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How To Balance A Real Estate Trade By Debbie Rood Real estate trades happen more frequently than you realize. I predict they will increase as a percentage of transactions over the next few years. There are two forces that will fuel my prediction. The first is a general tightening of underwriting guidelines. The other push will come from the downsizing of the baby boomers. Someday soon a lot of sellers are going to be headed against the normal flow of real estate. As the number of downsizers out number the upwardly mobile, SMACK! It is going to cause some ripples.
Americans will find a way to accomplish their goals regardless of what pressures squeeze the real estate market. Trading properties is only one of the tools that will be utilized to compensate for tight market conditions. Keep in mind that this is nothing new. Every sale is actually a trade. Exchanging money for anything is a trade. Cash has become an easy medium for us to understand because of its universal acceptance and its ease of accountability for the bookkeepers of the world.
This has not always been true. There was a time when barter was more widespread than cash transactions. I doubt it will ever be more acceptable than cash in the future but it can still solve problems.
Trading real estate is not complicated; it is just different than using cash as a medium. Will it always work? No, of course not, it requires that both parties want each other’s property. Allow me to rephrase that, both parties must want the other party’s property more than they want their existing property.
Let’s look at how it works. Assume that Tom owns a home worth $200,000, and Sue lives on the other side of town in a comparable house also worth $200,000. If both homes are free and clear, no mortgages on either property, then all that needs to happen is Tom deeds his home to Sue and she deeds her home to Tom. If you look closely, it is almost like Tom bought Sue’s home and she bought his. But that is not what technically happened, they traded properties, it was a simultaneous closing.
What if Tom owes $50,000 on his existing home? At the closing Tom must deed his property to Sue free and clear because her home is free and clear. He accomplishes this by placing a $50,000 loan on the home he is trading for and then pays off his old mortgage.
Now that we understand the basics let me tell you when it comes to real estate, nothing is as simple as the two examples above. Tom’s home could be worth $175,000 and he still owes $50,000, and Sue’s home is still free and clear and worth $200,000. There is a trick I use that keeps the math extremely simple. Remember Ben Franklin’s “T” bar method of making a decision? Old Ben would place plus items on one side of the bar and negative items on the other and the longest list won.
Draw a “T” on a piece of paper. Above the cap of the T on the left side write Tom, and of course Sue goes on the right side. Next
we enter the values of the homes each party owns before they trade, under the cap of the T. So below Tom’s name we enter $175,000 and $200,000 goes under Sue’s name. I like the T-bar because it makes it very easy to see both positions side-by-side. In a trade, the equities on both sides must balance so if Tom did not have a on his existing home, he would owe Sue $25,000. What we are doing is balancing equities with this tool. But let’s get back to our example; Tom owes $50,000 against his $175,000 home. On his side of the bar we place his amount right under his value, next we subtract it from the value leaving an equity on his side of $125,000. Sue did not have a so she gets a zero in place of her mortgage; $200,000 minus zero equals $200,000 on her side for equity. It is easy to see that Tom would owe Sue $75,000 when they trade. This simple little tool will balance equities no matter how many properties or parties are involved.
I have already mentioned why people trade properties. The reason is always the same; each party wants what the other party has more than they want what they already have. Wait a minute, isn’t that the same driving force behind people selling a home and buying another one? Exactly the same. Trading is simply another method of moving from one property to another.
Are their any benefits to trading versus selling and then buying? The largest advantage is having a built in buyer for your present home, you eliminate one step. There are actually many other benefits when it is the right fit and the better the fit the fewer the parties are needed. If both homes are free and clear for example, no one second guesses the values, no appraisals, no bankers, companies, etc.
Perhaps the chief advantage is there is no buyer or seller, both parties are in the same mode, simply moving on.
Debbie Rood is a Multi-Million Dollar Producing Realtor in Louisville, Kentucky. She is a residential real estate specialist. She publishes many articles on real estate and financing on her web site www.debbierood.com/
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Proposed RESPA Reform
Mortgage brokers may have some intrusive rules from HUD to deal with.
When I read the news on HUD?s proposed reform of the Real Estate Settlement and Procedures Act (RESPA) I was skeptical. Cathy from Sequim challenged me to read the 96-page federal register document so we could all figure out what?s going on. I am here to tell you that there is one very good change coming out of this proposal. In fact, it?s so good that I am borderline hopeful that this change might do what legislation is suppose to do and what HUD forgot to do when they signed the original version of RESPA in 1974. But first, the changes that will have many, but not all mortgage brokers screaming bloody murder:
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Neocon-omics
How much can the Fed and the U.S. government do in the face of declining housing prices?
