Straight Digs

  Photo by R80o

Investing in Orange County real estate in the past required a substantial down payment, but may not require as large of a down payment as it once did.  When the market peaked, a 50% down payment was often required to “break even” on an investment here in Orange County.  Now 20% or less may be required.  We go through an example below.

Lets assume that an investor wants to pay up to $400,000 for an Orange County rental property.  The investor wants to rent the property out and at least “break even.”  They have up to $50,000 to invest in that property, but would like to invest as little as possible.  The investor would like to invest in the South Orange County area, but is open to other possibilities.

Under $400,000, 3 bedroom condos and town homes and a handful of detached homes are possible to obtain in South Orange County.  As a benchmark, there are 107 properties available in Aliso Viejo alone.  The best ratio of bedrooms to price in Aliso Viejo is a property in the New World tract.  It is 3 bedrooms and priced at $214,000.  The question remaining is can an investor break even with a minimal down payment on this property.

Homes in New World have rented for between $1,800 and $2,100 per month this year.  Lets conservatively assume that the property this investor is interested in can rent for $1,800. 

The investor’s costs are mortgage payment, taxes, insurance, association dues, and maintenance.  We’ll calculate mortgage payments at the end.  Taxes for this property would be approximately 1% of $214,000 or $2,140 per year.  That is about $178 per month.  Insurance for the exterior of the dwelling will be covered by the Association.  Interior insurance is generally not required, but may be optionally purchased.  Association dues are listed at $227, but other listings quote them as high as $257, so we’ll go with that number (AV average is about $250).

Now we get to the first unknown number–maintenance costs.  Maintenance costs are generally 10% of rent for rental properties although they increase as a percentage generally the older a property is.  Because a lot of the exterior maintenance will be covered by the association, including the roof that may pull back some of the costs.  Lets assume 10% for this example and just be aware that this could fluctuate.  10% of $1,800 is $180. 

The amount left for mortgage payment is $1,800-$178-$257-$180=$1,185.  At 6.875% (a guesstimate based on recent a recent client’s “good credit” quoted rates), that payment would result in a fully amortized $180,385 loan amount.  Down payment would be $214,000-$180,385=$33,615 or about 15% of the purchase price.

The key will be finding a lender who will lend with less than 20% down.  Lenders have been burned recently with loans with a higher loan to value ratio than 80%.  This investor may need to put a minimum of 20% down to purchase this investment property because of current lending conditions.

One final thought, we did not calculate vacancy costs above.  If we did, we would find that New World properties leased in one month or less this year.  A one month vacancy cost of $1,800, even factored in every other year doesn’t quite get us back to needing 20% down.

A real estate speaker last year said the turn in the market would come when you could get cash flow positive on investment properties with 20% down payment.  If that’s true, we’re at the turn.

  Photo by SharkeyinColo

Daily we have the question put to us, “is this a good time to buy or a good time to sell?“  This is a classic real estate question that could take volumes to answer fully.  In short, however, today we say it’s a good time to buy.

The Orange County Register points out that prices have dropped to the point where the median single family home is selling below $500,000 for the first time in 15 years.  Buyers have noticed.  Sales were up in July for the first time in 3 years and are up again so far in August, this time by 12.7%.

Meanwhile, the California Association of Realtors reported that the supply of homes decreased from a near record high of almost 2 years of inventory in January to a two-year low of about 8 months in July.  Orange County home supply has changed quickly this year.

Demand has also seen an increase as pending escrows have increased 103% year to year.  Demand has continued to increase this year month to month, which has been the opposite of last year when demand dropped dramatically.  Measured relative to pending escrows, home supply is 4.7 months, significantly lower than the 8 months quoted by the California Association of Realtors.

Sellers can take comfort from this increase in activity.  However, we have noticed that seller expectations regarding price can be high.  Zillow recently polled homeowners and found 40% of U.S. homeowners believe their homes have increased in value over the last year and over 20% more believe their home prices have stayed flat.  In reality, 75% of U.S. homes declined in value in the last year.  Nearly all Orange County homes declined in value.  Unless, as a seller, you have a good reason to move (e.g., move up/down/or out of area) and you are willing to price your home aggressively, this may not be the time to sell for you.

However, on the flip side, if you are a buyer and have been waiting for an opportunity to jump into the market, look no further.  Other buyers have already noticed that the window is closing to get the perfect storm of low pricing, high selection, and low rates.  As we have said before, predicting the bottom of market pricing is next to impossible, but this year’s data suggests we may have already hit a sales bottom and a pricing bottom may be near.

