It’s becoming our weekly ritual to browse Open Houses on Sundays. We usually try to have a theme, from “cheap condos we’d eventually outgrow” to “houses that would be a stretch, but we could live in forever”. Last week, we actually did “beautiful multi-million dollar homes we’ll never afford” just for fun and possible remodeling ideas.

More and more short sales
One common theme that we’ve been noticing across the board is more short sale houses. Whenever you see a house listed for sale that just seems too cheap, it’s likely a short sale. A short sale is a type of pre-foreclosure situation where the buyer is already in default of the mortgage loan, but the bank has not foreclosed yet. Here, both the lender and borrower agree to sell the house for a price that won’t pay off the entire loan balance. The lender avoids a long foreclosure process and potentially lower price upon the eventual auction, and the borrower prevents an foreclosure from completely killing their credit history.

From the buyer’s perspective, it can be both good and bad. You might get a good deal, but it can get complicated. Instead of a seller accepting your offer within 24 hours, you’re looking a 2-4 weeks while the lender takes multiple offers, checks you out, demands pre-approval letters and sometimes large upfront deposits. There are more details than this, but that’s my basic understanding.

Flip or Flop
Today, we got to see the results of a house flip gone bad, just like on the TV show Property Ladder. They had the classic mistakes – they took too long with the remodel, they priced it too high and stayed stubborn, and they ran out of money before they could sell. Here’s the general timeline:

6/05: Bought house for $850,000. Remodeled… adding the obligatory hardwood floors, fixed up the bathroom, did some painting.
7/06: Listed for $1,100,000
8/06: Dropped to $1,050,000
9/06: Dropped to $1,000,000
3/07: Taken off market, decided to wait things out
8/07: Short sale at $800,000

The carrying costs for the loan were probably around $5,000 a month, although I think the “owners” did live in it or at least rented it out, as there was clothes hanging in the closets. Add in the remodeling costs, and things look pretty bleak. Even if they do get a short sale, forgiven debt is considered taxable income. I wish I could feel sorry for them, but the signs seem to indicate that just they got too greedy.

Ever since starting the house search and finding some real dumps with potential, I’ve been really into those home-flipping shows on TV. I’m not interested in any quick buy-fix-sells nor do I have illusions of making $50,000 in a month, but I do like to see the ways people can improve a neglected house and how much it roughly costs. I’m not sure if I’m alone here with my secret obsession, but after two months of having my TiVo packed full of episodes, here is my personal summary of the differences between three popular shows:

Flip This House on the A&E Channel focuses on the real estate flips of experienced investor teams. They pretty much know that they are doing, so I almost just sit back and take notes. My favorite team by far is Trademark Properties, with leader Richard Davis and trusty sidekick Ginger. They always seem very smart and professional in all their dealings. Apparently, Davis has a lawsuit against A&E over alleged non-payment, and so has moved to a new show on the TLC channel called The Real Estate Pros. I’ll definitely follow them there.

Then there are the temperamental Montelongo brothers. I thought they were entertaining in the earlier episodes, but in the recent ones they just seem to be faking drama (and doing it poorly). They wouldn’t be the first ones, as apparently another Flip This House team was accused of faking episodes and stealing money from other investors, resulting in all episodes involving them being pulled off the air.

Creative name, huh? TLC’s Flip That House usually has episodes involving more novice flippers, often first-timers. Surprisingly, most of the flippers seem to stay on track, and although there are some stumbles here and there, they usually come out only a bit behind schedule with the house looking beautiful. What I don’t like about this show is they always show “projected profit”, as if the flippers always get their full asking price for their house. Overall, I like this show, but it does seems to try a little too hard to make the flippers look good.

Are you tired of seeing all these greedy flippers? Do you want to see some people crash and burn? Then The Property Ladder (TLC) is the show for you! Composed almost completely of first-time flippers, this show isn’t afraid to reveal the ugly side of flipping. Hideous remodels, poorly-managed contractors, going insanely over-budget, fighting between partners, you name it. They give you status updates like “The house sat on the market for 10 weeks with not a single bid. Bob is now looking for renters.” Think of it as a show about what not do to.

There you have it, from stories of seasoned pros to the completely clueless.

I couldn’t help but catch some of the news coverage about this week’s continuing fallout from subprime loans, the resulting stock market wobbles, and the overall tightening of the credit market. CNBC’s ratings must be through the roof. Then tonight I stumbled upon a post on the housing bubble blog Patrick.net about it being a point of inflexion:

I believe we are now at what will be seen as the inflexion point. It took a long time to get here, but the housing bubble is finally recognized as a pass? concept. The real debate now is how much and how long of a correction.

