Smart Money – Most boomers want to wait until the housing market improves before downsizing, but the savings of a smaller home may make long-term sense.

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(Note: This is a real estate investing tip by REIBulletin.com and is presented as information only. It is not meant to be a strategy that SFResidence supports or recommends.)

Buying discounted notes can generate residual income just like methods used by financial markets on Wall Street, only on a smaller scale.

Have you ever heard of Mortgage Securities?

They follow the strategy I am about to show you but on a billion dollar a year scale. If it can work for them, surely it can work for you! 

Certain pieces of information become public knowledge when a home is sold. These items include:

1. Price
2. Taxes
3. Liens
4. Buyer’s Name
5. Seller’s Name
6. Amount of Mortgage
7. Names of Lenders

 All of this information can be found at your County Courthouse or the Clerk’s Office.

Let’s say you find a property valued at $80,000. The seller is retiring, owns the place free and clear (no mortgages) and wants to buy a condo in Florida for $30,000.

You suggest that he invest the balance of his equity into seasoned mortgages worth $50,000 and paying 10% interest, with monthly payments of about $500 per month to supplement his Social Security. This income will NOT affect his  Social Security. He agrees.

Now, locate a mortgage with a $50,000 face value, at 10% interest with monthly payments of at least $500.  

Offer the mortgage holder $35,000 cash, to be paid at closing. The note is to be placed into escrow along with signed a copy of the agreement (preferably notarized).

 At closing, your bank (if YOU are buying the property) or your buyer’s bank (if you are selling to a third party – see “Double Escrows”) puts up the money for a first mortgage of 90% of the price, or $72,000. From this amount:

•  You pay $35,000 for the note. The note seller goes home, happy. 
• You pay the seller of the property $30,000 cash and give him the $50,000 in mortgage(s). He goes home, happy.
• There is $7,000 left “on the table”. This belongs to you, along with $8,000 in equity in the property (the
  difference between the $72,000 mortgage and the $80,000 value). If you bought and sold simultaneously at a double escrow, you would walk away with $15,000 cash.
• in other words, the $7,000 left on the table and the $8,000 equity you sold to your buyer (his down payment).

Los Angeles Times – Real estate investors will outnumber traditional borrowers 3 to 1 during the next two years, a new survey says, helping clear millions of repossessed properties from banks’ books and pave the way for a recovery.

Who is going to lead the housing market out of the doldrums?

Certainly it won’t be move-up buyers. People who already own homes are not likely to be venturing forth to find another one until they can sell their current residences. And with all those foreclosures gumming up the works, it’s tough to stand out in the crowd unless you’re willing to give your place away.

It probably won’t be first-time buyers, either. Despite the most affordable prices and loan rates in ages, rookies have shown a marked propensity to remain on the sidelines. After all, why rush? Who wants to buy a house, only to see its value go down? Why not wait until we know values have hit bottom?

That leaves investors. According to a new survey from the California outfit that operates the official website of the National Assn. of Realtors, real estate investors will outnumber traditional borrowers 3 to 1 over the next two years.

Investors are sometimes thought of as bottom feeders who pick off properties from financially troubled sellers who see no other way out. And while there most likely will be a bit of that going forward, this time around the main prey will be banks, not strapped consumers.

That’s a good thing. The overwhelming consensus is that before the sinking housing market can right itself, banks must rid themselves of millions of houses and apartments they’ve already taken back or will repossess in the future. Get them off their books and into the hands of users. Only after houses under duress are cleared from the decks will housing find its footing.

Investors often are in and out in a flash, buying a place, splashing some paint on the walls, maybe updating the appliances and then reselling at a good, if not huge, profit. Again, while there will be some “flipping” in the future, the survey by Move Inc. found that most investors will buy and hold for at least five years, long enough for many neighborhoods to stabilize.

Moreover, nearly half say they plan to invest their own time and energy to repair, maintain and improve their properties. And 30% say they’ll hire a contractor to do the work.

