Is real estate investing coming back?

I have been on the lookout for some new real estate investments during the last few months. Most of the time, I have been met with unrealistic prices and expectations from the sellers. They still dream of the good ol days of 2005, where they could pick a number out of the sky and watch multiple bids come in.

But now, things seem to be slowly coming back to earth. Whether it be a short-sale, or more favorably a seller that just needs to get out of a property, prices are starting to get to the levels where investors can consider coming back in and establishing sound rental properties. Based on the dynamics of the still depreciating market, rehabbing may be a little ways off, but rentals are starting to look attractive.


I looked at a few houses this weekend in the D.C. metro area and after running the numbers, there are a couple that will receive offers. Of course, they will not be at asking price. I still believe that offers should be at about 80% of asking price, depending on the property, and especially as an investor. In a declining market, you do not want to be caught holding someone else's bag at an inflated price. I have a few friends that bought in early 2007, thinking that they were getting a "deal", only to see prices sharply fall after the so-called subprime meltdown around August 2007. Although, I believe the brunt of that meltdown is behind us, it is very important to still stick to the numbers and not compare anything to the levels of 2005 and 2006.

This market is starting to look encouraging for the investor again. Just make sure the numbers work and you do not buy on emotion.

2008 Spring Real Estate Market

For the past couple of Spring seasons, the real estate market has been in a slow, steady decline. Prices stopped rising at the breakneck pace that we have become accustomed to during 2001 - 2005. Based on that frame of reference, any reversal in appreciation started to look like the deal.

But something seems different about the coming Spring of 2008. I am beginning to see price reductions unlike what has occurred in the past 2 years. It seems like the true reality of the real estate market is finally starting to sink in. I have witnessed price reductions of 25% to 50% of previous purchase prices, which was usually during 2005 - 2006. You may be wondering how a homeowner is able to take such a hit to unload a home. Well, it is not the homeowner directly taking the hit. These steep discounts have been due to what are called short sales. A short sale is when a lender agrees to sell a home at less than the mortgage balance, just to write-off the loss and avoid a costly foreclosure. The homeowner avoids going into foreclosure, but may have other tax implications connected to the sale of the home. These short sales are becoming more common as foreclosures rise and are offering significant discounts for buyers.


Anyone in the market to buy a home should consider concentrating on these short sales in order to get the best value for their money. No one truly knows how low home prices will fall, but they are definitely hitting very attractive levels for the savvy buyer.

Jumbo Loan Rates Set to Fall

Congress has just passed their economic stimulus plan that is supposed to put money in everyone's pocket so they can go out and boost the economy. This is the highlight of the plan, but it also covers another important provision that will be good news for homeowners and potential homebuyers.

The conforming loan limit that is insured by Fannie Mae and Freddie Mac is $417,000. Fannie and Freddie are the government companies that buy and package mortgage backed securities from banks. Any loan amount over $417,000 is considered a jumbo loan and is not insured by these entities. Ever since the subprime fallout, these jumbo loans have become expensive and average about 1.25 percentage points higher than conforming loans. Wall Street is very reluctant to purchase these securities since Fannie Mae or Freddie Mac does not back them.


The stimulus plan will instate a temporary increase in conforming loan limits to about $729,750, depending on your location. This means that these higher balance loans can now enjoy the same low rates as conforming loan amounts. But this increase will only last till the end of 2008, so interested parties must act quickly.

In my opinion, this is the best part of the stimulus package. It will allow struggling homeowners to save from $200 - $400 every month by refinancing their high balance loans. Let's hope that Congress considers making this increase in the conforming loan amount a permanent fixture.

2008 Refinance Boom May Be Looming

With the slowing economy, talks of recession, the tick up in unemployment, and the volatile stock market, the 30 year fixed rate mortgage has slowly continued to drop. A couple of weeks ago, the Feds finally took steps to combat the signs of recession by cutting the Fed rate by a combined 125 basis points. Usually the Fed funds rate has little to do with fixed rate mortgages, but it usually does not take long for fixed rates to follow the trend.

Long-term mortgage rates are already low and may go lower. Usually when the economy faces a possible recession, these rates drop. We all remember what happened to rates from 2003 – 2005, after the 2001- 2003 recession. So, if history is any indication, there is a good possibility that rates can fall further. This is good news for potential buyers, but even better news for current homeowners with decent credit that want to refinance out of ARMs or higher rate fixed mortgages.

Rates have not been this low in a long time, and it may be worth investigating whether you can benefit from this low rate environment.

Home Staging Helping Today's Home Sellers

In order to sell a home in this market you must have a property that is in good condition and well priced. But one area that is often overlooked is presentation.

Professional home stagers have been receiving more business and have helped increase the likeliness of a home selling. Prospective buyers want to be able to picture themselves in a home. A house with too many personal items or unique features will make it hard for a buyer to see themselves in the home.

In order to cater to the variety of potential buyers, you should make your home as neutral as possible. This would include neutral furniture, paint, artwork, etc. You don't want to offend any prospective buyers.

