Posted on June 29th, 2009 by Jonathan Dalton

For the past several months, I’ve been fielding about an inquiry every two days about homes appearing on the Phoenix real estate market for under $50,000. These homes, though, aren’t always the deal they appear to be. Here are a few of the reasons why:

1) Financing. As you drop below $50,000 you’re approaching the lowest level where a mortgage can be obtained. And getting that mortgage depends on the condition of the home. No stove? No FHA loan. No air conditioner and other major repairs needed? No conventional funding available either.

2) Condition. When the median price for a home in Phoenix is well over $100,000 and you are looking at homes at one-third to one-half that price, might there be a reason? Often the key is condition - homes under $50,000 almost always are going to need some work. It’s just a matter of how much and how much it’s going to cost. In some cases, by the time you’re done with the repairs, you paid far more than you ever expected to pay.

3) Location. Sub-$50,000 homes are available only in a handful of locations. Steak tastes on a meat loaf budget isn’t going to work.

4) Competition. Few homes under $50,000 receive less than one offer. Most are getting multiple offers in the door the first day or two the home’s on the market, and many of these offers come through sight unseen. Buyers are firing the offers first, getting a home secured, and then using the inspection period to find out what they bought.

Truthfully, this phenomenon stretches well about $50,000. I have a couple closing on a house in Queen Creek tomorrow that we secured on our 14th or 15th contract.

The bottom line with any real estate, but particularly with these homes, is you get what you pay for. If you’re searching for the lowest sector of Phoenix real estate, you’ve got to expect the homes aren’t going to be pristine and aren’t going to perfect (and they’re not going to be in Scottsdale.) If they were in better condition, they wouldn’t have bargain prices attached.

Got more specific questions? E-mail address is at the top of the page.

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Posted on June 28th, 2009 by Jonathan Dalton

A bank owned home - this one a former model and still model-perfect - goes on the market in north Surprise at a list price of $182,000. More than a dozen offers flood in. Comps indicate that the home might be worth $200,000 on a good day but that doesn’t stop the buyers from climbing all over each other.

Winning bid on the home? $224,000. And that’s where the problems began.

You see, in the quest to obtain the highest possible dollar for the home, the lender seemed to forget about a little detail called the appraisal. (Why should a bank remember that the appraisal’s part of the deal, since the bank requires appraisals before issuing loans?)

With a normal seller I always discuss the looming appraisal - usually as a matter of trying to keep sellers from overestimating their home’s value. My guess is the bank (or more correctly, the bank’s asset manager) never gave a second thought as to whether this home really was worth the $224,000 being offered.

(Stay tuned for a brief aside on free market economics and why Phoenix real estate doesn’t necessarily apply.)

And so the bank accepts the offer at $224,000, with some closing cost assistance for the buyers included. And so the FHA appraiser goes out to the home and offers his opinion of the value of the property which turns out to be the only opinion that matters …

$184,000.

Oh, and the bank’s still paying buyer closing costs.

At this point, the bank could have told the buyer to take a hike but for reasons known only to them (and certainly, the idea that is was the “right” thing to do never entered into it), the bank agreed to lower its price to the FHA appraisal mark. Oh, and pay closing costs when it’s likely they could have found either a cash buyer or someone who didn’t need to be handed an additional $5,000 off the top.

The lender went for the highest offer and ended up accepting $3,000 net under list price.

This past week I had a buyer enter one of five offers on a home in Goodyear. We didn’t get the house. Why? As the listing agent put it, the lender accepted an offer so high “I don’t know how it’s going to appraise.”

If the offer’s bogus to the high side, if the buyer’s looking to be saved by the appraisal contingency, then why accept the offer in the first place?

And on a related note …

Not all lenders seem to have gotten the news that properties are moving quickly even if not priced well under the going market. There’s one neighborhood in Surprise where the REO agents keep going lower and keep selling homes in a 3-day span.

Wouldn’t it seem that if a home can be sold that quickly at price X, that it would sell just about as quickly … maybe a couple of days more … at X plus 1 percent? Especially when these homes are receiving multiple offers?

This would take some forward thinking, of course, and forward thinking rarely gets in the way of a motivated lender and an REO agent spending their next commission check.

Promised aside: Real estate is not a free economic market. Value is not solely the price at which buyers and sellers agree for the simple fact that they’re not the only parties to the sale, unless pure cash is involved.

Lenders have to decide for themselves whether they’re willing to accept the risk based on what buyers and sellers agree upon, which is why loans are based on the lesser of contract sales price or appraised value.

Just because someone’s willing to pay $224,000 for a $184,000 home doesn’t mean the bank has to provide the financing for a vastly overpriced purchase. Nor should they.

