New Form to Prevent Mortgage Fraud

This morning I received an email from one of the major banks we work with recommending the use of a “FBI fraudOccupancy Cert”.   They are recommending the use of this form on any loans we sell to their bank, including owner occupied, investment or second homes.    The form, which must be acknowledged by the borrower, states:

“Mortgage Fraud is investigated by the Federal Bureau of Investigation and is punishable by up to 30  years in federal prison or $1,000,000 fine, or both.  It is illegal for a person to make any false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan and credit application for the purpose of influencing in any way the action of a financial institution.”

The borrower must then select the occupancy for the specific property that is being financed:

  • Primary Residence – Occupied by Borrower(s) within sixty (60) days of closing as stated in the Security Instrument I/we excuted.
  • Second Home – To be occupied by the Borrower(s) as a second home (vacation, etc) while maintaining principal residence elsewhere.
  • Investment Property – Not occupied by Borrower.   Purchased as an investment to be held or rented.

Directly above the signature line, the form states:

“I/we acknowledge it is illegal for a person(s) to make a false statement regarding occupancy of property being financed in a loan and credit application and that we are subject to prosecution under Section 1001, 1010 and 1014 under Title 18 of the United States Code”

This document seems to make it crystal clear what occupancy is and the potential risk of trying to finance an investment property as owner occupied or as a second home.   Can something so direct make a difference and curb mortgage fraud?

Financing an Investment Property

EDITORS NOTE:  Rates on this post are from 2008!  Mortgage rates for investment properties are much lower now! Contact your local licensed mortgage originator for a current rate quote.

Obtaining a mortgage for a non-owner occupied propery is much different than buying one you will reside in.  For starters, qualifying is tougher and mortgage interest rates are higher as it’s a riskier transaction for the lender.   Here are some quick tips to help get you started if you’re considering buying an investment property.

Plan on using at least 20% for your down payment plus closing costs.   With a 25 or 30% down payment, you will receive a slightly better interest rate.   Just to give you an idea, here is a sample of some current rates based on a single family dwelling with a sales price of $450,000 for a 30 year fixed mortgage and a minimum 720 credit score:

Owner Occupied with minimum 20% down:  5.75% priced with 1% origination/discount point (APR 5.904%)

Non-Owner Occupied (NOO) with 20% down: 6.375% with 1% point (APR 6.537%)

NOO with 25% down: 6.250% with 1% point (APR 6.413%)

NOO with 30% down: 6.125% with 1% point (APR 6.289%)

Of course, you can always pay more in points to have a lower rate.   This is just to provide you with an apples to apples comparison.

There are two camps for qualifying for an investment property:  those who are proven at managing rentals and those who are buying a rental for the first time or who have less than 2 years history.  If you have less than a 2 year history, then it’s likely that you will not be able to use rent credit from the proposed purchase.  Lenders allow 75%  of the rent to be used for qualifying purposes.   Proving you’re a financially successful landlord to the underwriter will take your last two year’s complete tax returns including the Schedule E’s.   If you can qualify for the full PITI payment on the investment property along with your current PITI payment on your residence, then the underwriter may only require a regular appraisal.  Otherwise, count on the appraisal costing almost twice as much as a typical appraisal for conventional financing.   Fannie and Freddie also require a minimum of 6 months reserves (cash assets after closing) for NOO borrowers.

Odds and Ends

  • FHA can be a great way for first time buyers to get into the investor market when they’re buying a 2-4 unit home.  The buyer must occupy in one of the units and the mortgage will be treated as an “owner occupied” transaction.   You will have upfront and monthly mortgage insurance and can buy with as little as 3% down payment.
  • Second homes are sometimes treated as investment properties.  This is really up to the underwriter.  Typically if the home is located within 50 miles of the borrowers residence or if it does not make sense as a second or vacation home, the underwriter may determine that it’s an investment which means tougher underwriting and the NOO rate.
  • Fannie Mae programs exist that help family members buy properties that don’t meet the second home requirements without treating it as an investment purchase (Family Opportunity Mortgage).

As always, I highly recommend that you meet with your local Mortgage Professional as soon as possible if you’re even just considering obtain a mortgage for any reason (investment property, residencial purchase or refi, vacation home, etc.).

 

From 'A&E's Flip This House' to You!

[photopress:REIA__Image_Download__flip_this_house_logo_jpeg_from_mhv_reia_1_.jpg,thumb,alignright]Have you been watching the current real estate market and wondering how  to find the pot of gold in it? Fix and Flip guru Than Merrill from A&E’s Flip this House will show you how right here in Seattle on October 11. Than, like many other saavy investors, is building his business taking advantage of sellers in trouble.  Even though Seattle seems to be somewhat insulated from the current trend across the nation, there are still great opportunities to grab up distressed properties. Banks are looking to unload properties as are many homeowners on the brink of foreclosure.  These often become the inventory and raw product for the ‘fix and flippers’. But how do you find these elusive properties?

