Short sales: Playing by the new rules

There have been some significant changes to the short sale process which should help us all in closing these types of transactions. Hopefully, we will experience more closings and less frustration.

WASHINGTON - Dec. 8, 2009 - The U.S. Treasury hopes to speed transactions under its new short sale rules, but details count, and Realtors should understand the process if they hope to avoid delays. While the new rules become effective no later than April 5, 2010, lenders have been encouraged to make them official as soon as possible.

The new rules, released Nov. 30, 2009, as the Home Affordable Foreclosure Alternatives Program (HAFA), provide financial incentives to spark short sale or deed-in-lieu (DIL) closings. The change was made to grease the wheels of a short sale transaction, giving potential buyers a shorter wait time from contract signing to lender approval of the contract. It also should make a short sale more attractive to buyers by reducing the number of problems.

The rules do not necessarily simplify the amount or complexity of short sale paperwork, however. The oversight doc, Supplemental Directive 09-09, devotes four pages out of 43 to the new short sale requirements. Real estate professionals working with short sales should review the Short Sale section of the Supplemental Directive (pages 5-9) and review the forms and letters in Exhibits A and B.

Condo Financing Options

If you are in the market to buy a condo here in the South Florida, you’ve probably figured out that financing it may be a problem. It used to be that condos were treated like every other property. If you qualified for financing, there were loans available. That’s not the case anymore. As a result of the Mortgage Crisis, financing has become harder to get for all properties, but condos have been hit the hardest. A lot of this is due to condos being too successful. Condos fit the life style that works best for many homeowners, especially singles and couples who want prime living space but don’t want to spend their time mowing the lawn. Demand for condos was so high, both here in South Florida and throughout the nation, that it led to a boom in new condo construction and conversions. Over the last 3 years thousands of new condo units have come onto the market, even as the market has softened. Financing was too easy during the boom years, but now the cycle is reversing and guidelines are being tightened to the point where many condo complexes will not be able to get financing, even for the most qualified buyers.

Here are some of the changes we’ve seen in the last year that make financing for condos harder to come by:

• All the mortgage insurance companies instituted declining market policies which meant that in most cases 10% is the minimum down payment you can buy with on a conventional loan.
• Loan level price adjustments (price hits) were added so that in order to get the best pricing you would need to have a 25% down payment. With less than a 25% down payment there will be an extra .75% charge which means either higher costs or a higher rate.
• Fannie Mae and Freddie Mac have made several changes on how they look at condos, but the latest change may have the biggest impact. The pre-sale requirements have been raised from 51% to 70%. This means that new condo developments now must have 70% of their units sold and closed before they are able to take advantage of conventional financing. In the past there were plenty of banks and private lenders who would take on these loans for their own portfolios. But with the banking crisis this money has all but dried up.

Combined, these changes are likely to make a lot of newer projects unsalable. You can have the best amenities and the best location in the market, but if financing isn’t available there are only so many cash buyers. Over time the lending rules will ease up and financing for newer projects will be available again. But by then some of these new projects will be long gone or converted into rental units. The condo market is being divided into two classes, properties that can be financed and those that can’t. For those properties that can be financed, there are two options, Conventional and FHA.

Conventional condo financing

Conventional financing is for those loans that conform to Fannie Mae and Freddie Mac guidelines. This means loans of up to $417,000 (for higher loan amounts Jumbo loans are available, but they will still follow conventional guidelines) and is for well qualified borrowers with good credit scores. A year or two back, there was financing available for any new condo, even if you were the first buyer in the project. That has changed, but for most newer projects conventional financing is still the only option (though some newer projects have portfolio financing available). In order to qualify for conventional financing, we will need to approve both the borrower and the condo project itself. Borrower guidelines are tougher with condos because they look at this as a layering of risk. If you plan on putting down less than a 20% down payment you will need to have mortgage insurance, and mortgage insurance is tighter on condos than on single family homes. The mortgage insurance guidelines have changed along with everything else, and most buyers will need at least a 20% down payment to qualify.

