LEARN MORE about this Exclusive Program Contact Nothnagle Home Securities today! Benefits to client Won't have to wait for home to sell before buying. Have ability to negotiate a non-contingent offer. Can lock in at today's low rate. Advances equity allowing for a higher down payment. Ability to plan your move date. Eliminates anxieties about getting bumped, having to wait to sell and possibility of selling home and having no place to go. Allows your client to "Buy Right!" Program pre-requisites Must use a Nothnagle Agent to purchase new home; list existing home. Must obtain mortgage through NHSC. Certain guidelines and restrictions apply. Client must be approved by NHSC; contact your loan rep for details.

Exclusively available through our affiliated mortgage company, Nothnagle Home Securities Corporation. This program allows qualified applicants an advance of the equity in their home to be used towards a down payment and closing costs of a new home. Nothnagle Home Securities Corporation 585-461-4110 1501 Monroe Avenue Rochester, NY 14618 Licensed Mortgage Banker · NYS Banking Department

CURE TO THE POST TAX CREDIT BLUES

When the clock struck midnight on April 30th 2010, there must have been a record number of prescription antidepressants issued for many homebuyers that were without contract on a home on that fateful day. Either that or a lot of self medicating going on. A big fat check from Uncle Sam for $8000, out the window! That is a lot of money to lose out on.

However, there is no need to be depressed anymore. How would you like to stick over $9000 in your pocket on average, regardless of whether you are a first time homebuyer or not? With no strings attached? Without any tax payer assistance whatsoever? Keep reading...

The average interest rate on 30 year mortgages has plummetted from 5.21% in April 2010 to 4.56% in July 2010. What does that mean to the cost of homeownership in the Greater Rochester Area? Let's construct a realistic scenario:

1. The average list price in our area for 2010 is $146,274



2. Let's assume a 3.5% down payment scenario for an FHA mortgage. This would equate to a mortgage amount of $141,154.

Now that we have our controls, let's introduce the variable into this scenario... interest rates:

1. At 5.21%, the amount of interest paid on this loan over the first 10 years will be $40,248.53



2. At 4.56%, the amount of interest over this same time period will be $34,883.60

This equates to savings of $5,364.93 over the first 10 years!

Home prices have softened in our area since the expiration of the tax credit. The reason why? Think about it. The program artificially turbo charged the market and exausted the supply of buyers and this is what happened:

1. The average List Price to Sale Price ratio in April 2010 was 96.77%



2. The average List Price to Sale Price ratio in May 2010 was 93.76%

Assuming you bought an average priced home ($146,274), the difference in actual sale price between April and May would be $4403 in this scenario!

The total savings comes to $9767.93 for the average home purchaser. The beautiful aspect of this is that you are not constrained to $8000. Essentially, "the more you spend, the more you save" (I apologize for using the abominable marketing maxim).

How long will interest rates and prices hold this low? I think that real estate prices will stay relatively flat to weak in the near term because of the anemic state of our global economy and the risk of mediocre economic growth that is projected over the next ten years.

In regard to interest rates, I think that this is a different story all together. I do believe that interest rates will stay historically low (below 6%) over the next two to three years because of the not so hot economic outlook. However, the current level of interest rates (~4.5%) has precipitated because of the European fiscal crisis (in Greece, Spain, Portugal, Italy, and Ireland) and has resulted in a torrential influx of global assets into US dollar denominated Treasuries. The bottom line: short term fear has stoked a major drop in interest rates to an unsustainable level. As long as Europe stays in crisis mode, interest rates will remain very low. Look for rates to rise quickly and dramatically once fears start to wane concerning the EU's financial house. I predict them to rise to where they were pre Greece crisis.

ATTENTION FIRST TIME HOME BUYERS! You may call the checks you write out on the first "rent." Your landlord calls it a "mortgage payment." Unlike the rest of the country, there are many homes in the Greater Rochester area that you could buy, and pay less than what you are currently paying in rent! Not sure if you can afford a home? I have plenty of reputable bankers that can qualify you in 20 minutes over the phone! Call or email me for references!

FHA will tighten up in 2010 - Article by Matt Carter from Inman news.

