Archive for July, 2009

Silicon Valley Real Estate Blues

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Does this sound like anyone you know?

1. I’m a smart person with good solid  job. I should own a house.

2. That idiot down the street makes less than I do, but he just bought a cool house. He’s a homeowner!

3. I wonder how much house I can afford?

4. I don’t know much about real estate. It sounds complicated, so I’ll talk to someone who does it for a living.

5. Realtors and mortgage brokers know what they’re talking about! (No conflict of interest there, right?) They tell me to spend as much as possible, because housing prices always go up. I don’t have to even research that; it’s so darn obvious!

6. I’ll take out the biggest mortgage the broker will give me. I’m not worried, because they wouldn’t loan me the money if they didn’t know I could afford it. They’re professionals after all.

7. Everybody else is doing the same thing, so I have to be as aggressive as possible. They’re not making any more land and there’s a shortage of housing (again, it’s so obvious!), so I have to get into a house now or the prices, which never go down, will rise out of reach.

8. I make $100,000 per year, which puts me way above average, some might consider me rich. The median price of a house in my area is $700,000. I don’t care if that’s seven-times my income (the rule of thumb is that your house should cost 3 to 4 times your annual income), I’m a rich guy so I should get an $850,000 house. I deserve it!

9. Cool! I just bought my house. It cost me $928,000. I had to bid aggressively because some other jerks were trying to get it and we really love this house. I got it with an interest only adjustable rate mortgage, because the rates on ARMs are one whole percentage point lower than a fixed-rate mortgage (yes, rates are currently at 40-year lows, but I needed that extra percentage point to make the monthly payment).

10. My interest rate doesn’t reset for 3 years anyway, and I’ll certainly be making more than I am now in five years, (even though on average, people are now making less than they were 5 years ago).

11. The interest-only part of the mortgage also ends in 3 years, so I’ll just refinance the mortgage. The broker told me that should be no problem. (Unless, of course, there’s a massive global credit crunch that causes the biggest tightening of credit since the 1970s, but that won’t happen).

12. I’m a smart person who owns a house. All is right with the world.

13. Honey, some guy has stuck a notice on our door.

The morale is:

WHAT YOU DON’T UNDERSTAND CAN AND WILL COST YOU.

GET EDUCATED.

When Best Advice equals smallest Comission

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I just wrapped up a unusual scenariowith a referral client today. Here’s what happened.
“Bob” and “Carol” had been married about 3 years with 2 small children. They lived in a small condo in one of the most desirable cities in the Bay Area. This was bought when there was just the two of them. It was simply no longer suitable and they wanted to talk about selling it to buy a 3 bedroom detached home with a back yard in a neighbouring cheaper city.

Problem is they were only just getting by from week to week so an increase in monthly expenses was not possible. In fact there was a serious need to either reduce expenses or increase income.

Bob is Pastor of a start up church and receives a total of $47,000 per year split between Salary and a generous housing allowance.With the 2 toddlers Carol will not be working in the near future.

Although they have close to $180,000 equity in the condo the increased mortgage and property tax payments for even a small detached house would be impossible to make.

So what advice can I, a Real Estate Broker, give when buying, selling, or refinancing are not options, yet a nice young family have a genuine need.

Answer:

First, refi the current Adjustable Rate Mortgage into a 5 year fixed to take out some equity, part of which pays off the misc Credit Card debt. The balance to be safely invested to obtain a ongoing income stream. (this really is possible but beyond the scope of this discussion). At the same time set up a small Home Equity Line of Credit to be used only for emergencies.

Second, move into a rental house for themselves and rent out the Condo. The condo will still be cash flow positive even after the refi, and the house they will rent will be far nicer than any they had thought of buying, for approx two thirds the monthly expense.

Net result is is as follows:

They still have a foot on the property ladder.

They are living in a home much better suited to their current family needs which incidentally is not only closer to Bob’s church, but is served by the best elementary school in a top rated School District.

Their monthly income has increased.

