Foreclosure Property: Deal or No Deal? Part 2 "Flipping"

Ever heard of "Flip This House", or "Flipping Out"? If you haven't, "Flipping" refers to buying distressed property: foreclosure, short sales, estate sales, or just plain dumpy property, fixing it up comparable to other houses in the neighborhood very quickly, and putting it back on the market for sale, and then sell it for huge profits. Don't be fooled by these "Reality" shows. Remember "Flip This House" never really discloses exacly what the house sells for and how much the flipper actually makes in profit on the deal, they only offer projections. Check out this video below about one of the stars of "Flip This House."

Check out the story of the "Flip This House" veteran

In booming real estate markets you might have heard investors (on radio/TV infommercials) boasting about how they made $300,000 in three months using some "Home Flipping System." Fast money is sexy money, isn't it? Even the term "flipping" evokes the same type of emotion as high stakes poker or day trading technology stocks. These activities sound glamorous because they are seemingly fast easy profits. Who doesn't want make more money by working less? Its human nature. We tend to want to go through the path of least resistance. The action phrase at the beginning of the paragraph is "In a booming real estate market." Are we in a booming real estate market right now? It's not too bad in the Rochester, NY market but it's certainly not "booming." The point I am trying to make is that flipping property is only very profitable when prices are rising very quickly. Let's be honest, when prices are rising, everyone is making money not just flippers.

The house flipper reminds me of the "Dot Com Boom" day trader. Think about it:

1. Wake up at 8:30




2. Pour yourself some coffee




3. Buy 1000 shares of Microsoft for $20 at 9:30




4. Then sell for $22 a share at 10:30




5. Repeat or take the rest of the day off.

And you didn't even have to get rid of your morning breath or bed head! Fast forward a few years, now those people lost their shirt and ended up having to get a real job like the rest of us. If making fast money was easy, and since many of us don't like working harder for less money, wouldn't we all be doing it?

Now, I don't mean to say that there is no money to be made flipping houses, there just isn't nearly as much money to be made as you might think. Sure, some people get lucky (even in crappy real estate markets), but do you really want to leave your hard earned money to a draw of luck. It requires patience, constant supervision, and a lot of homework (HOMEWORK?!) Yes, homework. Do not do this by yourself. A second opinion always helps, work with your real estate agent to develop the best plan. Rehabbing and selling homes is some of my clients full time businesses and have been for a long time. They do not live a decadent lifestyle like you see on TV, but at least they have the opportunity to be their own boss and do something that they love.

If you are going to flip a house, keep three things in mind:

1. Before investing in any private business venture, make sure you have a detailed plan and be sure to budget for unexpected expenses, especially with older homes. For instance, if the entire project cost is estimated to be $185,000, including the purchase and renovation cost, budget at least 10% or $18,500 towards unexpected costs that may arise. The more distressed the property, they higher percentage you will want to dedicate. We call this contingency planning in the business world. Wall Street and government are not role models for the aspect of contingency planning (refer to current events) but I digress. For example, you may not be aware of a collapsed sewer line to the street because the property has been vacant for years and the water is shut off. Don't underestimate the benefits of getting an inspection from a reputable company after you have come to contract with the bank. Even if you think you know the ins and outs of home construction, you are bound to miss something. So get an inspection lest you lose your shirt.




2. Take into account that whatever profits that you earn upon the sale of the property may be subject to capital gains tax, which will be taxed at the same rate as your ordinary income. Keep records of all your expenses associated with rehabilitating the property, no matter how small each may be. Every Home Depot reciept can add up big time. In any event, you should consult with a Certified Public Accountant before doing anything, so that you can develop a plan which will leave you with the least amount of tax liability, unless you actually like paying more than what you owe.