In order for the loan to be approved, the condo building also has to go through an approval process. One of the first things I do when I get a new condo contract, is send out a condo questionnaire to the management company or home owners association. The completed questionnaire gives a quick picture of the financial condition of the project. Some of the things they look for are:

• How many units are in the project?
• How many are completed?
• How many are sold and closed?
• How many units are owned by investors?
• Is the project complete?
• When was the home owners association formed?
• What percentage of owners are behind on their HOA dues? (this is a big one)
  
• Is the project adequately insured?
• Is the association party to any law suits?

If any of these answers raise more questions, then further research will be done to make sure the project conforms to the guidelines. The appraisal and a review of the condo declarations and by-laws is also part of the condo approval process.

Conventional financing is the best option if you are putting down a large down payment, have excellent credit and are buying a building which meets all the new guidelines. Conventional guidelines are now set up so that the best borrowers will still be in fine shape, but for most borrowers, and especially first time home buyers, if they are able to buy with a conventional loan it will cost them a lot more than it would have before.

This is part of the reason that FHA has become such a big factor in condo financing.

FHA condo financing

FHA is a government program designed to help more people buy homes and more borrowers will qualify with FHA financing than with conventional. It is a low down payment (3.5% down) program and the credit standards are much looser. Because it doesn’t have the price hits that conventional now does, the mortgage rates are better, too. Anyone who is putting less than 20% down should compare both options and see which loan is better for them. Like conventional, we will need to approve both the borrower and the condominium project.

There are two ways that a condo can be FHA approved. The first way is if the developer or home owner’s association applied for and was granted a project approval. This means that FHA has already done all the checking and the project is ready to go. Here is a link to the site which tells whether a project is approved, or not:

FHA Condo Search Tool

This tool is just a starting point. You can search a number of different ways, but the results aren’t always up to date, and if you don’t have the search exactly right you might not find it, even if the property is approved. But it is a good starting point.

One problem with FHA approvals is that most of what you will find are older properties. When the market was booming, FHA was looked at as too old school, and there were conventional options with no down payment where the borrowers (and the developer) didn’t have to go through the extra paperwork that FHA required. So most of the approvals will be older, more established (and usually without the amenities most buyers are looking for) buildings which went through the process some time back, or newer properties that have just gone through it. The good thing is that there is another option, the FHA spot approval.

FHA condo spot approvals

(UPDATED for October 1st 2009)

FHA spot loans are a way to make FHA loans available to home buyers in well run condo projects even if they haven’t gone through the full approval process. The difference here is that these loans are for the individual unit, not the whole building. This is a huge advantage because a good portion of the condos that are eligible for conventional financing also meet the FHA spot approval guidelines. If you have a minimum down payment, or if your credit scores are below 700, this is the only way you will be able to buy a condo. If you are putting 10% to 15% down, this is still likely to be the least expensive way to go.

FHA spot loans won’t work for all situations. They are only an option for properties which have already sold out or are nearly there, and have shown that they have the financial resources to continue to perform well in the future. From the FHA guidelines, here is what is need to approve a spot loan:

• Projects consist of two units or more.
• Projects must be covered by hazard and liability insurance and, when applicable, flood insurance.
• Right of first refusal is now permitted unless it violates discriminatory conduct under the Fair Housing Act regulation in 24 CFR 100.
• No more than 25 percent of the property's total floor area in a project can be used for commercial purposes. The commercial portion of the project must be of a nature that is homogeneous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.
• No more than 10 percent of the units may be owned by one investor. This will apply to developers/builders that subsequently rent vacant and unsold units. For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100 percent complete; and only one unit can be conveyed to non-owner occupants.
• No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
• At least 50 percent of the total units must be sold prior to endorsement of any mortgage on a unit. Valid pre-sales include an executed sales agreement and evidence that a lender is willing to make the loan.
• At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units (the minimum presales requirement of 50 percent still applies).
• Legal Phasing is permitted for condominium processing. It is recommended that developers submit all known phases for initial project approval. For purposes of calculating the owner-occupancy percentage:
  

