Catching a clear shot of the Downtown skyline is no easy task with our flat relief. But it’s no problem for Ellenzilla, one of our great contributors at I Heart Houston Flickr group. Taken from I-45, this has got to be one of the best Houston skyline shots I have ever seen.

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Competition breeds opportunity

As the clock towards the expiration of the first time homebuyer tax credit winds down, more and more “fencesitters” are getting in the game and that’s creating unusual amounts of competition. This has been especially true in the entry level price point between $80k-$120k  (We discussed this in detail in our Bidding Wars post) and as a result a large number of buyers in the market for a home are exasperated to the point of quitting. They keep submitting offers on bank foreclosures and short sales that sometimes don’t even get acknowledged by the Seller or their representatives. When they are acknowledged, they literally take forever to get a reply (if you are one of the lucky ones). So what should you do as a seller to significantly increase your chances of success? Guarantee response time. Something to the effect of: Seller is committed to a response within 24 hrs of offer receipt. Make that absolutely clear and exhausted buyers and their agents will see your home as a front runner because with it – they have a greater chance of getting the deal done. And that’s worth its weight in gold these days.

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In what is definitely the strongest showing of the year, the Houston Real Estate market continued on the positive trend that started 2 months ago. The recovery trend seems to be getting stronger as the decline in sales is now down , prices are continuing to climb, inventories are healthy and foreclosures continue to slow.

Data and Meaning

1. Median Sales Prices rose 2% to $164,800 compared to July 2008 for the third month in a row. Remember, prices rose the same amount in June, about half that in May, they were virtually unchanged in April and they had been falling prior to that. Further evidence of a positive upward trend.
2. Total Property Sales dropped just 5% to 5,402 compared to July of last year. This is by far the most telling of stats for this month. Sales  had been dropping and a much steeper rate of 20-30% in the first six months of the year. June showed improvement at 15% and that trend strengthened in July. If sales move into positive territory combined with steady or rising prices, the tide will have turned in the opposite direction.
3. Absoption Rate, an indicator of inventory, dropped by 25% to 5 months. Inventory levels have been in stable territory throughout the year and now we’re seeing declines in it – surely a sign we welcome these days. Also average days on market for single family homes dropped 4% to a solid 76 days.
4. The share of sales attributed to foreclosures continued to slow further and now they account for just 16.6% of total sales. At the beginning of this year, they accounted for double the current rate.

Graphs

Data Source: Terradatum and HAR

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Owner financing (or contract for deed) is “advertised” as a second chance for buyers that cannot obtain conventional financing but in most cases, they are at best, a bad option. The pitch goes something like this: A bright handwritten sign by the side of the road will read “3/2/2 Home $2,000 down $1,000/Mo Must Sell”. Interested you call the number, view the property, hand over the 2 grand and the house is yours. No closing costs, no approvals, easy peazy. Right?

The Real Scoop

1. In 99% of the cases, when you purchase a property with Owner Financing, the title does not transfer from Seller to Buyer. Don’t believe me? Ask the Seller to close at a title company and watch them run faster than a track sprinter. They’ll try to tell you that your agreement will be filed at the county courthouse and that will protect your interest in the property. What happens if your Seller does not pay his mortgage or taxes? The property could be foreclosed out from under you and all the money you paid up to that point would be lost.
2. The only case when a Seller could  contract for deed the property to a Buyer is when the property in question is owed free and clear. If the Seller has an existing mortgage on the property, the lender has a “due on sale” clause in the note. That means, if the lender finds out that Seller sold the property to a third party without approval of the bank, they would make the entire loan due instantaneously. Most Sellers don’t have that cash laying around to pay the entire balance of the mortgage so the property could go into foreclosure and you would lose all the money paid up to that point.
3. Even if the property is owned free and clear (less than 1% of cases), mortgage terms are a function of risk whether the lender is a bank or an individual. So the only way a lender would be okay with making a loan without checking credit or credentials is if they price the risk into your loan terms. Translation: High Interest Rates, High Purchase Price. You are not exactly negotiating from a position of power when you’re on the receiving end of Seller financing.
4. Often these deals are advertised as “take over payments”. Which is a funny concept since 100% of loans these days are not assumable. That means the Buyer has to be approved by the Lender if they are to take over payments. Isn’t that what got you to consider Owner Financing in the first place?
5. Finally, these seller financing deals are offered from real estate “investors” who get a property under contract with the true owner, get a controlling interest from that contract and then “owner finance” the deal to an end buyer at a higher price than what they are paying to make the spread. This is very disadvantageous to the Buyer and creates slews of situations where the Buyer could lose their shirt. You don’t have to believe me – just contact an attorney and find out for yourself.

