USHUD And The Truth About Buying a Foreclosure Part II

As has been online now as the largest free foreclosure site since 1999 we are uniquely qualified to illustrate the truth about buying foreclosures. The most common reason that people don’t buy foreclosures is that they are not aware of some of the financial benefits and programs that exist that allow for the purchase of a foreclosure for less money and less hassle than the average resale property. These benefits were covered in the first article in this series.

Some of the common reasons are that people don’t understand and the other reasons are that foreclosures are not always available in the neighborhood that the buyer is interested in living. Foreclosure buyers are required to be more geographically flexible than the average buyer and they need to be flexible in the realm of floor plans and design. Foreclosures are available in all price ranges but they are not always available when the buyer wants to buy. The buyer needs to be a little more patient because of these differences in the nature of foreclosures. A foreclosure doesn’t spend as much time on the market as a conventional resale but they do pop up and the buyer has to be willing to be flexible in order to make a quick decision and move forward or they will lose the opportunity and be back in the waiting game looking for the right house in the right neighborhood at a foreclosure price.

This is why most (90%+) of the visitors to do not actually buy foreclosures. We are all interested in saving money but we are all not able to be as flexible as the determined foreclosure buyer needs to be.

A real estate agent that understands the priorities of the buyer has a step up on their contemporaries. The only way to find out the buyers priorities is to ask and determine if the buyer has the correct profile of the flexible buyer which is needed to find the right foreclosure at the right time. Many foreclosure specialists keep a list of buyers that are waiting for a particular floor plan or area and then get the buyers finances prepared for the foreclosure so when it came on the market everyone was prepared to make an offer on the first day. This tactic is still a good idea  and can save both time and energy, so long as the buyer meets all the right criteria and presents the right amount of flexibility in their needs and desires. This is again why most people, even the people who visit more often than not buy a traditional resale property.

USHUD And The Truth About Buying a Foreclosure Part I

Foreclosures are not a prevalent as they once were but they are still available in most real estate markets. The truth is that most people who look at foreclosures as possible purchases don’t actually buy a foreclosure. This is for a couple of different reasons that we will cover in this series on “the truth about buying a foreclosure”

Foreclosures represent several different obstacles that require different approaches than buying a conventional property on the resale market.

The first obstacle is to find the real estate agent that knows the foreclosure market and how to navigate the course without trying to use the same tactics and options that are common in the resale market but are not reflective of the foreclosure market. Using the state approved real estate contract on HUD or VA homes will lead to frustration and disappointment as both HUD and VA have their own contracts and will not accept a traditional real estate contract. If the agent is not familiar with the HUD or VA contracts they can easily get confused and miss out on the opportunity due to the lack of preparedness.

Secondly the loan officer has to know the many different ways to finance a foreclosure and the benefits of financing the HUD or VA home through HUD or VA depending on which entity is in title to the property. If the foreclosure is a HUD, it is always better for owner occupants to finance using FHA programs. By using the existing HUD/FHA programs the buyer can bypass the need to pay for a new appraisal as the appraisal that was done by HUD will suffice and there is no confusion. If the HUD property goes through a different financial program problems are likely to arise in the appraisal of the home. Problems could include but are not limited to missing appliances and condition of the home. Where HUD provides repair escrows for needed repairs, other banks and lending institutions are not as flexible as they are not prepared to finance homes that don’t meet their more stringent requirements and they have no box to check for repair escrows. This means that the buyer will be stuck with a contract on a home they cannot finance many of the times.

VA is similar to HUD in that they have their own contract and will be far more flexible financing their own home. Not to mention that when financing a VA home the buyer doesn’t need to be a veteran in order to qualify as a veteran and therefore the purchase requires no money down. This is a great opportunity that will be missed if the lender tries to finance a VA foreclosure via any other method other than the Veterans Administration.

These are just some of the reasons that most people don’t buy foreclosures. In fact over 90% of the homebuyers that visit buy a traditional home. and who wants to buy a foreclosure?

The quick and easy answer is “everyone” as everyone wants to save money or we wouldn’t have presidents day sales, 4th of July sales and every other sale that retail stores can create in order to generate more interest. Everyone is interested in saving money and this is no more true than when they are buying the largest single purchase of their lives. Most people never spend more money than when they are buying a home. This leads us all to desire to save as much money as possible.

We offer conventional home sales less than they are asking and hope to get a bite but we amp this up when we are looking into foreclosures. The prices are generally below market. The danger that we run into is when we take a good deal and try to make it great by offering even lower than the asking price.

This is a recipe for people to lose more than they will ever get. As real estate professionals we need to keep this to a minimum by keeping the buyers expectations as realistic as possible. We can’t afford to let them convince themselves of something that is just not within the realm of possibility.  There was a study done years ago that indicated that each real estate agent has no more than three chances to close a client on a house successfully. After the third attempt the buyer will generally want to change something. The easiest element to change is going to be the real estate agent. If they don’t completely give up on the process they will change real estate agents.

