own tenant suffers a financial setback, he/she/they could have a 60 day out clause, perhaps forfeiting a deposit paid initially and designed to go toward eventual ownership. This would provide a period of weeks for the “seller” to either find another tenant or consider alternatives such as an auction for at least the balance of the mortgage. Depending on the amount remaining on the mortgage, there could even be room for the seller to then profit while being done with the property and yet give a fresh buyer a great deal. If an owner suffers a setback, the tenant would be covering the existing mortgage.

For builders, they see the value of having tenants in units which have already been built and cost money to maintain if no one is in them. As more of them take to this idea, it could mean the difference between builders staying in business or not to have tenants in as many of their already built homes as possible.

My message to potential buyers with credit issues is to strongly consider this possibility. Builders are worth checking with, especially since there is a likelihood of a new unit and fresh warranties. My message to sellers is to weigh the risks of being able to get out from under a mortgage and move on vs. staying in your current situation. And my message to realty professionals is to consider ways to make this system seem better so that you don’t lose your commissions to a local builder.

It appears there are potential buyers with the financial capability but without sufficient credit. In many cases, the financial capability could win out. For everyone.

Monday, June 22, 2009

What happens in California stays in California

What happens in California sometimes stays in California, and sometimes it doesn't. It is way too soon to tell with regard to The California Foreclosure Prevention Act that took effect last week.
The intent is to require mortgage lenders to prove they worked with the homeowner to make a loan modification before they can begin foreclosure procedures.

This is with all the best of intentions. Yet, already there are 2 schools of thought on this.
One is that it could provide enough options to make a difference and prevent some people from losing their home and somewhat reduce the number of foreclosures. This in turn helps to keep property values higher when an area has fewer foreclosures to pull down the average home price.

The other thought is that not everybody facing foreclosure can be helped enough to make a difference and that is only delays the inevidible while costing the owner facing foreclosure more time and money.

Similar measures have already been attempted in California over the years and, obviously, were not completely successful. This time around, people from other states will also be monitoring to see if there is any (or enough) positive impact on the marketplace over the next few months. If there is, look for other states to look into this.

Meanwhile, I have seen several stories and heard from a few different sources which are not endorsing many of the "loan modification" programs now being made available. It appears some are being started by people looking to make a fast buck at the expense of home owners too stressed out to take a serious look at the potential long term impact of a loan modification.

Whatever your feeling, it is important to note that consumers do not pay for a legitimate loan modification program if and when it really does make sense. There are some web sites and advertisements out there looking to confuse consumers into thinking they need to pay an up front fee to get a certain loan modification program. Not true.

Legitimate entities, such as some banks, offer a loan modification program with no up front cost since they understand that those in need to not have the funds needed to preserve their current mortgage. Keep that in mind.

You may have noticed that some lenders are now offering a 40-year mortgage in addition to the conventional 30-year. They make it look appealing for the short term by showing monthly savings sometimes as much as $200 per month above the 30-year. However, some 40-year mortgages require an upfront payment to implement. When factored out, it reduces the monthly savings. For example, a $2,000 fee to save $200 per month comes out to $167 per month for the first year. Do the math with those figures and it amounts to a $33 per month savings for the first year. Without knowing what mortgage rates will be like in 1 year.

If you respond by saying "but in 1 year I could refinance", you would be right, but you would also be faced with still another fee to refi. That assures you would have spent to save a bit more than $1 per day.

Note that this is only for the short term with a 40-year mortgage. For the long term, needing 10 more years to pay also serves to increase the amount of interest you would be paying on the property.

Put this all together and it shows why financially challenged home owners should explore other options besides a loan modification to prevent foreclosure and to hopefully maintain (or not decrease) their credit status.

It becomes time to not be concerned about a profit and to be concerned with getting the loan balance paid off. If the house is valued at $300,000, but there is $200,000 left on the loan, the distressed owner would be out of his/her/their obligation with a sale for $200,000. A potential buyer, and it only takes one, would be more apt to "steal" the home for $200,000 than to wait until the $300,000 asking price comes down to $250,000 in 3 months.

