MARK SCHELLHAMMER

In my last blog, I discussed how appraisers are affecting the current real estate market slump.  How is this affecting sellers.  First, it means that they are affected, not by “the market” but by the appraisers. See, the appraisers set the market…not buyers and sellers.  A house should be “worth” what someone else is willing to pay for it, same as anything else.  If it’s a buyer’s market, then values will probably drop.  If it’s a seller’s market then the prices should rise.  But since there’s a loan involved, the appraiser steps in, and he sets the market.  The appraiser is there to ensure that the lender doesn’t overlend (?) on the property.  Thus in the case of a default by the owner, the lender is left with some equity to work with when he has to go sell the foreclosed property.  Look how well that worked out the last 5 – 6 years.  So now the appraisers are skittish.  And the seller is being punished.  There may be some foreclosures in the area.  So what.  That shouldn’t diminish the value of a property.  If the neighborhood is good, the homes are maintained, and a few people that live in the neighborhood fell on hard times, why does that diminish the value of the remaining homes in the area.  One or two bad apples spoil the whole barrel (read “neighborhood).  It’s put many sellers and owners who want to refinance in a pickle, because now their loan is greater than their value, as determined by the appraiser.

There are a few niche businesses that have arisen to help these sellers.  Need is the creator of opportunity.  There’s a few entrepreneurs that have found a way to help the seller of that property by using owner financing.  It works best when the property is owned free and clear.  But that’s not always the case.  Let’s say someone owns a house that’s worth $100,000 and he owes $110,000.  He can’t sell.  He’s underwater.  He’d have to come to closing with about $20,000 ($10,000 in closing costs and $10,000 or negative equity).  Let’s say he owes the $100,000 note to Chase.  His monthly payment is $900.  What’s the owner to do.  As Phill Grove says, about 4 things.  And none of them are good.  1) he can walk away from the house and the mortgage.  His credit will be hit hard with the foreclosure and he won’t be able to buy another home for 2 years on an FHA loan and 3 years on a conventional loan, if his scores rebound.  Not a good option.  2) he can ask Chase to do a short sale.  I won’t go into a short sale here in detail, but it’s where the lender agrees to take less than what’s owed on the house in order to sell it.  Most time’s it’s cheaper than the foreclosure process. 3) He can hold on to the house and try to rent it.  This isn’t too bad of an option, but he’ll have to get enough rent to cover his payment, and then he’ll have to be a landlord and risk the possibility of the house going vacant and making the monthly payment, hoping that, since he’s moved, something has changed in his economically deprived life.  All he has is a deposit to work with. 4) He can sell the house to a new owner and take a note on the property.  There are plenty of people out there who cannot qualify for a standard mortgage with today’s credit restrictions, employment and income guidelines (read “self-employed), and down payment requirements.  Many people have cash, are self-employed, and have a few credit bruises.  But they are good buyers who are being totally ignored in today’s lending climate. Now the seller has a chance to reach these people.  He can inflate, a little, the sales price of the house.  Let’s say he sells it for $120,000.  He’ll ask for 10% down.  He puts $12,000 in his pocket.  That’s a lot better than one month’s rent, at the most, for a deposit.  He’ll carry a note that’s at an interest rate slightly higher than the going rate, since he is taking somewhat of a risk.  So if the going rate is 5%, he may charge 6% or 7%.  Since the monthly payment is based on an amount that’s more than what he owes and a rate higher than what he pays, he may receive a payment of, let’s say, $1,100.  So now he’s also cashflowing $200 a month ($1,100 from his buyer less the $900 he’s paying his mortgage company).  He transfers title to the house to his buyer.  After all, it is their house now.  No landlording to do.  It’s not his house, it’s the buyer’s .  They’re responsible for their house.  If they tear it up, they’re tearing up their house, not yours.  If they fail to make a payment to you, you are like the bank.  You can have stipulations in your Deed of Trust as to how and when you will foreclose on them.  You can foreclose on them (which will take longer and be a little more expensive than evicting a tenant) but there’s a way around that.  You can avoid much of the time and expense of foreclosure by going to them, telling them that you are going to foreclose on them, but you have a better solution.  If they deed the title to the house back to you, you will provide them with a moving van and give them a little time to pack their things and move out.  You might even offer them a little money as a deposit on their new rental unit.  It will be cheaper and less hassle to do it this way, unless you just have to.

Now one of the things you’ll have to be aware of as the seller is that Chase, in this case, might catch wind of the “wrap”situation you’re involved with.  According to their Deed of Trust, you cannot transfer title without telling them.  See, you’re still on their note, but you’ve transferred ownership of the property to another person without letting them know.  They have the right, not the obligation, to call the note due, or “accelerate” the note.  Now, both parties are aware of this possibility right from the start.  There should be full disclosure.  And there should be an plan agreed-to by both parties as to what will happen should this “due on sale” clause be executed.  It rarely happens, but it could.  But there are viable ways to solve that problem too.  This is a very creative way for sellers to get out of a bad situation and be in a tenable situation.  It’s not the perfect answer, but it’s better than the other three solutions.

If you want to learn more about this method of financing there’s several people you can look up.  Here in Dallas I’d recommend Carol Johnson with www.Opendoordfw.com.  You also would want to look into George Roddy at Roddy Investment Group http://roddy.com/.  Carol is a realtor and a mortgage broker who works with a highly-qualified attorney named Scott Horne and they will help sellers, and buyers, with this type of financing arrangement.  They helped me use this technique to buy a house in Richardson that I ended up flipping.  It cost me very little out of pocket, versus what the hardmoney lenders wanted to charge me.  And I was able to take advantage of my seller’s low interest rate rather than pay a hard money lender’s much-higher rate.  George has classes and mentors people in the use of this technique.  So you would want to access his data bank of knowledge, classes and one-on-one mentoring to learn more about how to do this technique.

