Bad News Everyday....

Everyday I check the newspapers and the internet for news on Real Estate. There are always a few articles on real estate. I would like for anyone reading this post to realize that ALL real estate is local.

While there are similarities in markets, you have to realize that local is key. What is happening in Detroit is not what is happening in the Big Apple!

Take the time to do your homework when it comes to your market. Some sources to use are statistics from the local multiple listing board, if you have one. Some counties will publish numbers in local newspapers. On the internet, resources such as Zillow and Property Shark are becoming more accurate everday. The thing to remember with these sites, they may have closed transaction information, but they do not have details on size and condition of the houses. Zillow will give you a chart of homes that have sold, if you know the neighborhood, that helps.

Your largest resource would be to contact a qualifiied realtor for the information that you are seeking.

If you are a seller, keep in mind that the selling price is the price that you are willing to sell at AND that a purchaser is willing to buy at! Condition and location are all important. Gone are the days of buying a handyman special at high prices.

When pricing your home, you want to be at the lowest price of your style home and even 5% less than the lowest price! Be aware of the days on market in your neighborhood. If you wish for your home not to be stale, then price your home accordingly.

To Buy, To Sell, To Rent? What to do?

For all intents and purposes, I am certain that I can find a multitude of people who should do all of the above.....

However, I think that with all of the information that is in the news today, it can be very confusing.

Should I sell now? Are we going to see prices rise or prices fall further? What a seller needs to keep in mind is that real estate is local. Quite a lot of what we are hearing is from different parts of the country, and has no affect on our local market at all. I would suggest that you speak with a professional in order to determine what your specific market is doing. Parts of Long Island are booming, parts are flat and even some parts have fallen back slightly. Find out what your market is doing and price accordingly.

Should I buy now? I say why not? Mortgage rates are at historic lows (still) and home prices have dropped in our local market somewhat. (Not even 10% in most of the local Long Island markets). Do I foresee a further downturn? If I had that crystal ball to tell me that, well I would not be writing this blog now, would I? ;) What I do know is that we live on an Island and they aren't making anymore land! The city is moving our further east everyday....

Should I rent? Only if you can't buy.....have you thought of alternatives to straight renting? Rent with option, owner financing?

As you can tell, there is no one answer for all people. Ask questions, knowledge is powerful!

Mortgage problems

I know that there is quite an amount of information going around about mortgages, and most of it is not positive. I feel that although it is not the panacea that it has been in the last few years, it is still a wonderful time to buy a home!

Rates are still at historic lows....now is the time to buy. Inventory has leveled off, thus the large drop or "burst" that the papers were predicting is not occuring.

I would suggest that you make certain that you are still qualified to get a mortgage. Most banks have tightened the underwriting guidelines, meaning that you might not be able to get the mortgage that you once were able to qualify for. 100% loans are almost nonexistent at this point.

Creative financing will become more prevalent as we move forward in the future. Rent with the option to buy, or homeowner financing may become more common.

Take the time to educate yourself on what is happening in the market. It is always better to "measure twice and cut once". Call your mortgage person and get requalified!

All things Long Island

Long Island is a very unique place to live. One only needs to travel from the North to the South to see two different shores. Most of the North Shore has the feel of New England, while the South Shore is a beach feel. The South Shore is more flat, has more sand in the soil and definitely feels like a place that is further south than we are.

Many publications have given the impression that Long Island is no longer a place for people to live. The reasons that are stated are high taxes, high cost of living.....yes, we may pay more taxes than other states, but the acedemic landscape that is offered to the children of Long Island is second to none.

Take time to slow down and look around at the things that are good about Long Island. The beaches, the Sound, the Ocean, proximity to Manhattan, the food, the people, the shopping. We have all things Manhattan, without the overcrowding...open space! Celebrate Long Island, it is truly a destination.

The Real Estate Career

The market is absolutely going through a transition. I would not classify it as a bubble burst but a transition just the same. Some may be considering a career change but may think that it is too late to jump into the profession. If you think as such I am here to tell you that you are sadly mistaken.

It is my opinion that the people who have entered the market during this multi-year run up and buying flurry will have a harder time maintaining a level of success in the business than would someone with no experience entering the market now. Here's why, when I was younger there was a lake that was full of catfish. There were so many fish that at times it seemed like you could drop a bare hook in the water and catch a fish. You didn't need much of anything for bait on the hook. The real estate market, in recent years, was not much different. It appeared that everyone in the business was enjoying some level of success. Now that the market has started the transition to a buyer's market you are going to see a bit of an exodus from the real estate industry. Remember the old saying..."When the going gets tough, the tough get going"! It could now be said or added to it "and the weak just go away!"

