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As we progress in today’s market, I often see buyers looking at bank owned homes for deals.  But are you really getting a deal?  Some would say yes, of course, but I would caution anyone who may think just that.  Here are a couple facts to keep in mind if you are looking for a bank owned property.

REO properties (Real Estate Owned) are appraised by a neutral third party and priced for retail sale by asset managers, who have a fiduciary duty to their investors to maximize return.  So the so-called “bank deal” is largely a myth.  Asset Managers do not determine the value and then knock off 10% or more.  And if they do inadvertently price the property below market value, their selling strategy enables every buyer to make an offer within the first few days.  When that occurs the chances for multiple offers increases dramatically, and in some cases pushing the purchase price beyond retail value.

There are cases in which a home is damaged and can be purchased for a great deal, or what we like to call, “real market value”!  And once repaired and updated, can bring a decent spread as to what it is worth in a repaired state vs. disrepair.

Purchasing a bank owned home also includes an entire host of unknowns.  And in many cases the home is not in “running” order.  Or as it would be if someone was living in the home at the time of purchase.  They are always purchased as-is, so there is no recourse if you find out something is not correct like the lot lines, or easements that may not have been disclosed.

The days of offering 50% of asking price are also over.  There was a time in the beginning of our economical meltdown that banks had too much inventory and no system in place for selling it, so it was common to offer as much as 50% less than asking price and get it.  But those days are long gone as they realized the errors of their ways, which only cost them money in the long run.

So let’s let go of the myth, that foreclosures are the BEST deal out there, and retrain our thinking to include that the BEST deal out there is one that is priced correctly for the given market and one that includes all of the disclosures, so you know what you are buying.

Filed under: Buying Tips, Buying Tips by Steve Parafin
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As the market recovers, there will be fewer months where we beat the prior year. Such is the case with March 2012. In terms of new contracts written, numbers continued to show improvement over March of last year. Across all of our markets Closed Sales were down just a bit from last year. This is not a cause for concern (it would be if there were three months of decline). March 2011 was an unusually strong month, so it is not surprising that we did not top it this year. As the percentage of short sales grows, pending sales will outpace actual closings since there is a higher fall-through rate for short sales. The more significant number from this point forward is the average/median sale price, since much of the market gain will be in rising values. If available home inventories remain tight, in ensuing months we may even see a slight decline in the number of homes sold as we simply run out of homes to sell. That trend, however, should not last long because it will cause values to rise thus more homes will be released to the market.

Southeast Michigan as well as both Southwest (Grand Rapids area) and Northwest (Grand Traverse) Michigan, the Months Supply of Inventory (MSI) hit another two-year low. (Southeast Michigan had the largest positive movement.) This is a very good thing because each month with a falling MSI moves us closer to a sustainable appreciation rate. For bank-owned, the MSI fell below 3 months, with non-bank owned at 4.8 months.  Most of that fall was a result of an increase in contracts written in March. Available bank-owned inventories fell, but non-bank owned remained about the same.

The rest of the nation appears to be joining us in the market upturn. Brokers across the country are reporting strong buyer demand and a lack of home inventories, similar to where we where in mid 2011. With the rest of the country joining our party, housing is beginning to move from an economic anchor to one of the key pieces fueling the recovery.

For those looking to move, a common question is… should I buy/sell now or wait for the market to improve a bit? The chart below shows the cost of waiting to buy versus buying this year in terms of total cost of ownership. The chart used the anticipated mortgage and appreciation rates over the next few years to project the cost of waiting to buy versus buying this year (2012).

Chart – Buying Now vs. Waiting 

By waiting, buyers face both a higher interest rate as well as a higher purchase price on the home they buy. Each year a buyer waits it will costs them more (blue line), yet reduce their future appreciation gain (green line). For many homeowners, their mortgage gap is too wide to sell; however, that gap is closing every month, so it is more important than ever for sellers to ask their Realtors to track values.

If you’d like more information on the market, like to list your property, or want information on any property from any broker, you may call or email at anytime.

Thank you,

Steve Parafin

Filed under: Market Update by Steve Parafin
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A new month reveals that the market continues to improve. Pending sales were up and there continues to be a significant number of sales with multiple offers. It is the best time in the last six years for sellers to test the market: values are up over last year and many sellers will be surprised at how far up the market has moved.

The overall 90-day trend for our leading indicators has been either positive or neutral. Pending home sales are steady, home values are stable, and available inventory is down. In all cases, residential real estate values have improved since the same time last year. As the lower quality homes carrying a discounted value are sold or removed from the market, appraisals values and appreciation rates will begin to rise enough to draw more sellers into the market, increasing the pace of recovery.