My husband and I have been involved with about 2 dozens ‘fix and flip’ properties, but finding the right properties at the right price, i.e., below market, is a challenge. As a realtor, I live and breathe the mls, but once a property hits the mls, it’s generally going to be sold at retail, and paying retail is not the way to make a profit on a ‘fix and flip’.

There are several real estate investment groups in the Puget Sound area that will help you get started and offer advice in marketing, legal issues (recently, state law passed requiring a flip in less than one year to require a contractor’s license.  More about that later) and tips of the trade. Says Shirley Henderson, President of REIA, ” flipping is profitable and a lot of fun if it’s done right”.  And the members want to help you do it right.  Usually they have monthly meetings and from time to time offer educational events to help their members. Members are happy to share their knowledge and are there to help each other.

On October 11, The Real Estate Investors Association of Washington (REIA) is hosting a fabulous Special Event straight from television land.  Than Merrill of A&E’s ‘Flip This House’ will be speaking at a this very low cost event ($15)  to show you how he and his team did 30 deals his first year and after that, double each year over the next 2 years.  The team has 260 deals under it’s belt at an average of $27,000 profit per deal.  $7,000,000 in three years, I could live with that!

If you’re interested in learning how he did it, join REIA on October 11 from 6-9pm to hear about Than’s systems and marketing to find those distressed properties and fix them for the best financial return.  This will be my first ‘fix and flip’ seminar and I’m anxious to hear from the best. Of those 2 dozen flips my husband and I have done, we’ve had varied results (yes, some were losses) because we didn’t have the systems in place to find the bargains.

Hope to see investors from Seattle turn out in big numbers. Make some great connections. Maybe you will decide that this could be your next career.

DRIP DRIP DRIP

The snow is[photopress:snow_picture.jpg,thumb,alignright] finally melting off the tree branches in my yard today. One foot of snow fell last Wednesday afternoon turning my normal 45 min commute to Issaquah into 4 hours. I’m really impressed with how well the agents are doing maneuver on these slick streets. I had a showing Friday night, Saturday and Sunday on one listing, even though the roads are still slick and hard to navigate out here in Issaquah.

Nice to be back to RCG. I’ve been buried in an investment class for the last 3-4 months and haven’t been keeping up with the post reading or writing. Came up for breath today and I see that a Welcome to all the new contributors is in order! We’re honored to have you on board. 

Given that it’s tax time, I want to remind everyone to be sure you’re aware of all the tax advantaged investment programs out there for real estate. Who knows how long these will last. There’s a great new program called a solo 401K to go along with the Roth IRA programs investing in real estate.  I’ve blogged about this before and hope you check it out especially if you’re paying taxes on any real estate gains this year. 

I’m building a good retirment by investing this way and it will all be tax free.  A key player in the IRA game is the custodian.  I’ve been waiting for the new custodian in Seattle, Viking Bank with Jim Winder in charge of the Self Directed IRA department to get their website up and running so that RCG readers can get information on line. Jim Winder is a well known guru of self-directed IRA’s and he is respected local celebrity and has taught many many classes in the past.  He promises the Viking Bank site will be functional soon.  But it is tax time so until then, I’ll direct you to Pensco Trust to learn all you need to know about some really great tax strategies using some of the money you’ve already socked in retirement plans. Pensco Trust is a national leader in IRA education so I hope you find these articles helpful.  

Once Jim’s fully in the game I’ll post you his site and when he’ll be teaching live classes.  LTD will be hosting one, soon, I hope, and by the way, I met Jim here on RCG!

Cocktail Party Primer

I’d like to open this thread up to a conversation on the health of the Seattle market…

but there is a catch. I will not allow it to dissolve into a conversation about racism, liberals, RCG, or faith. If you’d like to have a reasonable intellectual conversation, you are more than welcome to participate. If you attack me, RCG, or any contributor, then I’ll happily delete your comment.

By the way, please consider this post the “anti-linkbating” post. Not only will I quickly delete any off topic comments, but more importantly, I will mark those comments as “spam”. That will allow me to ban your email, name, IP, etc. from the site after only a few off-topic comments.

Two days ago, Michael Lindekugel of Team Reba made a very interesting comment. No one ever challenged him on the merits of his argument, so I think it makes an appropriate starting point into a discussion on the health of the Seattle market:

It’s the hot topic at most cocktail parties. Is Seattle going to experience a bubble and burst? The short answer is no…..the long answer follows:

We experienced a busy market with a shortage of supply and increasing demand resulting in four or five offers and short “Days On Market

The Wisdom of Crowds

At a client conference in my last job, one of the keynote speakers was writer James Surowiecki, author of the book The Wisdom of Crowds. Pulling notes from his book, he made a compelling case that large groups of people are smarter than an elite few, no matter how brilliant; better at fostering innovation, coming to wise decisions, and even predicting the future.