These would-be investors still expect to reap decent returns. Nearly half of the 200 investors queried — a statistically relevant sample — expect to make a profit of 20% or more when they sell after their five-year or longer hold. In the meantime, most will put their investments to work as rentals. Some may even live in their properties until they jettison them sometime down the road.

In other words, says Move Chief Executive Steve Berkowitz, today’s investors, many of whom are new to real estate, are not your stereotypical deal-driven sharks. Rather, he says, they are mostly entrepreneurial individuals who “will make vital contributions to local communities by investing their own money and sweat equity [that] over the long run will help improve housing stocks, home values and property tax bases in thousands of local communities.”

Markets reversed this week, with stocks and rates both rising fast. The immediate cause: Greece is back from the brink. But not for long.

Deeper causes: Last week stocks stared at the darkness below 1,256 points, a bottom that has held since last Halloween, and have run up to 1,331 points on the bodies of short-sellers forced to cover. The 10-year Treasury note bottomed at 2.91 percent last week after a straight-line drop from 3.6 percent on April 12.

This week’s bolt to 3.2 percent was overdue; ditto mortgages to 4.875 percent. The coup de grace: the June Institute for Supply Management index rose to 55.3, beating forecast.

With Europe on hold again, interest rates will not decline unless the U.S. economy does, and until it becomes clear who will buy $120 billion in net-new Treasurys each month now that the Fed has stopped QE2, its latest quantitative easing program.

The newest housing data has showed signs of a bottom in price, delinquency and sales volume. However, three questions apparently too impertinent to pose at the press conferences of either the Fed Chairman or the President:

1. How much distressed housing inventory has accumulated?

2. How fast are distressed homes selling vs. new ones arriving?

3. If … if they are selling faster than piling up, but at a rate that will not clear for a decade or two, what are we going to do about it?

Variables are huge. Which will prevail: jobs first, economy first, or housing first? Any of the three? And, given the mass and velocity of the distressed-housing pig leaving the south end of the python, how much damage will there be to bystanders?

CoreLogic reports that shadow distressed inventory not listed fell in April, from 1.9 million homes to 1.7, down from the 2.2 million peak in early 2010. Distress is defined as 90-plus days delinquent, in the foreclosure process, or real estate owned (REO).

Meanwhile, LPS says the total count of distressed properties, listed and not, is 2 million that are 90-plus days delinquent, and another 2.2 million in foreclosure, plus analysts’ guess that REOs range from 500,000 to 800,000. Conservative “totus porcus” (if you’ll excuse the “pig” Latin): 4.8 million.

However, LPS says that an astounding 70 percent of loans in the foreclosure process have been there for more than a year, and almost that many 90-plus days delinquent are not yet in foreclosure. If that portion is frozen, the remainder of the distressed inventory is flying on and off the shelf at improbable warp speed.

The National Association of Realtors estimates annual sales of existing homes at about 4.5 million, and total listed inventory (all kinds) at about 4 million. Given LPS’ count of 4.8 million total distressed, minus CoreLogic’s 1.7 million distressed-not-listed, that would leave 3.1 million distressed listed properties: 77 percent of all listings.

Nonsense. There must be a hell of a lot of distressed inventory not anywhere near a market. And in the expanded definition of distressed, CoreLogic’s count of “underwaters” (homeowners who owe more on their mortgage — those at least 50 percent or $150,000 underwater — represent another 2 million homes. Big pig.

At what rate are we barbecuing the fat off this baby? CoreLogic says 30 percent of existing homes sold are distressed (two-thirds REO, one-third short sales): or roughly 1.5 million annually. If nobody else enters hopeless delinquency, or takes a strategic walk from underwater, it would take three years to clear.

Realistically, based on declining new rates of delinquency, we are probably net-reducing inventory by a few hundred thousand homes annually, clearing in 2020 or something. That clearing will likely cave-in the market some more.

What to do? Old stuff.

Do not ever let a big zombie pig hang around the yard. The only one way to run it off, as the U.S. Housing and Urban Development Department began to do regionally in the ’80s, and the Resolution Trust Corp. showed with commercial real estate: modest fix-up, price it to sell, and finance it: prepacked financing and no appraisal.