The Months Supply of Inventory (the time it takes to sell off the current home inventories) is at its lowest point for bank-owned properties in the past two years (3.1 months) as well as the lowest point for non-bank in 22 months (6.1 months). The market remains divided between the 30% of homes that sell quickly and the 70% that sit on the market for months.

For the typical home in almost any market, if there is not strong market activity and multiple potential offer interest in the first 30 days on the market, the home is not priced correctly to fit its condition and features. Currently, if a home has been on the market for over 90 days without a price adjustment, there is a less than 25% chance it will sell. A home on the market for over 180 days has less than 3% chance of selling without a price adjustment.

In order to push up the pace of appreciation, the older, less saleable inventory needs to be either sold or removed from the market. This less-than-perfect inventory is the key to market recovery. It’s also a great opportunity. With rental rates strong, there has never been a better time to invest in single-family rentals. Annual returns can exceed 10%, leaving room for rehabbing and renting. These historically high returns work for a buyer who fixes up to live in the property or to hold it as an investment. For those who need help with the fix-up costs, a common challenge for many, the FHA 203K program is ideal.

Here’s a good article from Inman News about first-time buyers using IRA proceeds to help with a down payment.

Filed under: Market Update by Steve Parafin
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National Association of Realtors FAQs*

New Medicare Tax on “Unearned” Net Investment Income

Q-1: Is there a 3.8% real estate “sales tax” or a transfer tax created in health care bill?
No. There is neither a real estate “sales tax” nor a real estate transfer tax under any federal law. The Internet has generated several viral items describing such a tax. Those Internet postings are totally false. The 2010 health care legislation did create a new 3.8% tax, but it applies only to a limited group of taxpayers.
Q-2: So who will be subject to the new tax? When is it effective?
The new 3.8% tax will apply to the “unearned” income of “High Income” taxpayers. The new Medicare tax on unearned income will take effect January 1, 2013. Proceeds from the tax will be allocated to shoring up the Medicare fund.
Q-3: Who is a “High Income” Taxpayer?
Those whose tax filing status is “single” will be subject to the new unearned income taxes if they have Adjusted Gross Income (AGI) of more than $200,000. Married couples filing a joint return with AGI of more than $250,000 will also be subject to the new tax. (The AGI threshold for married filing separate returns is $125,000.)
Q-4: Are the $200,000 and $250,000 thresholds indexed for inflation?
No. Thus, over time, more individuals may become subject to this tax.
Q-5: What is “unearned” net investment income?
Unearned income is the income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses if the investor is not an active participant in the business. The portion of unearned income that is subject both to income tax and the new Medicare tax is the amount of income derived from these sources, reduced by any expenses associated with earning that income. (Hence the term “net” investment income.)
Q-6: So the new tax will apply to rents from investment properties that I own?
Maybe. Remember that net investment income includes only net rental income. Thus, gross rents would not be subject to the tax. Rather, gross rents would be reduced (as they are under the income tax) by all allowable expenses, including depreciation, cost of repairs, property taxes and interest expense associated with debt service. AGI includes net income from rent, so if your AGI is above the $200,000/$250,000 thresholds, then the rental income might be subject to the tax.
For many investment real estate owners, the net rents will be the same as or similar to the amounts reported on their Schedule E, filed with their Form 1040 Income Tax Return. (For calculations, see Q-7, below. See also Q-8 through Q-12 related to capital gain from sale of principal residence, losses on sale and to vacation homes, below.)
Q-7: Does the tax apply to the yearly appreciation of an asset?
No. Capital gains are subject to this new tax only in the year when the asset is sold. The amount of the gain will be measured in the same way that it is for income tax purposes. This rule applies to real estate and all
other appreciating capital assets (including stocks and bonds). Net capital gains are taxable only in the year of sale.
Q-8: How is the new 3.8% Medicare tax calculated?
The new 3.8% Medicare tax is assessed only when Adjusted Gross Income (AGI) is more than $200,000/$250,000. (See Q-2 above.) AGI includes net income from interest, dividends, rents and capital gains, as well as earned compensation and several additional forms of income presented on a Form 1040 Income Tax Return.
The tax is NOT imposed on the total AGI, nor is it imposed solely on the investment income. Rather, the taxable amount will depend on the operation of a formula. The taxpayer will determine the LESSER of (1) net investment income OR (2) the excess of AGI over the $200,000/$250,000 AGI thresholds. Thus, if net investment income is the smaller amount, then the 3.8% tax is applied only to the net investment income amount. If the excess over the thresholds is the smaller amount, then the 3.8% tax would apply only to the excess amount.
