This featured blog is by RealtyJoin member Jeff Adams

We are all aware that the economy has taken a nosedive over the past couple of years. Businesses are closing their doors, employees are being downsized, and the current market value of houses has been consistently dropping. Although, the recession is damaging the current market, it does offer a plus side to the real estate investor.

Buying real estate during a recession allows buyers to thrive during a recession. They have the opportunity to make substantial financial growth. Falling prices and less activity in the current market can benefit the buyer in many ways. A recession typically lasts for about two years so investors should think about not just how low the prices will go, but also how much they can invest until it is over.

Upon deciding to invest, you should consider a variety of factors.

Realize if each house in question is functional to your particular needs. Buying because you fear the recession will end is not wise. The current market should not sway your judgment in this way. But since prices are typically down by three to five percent, buying does offer many advantages. Buyers stand to pay less for homes, usually five percent of more, during time of distress. In addition, sellers are often more anxious and motivated to sell just for the shear fact that they do not want their houses on the market for too long.

Before investing in a down market, it is critical that you research the comparable housing prices in the area, remodeling records for the home, and any financial situations attached to the home. Websites such as zillow.com or trulia.com are excellent resources for gather such information. The general location and overall condition of the house should also be taken into account.

Timing is everything if you plan to capitalize on the falling prices of houses and property. If you are a seller and you wish to move to a more expensive home, now is the time to buy. The longer you wait, the lower the value of your currently owned home will go. Savings to you on a new house are also available as it is being sold for less. Interest rates are also much lower and are gradually increasing, which is another reason to buy now.

Borrowing cheap is another benefit. Interest rates are very low, and even though banks may not be lending to risky buyers, investors with good credit are welcomed. Foreclosures, Short Sales, and Real Estate Owned (REOs) properties are an excellent way to potentially profit from an investment during a distressed economy. When a notice of default has been filed in public records because the owner has stopped making payments on the mortgage, and a lender has given notice that the house will be sold at public auction if the payments are not made current, the house becomes foreclosed upon. If payments are not made and the house goes to public auction, a buyer can usually purchase the house for the amount of money remaining on the loan. There is substantial profit to be made by only paying the amount owed on the mortgage and the owner’s equity can be picked up for free.

One thing to consider though, when going the foreclosure route, is that a house being sold at auction is not just a steal. Due diligence and thorough inspection of the house should be done prior to any bidding on any home.

Short Sales or Pre-foreclosures are also an option. These are homes that are in foreclosure but before the property goes to public auction. The lender must agree to accept an offer less than the amount owed on the property. Since the lender agrees to take less money in order to avoid foreclosure, the transaction is better for the investor. REOs are similar to Short Sales, but the lender already owns the house due to foreclosure proceedings. The house has been auctioned publically and did not receive a bid. This offers a benefit to the investor because the lender will usually sell for less than what is owed on the mortgage.

This is the best way to buy because the seller is no longer involved in the transaction. The deal is made between the lender, the seller, and the agents that represent them. At times the agents are not even necessary.

Overpriced homes are another investment opportunity to consider. An inflated price is the number one reason a house does not sell. A home that has been previously overlooked because is has been overpriced, has been on the market for a long period of time, and has not sold because of its price, should be revisited. A motivated seller could lower the price in a hot seller’s market where there are many buyers and less inventory. Offering the seller a sizable earnest money deposit or “Good Faith Deposit,” which is a portion of the down payment attached to the purchase agreement, and a list of prices for other homes is the area could also encourage a price reduction. Offering a “Good Faith Deposit” can also offer less risk to the seller because most contain provisions that give this initial deposit to the seller if the buyer backs out of the deal without cause. The money is usually held in a trust until of the necessary negotiations have been made and contracts have been signed.

Finding real estate to invest in can be easier said than done. Don’t wait for these homes to show up in traditional real estate listing services. Look for information on bank websites and county loan offices that know of foreclosures. You can also ask local real estate agents that are familiar with the area. Realtors can also offer insight on overpriced homes.

Updating...

Homeowners who owe more than their home is worth may be receiving some help from the Federal Housing Finance Agency (FHFA).

A recent speech by Edward DeMarco, acting director of the FHFA, alluded to the possibility of implementing write-downs for underwater homeowners.

The idea stems from the findings of an FHFA study which showed that Fannie Mae and Freddie Mac could save up to $1.7 billion if principal deductions were used. Since 2008, FHFA has been the conservator of Fannie Mae and Freddie Mac.