2008 Real Estate Outlook

Another new year has come and we are all looking forward to what it may have in store for us. This is true if you believe in New Year's resolutions or not. This may be especially true for all of the potential homebuyers out there. As most waited out the market shifts of 2007, 2008 may be the most favorable time than ever to dive into the market. There are currently some really nice deals out there, which has been absent from the market for a long time. Current home sellers are a bit anxious and the usual slowdown in sales that the winter months bring will accentuate this fact.

As always, no matter what the sale price may be, it is always best to negotiate within reason. This goes for owner-occupants as well as investors. You must also be looking to hold the property for at least the next 4 - 5 years. This is definitely not the time to consider rehab projects if you are an investor. Good, solid long-term rentals would be a better strategy. Normally, real estate cycles last for about 5 years. This would theoretically put us somewhere near the bottom of this current cycle. So 2008 may be the year for the homebuyer.


As for lending, FHA is back in favor again and should be considered especially if you are a first-time buyer. Their website www.fha.gov lists the loan limits for different areas around the country. If 2008 brings better loan programs that will allow more buyers to afford homes, we may see better sales a little sooner. The subprime mortgage crunch was one of the major factors that contributed to the drop in home sales for most of 2007.

Simple Tips for Controlling Mortgage Cashflow

Since we are in the middle of rising mortgage rates and potential foreclosures, I want to suggest a few ways for folks having cash problems to avoid potential disaster.

The number one rule is not to close your eyes and ignore the problem that you are having. It is best to read the signs and address problems that you see coming down the road. The biggest mistake would be to allow yourself to make late mortgage payments. That will virtual eliminate about 90% of the solutions you would otherwise be eligible to receive.

If you have an adjustable rate mortgage that you know will reset soon, pull out the paperwork and find out what new rate is due to adjust. Refinance ahead of time, because mortgage rates are pretty low right now.

Also, if you have consumer debt (e.g. car loans, credit card balances, etc) that has a high interest rate (8% - 20%), you can consider paying off those loans with a cashout refinance. This only works if you have enough equity in your home. This strategy will give you a fixed mortgage rate and reduce your total monthly obligations.

The Federal Housing Administration (FHA) loan is also making a comeback. While most lenders require that you keep 20% equity in your home on a cash-out refinance, FHA will allow you to keep just 5% equity in your home. This results in a much larger cash-out refinance.

With the squeeze in credit availability and the rise in consumer monthly payments, these suggestions should help you to manage your monthly cash flow.

Basics of a Reverse Mortgage

Reverse mortgages are starting to grow in popularity. In general the borrower must be over 62 years of age. This type of mortgage allows the borrower to receive monthly cash payments by tapping into their home's equity every month.

The mortgage interest that the borrower will usually pay is added to the balance of the reverse mortgage. So the debt against the property increases each month. Most reverse mortgage programs do not have income qualifications. A retiree with no income can qualify. The interest varies and can fall between 6 percent and 9 percent. The closing costs for a reverse mortgage are generally higher than with a regular mortgage refinance $15,00 - $20,000). The lender may also may keep the appreciation accrued in the home once the borrower passes, even if this appreciation is more than necessary to cover the remaining mortgage balance.

In my opinion, reverse mortgages are only good for individuals that do not have an income. If a retiree has some sort of income, a home equity line of credit (HELOC) may be a better choice. They have much lower closing costs and allow you to keep all of the remaining equity in your home, which allows you to pass it to your heirs.

Buyer's leverage increases

We have been in a buyer's market for more than a year now. Since the buyer's market began, buyers have gained leverage over sellers in negotiations.

Over the past few months that leverage has grown even more substantial because sales have continued to decline while inventory has risen. The problem now is that as inventory rises, sellers have put a lot of "junk" houses on the market. These houses that are in poor shape are usually listed at or close to the price of homes that are updated. Many of these "junk" homes are unrenovated investor properties or foreclosures. Since most homebuyers look at the cheapest homes in a neighborhood first, they are forcing the owners of updated homes to list their properties at or close to the price of the homes in poor shape. This again plays to the advantage of buyers that are actively looking.

In my opinion, this winter holiday season will be the most optimal time to buy this year. This should continue until about February of 2008. We may then see a slight bump in home sales as the spring season nears. For those in the market to acquire a home at a discount, the slow holiday season is the best time to make a deal.

Sellers must disclose defects in "as-is" sale

In this currrent market, there are a lot of properties listed as "as-is" sales. Many buyers are not clear on the meaning of "as-is" and what it may imply.

Selling "as-is" does not protect a seller who lied about the condition of the property or who concealed huge faults that the buyer could not see. They must still disclose "known" defects in the property, they are just not obligated to make any repairs before the sale is finalized.

When buyers take property in as-is condition, they acknowledge that they realize what repairs are needed and have offered below market pricing. But they have not agreed to accepting hidden defects in the condition of the property.