They have an emergency fund available as required without ever needing recourse to credit cards.

Commisions to me – ZERO

Goodwill earned – PRICELESS

 

 

A Reverse Mortgage Scenario

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The good news is that a Reverse Mortgage can be the only way to save some “elderly” folk (62+) ??? from financial distress.

The “bad”? news is that it reduces the inheritance of the kid’s.

Here’s an example from life.

John and Jean had been married 48 years when his physical health began to fail, along with an increasing level of dementia. He was consoled by knowing that his pension would allow Jean to stay in their home as long as she wished. He was a long serving pilot with United Airlines and had a decent pension with good survivor benefits. Jean was in good health and could expect to long outlive him.

One day a letter arrived from John’s pension administrators informing him that as a result of a settlement in his ex employers bankruptcy proceedins the survivor benefit was no longer covered. This was disastrous. It would mean that upon his death the house would have to be sold to provide the money for Jean to live the rest of her life on. She desperately wanted to stay in the house with her lovely gardens, and surrounded by all the friends from their many happy years there.

I was asked for suggestions which would keep her in the house, and in the financial comfort needed to enjoy it.

In truth there was only one real option.We did a reverse mortgage which gave us $319,000. On the advice of my Financial Planner colleague the bulk of this was invested in an Index Linked Annuity with a Capital Preservation guarantee clause, and a 15 year average annual return of 8.75%. This would provide the additional income required.

The 2 adult children were delighted with this result as neither of them had the ability to have their mother live with them. They fully understood that when she died or moved out of the house the mortgage would have to be paid off, either by selling or refinancing, but until then she had no payments to make.

As with all tools the reverse mortgage can be abused. However, there are many occasions where it is the means for older folks to enjoy their later life in the comfort they deserve.

There was a final twist to this story. About a month after this was all completed another letter arrived from the Pension Administrator announcing that John could take a one- time lump sum payoff from his pension. The amount was $969,000. Needless to say this was immediately accepted and invested wisely.

A.P.R. is Worthless

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The Annualized Percentage Rate APR is an economic measurement designed by politicians.

It was intended to provide the mortgage borrower with a simple way to compare the real costs of different mortgages. For example, is the low interest rate high points approach better than the High interest rate lower points? Unfortunately the way it was designed is badly flawed. It not only fails in this primary goal. it also allows the numbers to be manipulated in such a way that the borrower can take the low APR option but end up paying much more for the loan, and losing some tax benefits.

A detailed explanation of the problems with this legistlation would take another couple of pages, but if anyone is really interested drop me an e-mail and I’ll happily give you the gory details.

The REO Urban Legend

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I’m seeing more and more qualified home buyers holding back from actually buying based on the continueing folk legend that Banks are restricting the release of REO properties to avoid a glut of inventory which would drive prices down. The story is that a huge surge of new REO’s are coming to market in the fall and that will be the time to be a Buyer.

I believe this is total nonsense as the Banks have no sensible reason tho do this, and a very strong financial reason to do the exact opposite.

It has always been my understanding that once an NOD (Step 1 in the actual foreclosure process) is recorded the Bank has an official “Non Performing Asset” which must be excluded from their FDIC required reserves, and must be replaced immediately from other assets. This inevitably reduces the amount available for new lending.

If this is so then the Banks are strongly motivated to get whatever they can, as quickly as they can, for any REO properties they hold. The money recieved can then go back into the “Funds Available for Lending Pool” from where it can be loaned out to create new mortgages i.e. “Performing Assetts”. This is how banks make profits.

Can anyone comment on my understanding of this and offer suggestions on how we can counter this market distorting perception.

A Suggestion For Your 401-k/IRA Money

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The vast majority of money in 401-k type plans, and IRA’s is used to gamble in either Stocks (equities) or Bonds, mostly in the U.S. I use the word GAMBLE quite deliberately.