The article below concerns a recent announcement from HUD that could fundamentally change qualifying guidelines for FHA mortgages, the most popular product used by first time home buyers for their home financing needs. PLEASE KEEP IN MIND: This is not law yet. It will not become law until brought before congress. In bullet points the changes are below:

1. Maximum seller concessions reduced from 6 percent to 3 percent.



2. Minimum down payment increased from 3.5% to 5%



3. Minimum credit score increase.



4. Significant increases in Mortgage Insurance Premium.

So what does all of this mean? My interpretation of these changes is that regulators want to make FHA irrelevant. I think that HUD wants the abolition of FHA mortgages. So how do they do that without being percieved as pulling the rug out from under our housing market? They change the guidelines to make Conventional Mortgages more attractive than FHA. Essentially, FHA will have the same (more strict) approval guidelines as Conventional, however FHA will be more expensive with higher interest rates and higher Mortage Insurance Premium.

Why am I confident about this? I saw the same thing happen with SONYMA (NY state's mortgage program.) We used to do SONYMA deals on a consistent basis, with Nothnagle Home Securities the Upstate NY leader in SONYMA financing. As soon as NY changed the guidelines and program offerings to be practically the same as FHA, SONYMA application volume fell off of a cliff. I cannot tell you the last time myself of anyone in our office did a SONYMA. The program is still around, but no one sees real benefit in utilizing it. Here is the article from Inman:

"The Obama administration is moving to tighten underwriting standards on
FHA-backed loans by increasing the amount of upfront cash homebuyers must bring
to the table, raising minimum FICO scores for new borrowers, and reducing
maximum seller concessions from 6 percent to 3 percent.

The most obvious
way to increase upfront cash requirements would be to raise the 3.5 percent
minimum downpayment requirement for loans guaranteed by the Federal Housing
Administration.

A bill introduced Oct. 1 by Rep. Scott Garrett, R-N.J.,
would raise the minimum downpayment for FHA loans to 5 percent and prohibit
financing of closing costs. HR 3706, which has 27 co-sponsors, has been referred
to the House Financial Services Committee.

Housing Secretary Shaun
Donovan, briefing committee members on the administration's plans Wednesday,
said there are several ways to make sure borrowers have more "skin in the game"
currently under consideration.

HUD has "made the decision to exercise
our authority to increase the upfront cash that a borrower has to bring to the
table in an FHA-backed loan," Donovan said, but there "are several ways to
accomplish this, and so we are currently analyzing various options to determine
which is the most effective and consistent with our mission."

Testifying
on behalf of the National Association of Realtors, Vicki Cox Golder urged
Congress and the administration to "exercise caution before introducing
proposals that may have a profound adverse impact on our economic recovery."

NAR is strongly opposed to HR 3706, she said, because increasing FHA's
downpayment requirements would make it impossible for many borrowers to use the
program, and "not add a penny to FHA's reserves."

Dan Green, a
Cincinnati-based loan officer for Mobium Mortgage Group Inc., said an increase
in minimum FICO could have "a much larger impact than increasing downpayment
requirements from 3.5 to 5 percent."

The minimum FICO score for
FHA-backed loans was raised from 500 to 580 earlier this year, he said, although
most lenders already have even higher minimums.

"Most consumers are
going to walk into their bank, and their bank will say 620" is the minimum score
needed to obtain a mortgage, Green said.

FHA is in a difficult position,
Green said, because Fannie Mae and Freddie Mac continue to tighten their
guidelines, and that pushes more borrowers who are less creditworthy into FHA
loans.

"They are trying to limit their exposure to the riskiest
borrowers," Green said. "Your median FHA borrower looks decidedly worse today
than 18 months ago."
Green noted that Fannie Mae will implement a minimum
620 FICO score and other underwriting changes over the weekend of Dec. 12 as
part of its rollout of its Desktop Underwriter Version 8.0 software (see Fannie
Mae bulletin).

With claims on its mortgage insurance fund rising, HUD is
also considering raising FHA mortgage insurance premiums, Donovan told the
committee.