3. On a recent note, flipped properties can cause problems with financing when you put it back on the market, especially buyers using an FHA mortgage. Since flipping and over extended investing did its part in causing the market turmoil that we have now, banks are scrutinizing everything and that includes "Flipped" property that their borrower intends to purchase. They will want to know, "The property was sold recently for $80,000, what justifies a new value of $200,000?" Right now, some lenders are requiring two appraisals to be done on a flipped property, doubling the up front appraisal fee for a potential buyer. This may not seem like a big deal, however it puts your investment property at a competitive disadvantage. Some banks will require you to have all documentation about the improvements done to the property to justify its new higher value. So have that in order right from the start. These new guidelines may even get tighter in the near future so be wary. Below is an example of exactly why banks are doing this now on "flipped" property:

As the saying goes, "You need to spend money to make money!" And these days, cash is king. Overleveraging can leave you in a negative cash flow position very quickly, so be very careful when borrowing money to spearhead projects. If you do not want to use your own cash, you can always look into borrowing against other assets that you might own. If you have a large equity position in your current primary residence, a home equity line of credit could help you finance a real estate investment project. If you have a 401(k) or retirement plan, some employers allow you to borrow a certain percentage against these retirement assets. When it comes to capital, you have to be creative when not using your own cash. If you must, there are still mortgages that allow income verified individuals with excellent credit to buy an investment property with 25% down. Or Fannie Mae allows their REO properties to be financed with just 10% down for investors using their HomePath Finance through select lenders: http://reosearch.fanniemae.com/reosearch/. Whatever you do, shy away from "Flipping Systems" that claim to allow buying investment property with no out of pocket cash, an overwhelming majority of these are scams. And be very wary of internet characters insisting "Use My Cash To Flip Real Estate!" If you get involved with them, you might find yourself with a lawsuit on your hands and possible time behind bars!

I sincerely hope that this helps. Next installment will be guidelines and specifics for the buy and hold real estate investment strategy (one of my favorites).

Foreclosure Property: Deal or No Deal?

Did you know that searches for foreclosed homes are up 325% from 2006, according to Google Trends? Everyday, you see print advertisements, infomercials, and radio commercials promoting the latest and greatest cash generating foreclosure "SYSTEM", or "Call now for the super secret Foreclosure List!" or "This is a public announcement, the government and private banks are selling foreclosed homes for a real bargain. If your last name begins with A-O you may call today for your list of foreclosures...." These companies know that there is a lot of interest and curiosity about foreclosure properties. So in response to popular request, I have decided to do a series of four articles about the myths and realities of buying this class of property and some suggestions on how to invest, maximize profits, and most importantly what to expect in these types of endeavors.


When a client tells me, "I'm interested in foreclosure property." I interpret this request as "I want to find a really good deal." Keep in mind that not every foreclosure property is a good deal. And not every good deal is a foreclosure property. The two best deals that I ever put together for my buyer clients were not bank owned property at all. So be sure to communicate to your agent what your goals are. Afterall, any agent can slap together a list of bank-owned or REO property and 75% of it will be crap. So be clear and you won't waste your time. In the first series of this article I will reveal how to find foreclosure property available for purchase and what to expect in a purchasing environment in the Rochester, NY market.


Sadly, it seems that companies try to profit off of making foreclosure property seem very elusive or secret. i.e. "Call for the list!" The first thing these websites or call centers will do is ask for your credit card information for a free trial of their services and count on you to forget cancelling after the trial period is over. What kind of business model is that? There is no such thing as a super secret foreclosure list anyway! Mortgage defaults are publicly available information. How much more less secret can you get than that? This article will inform you how to locate foreclosure property, either by preforeclosure auction, REO (Bank Owned Property) / HUD (Government owned property), or short sale (which I will define later.)

Featured above is an example of one of those ridiculous ads I mentioned in the previous paragraph

All pre-foreclosures must be advertised in print to the public for a certain amount of weeks before it is scheduled for auction on the Monroe County Court House Steps in downtown Rochester. Where can you find these public announcements? Well you can look in the classifieds section of the Democrat and Chronicle or towards the last few pages of the Rochester Business Journal. The announcement will have a heading "NOTICE OF SALE." The notice will have the auction date, location (Monroe County Court House Steps), and the bank's attorney. The layout of these ads can be pretty annoying to search through because they have a smattering of mundane legal drivel. So the best and most consolidated layout for finding pre-foreclosure auctions is using The Daily Record newspaper. The Daily Record publishes all of the upcoming preforeclosure auctions on Monday in a simple, easy to read format. If you wish to not incur the cost of subscribing to the Record, you can visit your local public library and see if they carry it.

