lawrence yun

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Stocks continued their dizzying seesaw today, with the Dow Jones Industrial Average plunging more than 400 points at the open.  The drop was due in part to nervousness over a possible severe global recession and the battering various stock markets had taken in overnight trading.  In Japan the Nikkei dropped 9.6 percent as shares of Sony, the electronics manufacturer, slid more than 14%.  Germany’s DAX index slid 8 percent as Britain’s FTSE 100 dropped 8.5%.   At noon the Dow Jones had recovered a bit and was down 267.47 to 8,428.49, the Nasdaq was down 34.54 to 1,569.37 and the S&P 500 was down 26.96 to 881.15. 

But some investors were pleased about the positive news from the National Association of Realtors this morning.  Existing home sales rose 5.5% to 5.18 million from 4.91 million in August and were up 1.4% from the 5.11 million in the year ago period.  Lawrence Yun, NAR chief economist, said a broader range of markets are seeing improvement over the prior year. “The sales turnaround which began in California several months ago is broadening now to Colorado, Kansas, Minnesota, Missouri and Rhode Island,” he said. “The South was hampered by much lower home sales in Houston in the aftermath of Hurricane Ike.”

Yun echoed the call by many Realtors and investors to remove the repayment of the $7,500 tax credit and bring more stimulus to help jump start housing.  “Additional housing stimulus would stabilize prices more quickly, which in turn would bring faster stability to Wall Street. Removing the repayment feature on the first-time buyer tax credit and permanently raising loan limits would bring more buyers into the market and further reduce inventory,” the economist stated.

Now on to our real estate investor education section …

Back to the Future Part II

Yesterday we took a little trip down memory lane to look at how home prices have held up over the years. The results were impressive to say the least. Critics would argue that hindsight is 20-20 and it is impossible to predict the future. While that is technically true, it is also important to understand three things:

1.     Inflation is caused by the expansion of the money supply and we can track how much money is being created.

2.     Inflation can work for or against you. Those that put it to work for themselves can create millions. Those that don’t will find themselves in the poor house at the end of their lives.

3.     Inflation has been constant for decades- it goes up or down but hasn’t gone negative.

The evidence is obvious. A median priced home in 1973 sold for $28,900. By 2007 a median priced home cost nearly $220k. Gasoline went from 35 cents to $3.50 a gallon. Prices for other goods and services did the same. Short Sellers understand the ravages of inflation and how to use it to build wealth. Wish you had a way to predict what homes will cost in the future? You can get a good idea by using a little simple math:

1.     Determine the average rate of inflation. You can use the federal estimate for CPI but realize the limitations. A more reliable indicator is provided by ShadowStats which tracks inflation via historical measures rather than the new limited model. Today, the government CPI is an estimated 5.5 percent while the alternative measure indicates something closer to 9 percent.

2.     Use the rule of 72 to calculate the cost of goods or real estate in the future. The rule of 72 is typically used to determine how long it will take an investment to double at a specific interest rate but you can easily modify for your own needs.

3.     Take the inflation rate (for example 9 percent) then divide into 72 [72/9 = 8]. This means at the current rate of inflation prices will double in 8 years.  Let’s say you want to know an approximate value of a property if you held it for 16 years instead…the entire amount would double again. For example, if you purchased a short sale property for 100k then it could double to 200k in 8 years and reach 400k in 16 years. Of course these are estimates since some years go up much faster than others…

More next week—have a great weekend!

See you at the top!

Chris McLaughlin, J.D., M.B.A.
web: http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com

Phone: (800) 452-7627

P.S.: 

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In real estate news, the National Association of Realtors (NAR) announced that national home sales dropped 15% in August from the year ago period and the median price declined 9.5% to $203,100. There was a 2.2% decline for the August over July period. Lawrence Yun, NAR chief economist, noted that interest rates rose in August from July, but the recent bailout of Fannie and Freddie has led to a significant drop in interest rates, which should help housing affordability.

“However, home sales will be constrained without a freer flow of credit into the mortgage market. The faster that happens, the sooner we’ll see a broad stabilization in home prices that in turn will help the economy recover,” Yun said.

Now for our educational tidbit today … we’re going to focus on things that show up at the last minute when doing short sales…

When it comes to short sales, there are a few lions and tigers and bears for the buyers to be aware of but with a little planning and preparation you will have nothing to fear. In fact, use this quick checklist to stay alert to potential profits while walking away from common pitfalls that trip the unsuspecting.

1. Taxes. Taxes come in all shapes and sizes when it comes to short sales, bankruptcy and foreclosure; from property taxes to Federal Income tax liens, the property may be encumbered by a variety of taxes which could impact the deal. While property taxes are relatively easy to deal with, large Federal income tax liens may not be worth the hassle and headache required to clear the property, although we have done several where the US Treasury was willing to do a lien release (and partial lien release). Do your homework to determine the viability of the project and be sure to set aside funds to cover any taxes that become your responsibility with the transfer of the property.

2. Liens. Make no assumptions when it comes to liens; even brand new homes may have mechanics liens from builders or developers that failed to pay sub-contractors. Homeowners may have contracted improvements or work ranging from simple repairs to full blown upgrades. Other common liens include HOA fees, utility assessments, etc… Liens often become the responsibility of the buyer so take time to investigate potential liens when negotiating for the purchase price of the home. And I can tell you one thing about HOAs: they are a pain! Think about it: these typically are retirees with way too much time on their hands. They will spend $2,000 in legal fees putting a lien on a property for a $350 lien. I’ve seen it time and again. Recently we faced a situation where the HOA wanted to charge $200 for a payoff letter that would be given to our title company. I always advise my clients that if they are able, PLEASE STAY CURRENT on HOA fees, they are more trouble than they are worth when it comes to eliminating them at closing.

3. Permits. Improper work permits, zoning violations and other irregularities have resulted in higher than anticipated expenses for more than one buyer; understand what work was done, by whom and in accordance to what standards before making an offer. Work performed without proper permits or out of accordance to modern building standards should be considered a liability rather than an asset in today’s competitive market.

4. Easements & Restrictions. Know what you are buying before making an offer. Although it sounds simple enough, irregular parcels, easements and other restrictions can be tough to track down especially in rural areas or when property was transferred within a family. Homeowners associations frequently place restrictions on the use or transfer or property which may also impact your plans – take time to understand what is and isn’t allowed before making an offer.

5. HELOC’s, 2nd’s and Other. Distressed homeowners may have Home Equity Lines of Credit, 2nd or even 3rd mortgages plus a host of other potential liabilities that could impact the deal. Make a point of understanding – and explaining – how each is likely to impact the outcome of the deal for you and the current owner. Not only is it the right thing to do but it also increases the likelihood of a successful closure. I know of one sad situation where a homeowner was unable to make their first payment but had enough to make their payment on the 2nd. Not understanding the priorities of lien, the homeowner stayed current on their 2nd mortgage but not on their first! It is important that you NEVER tell any client to not make their payments, but in a situation like the one described you can explain lien priority and the client can draw their own conclusions.

More tomorrow…

See you at the top!

Chris McLaughlin, J.D., M.B.A.
web: http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com

P.S.: Did you hear about our amazing Webinar that we’re doing tomorrow night at 9 PM ET (6PM PST)? It is f.ree of charge to you! Nathan Jurewicz and I will be live on the web explaining the Top 5 Traps to Short Sales Investing, and we’ll have some new information that you won’t want to miss out on. We only have room for 20 more seats, so if you’re interested please go now to: https://www2.gotomeeting.com/register/798484502