This post first appeared in the November edition of Cirios Trends: Getting to the Bottom of the Housing Market

When trying to determine if they can afford to buy their first home, many first time homebuyers leave out a whole host of costs that then become
unwelcome surprises once they’re already emotionally invested in a purchase.

There are a whole host of fees and costs that neither Realtors or lenders are terribly excited to tell you about, preferring to gloss over the details until they have you well along in the process.

It’s imperative to sit down and budget all the out-of-pocket expenses that go into buying a home, in addition to the down payment and of course monthly recurring payments to arrive at the total cost, err, joy of homeownership.

Keep in mind that these are the realities of buying, and eventually owning a home. They should be accepted, evaluated and budgeted just like more widely quoted expenses like interest rates.

But a quick scan of a list of the fees included in an estimated HUD (effectively a list of all costs associated with a home purchase) can show be a bit intimidating:

- Loan Origination Fee
- Document Fee
- Processing Fee
- Tax Service Fee
- Appraisal Fee
- Credit Report Fee
- Messenger Fee
- Flood Cert Fee
- Escrow Fee
- Notary Fee
- Recording Fee
- Other Title Fee
- Monument Fee

Now that is a lot of fees! Some are no more than $10, but others can be hundreds or even thousands of dollars. When you first meet with a lender to discuss pre-approval, always ask for a list of fees or a sample HUD statement so you can have this information ahead of time.

In addition to closing-related fees, buyers also need to be aware that they may need to pay pro-rata property taxes. Pro-rata what?

In California, property taxes are due twice a year, February 1st and November 1st. So, depending on when you buy your house, you may have to pay taxes to carry you through to the next payment at the time you make your purchase.

On top of these lesser known fees and costs, you have the down payment to consider, which in most cases is the biggest out-of-pocket expense for any home purchase.

Don’t forget moving costs, buying furniture, repainting and any other initial maintenance items that your particular home may need. Also, don’t forget upkeep, which should be expected to be around 1% of your home’s cost, per year.

Although potentially intimidating, any potential home buyer should take the time to make a detailed budget of these costs, after careful research and consultation with both a real estate broker (like Cirios!) and mortgage lender.

Then, based on your own budget and the mortgage calculator resources available online (see previous edition of Cirios Trends for thoughts on mortgage calculators), you can ultimately arrive at how much home you can afford.

Then … it’s time to go shopping!

This post first appeared in the September edition of Cirios Trends: Getting to the Bottom of the Housing Market

One question almost every first time homebuyer asks us is: “Who should I talk to about getting a mortgage?”

The easy answer is: “Whoever gives you the best rate and terms.” While this answer does have some viability, if you are buying a home in the Bay Area for less than $700,000, most lenders now offer similar rates and terms. This is because the government basically controls the mortgage market, and banks are hawking the same, government-stamped loans to the public.

But that doesn’t mean the choice of where to get your loan is any simpler. Interest rate and terms aside, your decision should come down to which lender you feel confident can close your loan and which provides you the best service.

Below are the three main resources available to first time homebuyers in today’s mortgage market and how they stack up in terms of confidence to close and service:

1) Banks and Credit Unions

Closing Confidence: If a major bank or credit union provides you with a pre-approval for a mortgage, you should feel comfortable that your loan will close with the same terms provided on the pre-approval … assuming your appraisal comes in OK, of course, which given the new appraisal rules, is anything but a slam dunk.

Service: Big banks have notoriously lousy customer service, so find out early how easy (or hard) it is to get your loan rep on the phone. If a problem arises during escrow, you want your advocate on the other line, immediately.

2) Private Mortgage Companies

Closing Confidence: Despite a much-needed house cleaning in the world of private mortgage companies, some still exist. Most are reputable firms that sell government-backed loans to big banks, but do your homework to make sure yours isn’t a fly-by-night operator.

Service: These lenders get paid when your loan closes. As a result, most are efficient firms that offer service that is frequently better than banks or credit unions. Few private mortgage companies offer “Jumbo” loans, so if you’re looking for that million dollar estate or penthouse condo, chances are they can’t help.

3) Mortgage Brokers

Closing Confidence: Mortgage brokers do not provide the money for your loan. They are basically sales people for financial institutions. The question then becomes, who is the mortgage broker selling your loan to? Many big banks have stopped buying loans from brokers, which has severely limited these brokers’ ability to conduct business.