The seller frees up the obligation, and could then rent or live within their means for as long as needed.

With single family home auctions now available through which the seller has a right to refuse the "winning" bid, situations such as this are now possible.

Simply put, it does not need to cost any more to avoid foreclosure.

Tuesday, June 9, 2009

Real estate market musings..........

Upon reviewing more of the day to day real estate news stories of late, I am coming to the conclusion that the real estate market should actually be divided into 2 parts.

This reflects more on the mortgage side, but loans are a huge factor in determining the market, especially in today's credit crunch.

The 2 factions would be divided among those really looking to buy or sell and those who would like to refinance if and when conditions are right. People looking to buy are looking for the right home for their "right" price, and are not going hold off on the "right" deal because mortgage rates have risen within the past 2 weeks. Yet, it seems that too many people within and outside of the real estate community believe otherwise.

Those looking to refinance should be on high alert at the end of this month. The government is playing games with mortgage rates and that will probably continue for some time. They lower the rates to spur activity, and then raise them again to slow down the flow and keep those in the industry busy enough to survive (in most cases).

My personal prediction is that the rates will drop again on Tuesday June 30th, and perhaps by at least 1/2 point. You can't go by what has happened to the rates in Junes past, just as I say the experts should not keep going by home sales statistics from years past either.

Those who have also been tracking the rise and fall of mortgage rates over the past 8 months would have noticed the reductions coming prior to holiday weekends. The first significant drop took place right before Thanksgiving weekend in November. It happened during the exact week that a lot of people were traveling, preparing for the holiday, and generally not ready. Those who were in position started taking advantage of the reduced rates, but it wasn't everyone.

Same thing happened during the Christmas and New Year period, and again in February prior to the Presidents Day weekend. It was after Memorial Day that the mortgage rates have risen to their highest in a while.....from their lowest in years.

Why June 30th? Because it is the end of the month and end of the quarter, which distracts from lenders and financial types dealing with closings on properties, and closing out their month of June and 2nd quarter. Not coincidentally, this date comes 2 business days before the business world shuts down for Independence Day weekend. (Most businesses are considering Friday July 3rd to be a holiday.) This would also be 4 weeks after the current rise in rates.

But for those who would purchase, again, I don't see mortgage rates being prohibitive even if a bit higher than during prior weeks.

Within the past 2 days, I have read articles and opinions from the rentals angle. One point of view says that because fewer multi-family unit loans are available it means that fewer new apartment units will be built, resulting in reduced inventory. The angle is that less inventory will result in higher rents for what is available, and that means many who would be renters might be better off to purchase.

The other side of that coin indicates the same circumstances could be better for renters. Entities which develop apartment buildings for income would stand a greater chance of obtaining one or more new construction loans for multi-family if and when their present holdings are full and producing demonstrated income. That would seem to favor keeping rentals at reasonable rates in order to have them filled. Thus, a "renters' market" if I may coin a new phrase.

As of today, I favor the "renters market" argument. There are plenty of vacancies in many cities for rentals. Look through your local real estate section under "Apartments" and you'll find some of those "1 month free" type of offers.

Regarding the housing market, I have been saying this for months and will continue. With housing prices dropping in many cities, the issue for many sellers is finding a qualified buyer. When that is the issue, it means that the price is reasonable and that potential buyers are trying to get the property, but do not qualify.

The problem I have with that scenario is that the potential buyer winds up "turned away" and then either goes elsewhere or stays put. Rent to buy could be the way to go. If that potential buyer didn't qualify for a loan, chances are they could afford the monthly mortgage on the property they are seeking.

Often times the potential buyer is turned down due to credit issues, and NOT because they don't have a reasonable down payment. I'm not saying it's easy, but I am saying I don't hear about much of an effort to make something happen so that buyer and seller can both move on.