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You can get opinions about Zillow.com ranging from extremely negative to rave reviews. The negative views are more weighted toward real estate professionals who view Zillow as a threat, while many consumers see a great online resource with lots of bells and whistles for real estate shoppers. It’s a little of both, and some of the data from Zillow can be off the mark when it comes to estimates of value.
One area in which Zillow seems to be gaining credibility is in surveys and housing study results. The Zillow Housing Confidence Index is an example. The index increased over the summer from 63.7 in January to 64.2 at the end of the summer. Housing confidence increased in 11 of the 20 metropolitan areas tracked. Anything over a 50 indicates positive sentiment. So, generally people are feeling better about housing overall.
Zillow’s data also indicates a cautious attitude about value appreciation moving forward. Zillow’s Home Value Forecast predicts only a 3.1 percent growth in value through next year, as compared to 6.6 percent over the previous year.
When 10,000 questionnaires were returned, there was a distinct differentiation of attitudes based on age group as to whether the respondents were confident they would be able to afford a home someday. The percentages were:
• 18 to 34 age group – 82% confident
• 35 to 49 age group – 64% confident
• 50 to 64 age group – 48% confident
It’s nice to see that the younger generation is generally positive about the economy and I suppose about their job prospects. It’s hard to see why, when the percentage of working age adults actually holding a job in this country has been steadily declining. Perhaps there is an enthusiasm in youth that looks forward to better times. Or, maybe there is just a burned-out attitude that accelerates with age, accounting for the dropping confidence.
The value appreciation question is of crucial importance. The chart below is from the St. Louis Federal Reserve Bank, and shows that price appreciation of existing homes may be peaking. A chart of median new home sales prices looks very similar, with multiple tops and a move downward in the latest data.
This is an important trend to watch, as many home buyers currently own a home and are unable to move or upsize unless they can see some more appreciation. They’re still either underwater on their mortgage or they don’t have enough equity to sell and take any cash away from the closing table to use for another home.
So, what does the future hold?
Renting is still the lifestyle of the younger generation, but they seem to believe they’ll move from tenant to owner status at some point. An interesting quote from Stan Humphries, Zillow’s Chief Economist:
“It’s heartening to see younger renters express so much confidence in their ability to buy a home in coming years, because today’s renters by necessity are tomorrow’s buyers. Cynics might argue that these results represent no more than youthful exuberance, or perhaps some naiveté, but that’s missing the point. We need this generation to be confident and wanting to buy, regardless of the difficulties they face.”
Actually, the same Zillow survey showed that fully a third of the youngest age group expected home prices to rise by 6 percent per year over the next decade. That’s a pretty upbeat attitude, but if they are trying to buy, they’re shooting at a moving target. And, if wages don’t begin to improve more or if inflation worsens, they’re fighting on two fronts. So being confident and wanting to buy is nice, but there still has to be a down payment, affordable mortgage payments, and a sustainable job to pay them.
We’ll just have to wait and see, but my thoughts are that renting is going to continue to dominate the younger generation’s lifestyle. For investors big and small, buying and properly managing rental properties is still a good strategy. After all, if the younger generations do begin to buy into the market, investors have an asset that’s grown in value and they can always take their profits with a sale.
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Visit http://www.deangraziosi.net/ Welcome to Dean’s Weekly Video Blog as we talk about how to make profits in today’s real estate market… This week Dean h…
We read about it everywhere, and millions watch the reality TV shows on multiple networks about fix & flip real estate investing. It’s fun to see an investor turn an ugly duckling home into a swan and make a profit doing it. As with any “reality” television show, there are some behind-the-scenes things going on that help them in their profitability, such as getting material discounts for mentioning where the materials were purchased. But, fix & flip is still a viable real estate investment opportunity, even if you’re not a TV star.
But, it’s getting a little more difficult these days, as foreclosure inventories are shrinking and prices are rising. The investor must sharpen their pencil, cut the very best purchase deal they can, and then really “work the numbers” in the rehab part of the job. Some are backing away from fix & flip and moving into rental property investing or other real estate opportunities. There is a big opening here for the retail buyer to use a “fix & stay” strategy to move into a home that’s customized for their needs and a bargain buy as well.
You’re going to become a self-investing home buyer by locating the right foreclosure or distressed home that needs work. You’ll be choosing a home in an area you like and with the basic features you want, but it is in need of significant work to make it a livable home. Regular mortgage lenders won’t finance homes unless they’re already repaired and ready for move-in, so you’ll need to take a different approach.
Funding with the FHA 203k Loan
First, you need to know that when you find the right home with the characteristics you want and in a neighborhood you like that you have a funding resource ready. The FHA 203k loan is designed for the home buyer who will live in the home, but they need to have some work done before the long term mortgage is funded. In other words, the repairs and rehab must be a part of the loan and the work done before move-in. The 203k is for this specific purpose and the details can be found at www.hud.gov. There are two levels of funding depending on the amount of work the home needs:
• Streamlined 203k: The amount available for repairs is between $ 0 and $ 35,000, and the process for application is more streamlined due to the lower repair loan amount in relationship to the overall value of the home.
• Full 203k: This loan has a minimum amount of $ 5,000 and no maximum limitation. So, the home that needs a lot more work is probably going to fall into this more detailed lending process.