This reminded me of the graph below, which I brought up when I asked If Real Estate Prices Are Cyclic, Where Are We Now?. This was back on January 4th, 2007.

At that time, I guessed we were somewhere around Anxiety. Now, seven months later, where are we now? I’d say we’ve moved past both Anxiety and Denial already, and we are solidly at Fear. Mathematically, the inflexion point (aka inflection point) is where the second derivative changes sign. Guess where the inflexion point on such a sinusoidal graph is?

As this CNN Money article about tighter lending standard suggest, I may be well positioned to benefit from this progression:

In addition, tightened lending standards stemming from the subprime crisis likely mean fewer buyers, pushing down home prices. The one catch is this: You’ve got to be a buyer with good credit, a low debt to income ratio, a healthy down payment, verifiable income, and looking to finance less than $417,000 (the cutoff for so-called jumbo loans).

Bring on the Desperation! 😉

How about some helpful investigative reporting from the media this time? The New York Times article Every Penny Counts profiles six New-Yorks who managed to buy their home without the benefit of rich relatives or Wall Street bonuses. While the stories weren’t surprising, I still found them to be very reassuring and even inspiring. In addition, I tried to pick out a few useful themes:

Make The Home A Priority
There’s saying you want a home, and then there’s taking action to get that home. One of the new homeowners put it bluntly:

?If you want to own a place, you have to do everything to own a place and everything else comes second.?

Along those lines, every single person profiled changed their lifestyles to make saving up over $20,000-$100,000 a reality. While it wasn’t easy, each person did it their own way. Take Pablo Ag?ero and wife Janey Lee:

They gave up smoking to cut costs, they stopped meeting friends after work for beers, they didn?t buy new clothes, and they stashed away tax refunds and as much of their earnings as possible. Whenever they wanted to buy drinks, gadgets or cookware, they asked each other: ?Do I want an iPod or a house? Do I want a latte or a house??

Or Amy Wegenaar:

So she went into savings overdrive: she went grocery shopping only with a list and cut out luxuries like expensive juices. When she went out with friends, she ordered the happy-hour drink specials and often chose Mexican food so they could munch on free chips and split a cheap entree. She shopped the sales racks at Urban Outfitters and sewed dresses from discounted fabric she bought on the Lower East Side.

Getting Support From Your Family and Friends
Obi Onyejekwe actually made friends with co-workers who also wanted apartments of their own:

They chose to eat out at places with entrees that never cost more than $15 and went to events like the Warm Up dance parties at P.S. 1, where the only thing they bought was beer. ?A lot of pressure to spend and splurge wasn?t around because everybody was saving to buy real estate,? he said.

It worked: He and 8 friends now own homes that cost $320,000 to $550,000.

On top of this, I say share your goals with your friends. Tell them why you’d rather watch the game at home, or why you can’t fly out to Vegas. They should understand, and might even share the same dreams or at least wouldn’t mind saving a few bucks themselves.

Don’t forget your family either, all I ever hear is “Did you find a house yet?” I think being in this together with my wife has made the process a hundred times easier than if it was just me.

Where we live, most first-time homebuyers purchase condominiums or townhouses. (I haven’t seen any co-ops?) Besides simply finding a unit that you like, I’ve been worried about having to deal with homeowners associations, or HOAs. There are plenty of horror stories about evil HOAs out there, as outlined by this Yahoo Finance article 10 Things a Homeowners Association Won’t Tell You. They are often cast as petty and heavy with politics:

When one Virginia homeowner asked for permission to hang Christmas tree lights in 1992, the board didn’t like the idea but didn’t know how to prevent it. “We struggled with this one,” says lawyer Benny Kass, who represented the association. “But we finally concluded that the restriction against hanging lights was valid because you were pounding nails into the wood, and that was a fire hazard.” Ho-ho-ho.

…and they’re not afraid to sue you over it:

Experts estimate that in California, 75% of the homeowners associations are embroiled in a legal tangle of some kind. Chicago attorney Mark Pearlstein, who represents associations, figures that 60% of all condo boards and homeowners associations in Illinois are involved in some kind of legal suit.