But with that in mind, one would hope the lenders selling these homes think like lenders when reviewing the offers that come in the door.

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Posted on June 27th, 2009 by Jonathan Dalton

One of the requirements of obtaining a $15,000 loan from the city of Phoenix to purchase a bank owned home is that the purchase price needs to be no more than 85 percent of the home’s appraised value.

Setting aside the reality that such a scenario is virtually impossible in today’s Phoenix real estate market, such a requirement will do little more than crush further the home values in a given neighborhood. If the intent is for the owner to have immediate equity, the reality comes nowhere close.

Let’s say our potential finds a house. And, luckily enough, there are three identical homes that have sold, all at $100,000 (and for these purposes, we’ll make them completely identical - no adjustments would need to be made by the appraiser.)

What’s the home’s appraised value going to be? Of course, it’s $100,000.

Except the rules of Phoenix’s program say that the home can’t be purchased for more than 85 percent of appraised value. Miraculously, the lender agrees to these terms and sells our buyer the home - we’ll call it Home A - at $85,000.

That’s $15,000 in instant equity, right? Well, not so fast …

Another potential buyer comes along a month later and finds an identical home to Home A and to the previous comps. Enter the appraiser who pulls the most recent comps for this new home, Home B, and finds the last three sales were at $100,000, $100,000 and … yep … $85,000. What Home A appraised for doesn’t matter. It’s the sold price that counts.

Average out the last three sales and now you have a value of $95,000. The buyer on Home A still has $10,000 in equity (with $5,000 of paper equity gone), and others who own the identical home have watched their home’s value fall 5%.

Better yet, the buyer for Home B also is using Phoenix’s $15,000 loan program and the bank, defying the odds, agrees to sell the home for 85 percent of the appraised value of $95,000 -  $80,750.

What does that do to the value of Home A? The last three comps now are $100,000, $85,000 and $80,750 for an average of $88,000 and change.

Another $7,000 in paper equity, gone. That $15,000 equity cushion has dropped to just over $3,000 in the span of two sales, one of which the actual sale at 85 percent of appraised value.

This is supposed to be a good thing? Wouldn’t it seem much better to let the market work itself out as it has done for the past few months rather than artificially attempt (and fail) to create equity?

Fortunately, this will remain little more than an academic exercise thanks to the program’s near-impossible requirements. Sure, there may be a lender or two willing to sell for 85 cents on the dollar but as we’ll see in tomorrow’s post, lenders are too busy chasing imaginary high bids to even consider a city-enforced lowball offer.

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Posted on June 26th, 2009 by Jonathan Dalton

Was there ever any question what today’s music would be?

Have a good Friday and we’ll catch you tomorrow.

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Posted on June 25th, 2009 by Jonathan Dalton

KNXV, the local ABC affiliate, ran a story last night about Phoenix’s floundering $15,000 loan program for buyers purchasing foreclosed homes, first announced in March and written about extensively here.

The sense you get is the problem is the program isn’t well known.

“I didn’t even know about it,” said Phoenix resident James DiMartino.

“Never heard of it,” said Nick Calos, who also lives in Phoenix.

DiMartino and Calos both say they’re in the market to buy a home and have an interest in the program. It seems many people don’t know about the program or are discouraged with the requirements to get the loan.

First off … Nick, James … welcome to AllPhoenixRealEstate.com. If you were one of my readers you would have known about this program on March 17.

Onward … Forget the first half of the last sentence of the story. The biggest obstacle this program faces is the requirement that buyers purchase these homes at 85 percent or less of appraised value. In a market where there is barely three weeks of inventory of bank owned homes, that’s damn near impossible. (It’s also pointless and can damage the property values of any neighborhood where the program’s used, but that’s a post for tomorrow.)

There are other hoops . Potential homebuyers need to sit through eight hours of financial counseling and the $15,000 is a loan and not a giveaway - it needs to be repaid when the home is sold or refinanced.

Those presumably can be accomplished. It’s the 85 percent requirement that makes it impossible to get the loan, even if city officials believe appraisers will adjust their numbers and banks will sell for pennies on the dollar to help out a buyer.

And that’s why some three full months since the program began, not a single homebuyer has received a loan from the program. Phoenix is 0-for-the duration.

So how do you fix this problem and get the money to the people? Drop the 85 percent requirement. It’s really that simple. Allow buyers to use these funds to find and purchase properties at market value and you’ll see the money flow.

Until that time, the city may as well require buyers to grow a third leg before purchasing. It’s about as practical a requirement as the 85 percent limit.

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