I am not going to go into all of the ins and outs of the auction process, but I will give you some very good points to consider while exploring this method of locating these properties: (You can certainly contact me if you specific questions that I do not address.)

1. Be prepared to pay cash at the auction. If you are contingent on getting a mortgage, then this is not the method for you. But don't worry, there are other ways that you can mortgage foreclosure property. I will address it later on in the article.





2. You will not see the inside of the property before you take possession. Would you ever buy a house without inspecting the interior? Would you ever buy a car without checking out what's under the hood? What if it has pest infestation? What if the floor plan is funky? Cracked foundation? Mold? Leaking oil tank? What if the homeowners in default are still squatting there? This is precisely why buying auction property is so risky.





3. When you buy at auction, you inherit all of the leins attached to the property. Since the former home owners were irresponsible enough to not pay their mortgage, imagine how irresposible they could have been with all of the other aspects of their finances. You may be liable for paying back taxes, unpaid property taxes, mechanics liens (unpaid contractors), the list goes on and on. So if you can stomach not seeing the inside of the property before buying it, make sure you get a title search done to make sure what leins exist before you bid. If you buy a property that was unpaid real estate taxes at auction, you will be responsible for paying them back, no matter how much they are. If you don't, you will be subject to tax foreclosure.

Discouraged at what you just read? Well don't be. The three points illustrated above do not apply in these next two forms of foreclosure; REO/HUD. REO, or bank-owned property is clear of all leins, you can inspect the inside, and in some circumstances is a mortgagable property if it isn't beaten up too bad. If it has major mechanical issues, it may not be mortgagable unless you have a situation which warrants a 203(k) Rehab Mortgage. Visit http://www.hud.gov/offices/hsg/sfh/203k/sfh203kc.cfm for more information.

REO/HUD property is always listed by a real estate broker who cooperates with any and all licensed real estate brokers in the Greater Rochester Association of Realtors. So your agent is best at finding foreclosure property or other good deals on the market. Remember: "Not all foreclosure property is a good deal." Worthwhile REO/HUD property goes very fast, so if you or your agent finds a property that you are interested in, be ready to put pen to paper and write an offer immediately.

Also, be prepared for the fact that you may have to bid over asking price for very good deals. You may scowl at this and ask, "Over asking price? I thought that this was the most horrible real estate market since the Great Depression and the economy is in shambles." Don't be fooled by the national media machine. Rochester is a great market to be in right now. In fact Forbes magazine reported Rochester, NY in the top 25 US Real Estate markets. Take a look: http://www.forbes.com/2009/01/07/housing-cities-realestate-forbeslife-cx_do_0107realestatestrong.html

On the same hand, what do you think happened to the stock market, corporate bonds, mortgage backed securites, and commoditties? Trillions of dollars of wealth has left these assetts and inundated zero risk assetts like Treasuries and FDIC insured bank accounts. This is precisely why you are getting dittely in interest on your savings accounts. Institutions and individuals have been rocked so hard by what's happened in these markets that they have flown to liquidity AKA cash. Insurance companies have been reporting dissappointing quarters recently because they have nearly all of their investments in cash, which is yielding in the inflation adjusted negative percentages.

The point I am trying to make is that many individual investors have pulled their money out of the stock market and are looking to invest it in hard real estate assets. Think about a Rochestarian with their entire life savings in a checking account! This is what you may have to contend with. So do not fool yourself into thinking that you are the only one in a position to buy undervalued foreclosure property. You have to count on the fact that there is competition. Furthermore, do not take the bank's word as set in stone. Just because the bank "accepts" your offer doesn't mean they cannot rescind their verbal acceptance. It's not a deal unless you get written acceptance.