…or they could simply be ineptly run:

Ron Williams, an engineer with R.J. Moore, a consulting company that specializes in reserve accounting, once worked with a Northern Virginia condominium that had a paltry $100,000 set aside. “Closer to $1.25 million would have been considered healthy,” says Williams. When power-plant equipment gave out in early 1994, the association didn’t have the $400,000 needed to replace it. The solution: A $2,400 special assessment to each of the 170 unit owners and a 22% increase in monthly dues.

It’s almost enough to make me stop looking at them at all! Instead, I’ve tried to make a list of things to try and at least screen out HOAs with obvious signs of problems:

Try to get a copy of the homeowners association agreement and recent meeting minutes. I figure if I am serious about buying a place, I would want to read about all the things I can’t do like replace the flooring, how many units are allowed to be rented out… or if I can put up Christmas lights! Also, I’d like to see in writing exactly what my fees are covering – usually water, sewer, common areas, and basic cable TV. If possible, have an attorney read through it. (It helps if you have friends that are lawyers!)

By reading about recent meetings, I can hopefully get an idea of what issues are currently being debated, and how petty they are. I’m not sure how easy this will be though – whenever I ask the listing agent about HOA-specifics, they always seem off-balance and say something about “Oh, the last owners loved living here, I’m sure they are wonderful”.

Learn about the reserve fund to avoid big assessments. One common nightmare would be to move in, only to be hit with a big assessment for fixing the pool that you’ve never even used yet. I’d want to make sure the reserve is large enough to handle expected and unexpected future maintenance costs. A friend told me you can get a list of all previous assessments if you ask, as well as any planned future assessments. Part of this is also noting the overall age of the building, as well as the existing condition of all the common areas. From the Yahoo article:

When it comes to checking up on a reserve fund, there are two good rules of thumb. First, about 20% to 25% of your dues should go toward the reserve fund, says Robert Nordlund, president of Association Reserves, a California company that specializes in reserve accounting. Second, there should be a long-term schedule for the reserve fund in the annual budget, including a projection of upcoming expenses for each common-area item: elevator repairs, painting, pool maintenance and so on. Reserve accountants suggest that the account should contain no less than 70% of the projected reserve budget. If the account is 30% funded or less, you can expect to be hit with some big assessments down the road.

Try to talk to an existing owner that’s not the seller. Usually there is someone outside playing with their kids or walking the dog. I don’t mind striking up a conversation with a potential neighbor to try and get an insider’s view. On top of HOA questions, I’d ask things like how long they’ve lived here, if it’s been getting better or worse, how good the soundproofing between units is, and if it’s a family-oriented complex.

Ask your buyer’s agent to do some research as well. You have a buyer’s agent, right? Ask if he/she has clients that either live there now or have sold a unit there in the past. If not, have them do some digging and ask their co-agents.

Are you a condo owner? I’d love to hear your experiences and tips on dealing with HOAs specifically.

We did an Sunday Open House run yesterday, checking out some of the the different neighborhoods available to us. Some observations:

Beware of the sign-in sheets. Address? Phone number? E-mail? No way. I’ve since realized that Open Houses are actually more for listing agents to gain new clients than anything else. Prospective buyers walk in, put down their personal information, and of course… would you like to sit down for a free consultation? Also, if you have a buyer’s agent and don’t put that down on the sheet, the seller’s agent can argue for the entire commission. All in all, it appears to offer nothing for the buyer.

Stop with the “creative” listing photos. I hate when you see a picture of a lake or something on the MLS listing and it turns out you had to stand on the roof and lean over 45 degrees in order to see that view. If it’s not available from inside the house and without gymnastic talent, then it doesn’t count.

Staging actually does work. Some of the houses that have been obviously “staged”, with zero clutter, nice place settings with candles on the dining table, neatly folded towels in the bathroom, and flowers everywhere. I thought I would hate it, but I actually quite liked it.

Too much personal stuff is bad. Then there are the people with the huge collection of dolls or nude statues lining the halls. I’m sorry, but your stuffed dogs are distracting and really hurting my own ability to visualize living in your house.

What, no cookies? For some reason, I read somewhere that you should always have something baking at an Open House. But out of the 10 houses we saw, I got no cookie action. So sad…

Despite some gripes, I do like the idea of Open Houses. It’s low-stress and is much more definitive than just pictures.

It seems that many people have strong opinions about the subprime mortgage fallout. One common thread was that people really do need to get better educated about the mortgage lending process. What wasn’t agreed upon was who should shoulder that responsibility – the lender, the borrower, or the government? My view was that better transparency is in order, and the FTC concurs:

The Federal Trade Commission today released a Bureau of Economics report presenting the results of a study that found that mortgage disclosure forms fail to convey key mortgage costs and terms to many consumers. The study also concluded that better disclosures can be created to help consumers understand the costs and terms of mortgages to enable them to make informed decisions about mortgage products.