There are plenty of details; after all it does involve the government. But, you can locate a home that other retail buyers cannot buy, have it rehabilitated to move-in condition, and end up with the purchase price and the renovation and repairs all wrapped up into one neat mortgage. The total of the purchase and the repairs loans will of course have to meet LTV, Loan-to-Value, requirements. There is some flexibility in this stage, as you can select materials and change specifications as necessary to bring the rehab costs into line with what the lender wants.
What you’re doing is getting a contractor involved in the early stages to provide not just estimates but hard bids for the work. The process requires that no payments be made as the work progresses until it is inspected and completed as specified. You’re getting the benefit of these inspections and quality controls because the lender wants to be certain that their investment is covered.
The Buying Competition
Research the 203k loan, get some of the pre-approval process out of the way, and you can start shopping in a market with no retail buying competition. You will be competing with local real estate investors, but you have an advantage. The fix & flip investor must buy at a price that allows them a nice profit for the rehab work and for their time and effort. They’re usually selling to another investor, many times a rental property buyer. That investor buyer doesn’t want to pay full ARV (After Repair Value) for the home. The discount that buyer wants, when added to the profit the fix & flip investor wants, must be subtracted from the After Repair Value to come up with the price the fix & flip investor can pay for the unrepaired home.
This means that you can pay more for the home than the fix & flip investor because their profit isn’t a part of the picture, and you can work with full value, not a discounted value the rental property buyer wants to pay. Your lender will be looking at ARV for the final loan total calculations. If you want to jump through a few hoops and take a couple to four months to go through a purchase and rehab process, a Fix & Stay purchase might be perfect for you.
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Let’s face it, we’re a consumer society, and much of our consumption over the past decades has been financed with debt. Our interest payments have financed some nice lifestyles and created fortunes for banks and conglomerates. If you’re in or nearing retirement, you may still be paying a mortgage, a car note or two, and maybe even some consumer debt payments. Even if you’ve managed to get free of much of that debt, your income from investments can’t be looking all that great right now.
A recent check of the “safest” bond investments, Treasuries, showed yields under 2% on 5-year bonds. If you’re more daring, junk bonds pay significantly higher yields. But, they’ve broken down through 5% now, and there’s a lot of fear when even the most risky yields are that low. A half million dollars in a retirement account yielding a safe 1.80% is throwing off only $ 750/month before taxes. There are plenty of articles out there about rental property investing, and it’s a great way to go if you’re up to the hassle and moving your assets into a self-directed account.
After all, if you owned five $ 100,000 rental homes with that half million dollars, each could be renting out at around $ 750/month, five times the return before taxes of those bonds. Rental properties aren’t hands-off investments, and it’s easy to get really sick of late night tenant plumbing problems and unexpected maintenance expenses. The good news is that rental property isn’t the only way you can profit from real estate in a self-directed retirement account.
There aren’t as many choices for IRA and 401k custodians for self-directed accounts. And there are even fewer if you want to pursue different strategies. It can be well worth the search however. It’s not widely advertised, but you can lend money under the right circumstances and collect interest in your self-directed retirement account. You can turn the tables and become a collector of interest instead of a borrower.
You can issue short term mortgages, but there are other higher yield opportunities out there. Funding real estate investor deals can be really lucrative. There are companies that specialize in what is known as “transactional funding.” They loan money to real estate investors who are wholesaling or flipping properties. These loans can be for a few months while a home is in the rehab process before a flip, or they can be for a few days or even hours. Let’s see how it works:
• A real estate investor who is wholesaling properties locates deep discount deals and flips them to rental investors if the homes are in livable condition.
• If the home needs work first, they can flip it to a rehab “fix & flip” investor.
• In both of these cases, they may seek funding to close on their purchase of the home from the distressed seller until their flip to the other investor closes.
• In some cases these deals close the same day, or often in just a few days or sooner.
• The funding is secured by the real estate.
• There’s a lot of money to be made in a very short period of time with these deals, and the investors consider it a cost of doing business and factor it into their deals.
How much money are these lenders making? Rates and fees are varied, but one example quote from a transactional lender website shows: a minimum $ 1,000 for small deals, or 2% up to $ 250,000 and 3% over that, plus $ 495 per deal. Remember that we’re not talking about annual interest rates here. It’s a fee, and it is paid at the closing of the second deal, which means that the principal and the ROI are back in the account within a day or so in many cases. A chart from another lender shows fees for deal amounts like this:
Amount Loaned Fees
$ 80,000 $ 1,200
$ 150,000 $ 2,250
$ 350,000 $ 4,375
$ 1,000,000 $ 10,000
Even if you’re funding rehab and fix & flip deals, you can do quite well over a longer time frame, as the fees and interest rates increase to cover your risk. As with any other investment, there are risks, but you do have the security of the value of the real estate, and most of these lenders will only advance up to around 60% of the value of the property. This way they hope to recover their money if they must sell the home due to default. Of course, there is some really important due diligence that must happen:
• Work only with seasoned investors, and check their track records. A series of profitable deals indicate a successful business plan.
• You want to see both contracts: the purchase contract for the property, and the contract with the investor’s buyer showing everyone’s profit in the deal and covering your investment.
• Work only through reputable title companies or closing attorneys.
• And, if it’s through a retirement account, you have a whole new set of IRS hoops and rules, so make sure your custodian is experienced and ALL funds move through the account.
There are some nice rewards from short term lending like this, but there is a great deal of preparation before the first dollar moves. You may want to join a local real estate investment club and get to know some of the investors. There will be investors in these clubs seeking funding.
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