So in conclusion, just because you are a seller and you’re in a tight spot doesn’t mean there’s not a way out.  It means being creative, and a little bit risky, but the rewards can be so much better than the alternatives.

HOW ARE APPRAISALS AFFECTING LENDERS AND BORROWERS

There is much ado these days being discussed about the values of homes.  Many people complain that they are “underwater” with their home.  I read today an article on Yahoo Finance about the GOOD (yes good) aspects to consider even if you are underwater.  You may still have a decent interest rate, and your monthly payment may still be affordable, within your budget, such that it isn’t that big of a deal.  Robert Kyosaki maintains that a home isn’t an investment, it’s an expense.  When our house dropped over $30,000 in value over the last 2 years, my wife was complaining that we’d lost that money.  I told her we’d only lose it when we sell.  Right now, I pay a valid amount of money every month for a roof over my head.  If I didn’t pay the mortgage, then I’d have to pay rent.  One way or another I have to pay something for a place to live (unless you move in with the parents!  Too old for that!).  So if I’m happy making an affordable monthly payment for a house we enjoy living in, then there shouldn’t be that big of a worry about a slight decrease in the value of the home.

Now where it becomes an issue is if someone has a fairly high interest rate, and wants to refinance.  Or, maybe a job or business is requiring them to sell, and they cannot get the equity out of the house they need to move.  Today I’ll address the refinancer.  In the next day or so, I’ll talk about the seller/buyer, the mover.

The person who wants to refinance will be in somewhat of a pickle if value isn’t met.  If the value is close, but under what’s needed for our LTV (Loan-to-Value) guidelines, then the borrower may have to come to the closing table with a little more money than they’d originally planned.  It may still be a good deal, since the monthly payment will still be lowered, and they’ve paid down the loan balance, which will help them in the long run.  There are problems with those who are far underwater.  Recently I’ve had several refinances that have been killed due to the appraisers value not coming in high enough to be able to refinance the loan, much less roll in the closing costs.  I had a borrower in Brownsville that thought his house was worth $2.5million.  He owed around $1million. The appraisal came in at $870,000!  I had another client in East Dallas tell me she thought her home was worth $285,000.  We did her purchase loan just 2 years earlier and the house appraised at $285,000.  She owed $216,000.  You would think this wouldn’t be a problem.  The appraisal came in at $185,000.  That’s a 35% decline in just 2 years.  What caused this?  I don’t know exactly.  She went to a friend of hers that’s a real estate agent who looked at the appraisal and the sold comps he used, and looked at additional properties that had sold in the area, and delivered the bad news back to my client.  The appraiser was spot on.  When I looked at the house on Zillow I noticed that her house was valued at $265,000 and another house across the street was valued at $300,000.  Hmmm, I thought, maybe the appraiser made a mistake.  Then I looked at all the other houses around hers, in that neighborhood. Aside: I don’t like to use Zillow for valuations. However, it does sometimes give me a ballpark for the area, that I can use with a plus/minus factor).  I noticed that all the other houses were valued in the $100′s.  There wasn’t a single other house in that neighborhood that was over $200,000.  So she had one of the nicest houses in the neighborhood.  That’s a problem.  When you have the nicest house in the hood, then the lower-priced homes will tend to bring down the value of your home.  I get this a lot, where clients tell me how superior their house is over all the other houses in the hood.  I tell them that the $30,000 they spent to develop that special backyard project may get them about $5,000 in value, or maybe nothing at all.  If houses that have sold in the last 3-6 months within 1/2 mile of his palace are regular homes, then the appraiser cannot give him much additional value, since the sold houses don’t provide valid comparisons.  This will always be an issue, no matter how the market is doing.  Also, one must keep an eye out for foreclosures in their neighborhood.  Appraisers used to be able to not include or discount them in an appraisal.  Now, they have to use them and comment about the status of the neighborhood.  So you may have a palace, but if there’s 2-3 foreclosures, bank REO’s, etc, in your area, that have sold at severe discounts, then your value will suffer.  Lastly you might have a decrease in value because you purchased a new home from a builder in their subdivision from 2005 on.  Builders are able to use their own lenders and, back then, appoint the appraiser, and sell the house at an inflated rate.  They were using their other sold houses (at inflated rates) as comps.  Now it’s a few years later, the subdivision is sold out, and the people who bought them with an interest rate that’s higher than today’s, come in to me to refinance.  Unfortunately, those inflated sales prices have now come down to earth, and have also declined as the market has declined.  Houses that were purchased for $150,000, with initial loans of say $145,000, now owe around $140,000.  Their appraisals are coming in at $110,000-$115,000.  They are disappointed and angry, but there’s not much we can do about it.  These people will have to continue to stay where they are and stick this bottom out until values can rise and their note balance can be paid down before they can refinance.  They also realize that they can’t sell their property either.  They are so far underwater that they would have to write a very large check at closing to sell their house.  The one bright spot is using this appraisal to have their property taxes reduced.  My client in East Dallas immediately began her petition to Dallas County to have her taxes reduced.  What better way than to show them a valid, third-party appraisal showing a 35% decrease in value.  She figured that this would save her at least $2,200 in taxes in the upcoming years.  And she’s okay with her current payment, just not happy that she cannot get the best rate going rate now in this era of low rates.  But that’s the hand she’s been dealt, and she would live with it.  Others are having to possibly make some very hard choices with their properties.  Some of those choices aren’t good ones, but they’re choices they have to make.  These are the choices we read and hear about in print and on tv regarding the real estate market.

Next blog, I’ll discuss what’s happening with homeowners that want to sell their home and the difficulties they’re facing and what some of their options are.  See you then.