The third method of buying foreclosure property is through short sale. Short sale is actually not foreclosure in the technical sense, but it is similar. A short sale takes place, when a seller has full title to their property, however the market value is less than what is owed on the property. This is what the media refers to as "underwater homeowners." (Don't you love the overtly negative descriptive language the media uses?) For example, it is very possible that a house that is worth $80,000 has a mortgage balance that is $100,000. You may ask, "If the Rochester market is so relatively strong, how could someone's home value plummet so fast?" It has less to do with plummetting value and more to do with former loosey goosey appraisal guidelines and out of control second mortgages. During the mortgage boom period, home equity loans, lines of credit, and refinances were not only used to make home improvements. These borrowers used the proceeds from these debt products to send their kids to college, buy a sports car, go on a luxurious family vacation, pay for a wedding, consolidate credit card bills, TO PAY THEIR FIRST MORTGAGE, the list goes on and on. These are overleveraged homeowners who cannot come up with the money to pay off existing mortgage balances upon the sale of their house.

So in this event, the home seller's agent lists their house on the market for its fair market value and make the sale subject to short sale approval. This means that any offer must be reviewed by the seller (who doesn't care what the property sells for since thay are "under water") AND their bank. The bank must approve any offer because they must forgive the deficiency (difference in selling price and mortgage balance.) Short sales can render very good deals for buyers. Very often the bank will take less money for the property because it will prevent them from going into the very lengthy and expensive foreclosure process. How expensive, you may ask? On average, foreclosure costs the lending institution up to 40% of the principal balance in a normal market. This is not to say you can look forward to getting 40% off of the asking price in a short sale, but you get the idea.

Now let me offer what you should expect in a short sale situation:

1. Normally, when you submit an offer on a REO/HUD property, you can expect to hear a response (whether the bank or owner of record rejects, counters, or accepts your offer), within a day or two at most. In the case of a short sale, the bank reviews offers by committee and it could take weeks before you hear anything about the status of your offer. So have patience. Short sales are definitely not for those who have a tight time frame to work with.




2. Short sale properties in relatively good condition are not going to sell at the fire sale prices that you might expect. At best, you will most likely get the house at 90% of market value in the Rochester area. Not bad if you intend to hold the property for a significant period of time, but not so worthwhile if you intend to "flip" the property right away.




3. Keep in mind that a bank could reject an offer, even if it has been made for full asking price. Many times when brokers put a property on the market that is advertised "Subject to Bank Approval", they may not always have full cooperation for the bank. They may have not even talked to any bank representatives!

Have you ever seen the popular TV shows "Flip This House" or "Flipping Out?" Those shows about really good looking people buying an old house, fixing it up in two weeks, and selling it for windfall profits? Next weeks article will be about "flipping" as an investment strategy in buying foreclosure property. After that, the last two articles will teach you the two most profitable and financially rewarding real estate investment strategies. So stay tuned next Wednesday for Foreclosure Property: Deal or No Deal? PART 2.

ATTN: First Time Homebuyers, Make No Compromises

I can tell you from first hand experience. Being a first time home buyer is not easy. Before I bought my first home, I was overwhelmed with a deluge of options. What neighborhood do I want to live? What style of house do I want? Do I buy something that needs work or a home that is truly turn key? These are just a few of the possibly hundreds of variables that go into buying a house.

Before your head explodes, take a moment to congratulate yourself. You have just made the decision which satisfies the first prerequisite for building long term wealth. According to the Federal Reserve 2004 Survey of Consumer Finances, the average net worth of a renter was $33,700. That same year, the survey noted that the average net worth of a homeowner was $87,300! Renters are worth 38% of what homeowners are. This information probably does not help you any better in choosing which home you will buy, so I do apologize. However, it is a little tid bit to keep in the back of your mind as you shop, to keep you motivated and to encourage you that whatever decision you make, you are putting yourself on the right track! In the paragraphs that follow, I offer a few pieces of advice that I use to coach the many first time home buyers that I work with. My essential suggestion to them is: "Make No Compromises!"

