Thursday, January 31, 2013

What holds for 2013 Real Estate in B'more

Forecasting the course of real estate in Baltimore has been very difficult over the past several years due to widely conflicting data and opinions.  But since mid-summer several trends have become apparent that give better clarity to what the future holds.  Several facts have now become obvious:

1) Interest rate on mortgages will remain unusually low for at least the next two years, so says the Chairman of the Federal Reserve.

2) Rents in Baltimore are on the rise due to shortages and a lack of new construction. The average rent for all properties in Baltimore City is now $1,350 a month, a 9% increase over last year.

3) The sale of distressed property remains elevated but not as high as in the past. In Baltimore City foreclosures and short sales represent about 25% of all transactions and in the suburbs the percentage is in the low teens Many of these properties are being offered at a price that is below actual market value to produce a quick sale.

4) The government lending agencies are offering credit-qualified buyers attractive terms regarding the purchase of distressed property owned by these agencies. 

5) A “shadow inventory” of homes with delinquent mortgages, but not yet in foreclosure,  will insure a continuing supply of distressed property for sale for the next couple of years. But the inventory overhang is not as high as in the past as the market begins to heal itself. Prices are rising rapidly in those areas that fell the most and less so in the more stable areas. Price rises in the city are generally over 10% and as much as 30% in the hardest hit neighborhoods. In the suburbs the increases range from 5-10%. Continuing modest increases as expected throughout 2013 and beyond. 

 What does this mean for perspective buyers ?

Short-sale process streamlined. 

A lot of people are asking this same question these days. To be specific, a “short sale” is when a mortgage lender agrees to accept less than full payoff on a home so that the owner can sell the property and get out from under the mortgage. It happens when a home is “underwater” or valued less than the current mortgage balance. It is estimated that as many of 30% all homes in the US are currently “underwater” but only a smaller percentage are candidates for a short sale.

Lenders have become more interested in short sales than in the past. They have learned that the home will usually sell for about 20% more than in foreclosure. The owner remains in the home until the day of settlement, which reduces vandalism, and the cost of upkeep.  The owner benefits too. The lender may agree to file a less incriminating  credit report and/or permanently “forgive” all or part of the deficiency. They will also have a place to live until the day of settlement.

Not all owners qualify for a short sale. As a minimum there must be some financial adversity. This means job loss, income reduction, death of a wage earner, divorce, illness or some other situation resulting in financial hardship. The fact that the home is underwater, or was an imprudent investment, does not constitute hardship by itself.  A borrower with a substantial income, net worth and significant assets, beyond the home in question, will not normally qualify. Does the homeowner have to be broke? Absolutely not. But if the borrower has other meaningful assets the lender may only agree to a partial deficiency settlement or arrange a payment plan over time. In summary, the lender wants to get as much as possible without pushing the borrower into further financial difficulty. Money in retirement accounts is generally considered "off limits" in terms of measuring the borrowers assets.

Does the borrower have to be delinquent or in default of his payments? In the past if the borrower was current the lender assumed he was managing despite the hardship and would continue to do so and a short sale would not be approved.  More recently however,  some lenders have adopted a more proactive posture and will consider an application from a non-defaulting borrower. The idea is to avoid foreclosure, which always results in higher costs and reduced proceeds to the lender. Lenders are very cautious about so called “strategic defaults” where the borrower deliberately withholds payments in order to build the case for a short sale. For that reason lenders require a complete financial disclosure as part of the short sale application. Concealing financial assets in a short sale is bank fraud and  should never be considered. 

How is a short sale implemented?  The borrower will normally retain a Realtor who knows how the process works. The Realtor will compare the loan balance with the current net market value, taking into account all the selling costs. If the net proceeds are short and the borrower has  experienced some financial hardship, the Realtor will contact the lender and get a short sale “checklist”. This is a list of all the documents the lender will require to consider the petition. It includes all bank and brokerage statements, several years’ tax returns, evidence of the hardship and other supporting documents. 

When a Contract results the lender will request an appraisal of the property or more likely a Broker Price Opinion (BPO) from a third party as part of their evaluation. The lender will assign a "negotiator" who will review the supporting documents, review the contract and either approve, deny or modify the request. Once approved, the owner and contract purchaser are clear to close. 

What happens to the borrower after closing depends on the outcome of the negotiations between the homeowner and the lender. In the ideal case the shortfall is "forgiven" and the lender files a credit report notation "satisfied at less than full amount". This is the standard notation for short sales. It will affect the owners credit score for 3 years and may prevent another home purchase during that period. It is much less damaging than a foreclosure. In the worst case the lender may require the owner  to bring money to closing from other resources or execute a promissory note for a portion of the shortfall. 