a. On multi-phased projects the owner-occupancy percentage is calculated on the first declared phase and cumulatively on subsequent phases if the ownership of the condominium project remains the same;
b. If multi-phasing includes separate ownership per phase, each phase is calculated individually; or
c. Single-phase condominium project approval requests must meet the owner-occupancy percentage requirement.

• FHA Concentration

a. Projects consisting of three or less units will have no more than one unit encumbered with FHA insurance.
b. Projects consisting of four or more units will have no more than 30 percent of the total units encumbered with FHA insurance.

• Reserve Study - a current reserve study must be performed to assure that adequate funds are available for the funding of capital expenditures and maintenance. A current reserve study must be no more than 12 months old - if recent events or market conditions have affected the finished condition of the property that information must be included. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed.

The process for approving an FHA spot loan is similar to conventional condo approval. The mortgage lender (that’s me) needs to gather the documentation and prove that the unit meets the FHA guidelines. We do this through the condo questionnaire, the property appraisal and by reviewing the condo docs and by-laws. Once we have everything together we submit the package to the underwriter, along with all the borrowers documentation, and this becomes part of the loan approval. The FHA spot approval takes a little more time and some extra documentation, but for many people it is the best, and some times the only, way to buy a condo.

The fact is, there are too many properties that are too new or have issues which make them ineligible for any financing. It is going to take some time for the market to sort itself out. But there are options for home buyers, and with a little persistence condo financing is available.

Property Taxes too High?

Think your property assessment is too high? File a petition to appeal.

First, get your petition filed on time. The deadline is September 18th in Dade and Broward County and September 14th in Palm Beach. Whether you try to do the appeal yourself or you engage a professional to do it for you, this is the first important step. Secondly, 80% of success is showing up! Make sure you complete the form in full and all information is correct.

To get a tax assessment for your property, the county appraiser will go through the process of the determination of the value. First, he or she will choose a land sale (hopefully in your neighborhood, but not always) on which to base your land value. Land evaluations can be tricky especially since some areas have very few land sales. Values can change from neighborhood to neighborhood or even from block to block. If the land parcel they choose has more value than your land, it can adversely affect your assessment. An assessment can be challenged by using either the tax assessor's method of adjusted SF or the traditional appraiser's method of "under air" living area. Whatever method is selected, it should be applied uniformly across the subject property and all the comparables. Do not use adjusted SF on the comps and living area on the subject property only. You must always compare apples to apples. Make sure your adjustments are plausible and you have data to back them up.

Property Tax Basics

The 2009 property tax assessments for Dade & Broward County have been certified and are now posted on the their websites. To view your property assessment, go to www.BCPA.net for Broward and click on "Property Search" on the top left, and then scroll down to accept the terms of use. For Dade, CLICK HERE.

You may search for a property by owner name, address, or folio number. Click on your choice, and enter the information. If you search by name, all properties owned by individuals with that name will come up, and you must click on the folio number of the property you wish to view.

When the correct tax comes up, below the name and address you will find "Property Assessment Values". The first line gives the 2009 assessed values. If you are NOT Homesteaded, the Just Value will be equal to the Assessed/SOH Value, and this is the value on which your 2009 property tax will be based. If you are Homesteaded, your taxable value is the Assessed/SOH Value, which is typically less than the Just Value. However, due to declining home values, the SOH Value can be equal to the Just Value.

The actual tax owed is still blank because the millage rates of the individual taxing authorities have not yet been determined. The following is the Budget Timetable:

August 4 - Ad valorum taxing authorities advise the Property Appraiser of their rollback rate, proposed millage rate, and time, date and place of the first required public hearing. Special assessment districts to advise Property Appraiser of their proposed rates.