What I mean by this is very simple, when you buy your first home, buy something that you can see yourself living very happily with for at least 5 years. This applies especially for the Rochester, NY real estate market. Our area is pretty boring when it comes to real estate appreciation. It generally follows inflation at approximately 3% per year on average. The great part of this "Steady Eddy" market is that there are no volatile gyrations in our marketplace, as you see in other parts of the country.

Another note to take in is the fact that mortgages are front loaded with interest. Of course, tax deductible mortgage interest is one of the chief benefits of owning a home (Rent is not tax deductible.) But the fact of the matter is that during the first couple of years, the proportion of payment going to principle (which adds to your equity position in the property) is negligible. Virtually all of it is going to interest. The table to the right is an amortization schedule illustrating this phenomena. This assumes if you have a mortgage balance of $100,000. Notice that the principal balance increases only by 3% over the first two years, not even enough to cover brokerage fees.

Taking all of this into consideration, the last thing I want to happen is my client to buy a house and then call me 6 months to a year later and want to sell because it doesn't fit their needs anymore. Goodbye equity. This situation does not put a client into the best financial position. In a nutshell, when you go shopping, do not adopt the mentality of wanting to shop for a "Starter House." Take the time and think, "Can I see myself living here for the next five years?"

For your first home, make sure you have more than enough space to work with. 1000 square feet may work for you in the very short term, but you will fill it beyond capacity in a year or so. In response to this you may ask, more square footage means more money, right? What if I cannot afford a larger home? This is a very valid point. However, homes that need updating but are mechanically sound sell at a steep discount to those that are completely updated and turn key. In response to this claim, you may ask, "But I thought you said, 'Make no compromises?'" You would be right, but let me clarify. I meant make no compromises on features that you cannot change. Carpets, light fixtures, paint, kitchens, and baths are interchangeable. Another note: when looking at homes that are smaller, do not bank on additions. Home additions have some of the worst returns on investment of any home improvement. Additions usually throw a homes floor plan out of proportion; hurting resale value.

Many first time home buyers have the propensity for wanting to buy a "Starter House." Hypothetically, the starter house is something not too dissimilar from what the client's apartment is like; 800 square feet, 1 bath, not too much privacy, no yard. Why would any renter want to buy something similar to their apartment? The reason is that they are still thinking like a renter and not a homeowner. Some think of a mortgage payment like they do a rental payment. A rental payment is money that you never see again. What do you get after paying rent for 10 years? A shoe box full of rent receipts! A tasteless joke used often in the real estate business. When you buy a house, you have the right to all of the equity and all of the appreciation! So you have to go into this knowing that what you buy is a real hard asset with resale value.

Please do not construe these comments as a suggestion to live beyond your means. I am a big fan of financial stewardship and would never encourage anyone to bring themselves to bankruptcy over their desire to buy a "dream house" for their first purchase. Believe me, my dream house is a 4000 square foot Tudor on Canandaigua lake. I am not poor, but in the mean time I have to be realistic. This is precisely why I first bought a four family house and lived in one of the units. I didn't have enough sticks of furniture to even fill a small single family house. However, I knew that when the time was right, I could rent my unit out and keep the four family as a rental property and keep building equity. Multifamily apartment houses may be another option for your first home. This way, you don't have to sell if you decide to upgrade to a bigger better house before the five year mark.

In closing, let me reiterate, think 5 years of ownership for your first home. Picture all of the equity and appreciation you can look forward to earning over that time. The wealth accumulated over that period will bring you one step closer to buying your "dream house" in the future.

The Pitfalls of Zillow.com

If you are a potential home buyer or home seller, how would you start going about conducting research on the process? Would we go to the library and borrow some books? Maybe. Would we go to Barnes and Noble and pick up some real estate magazines? Possibly. How else might we start? Ok, lets stop kidding ourselves. When we have a question or want to dig up more information on a particular topic, whether it be real estate, automobiles, or the best new digital camera out there, we usually begin our research on Ol' Faithful, the trusty Internet, right?