Service: Like private mortgage companies, mortgage brokers don’t get paid until your loan closes. This means they will do their best to get your loan funded as quickly as possible. That being said, a broker is not the final decision-maker on your loan, so you may be strung along in a painful game of telephone if there are problems.

In the end, we advise our clients to reach out to each type of lender and get a feel for their level of service and loan choices. Your real estate agent should be a knowledgeable sounding board for everything you hear from your potential lender — if they are not, it’s time to find a new agent!

By RYAN TAYLOR

What exactly does an appraisal mean?

Perception doesn’t always equal reality. The perception is that an appraisal represents the most accurate value of a property. The reality is that it’s a value provided by a licensed professional, given the purpose and functional use of a property on a given day. The key in that statement is “on a given day.”

While appraisals are indeed very thorough evaluations of a property, they’re not always the most accurate valuation, since they often don’t take into account all the inputs required to derive the current and future value of a home.

An appraiser uses three separate approaches to derive a property’s value:

(1) Sales Approach
(2) Cost Approach
(3) Income Approach

The Sales Approach is similar to comparative market analysis, or CMA, performed by a real estate broker. The appraiser examines comparable (ie, similar) sales and listings from the last 6 months in order to come to a value conclusion. Typically, sales are weighted more than listings, since sales are actual transactions and represent a home’s true resale price, while a listing is simply what a seller hopes to get.

Comparables must conform not only with respect to the subject property itself, but also in neighborhood characteristics. 3 bedroom, 2 bath, 2500 square foot homes on opposite sides of town often sell for very different amounts. Comparables should be within 1-mile of the subject property, but this rule is far from set in stone, as certain neighborhoods dictate a narrower — or wider — radius of comparison.

In the Cost Approach, the appraiser examines the dimensions of the property and structure to determine how much it would cost to duplicate the same home on an identical lot. This is often referred to as “replacement cost.” While this is a useful method for certain types of properties, it’s rarely the most accurate for residential real estate — especially in a volatile market such as we’re currently experiencing.

In the Income Approach, the appraiser determines how much income can be generated from the property and a value is derived from this number. The appraiser usually projects into the future and assumes some ongoing stream of income, discounting the value of that cash flow for the time value of money.

The concept of the time value of money assumes (basically), that most investors would rather receive a lump sum payment now than many smaller payments over time, since inflation causes money to be worth less in the future. Of course, all bets are off during deflation, but that’s another topic for another day.

More often than not, the value of a single family residence is reached through the use of the sales comparison approach.

In reality, the sales comparison approach is effective in providing a well researched value, but it fails to utilize all necessary inputs. While comparable sales are very important to the value of a home, the comparable listings can be — and sometimes are — more important.

We like to view comparable listings as an upper bound for a property’s value, especially in a declining market. For example, if all comparable sales sold 3 months ago for $500,000 and there is a comparable listing is now on the market for $450,000, the listing is far more important than the sales. To ignore the listing and rely on the sales would be inaccurate.

Equally important is the concept of affordability, which is rarely used by appraisers. If there have been very few comparable sales in the past three months, affordability will be increasingly important when trying to understand how much buyers can afford. Weak demand indicates few willing and able buyers in the market, so evaluating prevailing income levels in a particular area help determine whether values are set for small declines, steep declines, or may be approaching stabilization.

Finally, mortgage and credit market conditions — especially now — are very important to the value of a home. In today’s lending world, you need a down payment, good credit and a strong employment history to get a loan. There are plenty of areas where the qualified buyer pool is very shallow. Appraisers don’t put a lot of weight into this fact. 3 sales in the last 6 months means a very different thing if last year there were 30 during the same time period, or just a handful.

While the sales approach does have value, it could be more comprehensive.

A crucial point to understanding appraisals is that the value is today’s value, saying nothing for tomorrow. The reality is that this is an appraisers job; they are not forecasters.

In the current market place, the appraisal can, and some would argue should, be considered irrelevant 30 days after the completion date. When markets can drop upwards of 5-10% in a single month, an appraisal that’s a month old isn’t worth the paper it’s printed on.