People entering the industry today will find an exciting career enhanced with technological advancements which keeps everything fresh and people on their toes. For an agent to be successful today they need to do the things that unsuccessful agents can't or won't do. First and foremost, you need to create a "business plan" for yourself. You need to understand that this is a sink or swim industry and you are not likely to enjoy a cushy salary and benefits while you are learning the fundamentals of the business.

You should enter this industry with the understanding that you will not likely earn any income in the first two or three months. That means that you will need an alternative means of support while you develop your business. Which brings up and important point, develop YOUR business! Even though you may be working for a large, national or multi-national franchise or a local Mom & Pop shop, you are in business for yourself and you need to keep that first and foremost in your mind during your planning strategy. If you have another job which will allow you the time to dedicate to learning the real estate business it would be best to team up with a more experienced agent and compound your time and efforts.

I have mentioned it in an earlier blog, there are basically two ways to make money in this world, either people at work or money at work. If you cannot trade your time for someone else's dollars then you better hope that you have money working for you earning more dollars. The first is a linear equation. What you do to one side of the equal sign, you must do on the other. TIME=MONEY. If you want to make more money you need to give more time. If you want more free time then you need to be prepared to make less money. That is the linear method of income. There is another way, by compounding your time, to earn.

If you are working another job and want to enter the real estate industry you should find a mentor or a manager who is willing to work with you to develop your business. You need to dedicate a certain set amount of hours each week to the development of this new venture. Your hours will be compounded by the time and experience of the mentoring agent or sales manager. So assume you can only work an additional 10 - 12 hours a week, your mentor agrees to help you and dedicates a couple of hours each week towards your success, your sales manager agrees to the plan and also dedicates a few hours each week towards your success. Now your 10 - 12 hours are producing the results and efforts of 20 hours a week or more.

Embrace technology and you will find that your efforts are amplified. Some people have said that you need quantity, in terms of time, in the business each week to succeed. I believe, for some, that may be true, but for others QUALITY time is much more productive. A statistic often tossed around is that 80% of the work is accomplished by 20% of the workforce. It is not because they work more hours but because they work more efficiently. Time management is key!

Remember, once you are able to transition to fulltime status in the real estate business that you should offer yourself out to mentoring others coming into the business. This is when you seriously start to reap the rewards of time compounding your efforts.

One of the biggest obstacles to success in this business is the low financial threshold it takes to enter. A person can literally enter the business with less that a couple of hundred dollars. Sometimes I wish that people would have to place a bond or deposit a large sum of money into an account that will only come back to them after they do what they need to do in order to become a success in the real estate business. I think that people would treat their business very differently if they had to pay $80 or $90,000 or even a couple of hundred thousand! But alas, they don't have to in this business and that is still a good thing.

So you have decided that you are willing to devote some time and effort to the business and you have a genuine interest in real estate and people, now what...

You need to decide where the best place for you will be. You need to conduct interviews for which company you will work. That's right, YOU will conduct interviews. Prepare a list of questions, comments and concerns that you have about entering the real estate industry and then look around where you live for an office that meets several different criteria. First, you want an office that has a pleasant working environment. Second, you want an office where people are positive and motivated to succeed. You need an office that is growing, because anything that is not growing is dying. Look for an office that actively markets in an effective and ethical manner.

Once you have created a short list of offices you will need to pick up the phone and call on a few. Schedule appointments to meet with a member of the management team at the office. Be sure to bring with you a pad of paper and a pen along with the list of questions, comments and concerns. Do not be afraid or shy about asking the questions and more importantly, about writing down the fundamentals of the response to the question. You will find these notes invaluable later in your decision making process.

Once you have interviewed all of your prospective agencies you need to review the answers provided and think about your potential market. You may think that you have no potential market without first knowing more about the various markets but in reality you do have more of an idea than you think. First, look at your own sphere of influence. This is a look into your own present and past life for people that you know. Write down the name of everyone you know, everyone! You will see a pattern emerge from the list of people. It may be young, upwardly mobile types, you may find that most of the people you know are pre-retirees or perhaps business owners. A pattern will definitely emerge. Now look at the community in which you want to work. It should be where you live! Compare your sphere of influence with your community and you will see overlapping areas and it is in these areas where you will likely have your greatest advantage. Now, go back to the responses provided during your various interviews and see how they compare with the "market" you are best suited for at this time. You should have a leader emerge from the pack.