If that means Fannie and Freddie is to finance REO buyers from servicers who cannot finance buyers (the whole subprime legacy), then do it. If the Fed has to buy those loans, do it.

The Federal Housing Administration cleared the oil and savings and loan patch in two years by offering sweet terms: $500 down for owner-occupants; 15 percent down for investors — got to qualify, for real. And knock off these pretend mitigations and procedural roadblocks.

This Mortgage Bankers Association accounting correlates fairly well with LPS numbers: Roughly 8 percent of U.S. mortgages are 90-plus days in foreclosure; of 54 million loans, that’s a 4.3 million-home pig.

Wall Street Journal - At first glance, you’re not likely to see a lot of similarities between stately Cambridge, Mass., and sprawling Denton, Texas.

Cambridge (population about 105,000) was already more than 200 years old when Denton (120,000) was founded in 1857. From the center of Cambridge, it’s an easy stroll across the Charles River into Boston. Denton, in contrast, sits where Interstate Highway 35 divides—to the west, it’s 41 miles to Fort Worth; to the east, 39 miles to Dallas.

But both are college towns. Cambridge is well known as the home of Harvard University and the Massachusetts Institute of Technology. Denton has North Texas State University and Texas Woman’s University.

They have something else in common, too. Both have pretty much recovered from the five-year-and-counting housing recession. And both provide invaluable clues for those looking to decipher whether their own markets have seen the worst of the crisis.

According to a statistical analysis performed for The Wall Street Journal by the online real-estate information and search firm Zillow, home values in a handful of communities are where they were just before the most frenzied days of the real-estate bubble. Focusing on communities with sufficient sales activity to produce statistically valid value estimates, Zillow spotted 25 places that are within single-digit percentage points of their home-value peaks. (Zillow found no communities where values have surpassed their high-water marks.) Not bad considering that home values in some major metropolitan areas are at half their bubble-era peaks.

As a result, spotting the factors that have helped those communities get by may allow all homeowners to better gauge what’s going on where they live—and what the future may hold for their home’s value.

Some words of caution.

First: Don’t look at these as housing-market “winners,” and don’t go looking for new places where you can score a killing. That’s the thinking that got much of the country in trouble in the first place. Housing isn’t an investment like stocks or bonds and shouldn’t be approached that way.

Second: Although many of the areas have certain traits in common, most are just nice places to live, places where anyone might want to work and raise a family. Each is special in its own right.

Finally, the biggest reason that most are surviving the downturn is because they never experienced the huge price runups that Florida, Nevada or California did in the first place.

In Denton, Zillow estimates values are down 7.4% from their peak, while values are down about 8.6% in Cambridge. That’s about where prices stood in 2004 in both towns. In contrast, the latest Case-Shiller Home Price Index indicates national prices are at 2002 levels.

So what should you look for if you are thinking of selling your home or buying a new one? What does a healthy real-estate market look like today?

Here are three big factors to look for. If your community shares any of these traits, you may already be on the rebound.

Wall Street Journal – Back in June 2006, when the housing market peaked, the prospect of a five-year national housing bust seemed unimaginable to most people. And yet here we are, with the latest Standard & Poor’s Case-Shiller index showing that prices hit new bear-market lows, falling back to 2002 levels nationally and to 1990s levels in some battered regions.

Despite all the gloom, however, there are growing indications that it is a good time to buy. Mortgage rates, which fell to 4.55% for the week ending June 2, according to Freddie Mac, are near 50-year lows. Homes have become more affordable than they have been in years: According to Moody’s Analytics, the ratio of home prices to income is now 20.9% lower than the 15-year average through 2010, and 12.5% lower than the 1989-2004 average. A historic glut of homes, meanwhile, has created a buyer’s market: There were about 15 million vacant homes in the U.S. last year, according to John Burns Real Estate ConsultingInc.—some 3.1 million more than normal.