Look, there were cases in the 1970s and 1980s when mortgage interest rates were so high that the only way to sell property was Seller financing. But in the current environment, you are always better off figuring out a plan to get bank financing approved rather than trying to cut corners and getting lost. When it sounds too good to be true…

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Photo Credit

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I did not get a chance to post this on Saturday as real estate has kept us extremely busy, but better late than never. Concrete Jungle by Angel Mendez Azpeytia is one of my favorite shots on the I Heart Houston Flickr Group Photostream because it weaves the organic and the man-made in such and expressive way.

If you would like your work featured here, head over to the IHeartHouston Group on Flickr and add your work there. We will be featuring one cool photo every Saturday.

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1. No rollercoaster fluctuations

I’ve got nothing more to say on this except that unlike your 401(k), your investment real estate will not do this:

2. Captured Equity

Due to the combination of plentiful foreclosure inventory and motivated sellers, deals below market value are within reach. We are seeing some foreclosed properties being sold at 20-40% below their true market value. Acquiring these properties at this time would essentially capture this significant level of equity (difference between price paid and market value) that the investor would cash in on when they sell or refinance the property. This one characteristic is hard to match by any other investment vehicle outside of running a pawn shop and who wants to do that?

3. Steady Cashflow

Houston is a very particular market when it comes to investment properties. Despite the fact that we have one of the largest property tax rates in the country, investment properties here break even when purchased at retail price. That means, if you were to purchase a property for $100k that was worth $100k, the incoming rent would cover the expenses of the property in full (in most cases), unlike in the majority of US markets. Now, if in the case of paying retail you break even, that means that if you get a deal, you have .. positive cashflow. What kind of return on investment? Cash on Cash Returns (cashflow over cash investment) we are seeing are in the range of 12-25% per year. Can your investment advisor beat that with any kind of consistency?

4. Tax Benefits

By definition, the IRS does not love many things, but they do have a soft spot for investment real estate. From allowing the paper depreciation of an appreciating asset, to deferred tax like kind exchanges and deductability of most expenses investment real estate certainly gets the royal treatment from the alphabet boys.

5. Appreciation

Given that I’m no Nostradamus, I can’t predict what future appreciation rates will be for our area. But looking at historical data, Houston real estate has been appreciating at a pace of 3-7% per annum pretty consistently. Even if you take a conservative approach and just call it 3%, it definitely ads up for the long term investor (and there’s really no other kind). Based on our median sales price for instance, that’s a jump in value of about $5,000 per year.

6. Additional Equity through Debt Paydown

As you collect rent payments your underlying mortgage on the property is being paid down at at rate of about $600-$800 per year. While it’s not something that will allow you to live in the Hamptons for the rest of your life, little by little we’re building up a pretty nice ROI (return on investment) package, aren’t we?

7. Good Management limits hassle

Every time I talk to a client about owning investment real estate, this question never fails to arrive: “But we don’t want to get calls in the middle of the night about a sink that’s leaking”. That my friends is old skool landlording and it’s no fun. If you buy the right properties and  hire a professional management company or in lieu of that, put a system in place to deal with repair concerns in a disciplined manner, you limit your hassle to watching checks flow in.

