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Take a look at the homes for sale in many of the local markets and you’ll notice a common trend from city-to-city…a lack of active listings. This has led to many areas seeing intense competition for available properties resulting in multiple offers, increasing prices, and frustrated buyers. We have seen similar conditions in the past, such as when the $8,000 tax credit was close to expiring. There are steps that buyers can take to increase their odds for success.
While the cause for this environment is debated by many, one of the key reasons is the lack of bank-owned listings. Bank owned properties, aka “REOs” have long been a staple in the market the past 5 years. The banks slowed down foreclosures significantly last year as they dealt with class-action lawsuits and government intervention. While many of those barriers have passed, banks have yet to start pushing their REO into the market. This makes the market comprised predominately of short sales with a few standard listings sprinkled in. This environment will likely run into the busy summer buying season, ratcheting up competition as the number of new buyers outpaces the number of new listings.
What can a buyer do? The most important step for a buyer to make is to secure solid financing. A large percentage of loans recently originated have been FHA loans. These loans have been very popular because they allow buyers to purchase a home with 3.5% down payments. Unfortunately, in April HUD raised the mortgage insurance requirements on these loans to 1.25% monthly and 1.75% upfront. These high MI rates have prompted up to seek lower cost options. A 5% down payment conventional loan has a monthly MI rate of .60-.72% with no upfront charge saving the borrower a considerable amount of money.
Why would a seller care what kind of loan a buyer gets? Seller’s agents are often biased against FHA loans for a variety of reasons. FHA loans are often perceived as loan for weaker buyers that don’t have the finances to secure a “regular” loan. Also, the appraisal required for FHA financing is stricter and can potentially cause issues midway through an escrow. In addition, FHA will not allow a buyer to pay more than the appraised value. In an increasing market, this sometimes causes a problem. For example, a seller’s bank might approve a short sale for $300k. They buyer’s appraisal might come in at $290k. The buyer may be willing and able to pay the extra $10k in cash, but FHA will not allow it. Sellers are aware of all the above, so when they have 6 similar offers on the table, they are going to select the offer that has the most flexible terms.
If the types of financing had to be ranked as seller-friendly, the list might look like this: 20% or higher down payment conventional financing (best), 5-15% down payment conventional financing, FHA financing, VA financing (worst). Cash isn’t necessarily king. It generally matters not to the seller’s bank how they get their money…they just want as much as possible. Lowballing listings with cash offers simply isn’t going to be productive in today’s market. Cash will be useful when the seller is against a tight deadline, or there are significant repairs to be made on the property.
If you have the ability to move your financing up the ranking level, then you should do so. If you need a specific type of loan, then you need to make sure you put your best foot forward. This means making sure your offer is complete to include your loan approval, asset and income information, FICOs, and proof of your down payment funds source. When I am placing offers for my clients I make sure I contact the listing agent to get a feel of what they’d like to see and I send a complete offer package with a cover letter outlining buyer’s strengths. There are also several behind-the-scenes “tricks” that we can use to increase the odds your offer is the one that gets accepted. Your agent plays a critical role in making sure your offer shines. If you feel you’re not getting the results you deserve, then feel free to contact me at firstname.lastname@example.org.
There have been a number of recent articles about banks ramping up their foreclosure starts for 2012. There is definitely a lack of inventory listed for sale on the MLS for the Inland Empire. In many areas, there is less than 25% of the “normal” number of homes for sale at any given time. Banks stalled initiating and processing foreclosures in 2011 with the “robo-signing” scandal affecting several of the largest lenders. With those issues largely behind them, banks are poised to begin foreclosing on properties in record numbers.
Many homeowners continue to stay in their home long after missing their first mortgage payment. There are many stories of folks being able to stay in their homes for 12, 16, even 24+ months without making a mortgage payment. If you are in that position, it might be time to consider listing your home for a short sale. The effects of a short sale on your credit are much better than foreclosure. A short sale limits your lender’s loss and also potentially limits your liability to the cancelled debt after the sale. A foreclosure has a far greater impact on credit and leaves the homeowner vulnerable to tax and legal issues after the bank takes the property.
It is an excellent time to list your property for a short sale and odds of successfully closing the sale are continuing to improve. Properties go into escrow very quickly as buyers are eager to take advantage of the low home prices and interest rates. Once the banks step up foreclosure proceedings and the wave of REO properties hit the market, your short sale listing will be competing with the REO listings for buyers. At the moment, it’s a wide open field. Give us a call any time to discuss your options. 951-846-9025.