The Internet is great for preliminary research on pretty much anything. We don't have to bother someone to get an answer on a particular issue. We can discreetly search for the latest YouTube video of that amazing scuba diving chimpanzee in our cubicle without the boss knowing. Thank God for the "Alt - Tab" feature! Furthermore, we can quickly find relevant research content by using the omnipotent Google.

We all know that the Internet isn't always the most accurate source of information. After all, most of what is on the web is generated by humans. To err is human, right? So we should take all information gathered on the Internet with a grain of salt. What percentage of the online contents that we encounter are accurate? 50 percent? 70 percent? How big of a percentage would we need to feel that we are working with very accurate information? 90 percent sounds pretty good, doesn't it?

Zillow.com is the Internets premier web based home valuation website. Buyers and Sellers come to this website to get estimates (Zestimates) on home values in particular neighborhoods. The estimates are based on tax records and multiple listing service data. It seems to have gotten so popular and seemingly credible that clients will argue with their agent about what a home's fair market value is based on information that they gathered from Zillow.com. These buyers and sellers may have valid arguments IF their data was based on accurate information. The truth is that Zillow has some very misleading information.

Did you know that in Monroe county 31% of these Zestimates are within 5% of the sale price? That means that 69% of Zestimates in Monroe county are at least 5% off from the actual sale price (the true market value indicator). Or even worse, in NY State only 18% of Zestimates are within 5% of the sale price! 25% within 5% on the national level. Where did I get these statistics? Zillow.com! Specifically:

http://www.zillow.com/howto/DataCoverageZestimateAccuracyNY.htm

If this site is so grossly inaccurate, then why do so many buyers and sellers count on it to get information related to buying their largest and most important asset? The most accurate way to calculate a home's value is a comparative market analysis or (CMA) completed by a local real estate professional, and in most cases it's free. If you are a seller, get a CMA completed by a few real estate brokers. This will give you the best representation of market value range. But take caution. There are some unethical tricks that some brokers perform.

Some agents will come in on their CMAs with an artificially high number. As sellers, we all know that we want to get the most money for our homes. Agents will take advantage of this desire and intentionally give you a high price that is not reflective of market value. They do this in order to get you, the home seller to list with them and not the competition (the ones with the more realistic estimates). This practice is so notorious in the real estate community that they have a name for it. It's called "buying the listing." After they get you to sign the contract with them for the inflated price, they beat you up on the price a week or two later to get it down to a more realistic level.

On the opposite side of the scale, there is the agent who will intentionally try to under price your listing. That sounds counter intuitive, doesn't it? If the agent wants to get more commission, wouldn't he want the house to sell for more money? The fact is that getting more money for a client's house involves more marketing; more advertising, greater exposure. Advertising is an expense on our income statement. Some people in our profession believe that expense... any expense is a bad thing; it hurts profits. So some agents will doctor a CMA to come in with an artificially low number, then under price your house so it sells in a couple of days. When it sells that quickly, they collect commission and do not have to advertise their clients property. But do not believe for a second that the agent doesn't believe in advertising, because this style of broker will usually spend the money that he/she saved by not advertising your house and invest it in self promotion advertising.

On another note, the home buyer should rely on their local buyer's agent to run CMAs on homes that may be of interest to them to come up with a reasonable purchase offer price. In any event, just remember that the most accurate real estate information is going to come from a local real estate practitioner, not a website proposing to give accurate data relating to home values. Home values cannot be calculated using tax records, satellite photos, or any other static metric or algorithm. For instance, would you watch a national weather syndicate to get your local up-to-the-minute weather? That's why local news and weather remain in business. Real Estate is a local phenomena, so you must rely on local people for the best information.

http://www.nyhomesgetsold.com

West Side 3rd Quarter Sales Stats

Below you will find the 3rd Quarter 2008 Sales statistics for the West side suburbs. Please note that this is Year over Year information. I believe that assessing performance on a quarterly basis gives a more accurate picture of what is actually going on. Monthly sales statistics for a specific area does not provide enough sampling to get an accurate statistic.