8. Favorable landscape

Stars are aligned in favor of investment real estate right now: Low interest rates combined with great deals on foreclosures which happen to be plentiful.  Fertile ground like this is very uncommon. In the eighties we had foreclosure deals abound but interest rates were in the double digits. In the early to mid 2000s, interest rates were low but prices were at their highest. It is very rare for conditions to come together like this so if you were thinking about taking action, the time would be now.

9. Earning 0.5% Interest in your Savings Account sucks

I know everyone has been in a sort of survival mode as of late, but still  there’s no getting around the fact that earning 0.5% interest in your savings account is a Dyson – it never loses suction. Inflation is at 3% for crying out loud – your money is losing money right now when it could be doing so much more in a safe and secure investment. If it’s not sleep-at-night emergency money, a savings account is no place to be right now.

10. Wealth Building

Did you know that a large portion of the overall wealth in this country was built in real estate in distressed times like these? Visionary individuals that had the outlook or the good sense to partner with the right people, stood in the sidelines until opportunities like this presented themselves and they pounced. When you acquire the right properties, in the right growth prone locations at the right discount, cashflow income on 4-5 properties is over $12k a year, the captured equity amounts to six  figures,  while debt paydown, appreciation and tax benefits just sweeten the deal further. Take a look at real estate and then compare it with your current wealth building method. Be honest: Is it even a contest?

That’s all I wrote. If you have any comments, or just want to call me an idiot, please leave them below.

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1. Make sure you get a home inspection.

As common sense as that may sound, I have to put it out there because after all, there’s no requirement that you do a home inspection on your property. The Buyer will sometimes opt out of getting a home inspection in an effort to save money. While that’s their right, its not a very good idea. The cost of the inspection is the cost of peace of mind, and if $300 is all peace of mind costs, you should definitely get it. I know that home may look new and issue free. But certain costly repairs are never visible to the eye much less the untrained eye. Exercise your right to get a licensed pro to inspect one of the biggest purchases you might make in your life time. Get a home inspection.

2. Find a good reputable home inspector

Picking the right inspector for the job can make all the difference in your home inspection experience. You want an inspector that will be thorough, helpful and fair on pricing. First, there’s no time requirement that an inspector has to be at a particular home but I’d say you want an inspector that will spend 3-4 hours + on the task. There’s just no way you can inspect every nook and cranny of an average size home in less than that without rushing. And you don’t want your inspector rushing. Second, inspection report language is convoluted with technical terminology that makes it hard to know when the issue is major or minor. The inspector will note everything on his/her report but you want them to take the time to help you understand what’s major, minor or just compliance. Last, you want an inspector that is fair on his prices. Home inspection prices range anywhere from $200-$450. So long as the price you are being quoted is average with respect to that range, you should be okay. If you want to know which inspector I recommend, you can read his Inspected Thoughts Blog.

3. Attend the inspection if possible

Attending the inspection is not a requirement either but it’s strongly recommended that you attend at least a portion of the inspection if you can make it. Usually we recommend to our clients to be there for the last 45 minutes of the inspection so they can get a first hand tour from the inspector of the issues that he encountered. That way you are not just relying on a report full of technical terms and you can ask follow up questions as well.

4. Go over  the report with your Realtor

The first time anyone reads an inspection report on any property, they get this strong impression that the home is about to collapse tomorrow. To this day, I have not seen a completely “clean” inspection report even on brand new, never live in homes. So you can get a better understanding of what the language really means, leverage the experience of your Realtor and go over the report with him/her.

5. Sometimes you need a specialist

Every inspection has its well defined “scope of work”. Meaning there are some things that the inspector, no matter how good she might be, cannot tell you for sure and will refer you to a specialist. For instance, your inspector may be able to tell you that the AC system is not cooling properly but you may need an AC specialist to tell you why and fix it for you. Or, the inspector can note that there are signs of foundation issues, but you will need a foundation specialist with appropriate tools to diagnose the problems, if any. Good news is most specialists out there offer free or very low priced estimates so you will be able to get the full facts before proceeding forward.