Q-9: Give me an example.
If AGI for a single individual is $275,000, then the excess over $200,000 would be $75,000 ($275,000 minus $200,000). Assume that this individual’s net investment income is $60,000. The new 3.8% tax applies to the smaller amount. In this example, $60,000 of net investment income is less than the $75,000 excess over the threshold. Thus, in this example, the 3.8% tax is applied to the $60,000.
If this single individual had AGI if $275,000 and net investment income of $90,000, then the new tax would be imposed on the smaller amount: the $75,000 of excess over $200,000.
Rules of thumb for predicting the application of this tax year to year are not readily determinable, largely because the proportion of net investment income compared to AGI will vary from year to year and from individual to individual.
Q-10: Will the $250,000/$500,000 exclusion on the sale of a principal residence continue to apply? Yes. Any gain from the sale of a principal residence that is less than $250,000 (individual) or $500,000 (joint return) will continue to be excluded from the income tax. The 3.8% tax will NOT apply to this excluded amount of the gain.
Q-11: Will the 3.8% tax apply to any part of the gain on the sale of a principal residence?
Maybe. The new Medicare tax would apply only to any gain realized that is more than the $250K/$500K existing primary home exclusion (known as the “taxable gain”), and only if the seller has AGI above the $200K/$250K AGI thresholds.
So, for example, if the taxable gain was $30,000 and a married couple had AGI (which would include the taxable gain) of $180,000, the 3.8% tax would not apply because AGI is less than $250,000. If that same couple had AGI of $290,000, then the application of the 3.8% tax would be subject to the same formula described above. The $30,000 taxable gain on the sale would be less than the $40,000 excess above $250,000 AGI, so the $30,000 gain would be subject to the new 3.8% tax.
Q-12: Is rent from a vacation home subject to the 3.8% tax? And what about the gain on sale of a vacation or rental property?
The application of the tax will depend on whether the vacation home has been rented out, the period for which it has been rented and whether the property is solely for the enjoyment of the owner. If the owner
has rented the home out to others, then the 14-day rent exclusion will continue to apply. Thus, if the owner rents the property to others (including family members) for 14 or fewer days, there would be no net investment tax. (Note that no deductions for expenses would be available, as under current law.)
If the home has been rented to others (including family members) for more than 14 days, then the rents (minus related expenses) would be considered as part of net investment income and could, depending on AGI and the calculations described above, be subject to the new tax.
If the vacation home has been used solely for personal enjoyment (i.e., there is no rental income and no associated expenses), then a gain on sale would be treated as net investment income and could be subject to the tax, depending on AGI. Similarly, if the property had generated rents, any net gain on sale could also be included in net investment income. The amount of the tax (if any) would depend on the calculation formula, above in Q-8 and Q-9.
Q-13: My rental property generates a net loss each year. How will those losses be factored into the new tax? And what if I have net capital losses when I sell?
Net losses from rents and net capital losses reduce AGI. Thus, the losses themselves would not be subject to the tax. If, after losses, AGI still exceeds the High Income thresholds, the 3.8% tax would still apply to any net rental, interest or dividends income
Q-14: I earn all of my income from real estate investments that I own and operate myself. Will my rents and gains be subject to the new tax?
No. If the ownership and operation of real estate you own is your sole occupation, then those activities are what’s called your “trade or business.” Income derived from a trade or business is not subject to the new 3.8% tax. If the owner of rental properties has a “day job,” however, real estate investments are not considered as a trade or business, but are rather considered as investments, even if they are a major source of income.
Many Realtors engage in business activities are that are the “typical” selling, leasing and brokerage endeavors usually associated with the term “Realtor.” If they also own rental real estate assets as part of their own personal investment portfolio, the net rents from that portfolio could become subject to the new 3.8% tax on net investment income, depending on AGI.
Q-15: Will “High Income Filers” lose any portion of the Mortgage Interest Deduction?
No. The mortgage interest deduction is unchanged. No cap was imposed on any itemized deductions.
Q-16: Why is this new tax called a “Medicare tax?”
The revenues generated from this tax will be allocated to the Medicare Trust Fund that is part of the Social Security System. That fund is currently on shaky financial footing. These additional revenues are intended to shore up the Medicare Trust Fund.
Q-17: How will this new tax affect marginal (the highest) tax rates when it is combined with existing law and with the possible expiration of the Bush tax cuts enacted in 2001?
Marginal tax rates are the tax rates assessed on the “last” dollars included in taxable income. If the Bush tax cuts are allowed to expire, then the marginal rates for upper income individuals will increase, particularly for capital gains income.