Such conditions might not last long. Moody’s Analytics predicts that the number of distressed sales will begin to fall in 2013, and that prices will begin to edge upward then. Home building is at a virtual standstill, so the supply overhang isn’t likely to get much worse. Meanwhile, demographic indicators such as “household formation”—the number of new households each year—are on the rise, and promise to take a bite out of the glut in coming years.

Lending

As rates hover near historic lows, experts expect banks to ease borrowing standards over time.

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Getty Images

Greenwich, Conn.
.Psychology

If prices stabilize, it could tip the balance away from fear and pull more buyers back into the market.

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Getty Images

Chicago
.Affordability

In several markets, it’s becoming cheaper to own than to rent.

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ASSOCIATED PRESS

Cleveland Heights, Ohio
.Demographics

The rate of “household formation” is expected to climb in coming years.

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Reuters

Providence, R.I.
.Employment

The strength of the housing recovery depends on job growth.

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Associated Press

Dallas
..Journal Community
Discuss: Is home ownership a good investment?
.The upshot: “While we might not see rapid growth in the next couple of years, there are a tremendous number of positive signs that could lead to a rebound,” says Anthony Sanders, a real-estate finance professor at George Mason University.

The short-term outlook isn’t encouraging. Job growth remains weak, foreclosure sales are making up more of the market, and economists are predicting that home prices will fall more in the coming months.

But the long-term benefits of homeownership remain very much intact. For now, at least, you can deduct the mortgage interest on your taxes—a big perk for people in higher tax brackets. You get to paint your walls any color you wish, without having to clear it with a landlord. And assuming you can buy a home for about the same price as you can rent one, buying will give you the ability one day to live rent-free. Come retirement time, a paid-off mortgage means your monthly expenses are significantly reduced, and you have a chunk of equity to play with.

So what might the next five years look like? Once the foreclosure mess begins to clear up, say housing economists, the traditional drivers of the housing market—demographics, affordability, loan availability, employment and psychology—should take over.

Here is a glimmer of what the future may hold: While overall home prices fell by 7.5% in April over the same period a year earlier, according to CoreLogic, a Santa Ana, Calif., provider of real-estate data and analytics, if you exclude distressed sales, prices were off just 0.5%. So if you are in a market that isn’t battered by foreclosures, you may be close to a bottom already.

“The regular marketplace is hanging tough,” says CoreLogic chief economist Mark Fleming.

San Francisco Chronicle - When deciding which home improvements to make, many homeowners consider the amount of resale value the improvement may or may not make and compare that against the cost of the renovation.   Homeowners concerned with making home improvements that will pay off when it’s time to sell the property, should consider the following tips.

Making sense of the story

• The first improvement/repair homeowners should consider are those that impact the home’s basic structures and systems.  Potential home buyers generally do not want to face expensive repairs, and if items such as the foundation, roof, air conditioning, water heater, or other basic structure need to be fixed, the property will be considered a fixer-upper and its market price will be discounted accordingly.
• Some minor replacements will produce big results for minimal cost.  Replacing and coordinating bathroom and kitchen hardware and fixtures are generally inexpensive, but tend to make a big difference.  The same can be said for getting rid of any dated finishes, such as old wallpaper and brass light fixtures.
• Homeowners who don’t know when or even if they will be able to sell their home are advised to choose home improvement projects carefully.  Unless the home is located in an upscale neighborhood and the property already is immaculate, owners can skip expensive upgrades – such as remodeled bathrooms – and focus on the fundamentals.

Real estate investors are expected to be more active in their local markets by a three-to-one margin compared with typical home buyers over the next 24 months, according to a survey released by Move, Inc.

The survey also suggests local markets may be heating up with renewed investor interest and activity, as nearly 70 percent of investors expect it will be easier to find properties in the near future.  Real-estate investors (62%) told Move they’re paying more attention to home values in their local markets, and only 43.5 percent say it will be harder to find bargains.  Those who are already in the market are starting to feel optimistic, as well as two out of five investors expecting it’ll be easier to sell their properties in the next six months.