?Mortgage disclosures designed more than 30 years ago can be confusing even for simple loans, and they do not address the variety and complexity of today?s mortgage products,? FTC Chairman Deborah Platt Majoras said. ?Although mortgage disclosures, alone, will not prevent deceptive lending practices, consumers who understand mortgage terms and choices are less likely to fall victim to these practices.?

Even if you disagree, the fact is that the government already does have some helpful information out there, and hopefully if we spread the word around the tax money already spent on making them won’t be wasted. 🙂 I sure wish Ms. Williams read a couple of these beforehand.

First up is the U.S. Department of Housing and Urban Development, whose mission is to “increase homeownership, support community development and increase access to affordable housing free from discrimination.” They have a whole section on Buying A Home, and even a brochure on finding the best mortgage [pdf]. Inside, it shows you how to compare all the costs involved in obtaining a mortgage. There is even a helpful Mortgage Shopping Worksheet included to help you out.

Shopping around for a home loan or mortgage will help you to get the best financing deal. A mortgage? whether it?s a home purchase, a refinancing, or a home equity loan?is a product, just like a car, so the price and terms may be negotiable. […] Shopping, comparing, and negotiating may save you thousands of dollars.

Next, you have a Guide to Mortgage Products [pdf] from the Federal Reserve Bank of Boston. It’s presented through a true/false question-and-answer format which makes it very digestible, and has a nice glossary of lending terms at the end.

What you should ask the lender:
? Which of your products offers the lowest interest rate?
? Will my interest rate be fixed or variable (change periodically)?
? If the interest rate can change, when will it change and how high or low can it go?
? If the lender offers an introductory or ?teaser? rate, ask, When does the rate expire and how will the new rate change my monthly payment amount?
? If the rate expires, what will the new rate be, and will it be fixed or variable?

Finally, check out these 12 others from the Federal Citizen Information Center:

– A Consumer?s Guide to Mortgage Lock-Ins
– A Consumer?s Guide to Mortgage Refinancing
– Buying Your Home: Settlement Costs and Helpful Information
– Consumer Handbook on Adjustable Rate Mortgages
– Guide to Single Family Home Mortgage Insurance
– Home Buyer?s Vocabulary
– Home Mortgages: Understanding the Process and Your Rights to Fair Lending
– How to Buy a Home with a Low Down Payment
– How to Dispute Credit Report Errors
– The HUD Home Buying Guide
– When Your Home Is on the Line

The hot real estate news this week is that interest rates on mortgage loans rose abruptly, thanks to some international happenings influencing Treasury rates here. According to this NY Times article, the national average for the 30-year fixed-rate mortgage jumped to 6.74 percent yesterday. At the beginning of the year, the average was only 6.18 percent.

As a potential homebuyer, my question is, will this be make homes more or less affordable? On one hand, rising interest rates will mean a bigger monthly payments for the same loan amount. But on the other, such higher payments may also start pushing home prices downwards. I’m sure the answer to this question is extremely complex, but I started to run some simple scenarios anyways.

Effect of Interest Rates on Monthly Payments
Here what happens when the rates change on a $300,000 loan:

As a rough estimate, when the interest rates rise by 1%, the mortgage payment rises by 11%. (Used the calculators at Dinkytown.)

Effect of Interest Rates on Affordability
For better or worse, lenders determine how much house you can afford by figuring out a maximum monthly payment based on your income. (I’ve written before about how these lending ratios can vary.) So if you keep the same maximum payment and the rates rise, then you can only afford a smaller loan amount. Here are some numbers starting with the previous example of a $300,000 loan.

So? Good or Bad?
I’m just using loan balances here, so I’m ignoring the dampening effect of house downpayments. And again, actual housing prices don’t fluctuate according to such simple rules. Maybe housing prices won’t drop enough to counter the higher payments from future interest rate hikes.

Still, one thing is for sure – people who have been shopping for homes may not be able to afford what they thought they could or maybe even were already pre-approved for. Rising interest rates can also affect the housing market in other indirect ways. For example, when people with adjustable-rate mortgage try to refinance to a lower fixed rate, they’ll either be rejected or still be faced with a much bigger mortgage payment. This may lead to more foreclosures and lower prices. At least I selfishly hope so…