[photopress:crowds.jpg,full,alignright] The most fascinating example (and there were many) of this wisdom is in the investigation of a submarine that had sank and disappeared. The Navy had limited information regarding its location, and all searches came up empty. One smart fellow had the idea to consult a wide range of experts – in oceanography, ballistics, physics, engineering, etc., and ask them to come up with a probable location of the submarine. All the answers were collected and analyzed, and an ‘average’ location was charted based on the data. Chillingly, the sub was found within hundreds of yards of that location.

With large sample sizes, crowds form a network, and the best solutions bubble up from the collective thought. Though it sounds very Borg-like, we witness examples of it every day. The financial markets often sniff out trends and problems before they hit the front page. There is no collusion or any critical mass of explicit cooperation here – these trends are created by the cumulative wisdom of the market’s millions and millions of participants.

Which brings me to the potential wisdom of the Chicago Mercantile Exchange’s housing futures index created by Karl Case and Robert Shiller. Theoretically, this market would allow individual homeowners to hedge their investment by purchasing future contracts based on their metro level housing market. Let’s say I owned an apartment in NYC that is worth $1.5mm today. I could buy contracts that would pay me if the market dropped by 20%. I would effectively lock in a certain value for my property at a future date with these contracts.

If this concept takes off, the swings in the housing market would flatten considerably. If Joe homebuyer sees the contract prices that are based on next year’s housing values reflect a substantial drop, Joe homebuyer will be less likely to overpay for a property. Also, if Joe homebuyer could basically buy insurance against a large correction, the real economic impact of such corrections would be dampened by the payout of this ‘insurance’. However, Surowiecki has doubts that such a ‘wise crowd’ can materialize in the near future. As explained in a New Yorker article on this market, culture and habit matter as much as economic rationale. He writes:

“Even today, it’s clear that otherwise rational people harbor deep-seated beliefs that make housing futures a tough sell. People generally don’t hedge individual investments, because they don’t like to limit their potential gains in advance. That’s especially true when it comes to housing, because of the ingrained assumption that, over time, real estate is guaranteed to be an excellent investment—even though Shiller, in a recent book, shows that, allowing for inflation, American home prices barely budged during the twentieth century. In that sense, the housing-futures market has what is known as a framing problem: selling a contract seems like betting on housing prices to fall, rather than simply insuring yourself in case they do.”

This market debuted only about four months ago, so there is by no means any critical mass to it. It’s thinly traded, and it only offers futures on 10 US markets (Seattle is not one of them). Interestingly, the trading activity indicates a correction in the ten covered markets over the next year (with Denver showing the least downside). I would love to have had Seattle on the list. But, if trading activity increases, I would imagine that more markets would be added – and Seattle’s got to be high on that list.

Given that real estate is extremely localized (e.g. neighborhood by neighborhood), would a market that had critical mass (millions of contracts exchanged per day) be a driving force in the direction of a metropolitan market’s value? Would the average increase or decline be pretty darn close, even if street level values varied significantly block by block? My guess is that they would be extremely influential in how money moved in and out of the housing market. Such an efficient market would provide opportunity for long term homeowners to hedge their investments, speculators to make bets on the direction of the market, and renters to protect themselves from ‘missing out’ on appreciation.

In other words, many of the financial benefits of the American dream of homeownership could be had without ever buying a home. Take things a step further, and perhaps a fully matured and stable housing futures market would advance the dream of disintermediation further than Redfin or Housevalues could ever do. With good market info, long term home buyers wouldn’t have to worry so much about overpaying on a property if the market indicates a strong future value. Therefore, a precise valuation that an agent might be able to give versus that of an automated system may not worth the extra money it would cost in agent fees.

Moving Forward…

I’ve been a little busy lately, so I haven’t had a lot of time to give an update on some of my favorite conversations around the web… Nonetheless, I’m back for an abrivated version (i.e. only 9 articles instead of the usual 10)…

Beau turned me on to a great article by Jay regarding the 30-year trend for Mortgage Rates… Interesting stuff. Also, don’t miss Jay’s tribute to Harry Ramos

I just got an email from someone at Windermere letting me know about Windermere’s new (beta) mapping platform… This is an update to the beta mapping platform they released a little over a year ago and I think they’ve made some great improvements… Here are some features I like: (1) Simple map-based search, (2) intuitive zoom feature, (3) Simple pop-up interface, (4) the filter tool is relatively straightforward, (5) viewing the details doesn’t require a page reload, (6) same with viewing the “list of homes”, (7) saving, emailing and/or contacting an agent can all be done without leaving the map view (8) simple city, state, zip box allows for easy navigation to distant locations… The only complaint I have is that the design doesn’t feel polished, but considering it is a beta and the technology works well, the design is minor…

Steve Weise also let me know about his map-based appraisal tool he recently released and asked me to solicit feedback from the RCG community… His interface is too GIS-specific for my tastes, but maybe other’s will find it interesting and/or useful.