DeMarco has long been opposed to write-downs and he and the FHFA want to make it clear that this is not about attempting to bail out the housing market.

“The anticipated benefit of principal forgiveness is that, by reducing foreclosures relative to other modification types, [Fannie and Freddie's] losses would be lowered and house prices would stabilize faster, thereby producing broader benefits to all market participants,” DeMarco said in his speech Tuesday.

Currently, there are about 11 million underwater homeowners and if this initiative were implemented, less than one million households will benefit. Thus, while it may provide relief for homeowners who are eligible for principal reductions, it will not affect the vast majority of underwater homeowners.

For more details on these write-downs read my full article on CBSNews.com.

Do you think that this initiative will significantly help the economy as whole?

The federal government and 49 states have reached a landmark $25 billion foreclosure settlement with the nation’s five largest mortgage lenders, the Department of Justice announced Thursday (February 9th).

The joint agreement is the largest federal-state civil settlement ever obtained.
U.S. Attorney General Eric Holder, Department of Housing (HUD) Secretary Shaun Donovan, Iowa Attorney General Tom Mill and Colorado Attorney General John W. Suthers announced today the federal government and 49 states agreed to the deal, which has been in the works for more than a year.

“This agreement…is the result of unprecedented cooperation among enforcement agencies throughout the government,” Holder said in a release Thursday.

“It holds mortgage servicer companies accountable for abusive practices and requires them to commit more than $20 billion towards financial relief for consumers. As a result, struggling homeowners throughout the country will benefit from reduced principals and refinancing of their loans. The agreement also requires substantial changes in how servicers do business, which will ensure the abuses of the past are not repeated.”

The joint federal-state agreement requires mortgage lenders to implement new mortgage loan servicing standards and to commit billions of dollars to resolve violations of state and federal law, including robo-signing, deceptive practices used in loan modifications, failure to offer non-foreclosure alternatives before foreclosing on borrowers and filing improper court documentation upon bankruptcy or foreclosure.

The requirements of the agreement were laid out in Thursday’s press release and you can read them all here: http://www.thinkglink.com/2012/02/09/foreclosure-settlement-states-mortgage-lenders-totals-26b/

Resources:

For more information about the settlement, go to www.NationalMortgageSettlement.com. To find your state attorney general’s website, go to www.NAAG.org and click on “The Attorneys General.”

If you’re a homeowner and have questions about whether you qualify for a loan modification or refinancing under the Home Affordable Refinance Program (also known as HARP 2.0), contact the Homeowner’s HOPE hotline at 1-888-995-HOPE or go to MakingHomeAffordable.gov.

Just one week after President Obama promised “no more red tape” for homeowners looking to refinance, there’s news that mortgage insurance giant Freddie Mac could benefit if banks stonewall their customers.

According to an investigation by NPR and ProPublica, the government-sponsored enterprise has spent billions betting homeowners won’t be able to refinance their high-rate mortgages — and taking some steps to make sure they’re right. While the investment arm of the company was profiting from homeowners with high-rate mortgages, Freddie was making it more difficult for those locked in high-interest mortgages to refinance to a lower rate.

Freddie and its larger cousin Fannie Mae have imposed new rules and regulations, and introduced new fees, effectively narrowing the number of borrowers who qualify for a Freddie-insured mortgage.

How is this possible?

The investigation suggests the investment arm is betting homeowners won’t be able to refinance, while the credit side is making sure lenders have enough money to make loans. The Federal Housing Financing Agency (FHFA) says a wall exists between the investment and credit sides of Freddie.
Read the full story on CBS Moneywatch: http://www.cbsnews.com/8301-505145_162-57368239/freddie-mac-accused-of-betting-against-homeowners/?tag=cbsnewsMainColumnArea

Question:

I signed a contract two months ago for a newly-built house with a leading builder. The home will take about four months to build. The builder has not applied for the permit and has not done any of the ground work on the home.

The builder told me that until I pay him about $9,000 in earnest money and all the money for the upgrades I ordered, he will not apply for a building permit and will not start building the home.

But when we negotiated the terms of our deal, he agreed that I would pay him for the upgrades in four installments over a period of two months. So far I have paid him most of the earnest money and most of the money for the options.

We found another house which we like more. Can we cancel the contract and get my money back? In the contract (obviously it has tons of papers), I believe it states that if we default, the builder will not refund any money. What should we do?

Answer:

It seems that you have new home buyer’s remorse and are now looking for a way to get out of the deal you entered into with the builder.