An uptick may be in the offing; some investors (22%) are bullish and expect prices to rise in the next six to 12 months, while almost half expect prices to remain relatively the same. Nearly a quarter of real estate investors expect prices will fall in the next six to 12 months

It is set to get heated out there. The Move Investor survey also suggests investors may be positioned to compete vigorously with traditional first-time homebuyers for hot deals:

• 65.5 percent said they expect the problems first-time buyers are having in getting mortgages will make it easier for them to compete for properties.
• 18.5 percent say they’ll be cash-only buyers, a strategy that’s out of reach for most first-time buyers.
• 80.5 percent expect cash discounts from sellers.

HomeSteps, the real estate sales unit of Freddie Mac this week launched a nationwide sales promotion for its inventory of foreclosed homes.

The HomeSteps Summer Sales Promotion offers up to 3.5 percent of a buyer’s closing cost and a $1,200 selling agent bonus for initial offers received May 16, 2011 – July 31, 2011, which result in escrows closed on or before Sept. 30, 2011. The offer is valid only on HomeSteps homes sold to owner-occupant buyers.

Some of the HomeSteps homes also may include a two-year Home Protect® limited home warranty that covers electrical, plumbing, air conditioning, heating, and other major systems and appliances.  Home Protect also provides discounts of up to 30 percent on the purchase of appliances.

Los Angeles Times - Despite the decline in home prices, 81 percent of U.S. adults believe buying a home is the best long-term investment a person can make, according to a national survey by the Pew Research Center.

MAKING SENSE OF THE STORY

• Homeownership topped the list of long-term financial goals for Americans, according to the study.  Respondents rated homeownership, as well as living comfortably in retirement, as more important than sending children to college or leaving offspring an inheritance.
• “Owning a home is really a part of the American dream, and that is just part of the American psyche and something that people aspire to,” according to one of the study’s authors.
• Although the vast majority of adults surveyed are in favor of owning a home, the public’s faith in real estate has somewhat declined compared with the last time a comparable survey asked people about the wisdom of investing in real estate.  In the Pew Research Center survey, 37 percent of respondents said they “strongly agree” that homeownership is the best investment a person can make, while 44 percent said they “somewhat agree.”  The same question was asked by a CBS News/New York Times survey in 1981, and at that time, 49 percent “strongly agreed,” and 35 percent “somewhat agreed.”
• While home prices have entered a renewed decline after showing some improvements last year, many economists believe that the worst of the housing crisis is probably over, which could help explain the resiliency in Americans’ optimism.

Homeowners in the survey were more positive about the financial wisdom of owning a home than were renters.  Among renters, the desire for homeownership remains strong.  According to the survey’s findings, 24 percent of renters surveyed said they rent out of choice and 81 percent said they would like to buy.

MAKING SENSE OF THE STORY

Despite the decline in home prices, 81 percent of U.S. adults believe buying a home is the best long-term investment a person can make, according to a national survey by the Pew Research Center.

Homeownership topped the list of long-term financial goals for Americans, according to the study.  Respondents rated homeownership, as well as living comfortably in retirement, as more important than sending children to college or leaving offspring an inheritance.

• “Owning a home is really a part of the American dream, and that is just part of the American psyche and something that people aspire to,” according to one of the study’s authors.
• Although the vast majority of adults surveyed are in favor of owning a home, the public’s faith in real estate has somewhat declined compared with the last time a comparable survey asked people about the wisdom of investing in real estate.  In the Pew Research Center survey, 37 percent of respondents said they “strongly agree” that homeownership is the best investment a person can make, while 44 percent said they “somewhat agree.”  The same question was asked by a CBS News/New York Times survey in 1981, and at that time, 49 percent “strongly agreed,” and 35 percent “somewhat agreed.”
• While home prices have entered a renewed decline after showing some improvements last year, many economists believe that the worst of the housing crisis is probably over, which could help explain the resiliency in Americans’ optimism.

Homeowners in the survey were more positive about the financial wisdom of owning a home than were renters.  Among renters, the desire for homeownership remains strong.  According to the survey’s findings, 24 percent of renters surveyed said they rent out of choice and 81 percent said they would like to buy.