DEAN GRAZIOSI: DEAN GRAZIOSI REAL ESTATE

The end of the homebuyer tax credit incentive program contributed to an unexpectedly deep decline in May home sales.  The Commerce Department’s May home sales report showed that only 300,000 homes were sold in the month.  It was the first monthly decline in three months. 

Additionally, April sales were revised to 446,000 units and March sales were trimmed to 389,000 units.  To qualify for the Federal tax credit, first time homebuyers and qualified existing homebuyers had to enter into a purchase contract prior to April 30, 2010. 

Analysts had expected May sales to be in the 400,000 range.  When the Commerce Department’s report was released on June 23^rd, U.S. equity markets fell sharply.  The S&P homebuilders ETF fell 1.6 percent. The news preceded the Federal Reserve’s announcement that lending rates would remain near zero through 2011.

The median selling price of a home in May fell one percent below April selling prices.  Prices have fallen 9.6 percent in the 12 months prior to May.

The absence of the tax credit will cause many first-time buyers to be creative.  However, buyers that have saved and are able to generate the required cash for down payments are in a position to be aggressive and make great acquisitions.

The impact on the low-end housing market may be the most severe, but qualified buyers are in position to realize significant savings in the middle to high-end purchases.

The Mortgage Bankers Association (MBA) announced that its seasonally adjusted index of mortgage applications decreased 5.9 percent. The index includes both purchase and refinance applications.

The MBA’s purchase index fell for the sixth time in seven weeks.  The 1.2 percent drop left the index near the 13-year low.  The foreclosure rate continues to stay at unprecedented levels.  With 9.7 percent unemployment, the housing market will remain a buyer’s market for years to come. 

In addition to the slumping new mortgage application rate, the MBA reported that applications for refinancing had fallen 7.3 percent.  A new trend to simply walk away from the mortgage obligation is leaving lenders with large inventories of REO’s.  Buyers who are positioned properly stand to make significant profits in the REO marketplace. 

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In 2009, the United States Treasury Department launched a new initiative designed to assist Home Affordable Modification Program (HAMP) qualified borrowers avoid foreclosure.  Under HAMP, qualified applicants must first prove themselves able to sustain the modified payment schedule through a trial program.  Unfortunately, a high percentage of these qualified applicants are unemployed and unable to maintain timely payments.  The next step for these homeowners is to enroll in the HAFA program.

In order to protect these homeowners from the long-lasting credit damage caused by foreclosure, the Treasury came up with a new program called Home Affordable Foreclosure Alternative Program (HAFA).  This program has many advantages for the failing borrower and for the investor seeking a motivated short sale seller.

HAFA provides borrowers who are qualified for HAMP a viable alternative to foreclosure.  Under the terms of HAFA, the borrower who finalizes the transaction is fully released from the future liability for the first mortgage debt.  This important provision protects the borrower and minimizes the damage to future credit reports.

Borrowers must agree to all of the Treasury’s short sale terms before listing the property.  This includes an agreeable short sale price and an agreeable occupancy and closing arrangement. 

To the borrower’s distinct advantage are a $3,000 allowance for the borrower’s relocation assistance and a $1500 allowance to cover administrative and processing fees.  Investors receive $2,000 for allowing $6,000 to be distributed to subordinate lien holders.  The Treasury Department has developed a formula for distribution of these funds.

HAFA is a sensible approach to a sensitive and negative situation.  Sellers involved in the HAFA process are ready, willing and able, unlike independent short sale sellers.  There are just too many advantages for investors in HAFA.  This program may be the best initiative put forth by the Treasury to date.  Serious residential investors should know everything about HAFA. 

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Short sales and foreclosure transactions are in the news.  The National Association of Realtors (NAR) says that when buyers had the availability of an $8,000 tax credit, short sales were accounting for at least 30 percent of all real estate activity.

Now that the federal tax credit has expired, short sales will play an even larger part in the overall real estate market. Investors are taking residential short sales more seriously than ever before. Unlike typical residential buyers who intend to reside in the home, today’s investors view the short sale opportunity differently.

Residential short sales present outstanding long-term value.  As investment guru, the Oracle of Omaha, Warren Buffett, has said the key to the economic recovery is the reduction of existing inventory in the housing market.  The abundance of short sales has created a buyer’s market.

For investors, this is not just an opportunity to acquire distressed housing, rent the housing until demand outweighs supply and then make a profit. This market has far greater potential than that.

The opportunity to acquire distressed upscale housing in a down market is rare indeed.  Well-situated residences in highly desirable areas with excellent school systems and today’s new structural amenities are still good investments.

These homes may well have cost $300-$400 per square foot to construct.  Now, these homes can be on the short sale market for as little as $200-$250 per square foot or less.  Investors who believe the market will stage a comeback in the future like those numbers.

What these investors also know is that the rental market is strong.  High-end homes in good school districts have strong rental appeal.  The formula is simple; buy low, rent high and sell high down the line. 

Of course the investor must find a good tenant, be willing to perform necessary maintenance and be sure the area will be in high demand in five to six years.  If investors do their research, they know which areas will be winners.

Just as equity investors know Apple, Goldman Sachs and General Electric will win in the long run, real estate investors know that great locations, excellent school districts and value packed per square foot housing will be in demand when the market stabilizes.  Be patient but be sure to be in the right place at the right time!

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