Frequently, builder contracts contain provisions that deal with the payment of funds from the buyer to the builder over time. In some situations, a buyer will pay a builder a small sum of money when the contract is entered into, then more money when the building permit is obtained, more money when the foundation is poured, then another installment when the house is framed with a final payment at closing when the home is finished and an occupancy permit has been issued.

There are many variations of the method that builders use to get money from their buyers. Builders will generally not want to proceed to the next step of the building process in building a new home unless their buyer has complete steps that are outlined in the purchase and sale agreement.

While you didn’t say so, it may be that your purchase agreement states that the builder will give you time to make payments on the contract, but the builder won’t have to commence construction on the home until those payments are made. If that’s the case, the builder has done nothing wrong under the contract and any delay in the closing date may come from the timing of your payments.

You’ll probably see a provision in the contract that states that the builder is allowed to delay the closing date to accommodate those payments and other delays caused by weather.

Some purchase agreements go so far as indicating a target date for closing but setting a firmer closing date when the builder actually obtains the building permit and commences construction on the home.

If you decide to not buy this home, you’ll have to negotiate a termination of the contract with the builder. You may need to be prepared for the reality that you will lose all the money you gave the builder unless the contract provides otherwise or the real estate laws in your state give you other protections. If you walk away from the deal, the builder will claim that you are in breach of contract or in default and try to keep all the earnest money you have deposited on the contract.

It would be at this point that you would be wise to talk to a real estate attorney and discuss your options. After listening to your attorney, you may decide to continue with this purchase, move in and ultimately enjoy living in your new home.

One last word of advice, when you buy a new construction home, you need to make sure you know who you are dealing with. Once you give money to the builder, that money may be at risk of loss if the builder goes out of business or files for bankruptcy. In the ideal world, you’d want your money held by an escrow company or other entity that would hold your money until closing in a segregated account that could not be touched by third parties.

Please speak to a real estate attorney immediately to understand your legal options.

If you own a home, you might want to start thinking about the IRS. According to Julian Block, author of “The Home Sellers’ Guide to Tax Savings” (PassKey Publications, $19.95), there are ways to lighten your tax load whether you’re living in your home or selling it.

Here are some top home seller tax tips:

1. Marriage penalty? Not when you’re selling a home.

Getting married? Are you a newlywed? The IRS bestows a gift on newlyweds who each own homes that they sell before or after their trip down the aisle. On their joint return, each spouse can exclude as much as $250,000 of gain, provided each spouse could exclude up to $250,000 if he or she filed separately. Unfortunately, one spouse can’t use any part of the others unused exclusion, so as to exclude gain of more than $250,000 per person. (Individuals may exclude up to $250,000 in gain on their home sale and married couples may exclude up to $500,000 when they file jointly.)

2. Bundle ordinary repairs into a bigger job.

If you’re debating whether to save up for a major renovation but still have a few repairs around the house that need attention, think about bundling them together (if your repairs can wait). Block says your home’s adjusted basis (which consists of the property’s purchase price plus the cost of purchase, sale, structural improvements, legal fees paid to defend or to perfect title, zoning costs, and the cost of selling the property) includes only the cost of permanent improvements (including replacing a roof or building an addition) so it might pay to postpone repair projects until they can be done in connection with an extensive remodeling or restoration project. Adding the smaller jobs into the bigger job may allow you to include some items that would otherwise be considered repairs, such as the cost of painting rooms.

3. Don’t forget to deduct points paid when you financed or refinanced your mortgage.

When refinancing an existing mortgage, or if you pay off the loan early, take a deduction in the payoff year for all remaining points you were charged when you obtained the loan. For example, if you refinanced your mortgage and paid points in the amount of $2,000 and have deducted $400 over the years, you can deduct the balance of $1,600 in the tax return for the year in which you refinance the property. If you refinance, check on whether you need to increase or decrease the amount taken out for federal income taxes from your paychecks or to increase estimated payments. If you will need to pay more to the IRS, you should increase your withholding or quarterly estimated payments. And, if you will owe the IRS less, you can decrease those payments to the IRS. To revise your withholding, file a new Form W-4 with your employer.

4. It may make more sense to prepay your credit card debt – not your mortgage.

If you find you’ve got a little extra cash on hand at the end of the month, you might be thinking about throwing a few dollars toward paying off your mortgage. And why not? It would be great to own your home debt-free. But if you also have credit card debt, you should instead take those bucks and pay down your highest interest rate debt. For someone in the 30 percent tax bracket (federal and state), an investment would have to yield a whopping 26 percent before taxes to match the benefit available from just paying off a credit card costing 18 percent. And with mortgage interest rates near historic lows (this week, a 30-year fixed rate mortgage can be had for about 4.5 percent), paying off a credit card makes much better financial sense. And the tax tip: Mortgage and home equity interest is tax-deductible if you itemize on your federal income tax return.