  Photo by Pinkmoose

The Orange County Register reported that July home sales were up from 2007 home sales in Orange County by about 17%.  That is the first time Orange County home sales overall topped the previous year’s home sales since September 2005.

A little bit of perspective on this number. 

In 2007, sales decreased just about every month of the year starting in March.  In 2008, sales have increased just about every month of the year. 

At the time, July 2007 was the lowest month in terms of sales in 2007.  July 2008 is the highest in 2008. 

July 2008 home sales are more than double home sales in January 2008, which is not at all typical.

Our opinion is that prices are down enough in Orange County that buyers are becoming more willing to buy.  It is too difficult to accurately call a bottom until we are well past it.  This data suggests, however, that if the bottom is not yet here, it is close.

  Photo by aeu04117

The housing bill that passed last week will affect Orange County home buyers as much as those facing foreclosure.  Here we focus on the affects on home buyers.

Permanent change to conforming loan limits.  Conforming loan limits were temporarily changed earlier this year up to about $729,000.  Conforming loans generally have the lowest interest rates available, so this change allowed some buyers to get low interest rates when they wouldn’t have before.  However, the $729,000 limit expires at the end of this year. 

The new housing bill set a permanent cap on the loan limit at $625,000.  It is not possible to tell today what the loan limit will be next year, because it is based on median prices of homes this year.  However, we know it will be no more than $625,000 and it could be lower.  If you are a buyer looking to get a loan of $625,000 or more, it might make sense for you to buy this year rather than next year.

FHA reform.  Loan limits similarly will be permanently capped at $625,000 for FHA loans.  These loans have been some of the most attractive this year, because they require the least down payment (which were just raised to 3.5%).  If you are considering a loan of $625,000 or more, this may be your year.

Down payment assistance by seller eliminated.  There are programs that help home buyers, especially first-time home buyers, purchase a home by giving the buyer down payment assistance.  Combined with an FHA loan, a buyer can effectively still purchase a home without a down payment.  However, this housing bill limits who can assist the buyer with their down payment, specifically eliminating sellers and other interested parties from helping out.

First-time home buyer tax credit.  The housing bill created a $7,500 tax credit for first-time home buyers.  We recommend talking to an accountant before taking advantage of this tax credit.  This credit acts more like a loan in that it would need to be repaid in future tax years.  That might not be the best financial strategy for many buyers.

  Photo by me’nthedogs’

It is becoming easier and easier to find silver linings in the local housing market.  Whether you’re looking at sales, inventory, prices or demand, there is something for everyone.

We reported previously that Orange County home prices were up in June from the previous month for the first time this year.

According to Dataquick, July is shaping up to be the first month since September 2005 that Orange County house sales are up from the previous year.

The California Association of Realtors reports that Orange County housing inventory was down for the fourth straight month in June.

The Register reports that the demand for Orange County homes has increased over the past two weeks after dipping the two weeks prior.

Anecdoctally, our latest listing sold with multiple offers priced more than a model match sale last month.  For our clients that was more than a silver lining.

  Photo by Davonteee

The U.S. post office has completed an environmental impact study on its proposed postal facility on Enterprise in Aliso Viejo.  According to the study there will be traffic and noise impacts from the facility.  The study itself is available for public view online today, July 25, through September 8.  A public meeting will be held at Don Juan Avila Elementary and Middle School on August 26 from 5:30p.m. to 8:30p.m.

As we have previously reported, the city of Aliso Viejo is opposed to the postal facility and has not ruled out a lawsuit to prevent its construction.

  Photo by wetwebwork

In our office meeting recently, agents griped about appraisal issues they are currently facing in Orange County.  While appraisals are generally going more smoothly than they were during the rapidly increasing market of say 2005, some appraisals are causing problems.

The buyer’s lender usually requires an appraisal of the value of a home to determine if it is worth at least the purchase price.  So, if a home is purchased for $500,000, it would need to appraise for $500,000 or more or the lender could refuse to lend on the home.

The most typical problem occurs when an appraisal comes in below the purchase price of a home.  So, in the above example, if the appraisal came in at $475,000, we would say that home “didn’t appraise.”  Depending on the lender’s policy, the lender could either decide not to lend on the property or the lender could lend up to the applicable percentage of $475,000.   So, if the above lender is willing to lend up to 80% of the value of the home, the lender would be willing to lend $380,000 ($475,000 x 80%) rather than $400,000 on the home. 