August 11 - Property Appraiser begins to mail Proposed Property Tax Notices (TRIM Notices)

August 24 - Last day for Property Appraiser to mail TRIM Notices

August 24 to September 18 - Time to file petitions to the Value Adjustment Board (VAB) if you wish to challenge your 2009 Property Tax Assessment

September 3 to 18 - Ad valorem taxing authorities hold public hearings on tentative budget per Tax Notice. Dates and times of these hearings are listed on the TRIM Notices.

Within 15 days after adopting a tentative budget, ad valorem taxing authorities advertise intent to adopt final millage rate and budget. Public hearing to be held 2 to 5 days after published advertisement, after 5 PM if not on Saturday, no Sunday hearings.

Within 3 days after adoption of the final millage rates, ad valorem taxing authorities deliver the Resolution or Ordinance adopting the final millage rate to Property Appraiser and Revenue Collector.

Once the millage rates are determined and the Tax Roll certified to the Revenue Collector, the individual tax bills will be prepared for mailing in November. Even if you have filed a petition to the VAB or have engaged another person to do so in your behalf, it is recommended that you pay your tax bill on time. VAB hearings can go on for a year or more, and the property tax can become delinquent. If your appeal is successful, your excess taxes will be refunded to you.

Broward County officials have publically voiced their intent to keep millage rates down and try to control expenses. However, fees are increasing to make up for the shortfall caused by lower property tax assessments. As you have already heard, Code Enforcement has become more aggressive, and now drivers are even being ticketed for seat belt violations.

Land vs. Building
One last thing...Many people have been questioning the recent changes in the building values vs. land values on the tax records. The BCPA website explains why this was done:

"Starting with the new 2009 real property assessments, our residential land values and improvement (building) values are correctly apportioned. In the past -- because of the antiquated tax roll system this office had used for decades -- we were only able to set correct amounts for the total Just Value of a property, but the internal division of value between the land and the improvements was entirely arbitrary. Using mass-appraisal methods, we equalized land values this year by neighborhood -- not just by subdivision within a neighborhood. This means the square-foot land value for dry lots in a neighborhood should be the same as for other comparable dry lots in the same area ... lots along a golf course will be valued the same as other lots along the same golf course ... waterfront lots will be valued the same as other similar waterfront lots (and point lots valued the same as other nearby point lots) ... and so on. "

In times of declining property values, you should see your land value decrease while the building value stays relatively the same with an allowance for depreciation. The structure itself does not absorb the fall in value. The land does. This has been treated incorrectly on the tax records of Broward County over the past couple of years. It appears that this has been resolved by the recent corrections.

Is Anything in Real Estate Recession Proof?

The Residential market is cyclical. It goes up and goes down and right now is the best time to buy investment housing due to the low prices and high inventory. The only problem is that residential lending is not what it used to be making it difficult to buy multiple homes. FNMA has increased the amount of homes one individual can own to 10, but after that your options become severely limited. Commercial lending on the other hand is still readily available. Regardless of where you live across the Nation, when the residential market is at its all time low Commercial is red hot.

The mortgage meltdown affects certain aspects of commercial real estate but not all… some properties are recession proof! So what types of Commercial properties are recession proof and why?

Apartments:
It’s natural to gravitate towards multi family Apartments when you first start out in commercial real estate. It’s a concept everyone understands “houses in a box.” When people loose their homes they need a place to live, the next place they go to is apartments.

Self Storage:
So what’s better than apartments with all that income from those tenants in one place? Self Storage, think about it it’s like having an apartment without the people, no toilets, no trash and no tenants to occupy the space just their stuff. When people loose their homes they transition into apartments and if you’ve ever lived in an apartment you know the closet space is limited and the storage space is even less.