This has little to do with the ability of the real estate agent and much more to do with the expectations of the home buyer. They need to have their desires met as the stress is building with each unsuccessful offer made. The more unsuccessful offers that are made increases the stress until they burst with anxiety and make the change that they think will solve the problem. This is not the case in most cases but they are left with little to do otherwise.

The secret is to make an offer than is in the ball park and not too far of the asking price. Making a good deal great makes a good deal for the next buyer while our buyers are still searching with one of our contemporaries.

Adjustable Rate Loans Can Be A Smart Risk

The Mortgage Bankers Association reports that only about 1 of every 10 home mortgages being written today carries an adjustable interest rate. A combination of negative press on adjustable-rate mortgages and a widespread belief that interest rates are bound to start rising in the near future has induced extreme caution among borrowers—as if the only proper response to risk is its complete avoidance.

But risks are worth taking when the benefits are large and the downside is known and manageable. This is the case for hybrid ARMs that have a fixed-rate period of some years at the beginning, before annual rate adjustments kick in. My impression is that too many borrowers are taking fixed-rate mortgages as the easier path without considering whether an ARM might serve them better. The purpose of this column is to describe the factors that prospective borrowers ought to consider before making a decision on whether they want an FRM or an ARM.

On June 9, well-qualified borrowers using my website were offered the following choices: a 30-year fixed-rate mortgage at 4 percent, a 10/1 ARM at 3.5 percent, a 7/1 ARM at 3 percent, and a 5/1 ARM at 2.625 percent. (Fees and charges were about the same for all four choices, and all have terms of 30 years). The initial payments on these loans are calculated using these rates. On a $300,000 loan, for example, the initial payments, in the same order starting with the FRM, were $1,432, $1,347, $1,265, and $1,205. The rate and payment on the FRM are fixed but on the ARMs they can change.

The initial rate and payment on a 10/1 ARM holds for 10 years. At the end of the 10-year period, and then every year thereafter, the rate is adjusted to equal the value of the rate index at that time plus a margin of 2.75 percent. The index right now is 0.1 percent, which contributes to the view that rate increases are inevitable.

At each rate adjustment, the payment is recalculated at the new rate over the period remaining. No rate change can exceed 2 percent, however, and the maximum rate cannot be more than 6 percent above the initial rate. The 7/1 and 5/1 ARMs are exactly the same, except that the first rate and payment adjustments occur after 7 years and 5 years, respectively.

If borrowers knew with certainty how long they would have their mortgage, their decision process would be relatively simple. If their expected mortgage life was less than 5 years, they would take the 5/1 ARM which has the lowest rate, and they would be out of it before the first rate adjustment. As their time horizon lengthens, at some point they would shift to the 7/1, then to the 10/1, and finally to the fixed-rate.

While very few borrowers know with any degree of certainty how long they will have their mortgages, most can hazard an informed guess. This guess should be an important part of their mortgage selection process.

The purpose of taking an ARM rather than an FRM is to reduce costs, but there is the risk that if interest rates rise and the borrower keeps the ARM too long, its cost will be higher than that of the FRM. But how long is too long?

To answer that question, I calculated total mortgage costs year by year for the FRM and for the three ARMs noted above. For the ARMs I did it on the assumption that interest rates increased by the largest amount permitted by the loan contract — a worst case. This allowed me to answer this question: If ARM interest rates increase as much as possible, how long must the borrower have the mortgage before the lower cost of the ARM than the FRM becomes a higher cost?

As an illustration, if the borrower takes the 5/1 ARM and doesn’t pay it off until Year 6, he or she still comes out way ahead. The total cost of the ARM would actually be lower until Year 9. On a 7/1 ARM, the borrower benefits if he or she is out of the mortgage before Year 11, and on a 10/1 ARM before year 13. I calculated these numbers using calculator 9ai on my site.

An important factor in the mortgage-type decision is the borrower’s capacity to meet the larger payment resulting from an ARM rate increase. Because ARM rates are capped, it is possible to calculate the highest possible payment that would result from a worst-case interest rate scenario. For example, if the interest rate on the 5/1 ARM rose from 2.625 percent to 8.625 percent, which is the largest increase the contract allows, the payment on a $300,000 loan would rise from $1,205 initially to $2,124 in month 85. The largest payments on 7/1 and 10/1 ARMs would be $2,132 reached in month 109, and $2,131 in month 145. Readers can find these numbers for their own mortgage on my website as Step 2 on the “Find Your Mortgage” page.

The 30-year FRM is a great instrument for borrowers who expect to retire in their current home, or who cannot anticipate that they will have the capacity to make higher mortgage payments in the future. Others ought to consider taking an ARM. Yes, interest rates are bound to go up, but rates were bound to go up four years ago, and here we are.