Assumptions are an Alternative

Assumptions are an Alternative

In the late 80’s, both FHA and VA began requiring buyers to qualify to assume their mortgages. The main reason there haven’t been many assumptions in the past 25 years is that interest rates have been steadily going down and if a person has to qualify, they might as well do it on a new loan and get a lower interest rate.

Based on projections by Fannie Mae, Freddie Mac, the MBA and NAR, rates for the second half of 2017 and 2018 are expected to be higher. When interest rates on new mortgages are higher than the rates of assumable FHA and VA mortgages in the recent past, it becomes more advantageous to assume the existing mortgages.

FHA and VA loans originated with lower than current interest rates have great advantages for buyers and sellers.

  1. Interest rate won’t change for the qualified buyerunnamedLower interest rate means lower payments
  2. Lower closing costs than originating a new mortgage
  3. Easier to qualify for an assumption than a new loan
  4. Lower interest rate loans amortize faster than higher ones
  5. Equity grows faster because loan is further along the amortization schedule
  6. Assumable mortgage could make the home more marketable

An Assumption Comparison can help determine the savings and financial benefits of an assumable mortgage with a lower rate.

Til next time… May all your deals be easy ones!
Follow me on Twitter @yourmendorealty

Clint Hanks                                   707-391-6000

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Buying Existing Loans, called “Real-Estate-Backed Notes”

Last week, I shared information about hard-money loans, which are loans that often work when conventional loans won’t. This week, I’ll talk about buying and selling notes secured by real estate, a close cousin to real estate-backed, hard-money loans.

If you sold a property and carried the financing, you are now the proud owner of a note secured by a deed of trust. The note outlines the terms of the obligation, including length, monthly payments, interest rate, and when any associated balloon payment(s) will come due, among other things. (A balloon payment is a payment that amounts to more than double the value of a regular payment, and is usually planned as the final payoff at the end of the loan.)

The main job of the deed of trust is to tie the specific loan to the real estate that secures it. In a seller carry-back situation, the real estate is normally the property you sold. When you sold the property and carried the financing, there may have been good reasons to do so: a higher sales price, a faster sale, a better return on investment than was available from other investment sources; or maybe the sale could not have happened at all without seller financing. Now, however, things have changed. Your princess may be about to graduate from high school and hoping to go to college, or perhaps you want to remodel your home or take advantage of an exciting investment opportunity.

Whatever the reason, you’re currently in a position of needing cash. Happily for you, that note secured by a deed of trust is a negotiable instrument. That means you can sell it.

Depending on a number of factors, you will usually get something less than the outstanding balance owed. If the financing you provided was at a low rate or had an especially long term, the note’s sales price will almost certainly be less than the outstanding balance. If the loan-to-value (LTV) ratio is high–calculated by dividing the total loan amount by the value of the property–you can also expect to sell the note for less than the outstanding balance. Still, cash in your hands may be worth more than the value of the note.

If you choose to sell the note, these transactions are typically handled by a licensed broker who charges a commission for arranging the sale. Like a real estate transaction, it should be handled in a professional manner, making sure all escrow instructions are carefully drafted and followed, and title insurance is secured.

As a buyer of this note, you should have your broker verify that the value of the property supports the loan, and that fire insurance and property taxes are accounted for. And most importantly, confirm that the seller does, in fact, own the notes–and that there are no liens that might encumber the note. Your broker can also provide a financial analysis to let you know what the rate of return will yield if all the payments are made in a timely manner (including any balloon payments).

When the dust settles, the sale of an existing loan can be a reasonable source of cash for the seller and an attractive investment option for the note’s buyer.

If you have questions about real estate investment, sales or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com.

Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

 

Family & Friends Mortgage

Family & Friends Mortgage

Anytime a lender and borrower can agree on rates and terms, it can be a good match but IRS has specific rules that govern the transaction especially when the parties are family or friends.26614035-250.jpg

The loan must be done in a business-like manner with a written note specifying the loan amount, interest rate, term and collateral. IRS requires that the mortgage be a recorded lien to allow the interest deduction.

Sometimes, a friends and family situation might have a less than normal interest rate on the mortgage. However, the rate charged in the note is regulated by the minimum applicable federal rate which is published monthly by IRS based on current Treasury securities. For July 2017, the rate is 2.57% for terms over nine years.