Assisted Living facilities:
The next recession proof property type is Assisted Living facilities. It’s nothing more than giving assistance for people in need and most common the elderly. We all know the baby boomers are right upon us and the demand for assisted living is and always will be here.

Senior Living Facilities:
Are a lot like assisted living but much easier to manage. When people get older they either end up in assisted living as we just covered or they look to have a relaxed lifestyle and choose to occupy space in a senior living facility. This is a fifty five plus senior living facility with active seniors who want the done for you lifestyle.

Mobile Home Parks:
While not as sexy as the other types of property types (most people envision mobile home parks to be in bad areas with management stealing from you), people who loose their home in a recession and they cannot afford to move into an apartment will occupy a mobile home in a mobile home park. It costs much less than a home or apartment and because of that reason alone, it’s classified as a recession proof commercial property.

Why is Commercial Real Estate the all time wealth builder?
The reason is simple… cash flowing properties. There are four reasons to keep cash flowing properties and each one has its own separate benefit.
1. Cash Flow
2. Appreciation
3. Depreciation
4. Cash Out
Most investors purchase commercial properties for one main reason other than Cash Flow and its Appreciation. Unlike residential property, commercial property goes up in value much quicker and when the rents increase, the NOI (net operating income) goes up, when the NOI goes up, the value goes through the roof. Next, good old “Uncle Sam” will allow you to right off a portion of the property each year. This is a right off for wear and tear known as Depreciation. Cash out is a huge wealth builder. When you fill vacancies on a commercial property and keep it at market occupancy for just 180 days, this is called seasoning. Once you meet lender requirements for season, then you can do a Cash Out refinance using your new NOI.

Here’s the wealth explosion; you can pocket the equity in the property and not pay taxes on that money until you sell! That is unless you use a 1031 tax deferred exchange and roll it into another asset without having to pay capital gains ever ;-)

Fed action sends mortgage rates below 5%

Less than a day after the Federal Reserve said it would double its purchases of mortgage debt, fixed rates on conforming 30-year mortgages fell well below 5 percent, and there's thought rates may stay there for a while. The last time mortgage lenders offered rates this low was 1965!

Obama's Housing Rescue Plan Simplified

Obviously there is a lot of information coming out of the Obama camp and getting the answers can be frustrating. After all, knowing that there is help out there means nothing if you don't know what that help is. I will try to simplify it as best I can:

The first part of the program, called Home Affordable Refinance, is aimed at homeowners whose property has lost value as housing prices have plummeted. It is only open to borrowers with conforming loans backed by Fannie Mae and Freddie Mac (no FHA, VA, or subprime). The program does not reduce principal, but rather allows the borrower to refinance up to 105% of the current value. Usual fees would apply, though for many borrowers the procedures would be streamlined. Unfortunately, since most values have doped over 40%, this program will help only a small amount of people in my opinion. Interested borrowers should contact their loan servicers to determine whether their mortgages are held or guaranteed by Fannie Mae or Freddie Mac. You can also contact me to determine what your home is worth if you are unsure.

The second program, called Home Affordable Modification, is more complex (and more interesting) and is aimed at borrowers whose mortgage payments have become unaffordable either because of a hardship such as job loss or illness or because the interest rate has been reset higher on an adjustable-rate mortgage.

For those borrowers, the government would provide cash payments and financial subsidies to help the lender lower the monthly payment to no more than 31% of the borrower's gross monthly income. In most cases the lender would reduce the interest rate on the loan to as low as 2% for five years. If that was inadequate to bring down the payment, the lender also could extend the term of the loan to 40 years or temporarily reduce the loan principal. In those cases, the set-aside portion of the loan principal would be repaid to the lender in a balloon payment when the house was sold or refinanced.

The 31% target income level would apply only to the borrower's primary mortgage payment; second mortgages, home equity loans and other consumer debt would not be included in that calculation.

However, administration officials said they would offer additional financial incentives to servicers to reach agreements with second-lien holders to accept partial repayment of those debts. Details of that policy are still being worked out.