*Several special calculations actually increase the marginal tax rates of many upper income individuals. These include the loss of the personal exemption, loss of some itemized deductions and special self-employment tax deductions and rate adjustments. This chart does not reflect those special calculations because their impact will vary from taxpayer to taxpayer.

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Moving Checklist

Two Months Before

    Sort and purge. Go through every room of your house and decide what you’d like to keep and what you can get rid of. Think about whether any items will require special packing or extra insurance coverage.

    Research.  Start investigating moving company options. Do not rely on a quote over the phone; request an on-site estimate. Get an estimate in writing from each company, and make sure it has a USDOT (U.S. Department of Transportation) number on it.

Create a moving binder. Use this binder to keep track of everything—all your estimates, your receipts, and an inventory of all the items you’re moving.

Organize school records. Go to your children’s school and arrange for their records to be transferred to their new school district.

Six Weeks Before

Order supplies. Order boxes and other supplies such as tape, Bubble Wrap, and permanent markers. Don’t forget to order specialty containers, such as dish barrels or wardrobe boxes.

Use it or lose it. Start using up things that you don’t want to move, like frozen or perishable foods and cleaning supplies.

Take measurements. Check room dimensions at your new home, if possible, and make sure larger pieces of furniture will fit through the door.

One Month Before

Choose your mover and confirm the arrangements. Select a company and get written confirmation of your moving date, costs, and other details.

Begin packing. Start packing the things that you use most infrequently, such as the waffle iron and croquet set. While packing, note items of special value that might require additional insurance from your moving company. Make sure to declare, in writing, any items valued over $100 per pound, such as a computer.

    Label. Clearly label and number each box with its contents and the room it’s destined for. This will help you to keep an inventory of your belongings. Pack and label “essentials” boxes of items you’ll need right away.

Separate valuables. Add items such as jewelry and important files to a safe box that you’ll personally transport to your new home. Make sure to put the mover’s estimate in this box. You’ll need it for reference on moving day.

Do a change of address. Go to your local post office and fill out a change-of-address form, or do it online at usps.gov. But in case there are stragglers, it’s always wise to ask a close neighbor to look out for mail after you’ve moved. Check in with him or her two weeks after the move, and again two weeks after that.

Notify important parties. Alert the following of your move: banks, brokerage firms, your employer’s human resources department, magazine and newspapers you subscribe to, and credit card, insurance, and utility companies.

Forward medical records. Arrange for medical records to be sent to any new health-care providers or obtain copies of them yourself. Ask for referrals.

Two Weeks Before

Arrange to be off from work on moving day. Notify your office that you plan to supervise the move and therefore need the day off.

Tune up. Take your car to a garage, and ask the mechanic to consider what services might be needed if you’re moving to a new climate.

Clean out your safe-deposit box. If you’ll be changing banks, remove the contents of your safe-deposit box and put them in the safe box that you’ll take with you on moving day.

Contact the moving company. Reconfirm the arrangements.

One Week Before

    Refill prescriptions. Stock up on prescriptions you’ll need during the next couple of weeks.

    Pack your suitcases. Aim to finish your general packing a few days before your moving date. Then pack suitcases for everyone in the family with enough clothes to wear for a few days.

A Few Days Before

Defrost the freezer. If your refrigerator is moving with you, make sure to empty, clean, and defrost it at least 24 hours before moving day.

Double-check the details. Reconfirm the moving company’s arrival time and other specifics and make sure you have prepared exact, written directions to your new home for the staff. Include contact information, such as your cell phone number.

Plan for the payment. If you haven’t already arranged to pay your mover with a credit card, get a money order, cashier’s check, or cash for payment and tip. If the staff has done a good job, 10 to 15 percent of the total fee is a good tip. If your move was especially difficult, you might tip each mover up to $100. Don’t forget that refreshments are always appreciated.

Moving Day

Verify. Make sure that the moving truck that shows up is from the company you hired: The USDOT number painted on its side should match the number on the estimate you were given. Scams are not unheard-of.

Take inventory. Before the movers leave, sign the bill of lading/inventory list and keep a copy.

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Fannie and Freddie’s overseer has plans to streamline the process

By Ken Harney

Inman News®

For home sellers, buyers and real estate brokers hoping for breakthroughs on simplifying short-sale transaction and timelines, this may not be the proverbial silver bullet, but it’s definitely positive news: The agency that controls Fannie Mae and Freddie Mac has a serious effort under way to remove or minimize some of the major hurdles and to put those changes in the field as soon as this fall.