Borrowers currently pay an upfront premium of 1.75 percent,
plus annual premiums of 0.5 percent on loans with loan-to-value ratios of up to
95 percent. The annual premium on loans with higher LTVs is 0.55 percent.

Although HUD has the authority to raise the upfront premium to as high
as 3 percent without additional input from lawmakers, annual premiums are at
their statutory limits.

Donovan said HUD is requesting authority from
lawmakers to raise annual premiums for new borrowers, "as this is one of the
most effective means of raising capital" for the FHA's capital reserve fund,
which has dipped below statutory minimums (see story).

Raising the
annual premiums of FHA borrowers would likely be a greater hardship than
increasing their upfront premiums, since the cost of upfront premiums can be
financed into a mortgage, said Faramarz Moeen-Ziai, a mortgage banker at San
Ramon, Calif.-based Bank of Commerce Mortgage.

Moeen-Ziai said that
because an FHA-backed loan is, for all practical purposes, the only option for
most borrowers who can't come up with a 20 percent downpayment, the program
"must survive. If FHA goes away you have nothing to fill its place right now."

He doubts that raising credit scores or minimum downpayments will help
FHA's bottom line in the short term, but is not opposed in principal to raising
minimum downpayment requirements.

"We don't want to kill the golden
goose here just to keep real estate prices inflated by making money available to
a lot of borrowers," Moeen-Ziai said.

That said, he worries that the FHA
is proposing to tighten its standards at about the time the Federal Reserve
plans to shut down a program in which it has kept interest rates low by
purchasing $1.25 trillion in mortgage-backed securities issued by Fannie Mae,
Freddie Mac and Ginnie Mae. The Fed has said it will wind the program down at
the end of March, which could send interest rates up and put downward pressure
on prices.

Most of the changes Donovan outlined can be made with no
additional authority from Congress, and Donovan said HUD expects to provide more
details and public guidance on the changes by the end of January.

"The
good news is that when FHA rolls out changes, they don't do it overnight," Green
said.
If HUD issues guidelines to lenders in January, they aren't likely to
take effect for 60 days, meaning homebuyers have several months before the
latest changes kick in. In September, FHA announced new guidelines for ordering
appraisals and streamlined refinancings, which take effect Jan. 1 (see story).

Donovan said HUD is currently analyzing what the floor for FICO scores
should be, including the relationship between FICO scores and downpayments. HUD
is looking at whether to increase FICO minimums in combination with changes to
other FHA underwriting criteria for lower-downpayment loans.

Reducing
the maximum allowable seller concession to 3 percent would bring FHA "in line
with industry norms," Donovan said. The current 6 percent level exposes the FHA
to excess risk by creating incentives to inflate appraised value, he said.

HUD is also stepping up enforcement to make lenders more accountable, he
said, increasing its review of lender compliance with FHA program requirements.
HUD will develop a "Lender Scorecard" summarizing the performance of lenders who
do business with FHA, and post it on the Web.

In releasing the results
of an actuarial study last month that found FHA's capital reserve ratio has
fallen below a 2 percent minimum established by Congress, Donovan noted that
seller-funded assistance loans were the most substantial pool of troubled loans
on FHA's books, with claim rates 2.5 to three times higher than other loans.

HUD has estimated that seller-funded downpayment assistance was used on
more than 35 percent of all home purchase loans insured by FHA in fiscal year
2007, compared with less than 2 percent seven years earlier.

Congress
abolished seller-funded downpayment assistance on FHA loans in 2008, but HUD
says remaining risks to FHA include its greatly expanded market share and
subprime lenders moving into FHA lending.

In the 12 months ending Sept.
30, FHA insured almost 30 percent of all purchase loans and 20 percent of total
refinances in the housing market, HUD said. First-time homebuyers accounted for
nearly eight out of 10 FHA-backed purchase loans in the second quarter of 2009,
with nearly 50 percent of all first-time buyers relying on FHA-insured loans.

A recent Federal Reserve report demonstrated HUD is "not the new
subprime lender," NAR's Golder said, with the average credit score for current
borrowers having increased to 693, and only 13 percent of purchase borrowers
having FICO scores below 620.