The field "months supply" refers to how many months we have of inventory assuming that no new homes come onto the market for sale. Months supply is based on the most recent quarter sales performance for a given area. Months supply is a good statistic to use in order to gauge where a market is trending. For example, a high months supply usually does not look good for a specific market's home prices. This data does not take account for markets within markets.

For example, it does not account for different price tiers. The $50-$100k market within Hilton may have a two month supply, but the $300-400k market may have a 20 months supply since there is quite a lot of high end construction going on in Hilton at this time. So please be careful when analyzing these numbers so that you do not come to false conclusions.

http://www.nyhomesgetsold.com/

4.5% for a Thirty Year Mortgage?

The smarty pants constituents of the Treasury and the Congress have come up with a new idea aimed at spurring up demand in order to stabilize home prices. They want to offer 4.5% fixed rate thirty year mortgages to home buyers.

If you are a homebuyer, this offer sounds pretty sexy doesn't it? Well what if you are a responsible homeowner who keeps current on your current and has no intention of moving in the next five years? Does this offer sound sexy to you if you do not stand to benefit?

Is it safe to assume that you might even become angry at the fact that your new next door neighbor could be graced with a 4.5% rate and you (the responsible homeowner) is locked into a 6.5% 30 year prison sentence? I know that I would be livid and even pissed... upon first impression.

The general public is greeting this idea with sour disdain and anger. You should see the blogs. People are spitting venom. Why should responsible homeowners who are not buying a house in the near future (the majority of Americans) be penalized and left out in the cold? I understand the objections, but let me offer an idea on how you will benefit if this measure is passed by the Treasury.

Quite simply, those who do not stand to benefit directly from a bought down 4.5% interest rate, do stand to benefit indirectly. For example, if there are more buyers in your real estate market because of this artificially low rate, don't you suppose that it could positively affect your homes value? Now although you do not get the sweet deal on the mortgage directly, you do have a stake in this, afterall you are a homeowner!

Another way that you stand to benefit is quite simply microeconomic effects. Are you generally better off if the economy in your town is doing well? Of course. Did you know that when someone buys a new home, 17% to 20% of the sold homes value is spent in the first year by the new homeowners. Hard to believe, right? When you start to break it down, it makes sense. First, you have the real estate companies commission, then mortgage fees, appraisals, inspections, new furniture, moving companies, homeowners insurance, the new dog, etc. This starts to add up fast and it greatly benefits the economy.

Now I would like to state my disagreement as to how the Treasury plans to pull this off. Paulson, Bernanke, and all the other muckity mucks are astounded at the fact that 10 year treasury bills have a yield of 2.65 percent which is really cheap. This allows the Treasury to borrow money at 2.65% and then lend it out at 4.5 %, therefore capturing a handsome profit. Sounds great, doesn't it? This idea scares the hell out of me.

First of all, what happens when interest rates go up during the holding period of these discounted debt instruments? Lets take a savings bond for example. Lets say you buy a $100 30 year savings bond at a 4.5% interest rate in December of 2008. You are very happy because 4.5% is a great rate to have on a government insured investment. Let's fast forward to July of 2011. Interest rates on 30 year savings bonds are now 8%. How does this effect the value of your hypothetical savings bond? It literally pulverizes its value. You still get the same interest payment, however the face value of the investment greatly diminishes. If you hold it for the entire 30 year period, you will not be materially affected for the most part. However, what if you need to liquidate it to honor a short term obligation, or any obligation at all?

Do you really think the Treasury will hold these discounted mortgages for the entire 30 period? My sources point to "NO." In light of the aforementioned, this would leave the Treasury exposed to unwarranted risk. Interest rates will go up dramatically when the economy recovers. I think this would be opening Pandora's box. Let me offer a different approach.

