Portland area home buyers may have heard the announcement last week regarding FHA mortgage changes.  Why pay attention to these details since it only usually affects first-time buyers?  Well, changes to entry level financing affect all Portland real estate in reality.  Also, FHA loans are by far the most popular right now and are not used by only first time buyers.  Home purchasers take advantage of the low down payment option of 3.5% and that’s the attraction. 

Financing options during boom years of 2005 and 2006 made use of loser lending guidelines like the ever popular 80/20 loans which eliminated mortgage insurance.  Those days are in the rear view mirror.  Mortgage insurance is pretty much a requirment today for anyone putting less than 20% down.  Although no buyer ever wants to pay these extra fees they are a necessary evil and insure lenders against default.  Portland’s entry level market is sustained by first-time buyers coming in with minimum down.  If we went back to yesteryear requirements of 20% down minimum the market would be crippled. 

New FHA loan guidelines:

• Mortgage Insurance Premium (MIP) increase from 1.75% to 2.25% of loan amount
• FICO minimum (credit score) 580 to qualify for 3.5% down payment
• Seller credit to buyer’s closing costs down from 6% to 3% of purchase price
• Mortgage Insurance Premium payment shifted some cost from up-front MIP to annual MIP

What does this mean for the Portland real estate?  Since first time home buyers drive the entire housing model, without these there are minimal upper end sales.  Move-up buyers are critical to the cycle.  Looser lending guidelines generate more buyers, tight guidelines eliminate qualified buyers.  Changes mentioned above are tighter and will have some affect on Portland house sales. 

Most area home buyers come in with only 3.5% total cash (the down payment) for their first home.  Statistically that’s just reality.  Sellers often are requested in the offer to pay buyer’s closing costs (loan costs) which keeps cash out of pocket to a minimum.  Figure $200,000 houses for sale in Portland will cost buyers closer to 4% of purchase price, or $8000.  With new seller contribution limits going from 6 down to 3 percent this leaves buyers coming up with the difference.  More money out of pocket is now required to get into a house, potentially.

Tightening restrictions cautiously and slowly is key to not rocking the already fragile housing market.  My guess is that overall we’ll see minimal affect on Portland real estate in general and it’d take a micro-economic guru to place figures on such changes.  Yes, home buyers may have to come up with slightly more money but we’re only talking another thousand or two and if cash is really that tight buyers may want to build up a bit more reserve before purchasing anyway.  No one wants to be house rich and cash poor, right?  Something to consider…

OK, have to comment on recent influx of hype regarding how fantastic lease options are.  Since investments in Portland real estate have chased the national numbers we knew that there’d be new schemes making headlines and sure enough, The Oregonian newspaper picked up on it.  Interesting that this subject comes up more prominently while house sales are slow.  Maybe there’s a reason?

A quick overview of lease options

Agreement is made between buyer/tenant and seller/landlord.  Buyer may come in with zero down or thousands to “purchase the option.”  Seller is essentially renting his home for a premium in rental payments and contributing this premium amount towards buyer’s down payment.  At the end of the lease term, say 12 months, buyer has an option of purchasing the house for a preset amount.  Should buyer choose to not exercise his option he forfeits down payment and/or rent premiums.  While contracts can vary significantly, this is the overall premise.  Buyer is purchasing the Option to Purchase, it’s not free!

Why do a lease option?  From a prudent financial or conservative buyer standpoint… beats me.  From a seller/landlord standpoint, go for it.  These definitely benefit the seller in our current market.  A few years back this scenario may have benefited the buyer… maybe.  Though, in a hot real estate market why would a seller jeopardize an immediate sale by taking a risk on lease options?  He probably wouldn’t and that’s why these deals weren’t around in 2005 – 2006.

Immediate gratification

Many Portland home buyers choosing this avenue are doing it for one reason.  Financial issues.  Most likely that financial issue means not qualifying for the purchase, waiting for another house to sell, or bad credit.  Here’s a stretch; The best reason for obligating yourself to a lease option is that a particular house is so incredibly perfect that nothing like it will ever be available in the future, it’s one in a million.  Not leveraging yourself further would be catastrophic!  Now, how many buyers fall into this category?

The sales pitch

1. Get into a house while cleaning up your credit.  Lease options do get you into a house, at significant cost.  If you’re cleaning up credit could this money be applied towards the credit problems, accelerating a good credit rating?  What if mortgage rates go up before credit is repaired and buyer still doesn’t qualify?  Lease option money is out the window.

2. Get into a new house while waiting for your old house to sell.  Lease option again gets you into a new house.  One of the risky things about Portland’s current real estate market is that selling a house is not a quick process.  Putting the cart in front of the house is part of the reason we’re in this housing predicament.  Buying before unloading the old property means double mortgage payments.  If you really have to move into a new place, rent (with no option).  Payments will be lower than those with a lease option.  Plus, if the market does slide another 10% in 2009 then that option price originally set is not going to be very attractive!

