Sunday, October 3, 2010

Real Estate Woes... or Cash is King

For all the news about the simultaneous meltdown of the financial and housing markets, it is still sometimes difficult to know which precipitated the other. Both were clearly out of control. The resulting mess is doing just what it is supposed to do, bring rationality to the market. That will happen without government programs, bailouts and superfluous regulations. Politics aside, the current market is an excellent opportunity to buy, if you can manage it. Bargains abound, especially in the foreclosure market. My wife found this property by chance really, while visiting a friend. Kudos to our agent, Mary Spillman, who worked very hard to help us pull this deal together. You can email her here if you’re in the market.

The house that we recently purchased is an amazing value as we only paid 62% of its appraised value, and that appraisal was rather harsh. Granted, the home needs extensive repairs, but I fully expect the home to appreciate another 60-70% once the renovations are complete. I don’t intend on selling the home, but it is nice to have a long term investment make such impressive short term gains. It builds my confidence and motivates me to do the work knowing that at least on paper, I’m earning a good return on my work. The short term payoff for me will be the 35% loan to value ratio, the improved cash flow from having a mortgage payment that is one-fourth my current home and a home that I hope to own free and clear within 7 years.

The greatest challenge was arranging the financing because contrary to government bailouts designed to improve lending, the market has other ideas. Excellent credit scores and low debt qualified us for the loan with 5% down, but once it came time to underwrite the loan, we ran into problems. First, no one believed that we are actually intent upon moving from a recent 3100 square feet home down to a 1700 older one. We had to write letters to describe the hows and the whys of our decision. Next, no company would underwrite the mortgage insurance (MI) despite the fact that we fully qualified in every way. It was impossible to get, either private or FHA. Our only solution was to put 20% down, bypassing the MI market completely.

Of course, putting that kind of cash down drained out reserves and took money that we had planned to use for the repairs. Speaking of repairs, as condition to receiving the loan, I had to write more letters promising to do certain ones within 2 weeks of closing to appease the lender. Despite all of the headaches though, our loan officer, Keith Johnson, was great. He always kept us informed and updated on the process and helped smooth the way.

At the end of the day, we ask ourselves if we made the right decision, if the potential payoff is worth the risk. Only time will tell, but for now I am excited about the future possibilities. On NPR this morning, they reported that the sales of foreclosed properties is on the rise. This is good news if we’re ever going to turn the housing market around. It’s simple Econ 101, supply and demand. Forget the news and the pundits, capitalism is alive and well. It isn’t always pretty, but it is the best possible way for individuals to determine their own destiny. Markets work if we let them, and I, for one, would not have it any other way.

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