Above all, make sure your choice of agency embraces technology. If they do not you will be limiting your potential of success greatly! They should respect the past but embrace the present and anticipate the future.

Now is a very exciting time to enter the business and if you make an effort to create good habits you will have certain success no mater which way the market goes from here. While developing your initial plan remember that you need to include short term, 0-6 months, intermediate term , 6 months to 18 months, long term, 18 months or more, and ultimate goals [what you want to leave as a legacy]. Your goals must have four key components: first, they must be clearly defined, second, they must be measurable, third, the must be realistic and fourth, they must be truly desired.

Be patient and purposeful. Plan your work and work your plan and you should have a smooth and successful transition into a great career and a great industry.

Financing Approval Fundamentals for Real Estate

Today we will consider the fundamentals of Real Estate financing approval. The first thing that we need to review is what a bank looks for in a prospective borrower. There is a simple way to remember the 5 key factors a bank looks at when considering a loan. The acronym is MICCE.

M is for Money. The bank wants to know if the borrower has sufficient funds to close. The bank looks at your available cash reserves or savings to ensure that you have enough for a down payment, if necessary, and if you have enough money on hand to cover your closing costs. The bank may also want you to have sufficient funds in savings as a reserve for two or three months of expenses.

I is for Income. The bank wants to know the nature of your income and the length of time you have had such a level of income. They will also want to know if there is the likelihood for the income to change in the future.

The first C in the acronym is for Credit. The bank wants to know the credit-worthiness of the borrower. The bank will request that you permit them to conduct a credit search on you. Typically, the bank will pull a report from the three major rating agencies. All three agencies currently use the FICO rating system which gives a three digit score for the borrower. Generally, the lowest is around 400 and the highest is 800. Anything above 650 is considered very good. 700 and higher is excellent. Each of the agencies can have very different information as some creditors may or may not report to a particular agency. The higher your credit score the lower the risk for the bank.

Your credit score is incredibly important in the borrowing process and you should do everything within your power to ensure that you have an accurate credit report. Recent legislation has made it mandatory that each of the three agencies provide a consumer, upon request, a copy of their written credit report. This free copy will not contain your FICO score but it will have everything else on it. You are entitled to this report once each year from each agency. This report can be obtained online.

Review your report and contact the reporting agency should you find any incorrect information.

The second C in the acronym is for Collateral. The bank wants to know what assets you have as collateral for this loan. The primary asset will be the property, itself, for which you are borrowing. The bank wants to ensure that there is sufficient value in the property. An appraisal will tell the bank what similar homes have sold for in a relatively recent period of time. Although an appraisal is not an exact evaluation of the property, it is as close as you can get to one. As we have discussed in a previous blog entry, a home is ONLY worth what someone is willing to pay for it.

The last letter in the acronym is E which stands for Employment. Now, like me, you initially may be somewhat confused. You believe that this was covered under the heading of Income. The fact is that INCOME has nothing to do with EMPLOYMENT. Many people have an income but are not employed.

There are two ways in this world to make money. The first is people at work and the second is money at work. If you are trading your time for someone else’s dollars then you are an example of people at work. If you do not trade your time for dollars and use your money to make money for you then you are using the money at work strategy. When the bank asks about your employment they want to know if you are employed and if so, for how long have you worked with your current employer. The bank will also want to know how long you have worked in your current field.

So there you have it, the 5 key factors a bank looks at when determining your ability to borrow certain sums of money. What is critically important to understand is that you are not REQUIRED to give all of the information to the bank when applying for a loan. Nowadays, banks have become rather creative in the financing process. A bank will consider you for a loan even if you refuse to provide information needed to satisfy one of the 5 keys. For example, you can still get funding for a loan to purchase real estate if you refuse to provide your income information to the bank. As a matter of fact, you can still get a loan even if you refuse to tell the bank about your assets and you refuse to give them information about your income.

What is important to remember is that it is a risk versus reward scenario for the bank. When you close their eyes to one or more of the 5 key factors you are increasing the risk the bank is taking in making this loan to you. For this increased risk the bank is going to look for a higher than usual reward. In this instance, the higher reward will be a higher interest rate on the loan. Conversely, the more information you provide the bank the lower the rate should be for your loan.