Clever, but probably too simplistic, Rob let me know about his collection of quotes that compare the great depression to today’s housing market. Any way you look at it, he provides a good read…

Greg picked up the new Move commercials on YouTube… The latest fun news around Move is that my favorite commercial (Search) got picked up by AdForum and is currently displayed on their front page!

I really like how Zachary picked up the ball and started posting videos of his properties… They are not high art, but I think they are darn useful, especially for someone selling land in such a beautiful area!

Sometimes being a great agent means divulging the good with the bad… Osman tells us how people can and do loose money in real estate

I hate homework too!!!

The NYTimes real estate blog is officially dead. (although it is everywhere now, I first saw it on Luxury Sarasota Living). I can’t say I’m particularly sad, because the main editor seemed to have such a thing against real estate agents that his blogging on the subject just wasn’t very interesting… (Marlow also noticed this tendency of Damon).

Would you lie for God?

Yesterday’s theme was PreFab, today I’m back to simply providing links to 10 interesting real estate conversations…

  1. Prosper is an online marketplace for people to lend money to other people. Shaun has been playing with Prosper and has some interesting observations.
  2. I don’t agree with Mark’s conclusions, but I think he makes an interesting case that a good time to “upgrade” is in a down market. (via Steph)
  3. For those looking to improve things before they sell, Rory provides some great home improvement links.
  4. If you are going to be upgrading (up market or down), you’d be wise to follow Noah’s advice and sell first!
  5. Will the number of sold homes rise in August as Bill suggests? But I sincerely doubt it.
  6. Todd, since you asked… My take is that if you are going to change domains, you want to do it sooner than later. You’ve still got lots and lots of growth left in your site, but the longer you wait, the harder it will get. Even better, consider getting a hosted version of WordPress that you can put under your own domain. Many hosts have made it so that there is a “one button” install of wordpress and they even manage the upgrades on the backend. (WordPress.org has a list of their “preferred” hosts.) In the long run, this will definitely give you the most flexibility with things like video/podcasts and stat tracking.
  7. Jim’s thinking he wants a sideblog plugin… I’m thinking just take notes and when you get to 10, hit publish. Have you noticed? 🙂
  8. Fran is good for providing a useful tip every few days… Today it is about the importance of the buyer walkthrough.
  9. Jay Thompson (of AZ) gives us a “pick of the week” that includes one hell of a house!
  10. Larry Cragun tells us to watch out for real estate transactions involving religious institutions. Some people are more than happy to lie for God.

I’m actually shocked at the number of emails these lists have generated. Don’t people know I have a job? 😉

How much for the bathroom?

  1. [photopress:WWCG_logo_JPG.JPG,full,alignright]Frances Flynn Thorsen is raising 100K with the Web Women Giving Circle for CARE — a humanitarian organization that works with women to fight global poverty.
  2. There is no good follow up item because everything else is void of the meaning in comparison. I recommend (1) following the links in the first point, (2) donate some money and/or time and (3) repeating the process until it creates an infinite loop of giving.
  3. NAR has whole pages on the social benefits of homeownership. “Homeownership also provides many benefits to the family, children and the community, such as increased education for children, lower teen-age pregnancy rate and a higher lifetime annual income for children, as discussed in the following articles and studies.” Does anyone really believe homeownership causes these things? I don’t doubt that there is a correlation, but causality?
  4. Joshua Dorkin decides to one-up (make that 22-up) Cheryl, and lists his top 35 real estate blogs!
  5. Fliperati is searching for good investment blogs… (I am too!)
  6. How much is a bathroom worth? depends on how bad you gotta go…
  7. Today’s seemingly random plug for a decent person: Seattle Agent Ann Bergstrom.
  8. I noticed some traffic coming from a MarketWatch article on the value of agents despite the web. Looks like RCG is featured in the sidepanel as an area to keep up with real estate trends. Very cool!
  9. Tom has a different take than MarketWatch his comments on how the web is helping agents compete.. He quotes an article I found most interesting because people like Brad Inman and Greg Sterling comment on the type of real estate companies that will survive a soft housing market.
  10. Dean is asking what I (and you) think of 50-year mortgages? Personally, I despise acting desperate in anything I do, and 50-year mortgages reek of desperation.