Officials at the Federal Housing Finance Agency — the folks who now make the rules governing millions of mortgage transactions at both companies — told me last week that they are actively seeking input from lenders, servicers, REALTORS®, investors and housing counselors about how to speed up short sales on loans connected with Fannie and Freddie.

National Association of REALTORS® officials, who have already met with the agency’s special short-sale task force, confirm that the effort is for real and promise potentially significant reforms. FHFA officials say their deadline to wrap up their review of short-sale obstacles is June 30, and they plan to announce detailed improvements to the process no later than Sept. 30.

Given the sheer size of the companies’ portfolios — plus the estimated 1.7 million additional loans expected on the foreclosure conveyor belt at Fannie and Freddie in the coming several years — any substantive improvements could have wide-ranging benefits for everybody involved.

What’s the agency looking at?

High on the list:

1. Second liens. Banks that hold second mortgages and equity credit lines on underwater houses often drag out the short-sale process by refusing to recognize hard economic realities: The collateral that once secured their loan no longer exists.

They stand to be zeroed out in the event of either a foreclosure or short sale, and they will have to report that loss to auditors, investors and regulators. As a result, they dither and delay deals by demanding too much for their consent to sale terms, or they simply hold out until buyers give up and the transaction collapses.

FHFA officials leading the short-sale reform effort believe that Fannie and Freddie have sufficient pressure points on banks that they can bring to bear — mainly related to servicing rules and penalties — but they decline to discuss what they might entail. For their part, servicing experts in the private sector say better standardized rules between the two companies on second liens in short sales, plus fixed ceilings on what banks can expect out of transactions in advance, could reduce much of the current friction.

Travis Hamel Olsen, chief operating officer of Loan Resolution Corp., a Scottsdale, Ariz.-based firm that assists major lenders in troubled mortgage workouts, says FHFA should enforce a non-negotiable 10 percent ceiling on what second lien holders can obtain from short sales.

That is higher than the 6 percent or $6,000 ceiling allowable under the federal government’s HAFA (Home Affordable Foreclosure Alternatives) ceiling, but attractive enough to bring most major banks who deal with Fannie and Freddie to the table faster.

2. Mortgage insurers. The FHFA task force expects to come up with rules that eliminate or reduce mortgage insurance companies’ current ability to prolong negotiations indefinitely over claims in short sales, and thus contribute to the breakdown of transactions.

3. Mandatory timelines. Though FHFA is nowhere close to deciding on hard and fast timelines for participants to meet in short sales involving Fannie and Freddie, they are a top priority in the current effort. Six months from start to finish “is way too long,” said one official, who declined to suggest what would be a more acceptable limit.

Legislation pending in Congress and supported by NAR (House bill H.R. 1498) would nail down one key time segment — it would require servicers to respond within 45 days to any fully executed short-sale offer.

4. Valuation issues. FHFA expects to produce better guidance on the steps servicers and other participants in short sales should follow to arrive at acceptable property valuations. That, in turn, should help limit negotiations over what lenders and buyers expect from transactions and the methodologies used to get to the final numbers.

In its recent meeting with FHFA officials, NAR pushed hard for Fannie and Freddie to tell brokers and other interested parties early in the process what minimum price they will accept in any given short sale.

5. Staffing. Though the biggest banks and servicers have muscled up their loss-modification and foreclosure alternatives staffing since the start of the mortgage bust, FHFA believes that greater responsiveness to short-sale participants — sellers, buyers, realty agents — is needed. Since both Fannie and Freddie have “servicer performance evaluation” standards, FHFA has a variety of administrative carrots and sticks available to prod lenders and servicers to push through short sales faster.

So what does this all add up to? Just another bureaucratic exercise? Or could FHFA’s new push for short-sale efficiency really mean something on the front lines? My guess is that it just might. FHFA, which is tasked to “conserve” Fannie’s and Freddie’s assets and achieve the best possible financial resolutions of their troubled loan portfolios in the taxpayers’ interest, appears to be genuinely seeking to cut timelines and red tape in short sales. They also know the hard facts: Short sales yield Fannie, Freddie and investors much more at the bottom line — they cost taxpayers a lot less on average — than foreclosures.

Remember these deadline dates — June 30 and Sept. 30. We’ll check back and see how much actual streamlining comes out of the FHFA’s latest high-priority project.

Ken Harney writes an award-winning, nationally syndicated column, “The Nation’s Housing,” and is the author of two books on real estate and mortgage finance.

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