It doesn’t end there. The bank also employs a few standard ratios that you should be aware of when considering purchasing real estate. These ratios give an indication to the bank your ability to pay the monthly payments in addition to your current monthly obligations.

The first ratio is the Front End Debt Ratio or FEDR. This industry loves acronyms! The FEDR is calculated by dividing the Monthly Principal, Interest, Taxes and Insurance payment or the PITI, by the monthly gross income of the borrower(s). The bank likes to see a 28% ratio or LOWER on the FEDR. This is interesting because my husband’s father taught him, when he was young, to keep his housing payment to one quarter, 25%, of his monthly pay and to use the remaining three quarters on which to live and save.

The next ratio is very similar to the FEDR and it is known as the Back End Debt Ratio or BEDR. The BEDR is similar to the FEDR but it also incorporates your other monthly debt service or MDS. Your monthly debt service is the sum of all monthly payments required of you for revolving charges, installment loans or other obligations for which you make monthly payments. To calculate the BEDR you add together the PITI payment and your MDS and divide the total by your gross monthly income. The bank looks for a ratio of 36% or LOWER on the BEDR.

Of the two ratios, the most important to the bank is the BEDR. This is simply because it takes into consideration all of your financial obligations. It is important to note that if your ratios are not at the desired levels of 28% and 36%, respectively, you are still able to secure financing. Once again, it comes back to the risk versus reward scenario for the lender. If your ratios are higher, your interest rate will likely be higher. This is ironic because the higher the interest rate the higher the ratios will be. I believe they call this a “catch-22”. Where I am from, which is down south in Oklahoma, we look at it like a dog chasing his tail. Even if he catches it he sort of loses because he is actually biting himself in the behind.

Another important ratio the bank considers is the LTV – yes, another acronym, it stands for Loan to Value Ratio. The bank wants to know what percentage of the value of the home you are borrowing. That risk versus reward scenario is going to rear her hideous head again. The higher the LTV the lower the amount of equity you will have in the home and the higher the risk for the bank. The LTV is a simple calculation. You divide the amount of the loan by the appraised value of the property and express it in a percentage. For example, a home valued at $200,000 and a loan amount of $100,000 has a 50% LTV.

If your LTV exceeds 80% you will generally be required to pay Private Mortgage Insurance or PMI. This is not a pleasant situation for any borrower. PMI is generally expensive and not tax deductible. Further, it is somewhat difficult to remove from you loan. In many cases, you will need to wait a certain period of time and then provide an independent appraisal showing the value of your home and that you have 20% or more equity in the home. PMI protects the lender should you default on the loan. A common misconception about PMI is that it protects the borrower or it is a life insurance policy on the borrower. This is absolutely incorrect. PMI only protects the lender should you default on the loan.

Briefly, while on the topic of misconceptions, a pet peeve I have is that most people don’t understand that they do not GET a mortgage but rather GIVE a mortgage. You GET a loan and give, as collateral for the loan, a mortgage. I just had to get that off my chest, thank you for your indulgence.

So there you have it, the fundamentals of loan qualifications for real estate. To recap, the bank looks at 5 key factors in determining your eligibility to secure a loan (and GIVE a mortgage). The five keys are best remembered with an acronym MICCE; Money, Income, Credit, Collateral and Employment. The bank employs a few ratios in the process. The first is the FEDR or Front End Debt Ratio which is determined by dividing the PITI payment by the Monthly Gross Income. This ratio should be 28% or better (lower). The second ratio is the BEDR or Back End Debt Ratio which is calculated by adding the PITI and the MDS and dividing the total by the Monthly Gross Income. This ratio should be 36% or better (lower). The final ratio discussed in this blog entry is the LTV or Loan to Value ratio which is determined by dividing the loan amount by the value and expressing the result as a percentage. This ratio is ideal at 80% or lower.

While we are on the topic of loans I would like to add a few closing thoughts to consider. When you open up the local newspaper and turn to the mortgage rates, you need to understand that the rates listed in the paper are quotes and not offers. There is a substantial difference between a quote and an offer. A quote is a number given to you to peak your interest and to get you to consider a particular lender. A quote can be considered a “teaser”. An offer, however, is a rate provided by a lender which they know they could secure for you at a given time. Don’t allow yourself to be fooled by quotes and always ask for an offer. The offer should be in writing and should be accompanied by a GFE (another acronym!) or a Good Faith Estimate.