To address the problem of borrowers who default again on mortgages, the government would provide additional payments to lenders and servicers the longer the borrower stays current on the loan. And borrowers would also see a benefit: For each of the first five years that they continue to pay the mortgage, the government would reduce the loan principal by $1,000.

And those whose interest rates are reduced below market value would see rates float back gradually after the initial five-year loan period -- at 1% a year, up to the market rate on the day the loan modification was signed. Interested borrowers should contact their servicers directly, administration officials said, and should pay no fees to access the program.

Finally, if neither one of these programs work for you, or perhaps you have an investment property, you still have the option to Short Sale it and spare your credit the stigma of Foreclosure...

Protecting Your Family

The single most important document in your estate conservation strategy might not be your will or any of the other instruments that you probably paid an attorney to create such as Revocable Living Trusts. In fact, what is likely to be your single most valuable asset will convey directly to your heirs without going through probate or any of the typical estate distribution channels.

In this case, the asset is your retirement savings, and the document is the retirement account beneficiary form. Because your beneficiary designations will override any instructions in your will regarding who will inherit your IRA or employer-sponsored retirement plan, ensuring that the correct beneficiary is named on the account form might be the easiest, most inexpensive step you can take toward a sound estate conservation strategy.

Yet experts say it is fairly common for beneficiary designation forms to be outdated. This can be an especially serious problem when a beneficiary was named years ago and the designation was never reviewed. Then, because of life events — marriage, divorce, birth, or death — the named beneficiary is no longer the person whom the account owner wishes to inherit the money. If this information doesn't come to light until the account owner’s death, it’s too late to do anything about it. The custodian of the plan has no choice but to follow the instructions on the form, even if it means the decedent’s children are deprived of their inheritance because a former spouse or now-estranged family member was the designated beneficiary.

Fortunately, there’s an easy fix to avoid this scenario. Regularly reviewing and updating your beneficiary designations can help ensure that your loved ones inherit your retirement savings.

Foreclosures Stoppage Awaiting Obama's Plan

Citigroup, Chase, Bank of America, Wells Fargo, Morgan Stanley, Bank of New York, and greed to suspend foreclosures to give time to the Obama administration as it continues to craft a housing plan to modify mortgages for troubled borrowers.

Citigroup will halt foreclosures through March 12, or until a plan is completed, the company said Friday. Wells Fargo said its moratorium is in place until a plan is announced. The other lenders said foreclosures will be stopped on owner-occupied homes until March 6.

Fannie Mae and Freddie Mac said they will suspend foreclosure sales involving occupied single-family and two- to four-unit residential properties through March 6.

New Condo Guidelines for Fannie Mae loans

Fannie Mae has issued new guidelines that Florida condos and condo conversions, and, in some cases, old condos, must meet before it will fund loans:

• At least 70 percent of the units in new condos must be pre-sold.

• No more than 10 percent of units can be owned by a single entity.

• No more than 15 percent of units in all condos can be more than 30 days past due on association fees.

• No more than 20 percent of a condo can be devoted to commercial use.

• All condos, new and old, must have fidelity insurance, which protects association funds from fraud.

• The seller is not allowed to help with down payments or offer other perks, like deductions of association fees, unless they are disclosed.

• Condos must have hazard insurance.

• When investors buy in established projects, at least 51 percent of units must be owner-occupied.

**If the condo you wish to purchase or refinance has any of these issue, it may still be possible to go FHA. Contact me with the address and I can check whether or not the project is approved by them...

Rates Plummet to mid 4's

US Treasury begins purchasing FNMA and FHLMC Backed Securities - On Monday January 5, 2009, The US Treasury initiated their purchase of mortgage backed securities as previously announced on November 25, 2008. As a result, mortgage rates have plummeted to the mid 4's causing a renewed interest in refinance applications and those buyers willing to jump back into the real estate market yet another incentive to buy now.