However,  most people have no choice as the plan administrators only permit these options. You can choose from a small range of Mutual Funds or, more rarely, a Self Directed Option. This means you are investing in individual companies and a good part of your money goes on trading commissions. Always remember that you pay the same commission on a bad trade as on a good one, but you have given up all control of how and when they will be made.

Given this, the challenge is how to make the best selection from the limited options available.

Here’s a little snippet of historical data that might give a reason for my preference:

For the past 30 years (1978-2008) the U.S. Stock Market has undergone 4 different Bear Markets (a loss of at least 20% in the S&P 500 index). Specifically these were 26%, 33%, 20%, and 49%.

Despite this the average return on an investment tied to the S&P 500 index over these 30 years has been 13%. (Source. BTN Research).

Given this record my suggestion is that where possible you put your retirement savings into the fund that most closely tracks this index. My favourite is found here http://www.google.com/finance?q=MUTF:VFINX

Of course, if you can find a Mutual Fund (either Stocks or Bonds) which has done this good over a similar time then go for it.

All Real Estate Is Local

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Most successful Realtors know the truth of my Title (Paraphrased from ex Speaker of the House of Representatives Tip O’Neill “All politics is local”).

Unfortunately many of our clients get most of their information from the talking heads and empty suits of the mass media whose purpose is to sell advertising, with LITTLE or NO REGARD to TRUTH or CONTEXT.

They are therefore led to believe that any house can be bought for at least 20% less than a year ago, anywhere it happens to be located.

Here are a couple of facts that might be thrown into the running conversations about “How’s the market”

Over the past 10 years the average home price has INCREASED by 6.2% Nationwide.

Over the past 20 years the average home price INCREASE has been 4.7% Nationwide.

Source www.ofheo.gov

These are way below the numbers for Santa Clara County (Silicon Valley) where I live and work, and they are way above the numbers for Dallas Texas.

The Morale is “East San Jose is NOT Palo Alto. Sacramento County is NOT Santa Clara County, Southern California is NOT North California”. Florida statistics are not relevant to any other State.

ALL REAL ESTATE IS LOCAL

The Best Legal Self Help Site in the UNIVERSE.

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Based in Berkley Ca, that bastion of Free Thought, The NOLO PRESS is one of the jewels of California. For those who have never heard of it give yourself a treat and see just how much Legal information and advice is freely available at this web site. http://www.nolo.com/index.cfm.

It’s sections relating to landlords and tenants and relevant paperwork are a major resource to myself and many of my clients.

Here is their “Mission Statement”:

Since 1971, Nolo’s goal has been simple:
To make America’s legal system accessible to everyone. With hundreds of top quality, plain-English legal products, we’ve helped make that happen. Every year, over 10 million people turn to Nolo to save billions of dollars. Thank you for your support.

Ralph Warner, co-founder

This is does not allow you dispense with the services of an attorney, but it can help decide if you need one, and to work more productively with them should that need occur.

Be advised that I am not an attorney and do not intend this as Legal Advice.

Here’s The Good News

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These days when every mass media empty suit is competing to see who can spread the most gloom and doom let me point out one very positive outcome of all this, especially for the Real Estate Market.

It’s great for mortgage interest rates. When stock markets go down it’s because a lot of people are selling. Where do you think they put the money received from the sales?

How about the traditional safe haven BONDS? This drives up the prices on Bonds.

When Bond prices go up, interest rates go down. That is exactly what happened yesterday when we saw 2 reductions and modified rate sheets during one day.

If your mortgage was in process you might have received a call late yesterday to discuss locking in the interest rate.

The New Bidding Wars

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Here in Silicon Valley we are in the middle of the most amazing 1st time Buyer market i’ve seen in my 20 plus years working here.

We have an much higher than normal number of Short Sales and REO properties. While for numerous reasons short sales are just sitting out there, the REO properties are flying off the market as quick as they arrive, and in most cases with multiple offers.

For a great summary on this topic check out Scott Schang’s blog at http://www.californiateachersandemployeeshomeloanprograms.com/buying-homes-in-a-bidding-war-understanding-competitive-markets/