Even if the lender is willing to lend, however, oftentimes the buyer is unwilling or unable to go forward.  The buyer often decides the appraiser is “right” about the value and asks the seller to reduce the price or the buyer will “walk.”  Sometimes a negotiated, in-between amount is worked out. 

If the buyer wants to move forward, the buyer will have to make up for some of the cash difference in value.  In the above example, the buyer would need to bring to close of escrow an extra $20,000 to make up for the reduction in value ($500,000 purchase price less $380,000 loan amount is $120,000).

Usually, appraisals come in low when comparables are hard to find or are low due to foreclosure or REO activity.  When the last 3 sales in the area occurred 6+ months ago, the appraiser could be hard pressed to find comparables that make sense for the area.  If the last 3 sales were foreclosures or bank-owned homes, the prices could be low relative to the value of an “equity home” in the area.

Sometimes, lenders are rejecting appraisals because of the quality of the appraisal.  Recently, we sold a home where the appraised value came in $25,000 over the purchase price, but the lender did not approve of either the wording of the appraisal or the comparables used.  It took a second appraisal worded differently to impress the lender.

The key with any appraisal issue is to have experienced representation whether you are the buyer or seller.  If you are the seller, a good agent will prepare you for the possibility of an appraisal issue in advance and will present your best case to the appraiser.  If you are a buyer, a good agent will have thoroughly explained the comparables so you are comfortable about your offer relative to other homes selling.

  Photo by bfick

When you’ve got it, flaunt it. 

Orange County prices went up for the first time this year according to Dataquick as reported in the Orange County Register.  The median Orange County home sold for $495,000 in June up 2% from May.  Bankrate.com also reported that interest rates were down this week from one week, one month and one year ago.

Not all of the news is rosy.  According to the Register, prices are still down from a year ago and sales are down from both last month and last year. 

However, this is the first time we have seen a reliable report of prices being up this year.  Also, interest rates coming down after the Indymac bank failure suggests that getting a reasonably priced loan today is still possible even as some of the riskier loan providers close their doors.

  Photo by yomanimus

This year, Aliso Viejo had the highest percentage of homes with a property tax reduction according to the Orange County tax assessor’s office.  26% of Aliso Viejo homes either had no change or a decrease in their taxes this year.  We’d like to think that it was our blog and email campaign getting the word out that helped out Aliso Viejo residents!

It is still possible to file a formal appeal if you did not have your taxes reduced and you believe that your assessed value is higher than market value.  In your due diligence for filing an appeal, make sure you consult a Realtor (R) about values in your area.

  Photo by respres

Half of Aliso Viejo’s housing inventory consists of short sales and bank-owned homes.  As of July 9, 2008, the MLS showed Aliso Viejo active inventory at 286 homes.  Aliso Viejo REO homes or bank-owned homes totaled 25 homes.  Finally, 118 Aliso Viejo homes were short sales or “subject to lender approval” sales.  Combined, 143 homes were either bank-owned or short sales, which is exactly half of the Aliso Viejo inventory.

As we pointed out in a previous blog post, short sales are not selling quickly.  In the last 3 months, 24 short sale homes closed escrow (sold) in Aliso Viejo.  At that pace, it would take about 15 months to sell all of the current short sales in Aliso Viejo. 

It would appear that short sales are an extreme buyer’s market and a great opportunity for buyers today.  However, it is still generally difficult to negotiate a short sale.  Banks are overloaded with them and don’t have the resources to handle them adequately.  Our recommendation is to only work with them if you have an abundance of time and patience and are keeping an eye out for deals in the other markets.

35 Aliso Viejo bank-owned homes sold in the last 3 months, which means it would take about 2 months to sell the active bank-owned inventory in Aliso Viejo.  Bank-owned homes continue to be an extreme seller’s market.  With our clients, we have seen multiple offers on many bank-owned homes.  Banks are pricing their homes aggressively attracting many buyers.  We don’t recommend you focus all of your attention on bank-owned homes, but often these are the best deals in town.

133 Aliso Viejo homes that were neither bank-owned nor short sales sold in the last 3 months.  We call these sales “equity” sales, because the homeowner has equity left after the sale.  At that pace, it would take just a little more than 3 months to sell all of the Aliso Viejo equity sales. 

Believe it or not, the equity market in Aliso Viejo is a balanced market.  If it only takes 3-4 months to sell your home in today’s market, you are a happy seller.  As a buyer, you can still find great prices relative to last year.  This is a balanced market, because sellers in this category have been much more aggressive with their pricing in the last few months as they have had to compete with the increasing numbers of short sales and bank-owned homes.