There are no adverse Federal or State Income Tax consequences if the property is a primary residence as per a recently enacted tax law. If it is investment property the "forgiven" portion of the debt is taxed as ordinary income,   

Each lender has its own policy regarding the initiation of an application. Some will not even consider a review until a contract has been executed. Others may indicate "preliminary approval"  at the listing stage. Your Short Sale Realtor should determine the policy of the lender in question. The review period varies by lender  and can be as short as two weeks or as long as several months. In general, the process has improved greatly over the past year. A common problem is buyers becoming discouraged if the process becomes too lengthy. On the other hand short sales often represent a bargain and that serves to keep the prospect "on the hook" for longer than normal .

The biggest obstacle to consummating a short sale is determining who own the mortgage and who is authorized to approve the deal. In some cases it is simple and straightforward. In others it is more challenging. Also, the expertise of various lenders and their service companies varies enormously. Some big lenders have gotten very good at it and others are just learning. 

Choosing a Realtor who understands the process in important. If the Realtor routinely does "BPO's" (Broker Price Opinions) for lenders that is a big plus. That Realtor will know how to set a price that conforms to the lenders expectations. If the price is too high the home won't sell. If it is too low the lender will balk. Unlike a regular sale the owner doesn't get any money at settlement. The objective is to get relief from the debt so maximizing the price is not the objective. Short Sales entail considerably more work for the Realtor so a slight increase in commission may be warranted. That is especially true if the lender requires the Realtor to "discount" the commission which has become quite common. . 

Readers having questions should email the undersigned

Tuesday, May 3, 2011

New FHA Condo Rules now in effect.

The FHA has always required that a condo be specifically approved for FHA lending. The government wants to make sure that the Condo Association is properly constituted and on a sound financial footing. Last year when high foreclosure rates started appearing in Florida and Arizona, FHA decided that all existing approvals needed to be re-certified during 2011.

Because FHA is such a big part of the mortgage market, Buyers and Sellers contemplating a condo transaction need to check the current eligibility of the property. This website shows all FHA approved condos including those with expired or pending approvals.

The renewal of an expired approval can be accomplished by certain authorized lenders.  The process is called DELRAP.  A renewal application sent directly to HUD is called HRAP. Condo Associations can also initiate a renewal but the process can be complicated.  Some Associations may be unwilling to incur the effort or expense.

Baltimore Flashes a "Buy" sign vs. Renting

The popular realty website Trulia.Com keeps track of rental rates and selling prices across the country. Periodically they rate markets whether renting or buying is more advantageous based on rents and prices. This is something we have written about in previous posts. Baltimore is now clearly in the camp of buying being a much better deal. Trulia reports that the average selling price in the Baltimore Area only 12 times the annual rent. This means that a  house that rents for $1,500 a month will sell for about $216,000. A, 90% mortgage on this house would have monthly payments, including taxes and insurance of about, $1,250.  Not only is this less than rent but there are tax advantages as well. Also, the monthly payment won't  increase like rent. To read a full report on this subject including a data map on the entire US, click here.

Saturday, April 30, 2011

10 Tips for Surviving the Housing Downturn

CNBC, the business channel, has posted 10 tips for surviving the housing market and profiting from it in the meantime. This post on their website has a lot a useful advice and is well worth a read. I especially like the advice to those people wanting to move up; "Do it now!"  The price reduction on the new house probably exceeds that of your present home. You can actually benefit financially from the downturn. Read the entire post here: 

Thursday, March 24, 2011

Federal Home Loan Bank offers Grants up to $7,500

First Time Buyers in Maryland can get a grant up to $7,500 from The Federal Home Loan Bank in Atlanta for the purchase of a primary residence. Certain conditions must be met:

  • Applicants must complete home ownership counseling.
  • Sellers can help with closing costs.
  • The underlying mortgage will be a FHA or USDA loan.
  •  Buyer must bring $500 or 20% of the grant amount, whichever is greater.  
  • Buyer must agree to remain in residence for 5 years or partial recapture of the grant will apply.
  • Family income cannot exceed 80% of the areas median income. ($82,200 in Baltimore County).

Only a limited number of lenders are offering the program and funds are limited. Call Bob McGee at Advance Realty Timonium at 410-560-4574 for info on qualifying income in other counties and the name of a participating lender or email me at

Government Offers Attractive Financing on Foreclosed Homes

Fannie Mae, the giant mortgage lender that was taken over by the government last year, is awash with foreclosed property that it needs to liquidate. It has announced a new loan program for foreclosed homes that it owns that has some unique features:

  1. Homes are listed at a price designed to result in a quick sale.
  2. Many homes are in excellent condition and require little or no work.
  3. Low down payment of 3%
  4. Up to 3.5% closing cost help from Fannie Mae
  5. No appraisal required.
  6. No mortgage Insurance.
  7. The contract price is negotiable.
  8. The 3% down payment can come from a gift or grant.
  9. Only $500 deposit money at contract.
  10. Additional funds available for light renovation if needed.
  11. Prospective owner occupants are given a 15 day “First Look” after the property is listed.