However, since the appraisal is still considered by the housing industry to be the most accurate representation of a home’s value, always look at the completion date to determine what lenders and investors believe a home to be worth on a given day. Whether you like it or not, this is the value on that day.

Is the process of reaching an appraised value the most defined valuation process in today’s marketplace?
Definitely.

Is an appraisal the most accurate process to determine the true value of a single family residence? Maybe.

Is an appraisal a projection of what the value of the property will be in the future? Absolutely not.

By ANDREW JEFFERY

This post first appeared on Minyanville.

With millions of homeowners falling behind on their monthly payments, one in 6 underwater, and countless more struggling to keep up, politicians and banks alike are jumping on the loan modification bandwagon.

A modification – or “mod,” as it’s known in the industry — is simply the bank agreeing to change a borrower’s loan to make it more affordable. Mods usually result in a lower interest rate, principal forgiveness or some combination thereof.

For banks, adjusting loan terms is a way to keep cash coming in the door - even if it’s less than they’d been hoping for when they originally wrote the loan. For troubled borrowers, mods can provide an alternative to default and eventual foreclosure. It’s for these reasons that FDIC Chairman Sheila Bair and big banks like JPMorgan (JPM) and Bank of America (BAC) are aggressively promoting mods as the best way to fix the housing market.

The flood of troubled mortgages has also fostered a cottage industry that caters to distressed borrowers. Some are honest folks aiming to help struggling borrowers by using their mortgage expertise and contacts to negotiate better deals on behalf of their clients.

Others, however, are less upstanding.

According to Mandana Nejad, a real estate attorney and founder of Silver Lining Legal Group, a loan modification firm based in California, troubled borrowers have a lot to be wary of.

“Most loan modification companies are compromised of former lenders and brokers who put homeowners in these horrible loans in the first place,” says Nejad. ”Meanwhile, credit repair and debt consolidation firms are simply out to collect fees, regardless of whether or not they can actually successfully modify a loan.”

Last year, the Bush administration formed HOPE NOW, a government-led effort to get banks and the loan servicers who collect payments on their behalf to step up loan-modification efforts. By most accounts, results were underwhelming, as HOPE NOW counselors often asked for too much, and banks gave too little.

Data show that mods done at the outset of the mortgage crisis ended up in default, despite the lower payments. Without proper screening criteria, mods simply delay the inevitable.

For a mod to work, lenders and borrowers must be able to find common ground. Falling home prices, job losses and massive fraud at the time of origination have exacerbated the challenge of finding new loan terms that make sense for both parties. To complicate matters, if a loan has been packaged into a security, loan servicers are obligated to follow predetermined modification standards set by myriad third-party investors.

Borrowers looking to handle modifications on their own face a maze of legal and bureaucratic complications - not to mention the stress of negotiating to save one’s own home. Nejad tells her clients that anyone can attempt to modify their loan themselves, but doing so requires knowledge of the best strategies for success.

Banks treat mods almost like a fresh loan. In order to get the best deal, borrowers must submit a complete application, write a compelling hardship letter, include verification of income, and often support the home’s current value with an appraisal.

While this is no easy task, troubled borrowers shouldn’t run out and answer the first debt consolidation or mortgage relief advertisement they hear on the radio.

Upstanding modification firms should offer:

• Money back guarantees with no exclusions
• At least one experienced attorney assigned to each case
• Direct access to the borrower’s lender(s)
• No more than a 50% charge up front
• Verifiable success stories, not just web testimonials

Still, successful mods require lenders to take losses. Armed with billions in bailout money, banks are now in a better position to allow their borrowers more affordable loans, even if it means more writedowns and less interest income going forward.

Time will be the true arbiter for the success of Bank of America and JPMorgan’s recent plans, but as pressure mounts to seriously curtail foreclosures, more and more federal money will be thrown at the problem. Other banks are likely to follow suit.

Wells Fargo (WFC) has yet to announce a plan of its own, but – given its recent purchase of Wachovia (WB) and its inheritance of a massive portfolio of California option-ARMs – we shouldn’t have to wait too much longer.

While mods are by no means the magic bullet many are searching for to fix the housing mess, they do offer a way for lenders to retain a cash-generating loan - and borrowers to keep their homes.