There are other tax deductions and perks available for homeowners. In his book, which is available at Amazon, Block takes homeowners through foreclosure and short sale tax issues. And for more personalized information, consult with your tax preparer, accountant or enrolled agent.

I learned two interesting things this past weekend.

The first is that lightning can strike at any time and it can hit close to home. The second that you need to make sure your insurance policies are up to date and that you have the right insurance carrier to help you out.

Do you have insurance for Lightning Strikes? Would you be prepared if you had a total loss?

Early Saturday morning, we were awakened by a loud storm passing by. The lightning was fierce. At about 1:30 one strike felt like it hit near our home. I got out of bed and wandered around the home and looked out the windows to see if our home or any neighboring trees or properties had been hit. Lightning had not struck our immediate vicinity but had hit the house of a friend a couple of blocks away. The lightning missed the tall trees surrounding the home and hit the roof instead.

Luckily they were not home, but the lightning ignited the roof of the home and quickly spread throughout the home. By the time the fire department arrived at the home, the home was fully engulfed in flames. Not much was left of the home. The picture above is the actual picture of what’s left of the home.

In talking to my father, he recalled how all homes where he grew up had lighting rods. In our area, there is no requirement for lightning rods to be installed in old or new homes. Well, our friends found out the hard way what happens when lightning strikes a home.

While in hindsight, the following items might have helped minimize the loss, including a home sprinkler system, a monitored fire alarm system and, perhaps, a lightning rod, there are a couple of things a homeowner can do to help prepare for a possible disaster and assist in the recovery.

The first thing that you should have available at all times is a copy of your insurance policies. If you have had your insurance policy for some time, make sure that your homeowner’s insurance policy contains the declaration page along with the policy and all endorsements. You might like to know that insurance carriers frequently update and change their insurance policies and will add endorsements to your policy. However, these endorsements may come to you after you have received the policy and it will be up to you to have the policy and all endorsements stored in one place.

Many insurance carriers will give you online access to your policy and forms, but if your policy is several years old, you may have to request that the insurance carrier mail or email to you the current version of your insurance policy along with its endorsements.

A helpful list would be for you to have an inventory of everything you own. You can create a list of all of your worldly possessions and make sure you have it in a safe place. But, you can also to around your home taking pictures of everything you own.

If you decide to use a camera, don’t forget to open up cabinets, closets, storage bins and boxes to take pictures of those items as well. At least if you’ve taken pictures of everything, you will have an easier time remembering all of the things you owned and can prove that you had four sets of china along with a one hundred pairs of shoes or a jean collection.

If you’ve taken those pictures or have an inventory, make sure that the information is kept in a safe place you can retrieve if there is a disaster. It won’t do you too much good to put that back up disk or drive in your basement if you end up with a flood there. You may wish to keep multiple copies of your files in different locations that you may be able to access readily in the future.

If you have this information, you can at least talk to your insurance adjuster about all of items you lost in your home and can show evidence that you had those items there.

When you deal with insurance companies, make sure you’re working with a reputable insurance carrier with a good reputation in dealing with their customers after a disaster. If you pick the cheapest carrier, you may pay less in premiums but your first disaster may be compounded by a second when they fight you for what you might be entitled.

Once you choose an insurance carrier, make sure you have adequate coverage for your home and possessions. If you think it would cost you $300,000 to rebuild your home from scratch, don’t buy $250,000 in coverage to save some money. Frequently, homeowner’s underestimate the amount it will cost to rebuild a home and if it costs more than the amount you have covered under your policy you may be out of luck.

Some insurance agents will try to convince their customers that the insurance company’s policy will cover them for up to 125% of the policy amount. However, if you suffer a total loss, you may need that 25% additional coverage for other unexpected costs. And, if you are a collector of special items, make sure your insurance carrier knows that you collect antiques or other items that may have a high value and may not be covered under some policies.

If you have covered your home for the amount that it would take to rebuild it, make sure you keep up that amount from time to time, if the amount has not gone up in years, you may want to reevaluate whether you should increase the amount of coverage for your home.

Once you have covered the home, make sure the things you own inside of it are covered as well. If you have a total loss, do you have enough coverage under the policy to cover you for the televisions, games, jewelry, clothing, bedding, furniture and other items that you own? Make sure you have enough of this kind of coverage and that your policy will cover your expenses while you have to live somewhere else for up to two years.