The seller must report the interest paid to them along with the name, address and Social Security number on schedule B when the buyer uses the property as their principal residence.  A mortgage between family and friends can be good for both parties. It may allow the borrower a slightly lower rate without the expenses of a traditional lender while giving the note holder a higher rate than they can earn in available investments.

Your tax professional can guide the transaction whether you’re a buyer or a seller and your real estate professional can help arrange to have the documents drawn and filed.

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The TRUE Cost of Building

I’m frequently asked why we don’t have more houses available in Ukiah for sale or rent. Although the Realty World Selzer Realty property management division manages about 800 properties, we typically have almost no vacancies—and that’s been true for at least a couple years. The reason, of course, follows the laws of supply and demand. Although the demand for more housing is high, the cost of building it is higher.

Part of the reason for the high building costs is that City of Ukiah is still paying off a $72 million sewer upgrade debt from five years ago. Although I like the changes in attitude I see in our current councilmembers as they support policies to encourage affordable housing, we are all saddled with debt incurred by poor decision-making in years past.

When people try to build on a vacant lot rather than buy an existing residence, they are often surprised by how many fees and expenses they incur. Recently, the sale of an empty lot fell through because the costs of developing the property ran tens of thousands of dollars more than expected. I’m not talking about the cost of the lot itself. I’m talking about the regulatory costs associated with preparing the lot.

Here are some of the costs the buyers would have incurred for the simplest of building projects: putting a mobile home on a vacant lot.

  1. Sewer, water and electrical fees: $19,000.
  2. Sewer lateral and water line from mains to the property line: $10,000
  3. Installation of four street trees installed within five feet of the sidewalk with garden stacking blocks for watering: $3,600
  4. Storm water drainage mitigation (an infiltration ditch with gravel and berm at low end of lot to stop runoff – two feet wide by three feet deep with one-inch berm): $4,600
  5. Demolition of existing sidewalk and ADA-compliant replacement sidewalk around driveway: $6,000
  6. Excavation for utilities from house to sidewalk for underground utilities: $2,200
  7. Building permits: $4,500

This amounts to about $50,000, much of it includes things the owner would not have elected to do given a choice. While every new home needs sewer, water and electrical services, the hook-up fees and the cost of connecting to those services to the structure adds up to more $30,000. That is a lot of money.

Another proposal fell through when a developer wanted to build an apartment complex on the lot behind Rite-Aid in Ukiah. The sewer hook-up fees alone exceeded the contract purchase price for the land.

The bottom line is this: before we see new construction of single-family homes, prices for those properties will have to increase. We are still waiting for the current market value of a typical home in Ukiah to reach the value it held in 2007, before the housing bubble burst.

Once that happens, we still won’t see a huge construction craze because since 2007, inflation and regulations governing construction have consistently driven up building costs.

To support the cost of building a new 800-square-foot, two-bedroom, one-bath apartment, rents will probably need to rise to about $1,200 per month. While this is not a welcome idea for people looking to rent an apartment, it is just the simple facts of life when it comes to the cost of building a multi-family complex in the Ukiah Valley. There are a few apartment projects in the planning stages, but they are unlikely to go through until the developers are confident they will have the income to support their project. Based on the shortage of housing, particularly rentals, and the fact that there will be new construction in desirable locations, I think they’ll be able to achieve these numbers.

If you have questions about real estate investment, sales or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com.

Dick Selzer is a real estate broker who has been in the business for more than 40 years.

Down Payment Problem – Are You Sure?

Down Payment Problem – Are You Sure?

There is increasing difficulty for first-time home buyers to save for their down payment as indicated in the graph.  Several factors that contribute to this trend include rising rents, rising home prices, student loan debt and flat wages.down payment graph.png

Some would-be buyers feel they cannot buy a home today but a large part of those decisions may be based on inaccurate assumptions.

Nine out of ten non-owners believe they need ten percent or more for a down payment. The typical down payment for first-time buyers is six percent. VA has 100% loan programs as well as USDA for certain qualifying areas and buyers. FHA is known for 3.5% down payments. And FNMA and Freddie Mac have down payments as low as 3% and 5%.

There are gift provisions available for buyers who have an “angel” who would like to help them with their down payment.

There are ways to borrow against a person’s qualified retirement program for a down payment. It isn’t necessarily limited to the buyer but could include a relative. Interestingly, a son or daughter can borrow against their retirement to benefit their parents.

In some respects, having good credit and sufficient income is more important than the down payment. Don’t rely on “common knowledge.” Get expert advice and counsel to see if there is a way to advance your dream of owning a home.

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