That?s been my worry since I saw the housing bubble peak in 2005. Historically, declines in housing prices take 3-4 years to bottom, which means we still should be at least half a year away. But after that, the economy doesn?t rebound instantly. It yo-yos for a bit - essentially running horizontal.
Fannie Mae and Freddie Mac have entered into cooperation agreements with New York?s attorney general to only purchase loans that meet a new home valuation protection code, the state announced. The code is effected on Jan. 1, 2009. Under the new code, mortgage brokers and loan originators are prohibited from choosing or communicating with appraisers.
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Choosing Second-best
How to leverage your second choice into seller concessions and a better deal.
So, rather than competing for the best house and paying top dollar, you can use it as leverage to get a lower price and seller concessions on a home that could be even more ideal for you ? after you do a little work.
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Price Depression
A forecast for more housing price depression.
My theory is that housing prices will continue to wilt as long as large levels of foreclosures and new home inventories run high. These are not traditional homeowners, and are motivated to slash prices, thus continuing to depress prices.
You should try to get pre-approved by a lender prior to shopping for a home. A pre-approval is a strong marketing tool when making an offer that may contain many a number of seller concessions. Telling a seller that you are already approved for a loan makes the acceptance of a low offer or one where he may be paying the closing costs much more palatable.
US News and World Report implies (hopes?) we may be nearing a bottom in housing prices but with a mountain of resets coming in the next few months, it?s difficult to see how a bottom can be seen or even predicted.
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Strike One
A look at role of mortgage insurance in FHA loans.
Regarding the second point: By not raising the loan limits they fail in one of the 11 ways they can help. I believe they will fail in almost all, but let us have hope. To be specific as to why I support this: FHA is not a government gimme. It is a government guarantee the mortgage will be paid or the lender compensated for losses. The program pays positive cash flow to the government in that there is a type of mortgage insurance fee charged the borrower. It is reasonable and more than pays for the reimbursements made to the lenders that suffer a default.
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Who's To Blame
Mortgage brokers share the blame with the rest of the industry in the current real estate mess.
Who is not to blame for the mortgage mess? Take one step back. As lenders, money was flowing from the spigot like there was no tomorrow. As mortgage brokers, there was money to be made by cranking the faucet, and it was a foot race to see who could get to the sink first. As agents, we sang the ?Houses are expensive, but money is cheap? refrain until we were blue in the face. And, as for the consumer, it really doesn?t matter in the final analysis whether they were motivated by necessity, opportunity or unadulterated greed. We all helped make this bed in which we now must lie.
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Trying To Move
Hard to move when you're house loses value.
I will continue to work from Los Angeles while we work on selling our house, which unfortunately is bad timing as housing prices have taken a bit of a dive around here. Once we have things settled over here, we?ll pack our things and move up to Seattle.
What else can you say to such a ridiculous report, such obvious sensationalism? The sad thing is, many people will read this wild hyperbole and imagine that the TV station?s salacious report has a ?point? to it.
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Home Buyers Returning This Fall
This blogger says lower mortgage rates will drive buyers to the residential real estate market soon.
Ten days ago after the Fed calmed the markets' credit panic with a 1/2 point cut in the Discount rate, I postulated that home buyers will come back this fall when the Fed finally drops the Fed Funds rate, and mortgage rates drop. It's now almost certain to happen. Here are the parameters in play now:
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Lead Scrub Rates
A look at the cost of a lead for a mortgage broker.
Joel has a good interview with Dave Wengel of TargusInfo around Mortgage lead scrub rates. Specifically that lendingtree and lowermybills have a 15% scrub rate whereas the free ipod guys (lure people in with promise of a free ipod but they and their friends have to signup for credit cards, netflix and talk to mortgage brokers to get it) have around a 50-60% scrub rate.
Having been an FHA lender I can attest it is a pain at times. FHA requires annual financial audits of the mortgage brokers financial condition and more. We always have survived the several day pain, and the expenses tied to it, but only FHA drags brokers through this. The actual banks that sponsor the mortgage broker go through even more red tape and grief. Loan officers have to know more rules. FHA doesn?t rely on the easy automated underwriting or the quick answer from a subprime lender. FHA restricts how the borrowers pay for certain expenses and how much the lender can charge.