In September, 45 percent of FHA loans had
FICO scores above 700, and less than 5 percent had scores below 620, she said.
The percentage of FHA-backed loans with loan-to-value ratios above 95 percent
fell from 72 percent in 2007 to 62 percent in 2008.

"The reason the
capital reserves have fallen below 2 percent actually has nothing to do with
FHA's current business activities," Golder said. "The decline is simply a
reflection of falling value of homes in their portfolio." "

If you are depending on FHA financing after the the New Year, I would insist that you do not get discouraged. Every problem poses a solution. Just because these are changes that HUD is calling on Congress to pass does not neccessarily mean they will all become law.

However, at the very least I believe that minimum credit score increases or minimum down payment increases are on the table. So I strongly recommend planning accordingly. Loan officers with reputable local mortgage banks are experts at developing strategies for increasing borrowers credit scores. In regards to coming up with more money for a down payment, this time of the year could not be any more perfect to start planning. Here are some budgeting tips before you start whipping the plastic out of your wallet this holiday season:

1. A great gift for someone does not have to be expensive. A great gift is a thoughtful one.
2. If family or friends are asking what's on your wish list. Let them know that you are planning on buying a house and the best gift would be check or cash for your first home reserve fund.
3. Most online banking websites have budgeting software that allows you to track your expenses by category just like the frugal John Pierpont Morgan did with his personal finances. This will make it easy to cut wasteful spending and make you more aware of your personal expenditures.

Home Buyer Tax Credit Extended and Expanded

Quick update! After passing both the Senate and House of Representives, the proposed Home Buyer Credit expansion and extension (Yes, I said home buyer not just 1st time home buyer) has received the President's approval and is now law! So what does this mean for you?

1. It means that if you have not owned a home for the past 3 years, you are eligible for up to an $8000 tax credit on your federal tax return. If you owe less than $8000 in federal income tax liability, lets say hypothetically you owe $6000, then you get $2000 back when you file your taxes. If you owe no money in Federal Income tax, then you get the full $8000 in the form a check from the US Treasury.



2. If you have owned a home and kept it as your principle residence for 5 consecutive years of the past 8 years, you are eligible for up to a $6500 tax credit if you purchase a new home as your primary residence, as long as the purchase price of the home does not exceed $800,000 dollars.

Here is a detailed chart of how the expanded tax credit works in comparison to the original tax credit (click on he picture to get an enlarged version which you can read):

Whether or not you support this program, it is important to understand the chief benefits of having a strong real estate market and how it pertains to emerging from this period of economic malaise. Let's face it, the reason that we continue to stay in recession mode is us. That's right, US, the consumer. Consumer spending has historically accounted for about 2/3rds of economic activity. When the consumer loses confidence, he usually dramatically cuts spending on consumer discretionary items such as automobiles, televisions, housing renovations, etc. (big ticket items). People instinctively hoard cash when they fear of losing their job or getting downward pay adjustments. Seeing the latest unemployment number (the worst since 1983) come in at a whopping 10.2% does not help either.

Politicians know this. So, in times like these they try to hatch schemes to get you, the consumer, to start spending again. They usually attempt to do this by playing around with the tax code to incentivize constituents into doing specific things like buying homes. Although buying and selling homes is great (especially for the real estate industry), you the taxpayer may ask "How the hell does it help the rest of us?!" The answer may surprise you.

Statistically, home buyers on average spend approximately 20% of the homes value within the first year of ownership. For example, statistics suggest that a family buying a $100,000 home have a high likelihood of spending $20,000 that they would have otherwise not spent if they didn't purchase a new home. This is a consumer led recession and it's going to require the consumer's participation in order to get out of it.

If you have been following Wall Street recently, investors have been obsessive over revenue growth for companies. Although many companies have increased profitability dramatically by laying off workers & cutting costs, their revenue growth has lagged analysts expectations because the consumer is responsible for fueling revenue growth. Expect mortgage rates to remain low until the consumer shows signs of life. Once investors are affirmed that consumers are spending again, watch the institutional money fly off the sidelines (cash & cash equivalents) and into riskier asset allocations (stocks & bonds). This is the point in time when mortgage rates will increase significantly.

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.