3. Get into a new house while building landlord/rental history.  This was a new one to me but recently had to hear the pitch from a mortgage broker on why lease options were a viable avenue.  Theory is that lending guidelines have tightened and banks are requiring that keeping an old home as a rental requires it’s track history to be 6 months long before rental income can be counted.  Again, if you really have to move into a new place, rent first.  You’ll be money ahead on a monthly basis and in 12 months you may not even want the house you’re lease optioning!

Opportunities to buy a house in Beaverton, Lake Oswego or anywhere around Portland’s metro areas have never been greater but think twice about doing it via a lease option.  For more information on Portland real estate visit our website.   www.maxwellsinclair.com

Many properties in the marketplace today fall within one of three categories peaking interest of investors/rehabbers.  Foreclosures, short sales and listings labeled as fixers.  So, which one will provide the greatest potential as far as return?  Property analysis is same regardless of the selling situation.

Here’s a fairly typical case study

Yesterday I went out with clients looking at an entry level project house for sale.  It came on the market that day and was listed at $169k.  Wow!  Houses in Beaverton listed for that price draw attention.  Very few properties for sale even come up under $200k (detached homes).

Looked like a decent deal at first glance.  Hey, you can practically break even on payments with 20% down using it as an income property.  Pretty interesting, on paper…  We arrived at the home and it did match the pictures a little too well.  Blue roof of several layers, single pane windows, cheapest sheet siding known to man, and best of all… trashed.  Rather bummed on this find.

After quick review of the surrounding homes and overall condition of the neighborhood it was estimated that resale in average to decent condition would fetch around $190k.  A rough guestimate of rehab costs was an easy $20k as long as sweat equity was involved and not 100% contractor labor. Question then is; At a list price of $169k is the home worth purchasing strickly for potential gain?  In my opinion there are more lucrative forms of real estate investment out there.

Taking a look at overall investment costs, just rough numbers:

Loan and closing fees: $6000

Carrying cost during rehab: $2000 (figure two months)

Material and labor costs: $20,000

Total investment: $28,000

From $169k add this $28k and we have a product that most likely isn’t going to sell for the money spent.  If a buyer is looking at keeping as a long term rental or primary residence it’s not too bad.  For $197k you’ve pretty much got a new house but for immediate resale… dream on, there’s no money in such.

My guess is that this particular piece of Portland Oregon real estate is not going to sell in it’s current condition for much over $160k and it’ll take a couple of low-ball offers to convince the seller of such.  Still, if you’re searching for fixer type houses for sale in Beaverton, Hillsboro, or any other Portland metro area you can do better.  Look for key words like “fixer”, “short sale”, and “foreclosure.” Check out the website and search all RMLS listings for free at www.maxwellsinclair.com.  Great investment opportunities are available with a little searching!

Portland home prices have slid a bit and are mirroring the rest of the U.S. housing market.  Albeit not to the same extend but we were bound to feel the push towards price reductions and sluggish home sales eventually.  As of this moment RMLS numbers are showing a decrease of 4% over this time last year.

New construction sales fall in sync with resale and builders are having to come up with creative incentives to move product.  Most are no longer pouring foundations without a sale agreement in place.  Buyers can typically not make new builder’s sale agreements contingent upon sale of an existing home.  Time for construction to be completed is roughly six months here.  At the point where final occupancy permit is available buyers are required to have financing in place and close the deal.

The light turns on for some buyers after waiting six months for their new home and watching prices slide.

“Why should we pay the price agreed upon 6 months ago when the builder is now offering more incentives for the same house!?”  Good question.  What has to be weighed is what the loss or gain will effectively be.  Most likely buyers of new construction have released earnest money to the builder for upgrades, etc.  It’s not refundable.

Choice is to go forward with the existing sale contract, attempt to negotiate a new price, or walk away from the purchase and any funds already paid.  Tough one.  Going forward as planned means a buyer is potentially paying a premium compared with today’s pricing.  No one wants to do that but an agreement is an agreement.  Keep in mind that a builder takes the same risk in seller’s market.

Purchasing pre-sale homes in phase one of a development can potentially be very profitable in an up market.  Locking in a price early on and watching phase two prices climb in a quickly appreciating market is fun.  Buyer’s love it.  Flip side is the case now and buyer’s hate it.  Builders want to maintain good report in any community and may have suggestions.  Probably the best advice is to evaluate options with your real estate broker.

Check out www.maxwellsinclair.com for awesome tips on negotiating real estate purchases or possibly re-negotiating with builders!  Search Houses For Sale in Portland that have come onto the market recently and compare resale with new construction.