Before you go shopping for a new home, take a few minutes to understand or even master these concepts. Then contact a trusted loan officer. A loan officer is best found by referral. Ask your professional Realtor, your attorney or your accountant for a referral. Each of them should give you no less than three referrals. Your search for a loan officer will be short if the same name appears on all three lists. Alas, that is not likely, so take the time to measure twice and cut once! This is, most likely, the single largest purchase you will ever make. It is not often that you get the chance to do it again in situations such as this so you better make sure you get it right the first time. Call each of the referrals and ask to meet with them for a few minutes. Prepare a list of questions, comments and concerns, before the meeting and ask each of the prospective loan officers the same questions.

It won’t be long before you develop a comfort level with one of the referrals. Once you have selected a professional loan officer to work with ask him or her for a Pre-Qualification Letter or a Pre-Approval Letter. This will be very helpful in your search for a new home. It will give you a price range with which you should be comfortable.

HOME PRICING

This is one of the biggest obstacles to selling real estate in a timely manner. Too often a home seller will place emotion ahead of logic in determining the selling price of a home. Perhaps the prospective seller has the impression that the market is ripe in their area or that the home is worth far more than it really is.

The bottom line is that there is only one way to determine the true value of the home and that is to actually sell the home. After all, it is only worth what the open market will bear. You can have agents come in and perform a market analysis; you can even go out of pocket for an independent appraisal – which is not a terrible idea, by the way! It really doesn’t matter which method you choose, the bottom line will always be that the home is only worth what a person is willing to pay today.

All too often we see and hear of homeowners pricing their homes above perceived market value in order to bring the price down to be in line with current pricing during the selling cycle. This is, generally, a mistake.

When it comes to selling your home, which is most likely your single most valuable asset or it represents your largest investment, it is always better to apply the old adage of measuring twice and cutting only once. You will not likely get a second chance to sell the home again.

Some other things to consider are the carrying costs and the time value of money. I have seen investors, in particular, buy a piece of property with the intention of flipping it for a quick profit. Unfortunately, as in many real estate investments, there are often unforeseen expenses or delays that could adversely affect even the best laid plans.

One such investor felt that it would be best to price the home above the market for a couple of weeks and then, slowly and gradually, bring the price down with the intent of selling at the market price. This investor would have been better off pricing the home correctly and selling it much sooner. When you consider the aforementioned principle of the time value of money combined with the carrying costs you can easily see how quickly a good investment can turn into a worrisome or even, a bad investment.

Here is a little food for thought:

According to my research on MLS, the average listing price for a home sold in Suffolk County, in the past thirty [30] days, has been $477,984. The average selling price during the same time period was $457,027, a net difference of 2.86%. Keep in mind that these homes were on the market for an average of 113 days. That will be a critical statistic when you read on.

For the same period, exactly one year ago, the average listing price for a home sold in that thirty day window was $479,894 and the average selling price was $474,535, for a net difference of only 0.56%. The average number of days on the market was only 70 days!

For the same period, two years ago, the average listing price for a home sold in that thirty day window in Suffolk County was $429,638 and the selling price was $417,089 for a net difference of 2.4% with an average of 78 days on the market.

This, by no means, constitutes exhaustive and comprehensive research on the Suffolk County Real Estate marketplace. It is, however, a good indicator of a trend pattern. Based on this information we can see that the average listing price has dropped slightly over the past year but has increased by nearly 10% over the two year period of time. The average selling price has dropped by approximately 4% in the past year and has risen by nearly 10% over the past two years.

The most dramatic of all these statistics is the fact that the time or days it takes to sell a home has risen by nearly 60%! The reason for this is many. Not the least of which are inventory and incorrect pricing.

If you price your home correctly and you save 100 days of selling time that means that you could, theoretically, have your money invested elsewhere working for you for 100 days --- or more. It means that you would not have the carrying costs for 100 days --- or more.

Some people say “location, location, location” and yet others say “timing”, I say neither. It should be pricing and “time in” the market. If you have the luxury of waiting out the market to get your price then you are better off not putting it on the market actively until you feel that the market will bear your asking price. If you insist on putting it on the market now the chances are that it will not sell in a timely manner and will become “stale” to the Real Estate agents in your area.

Take the time and use the resources available to you in order to price your home correctly, based on what the market will bear rather than on emotion. Spend a few dollars on an independent appraisal and while you are at it, get a qualified home inspection. Both things should cost you well under $1,000 but will save you considerably in the long run. There will be no question, for the prospective buyer, when you have an appraisal and home inspection in hand, that the home is not worth what you are asking for it!