These steps won’t eliminate the tears shed from the loss, but may minimize some of the hard work that you will have to go through trying to reconstruct your life after a big loss.

Do you have a story about an insurance loss you’ve had and the problems you went through with your insurance carrier? If you did, please leave a comment about what you went through with your insurance company and how you managed and solved it.

Question:

About 3 years ago my neighbor moved out and abandoned her home. Now I find that the house will be auctioned off for tax delinquency. The starting bid is very low.

I would like to bid on and try to buy this home, and then use it as a rental property. I know about the laws requiring me to wait one year before foreclosing on the owner, but I am unsure if the house was paid for, or the lender has just decided it won’t get its money back. (You would think after three years abandoned the bank would have foreclosed already.)

I am real nervous about the whole idea because I have never invested in real estate before.

Do you have any advice or pros and cons I should be thinking about? I am planning on purchasing the property and then doing some repairs to make the house habitable.

I have a set amount I put aside, to pay for the property and then for repairs so I’m set financially. I am just worried about things that I might not know legally that might come back and bite me.

Buying and renting this property seems like a win-win proposition, but is there any way someone can come take the property and I will lose my money?

Answer:

Here’s what happens when you bid on property at a tax sale: you can purchase the tax delinquency, but you will probably have some competition. If the bank finds out that the property is being sold for back taxes, it might jump into the fray and pay the taxes that are owed.

In some parts of the country, when you buy a home for the real estate taxes that are owed, you don’t get title to the home. You get the right to start the process of owning the home but the current owner of the home has the right to redeem herself and come current with the taxes: that’s the one year period you were referring to. If you somehow made improvements to the home, you might not get that money back.

Depending on the process in your jurisdiction, the homeowner or the lender can simply repay the real estate taxes that are owed, with penalties, fines and other costs and the tax sale would be cancelled.

On the other hand, if the homeowner doesn’t pay and the lender decides not to pay either, you, as the tax buyer, have the right to wipe the slate clean and become the owner of the home. There are certain steps that you may have to take to make sure that the slate is clean when the final tax deed is issued to you and for that reason you’d better make sure you know the rules in your jurisdiction and know what you are doing.

Why don’t you hire a real estate attorney or an attorney that has experience in tax sales to walk you through the process for the first time?

I often recommend that wanna-be investors hire a team of people who can help them achieve their real estate investing goals. You’ll want to chat with a tax preparer (accountant or enrolled agent), a contractor (who can advise you on how much money you’ll have to spend to get the property into habitable condition), a mortgage lender (if you decide to finance part of the purchase), and a real estate attorney to draft up the paperwork and make sure you’re protected.

You’ll pay a little bit of money, but will have peace of mind that you will understand what your risks are.

But if you get the home, what I like best about your plan is that you live right next door. You’ll always be able to keep an eye on your investment.

Q: How can we take money out of 401(k), pay off our mortgage and not pay taxes on it all if we do it all at the same time? Can any of it be deferred? The amount we’d want to take out is $105,000?

A: Unless you’re in danger of losing your house, you generally shouldn’t take money out of a 401(k) and use it to pay off a home loan.

Why? Because your money is growing inside your 401(k) at a faster rate than you’re paying out for your loan. Also, your mortgage interest may be deductible if you itemize on your federal income tax return.

If you’ve recently refinanced, you’re probably paying less than 5 percent for your mortgage. (I just refinanced to a 15-year at 3.75 percent.)

If you itemize, your net interest rate is somewhere around 3.5 to 4 percent. That’s basically like free money, and over time you’ll do a lot better by keeping the cash inside your 401(k).

In addition, if you’re under 59 1/2, you’ll not only pay taxes, but you’ll also pay a 10 percent penalty on your withdrawal.

So the real question is why would you want to take out that much money to pay off your mortgage? And if you did, that much of a withdrawal from your 401(k) would probably put you in a higher tax bracket causing you to pay even more federal income taxes on the amount you take out.

The only way to get tax-free cash is to borrow from your 401(k). But, again, I don’t recommend it. If you lose your job, you’ll have to replace all the cash within 60 days, plus you’ll be losing out on any return your retirement cash would generate inside your 401(k). The risks are extremely high that you could be caught short and wind up losing your home if you can’t come up with enough cash.

My suggestion is to keep your 401k money where it is and focus on finding additional ways to save in your budget to throw more cash at your mortgage.