6. Use your report

Once all the inspection “cards” are on the table, it is time to let them direct your course of action. If the inspection revealed major issues (i.e. foundation is broken in half) that you don’t have the money or inclination to fix, move on. As hard as it may be to take steps back, remember that you did this inspection to keep you from getting in a hairy situation that would cost you thousands. If there are minor issues that are inexpensive to fix, you might make a repair request to or get an allowance from the Seller to cover those. Or if, the issues are negligible, you can move forward confident that you are getting a solid property. You win either way.

And that’s all folks -  My 6 quick tips on home inspections.

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Photo Credit: Andercismo

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Where would you guess this shot was taken – Walden on Lake Houston, Lake Conroe, Seabrook?

Aperturo brings us this Sleepy Pondering in Hermann Park in the heart of the Medical Center

If you would like your work featured here, head over to the IHeartHouston Group on Flickr and add your work there. We will be featuring one cool photo every Saturday.

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Quick Peek

Running our Foreclosure Search for properties above $400,000 yields 65 total properties, the highest priced just a hair under $2M. Twenty percent of the luxury foreclosures are sitting pretty Inside the Loop, while the rest are spread out in Suburbia sporting much larger lots  (lower land cost) and monstrous square footage. You can find one in whatever flavor sloats your boat: Rice Military Chocolate Chip, Memorial French Vanilla, West University Pistacchio or Midtown Stracciatela. Or if you’re in the mood for something more … suburban, you can maybe try some Sugar Land cheesecake, Richmond McMansion Nuggets or some Spring Mix Salad.

Jump In

Some parting thoughts:

1. If you’re in the market for a luxury property, check foreclosures first. You might be able to land a deal for much less than you’d pay retail, and still get that new house smell (some deals are foreclosed from builders and have never been lived in).
2. If you already live in the luxury property, congratulations . Second, you should probably still take a look. You might be able to upgrade to something bigger and better for the same money you’re paying now.
3. Even if you have no interest in buying something, take a look anyway and see what’s out there. It will be like your local HGTV show without the sugarcoating.

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$8000 Homebuyer Tax Credit 411

The National Association of Home Builders (NAHB) has a great free resource for those wanting to learn the specifics on this tax credit. Snapshot of main points:

1. The tax credit is for first-time home buyers only. For the tax credit program, the IRS defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase.
2. The tax credit does not have to be repaid.
3. The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
4. The credit is available for homes purchased on or after January 1, 2009 and before December 1, 2009.
5. Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.

In addition you may also want to check out NAHB FAQ page, IRS info,  or HUD’s Press Release.

Tick Tock

In the past, I’ve shown you how you could stimulate your home purchase in 2009 by combining price reductions through smart negotiations and the First Time Homebuyer Tax Credit to land a steal of a deal. Now, it’s time to talk about timing. There’s 4 months left till this tax credit expires. 16 weeks. 120 days. So, what’s the rush? You could probably close on a house with some time to spare for a mini vacation, right? Think again. One of the conditions to qualify for the credit is that the transaction has to close by December 1st 2009. Due to a May 1st change in the way property appraisals are performed, average closing times are running anywhere from 45-60 days. That leaves you with about two months to find the perfect home for you and get it under contract. Depending on your price range, that’s not  such a cakewalk anymore since we’re seeing bidding wars on foreclosure properties. Bottom Line: If you are looking to buy and want to take advantage of the $8000 tax credit, you might want to start looking sooner rather than later.

Moral of the Story

Honestly, the tax credit in and of itself, is no reason to buy a home. But if you are on the fence and looking, it makes no sense to let an opportunity to get a deal slip just because of procrastination. After all, in a real estate market like Houston’s where median home prices are in the mid $100s, this tax credit amounts to about a 5% additional discount on top of the price reduction you can get through smart negotiation. In the words of Warren Buffett: “Buy when others are fearful, fear when others are buying”.

We are here to help with anything Houston Real Estate.

If you are ready to start looking, start searching Houston Homes.

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