Instead of actually owning the mortgages, let the government subsidize the lower rate to the lending institution. Let the government essentially buy down the rate to the artificially low level. This approach would be very similar to the way corn subsidies are delivered to farmers in the US. For example, interest rates on conventional 30 year fixed mortgages are 5.37%. JP Morgan Chase funds the mortgage and receives 5.37% of the principal balance over 30 years. The homeowner involved in this mortgage pays 4.5% a year over thirty years. So who fills the 0.87% gap? Uncle Sam does! Considering that the Median Home Sale price in the US is $191,000, this would equate to a $1,661.7 subsidy per year, or $49,851 over the life of the loan. In 2007 there were about 5 million homes sold. So to sponsor a project such as this, it would cost the government approximately $250 billion dollars over the entire life of the loans. $250 billion is the cost involved if every single one of these 5 million buyers applied for this mortgage, got it, and held the house, and did not refinance for 30 years. The probability of this happening is slim to none. On average people move every five years or so.

Let me know your feedback on this opinion piece!

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3rd Quarter E. Monroe County Real Estate Sales Statistics

3rd Quarter Sales Statistics for Eastern Monroe County

Well, its that time of the year where we compile our quarter over quarter sales statistics for Q3. As you dissect these stats, you will notice that the Greater Rochester Area has had a fairly strong year in Real Estate, especially when you compare it to other markets on the national stage. The chart below illustrates just this. This chart compares our local market to the Standard and Poor’s Case-Shiller Home Price Index for all months dating back to January of 2007. Keep in mind that this is a month-to-month accumulation of percent values. This expresses the value deviation away from 0%. Furthermore, I would like to point out to you that by no means should you interpret this data as applying to your own personal home. Average home sale price in our area has actually increased approximately 5.6% since Jan. 2007. On the other hand, the largest twenty real estate markets across the US have witnessed a 22.3% decrease in value on average.

Not too shabby, eh? We have a pretty boring real estate market here in Upstate NY. However, boring isn’t always bad, as you can see here. Now, onto the main point of this article: Q3 Real Estate Sales Statistics for Eastern Monroe county suburbs. Before you start looking at these numbers, two things should be taken into mind:

1.) These are median home sale prices for Quarter 3 2007 and Quarter 3 2008. If you live in Pittsford and see the -20% in bold red letters, do not freak out. This does not mean that home prices are plummeting across the board. It means that the median of what sold in these two periods had a difference of 20%. It means that homebuyers bought less expensive homes in Q3 ’08 than they did in Q3 ‘07, capiche?

2.) In the table below, you will see the term Months Supply. Months Supply is defined as number of single-family homes sold per month in Q3 below number of single-family homes active on the market right now. This statistic is a good gauge as to how hot a given market is. A very low months supply indicates a shortage of inventory as it compares to its peers. Markets with a low months supply will usually tend to get offers closer to asking price. Please keep in mind that months supply is always a bit skewed for Q3 every year. The number of active properties on the market decreases substantially around this time of the year because of the Holidays.

If you compile all of these together, you have about a 1% decrease in median home sale price in these townships. In the grand scheme of things, prices have been fairly flat.










If you prefer a more visual representation of this data, I have included a chart below.


If you were to take a pulse of the real estate market right now in Rochester, you would find that there is a very large shortage of inventory. It seems as though uncertainty about the real estate market and the economy has kept many sellers from putting their home on the market. As a result, many brokers in my office including myself have found that buyers are having a difficult time finding suitable housing because there has not been a steady flow of inventory into the marketplace over the past few months. Inventory is so low in fact that I have resulted in searching for “For Sale by Owner” properties for my buyer clientele. If you compare the months supply of Q3 to last years market, the months supply was 9 months supply to 10 months supply on average. It is my opinion that we have some very serious pent up demand at this moment in time.

Q3 sales statistics for Western Monroe county suburbs will be released in the near future. Furthermore, if I have not included an analysis for your town or neighborhood, please feel free to contact us. We would be happy to perform a free custom market analysis for your home or neighborhood.

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