Dean Graziosi | Dean Graziosi Real Estate | Dean Graziosi Investment

Every now and then an investor comes up with a novel idea.  The Mack Companies are a real estate investment company located in Chicago and specializing in the city’s south and west sides.  The company has come up with a nice package, which they call home-redevelopment.

The home-redevelopment concept is designed for the small to medium investor who has a small appetite for risk.  The company has put together an interesting formula with controlled exposure and a steady yield with long-term potential.

The new product is called RECAP, which stands for Real Estate Cash-flow and Appreciation Program.  The Mack Companies promote the product as the simplest way to be in the real estate investment business with minimal risk.

Rather than purchase short sales or go through the foreclosure process, investors purchase one or more of Mack’s tenanted, professionally managed completely redeveloped homes at discounted prices.  All properties in this offering are located in secure, stable areas of the city.

The homes are in “pristine” condition, are guaranteed to be structurally sound, including all the structural systems, and have all appliances that appeal to tenants.  All tenants in the RECAP homes have been qualified by the company.

As the real estate market improves, investors can anticipate long-term growth.  Meanwhile, investors have a steady stream of income.  The Mack Company says investors receive one check for each property each month.  From the proceeds the investor must pay property taxes, the mortgage, management fees and insurance fees.  Typically the investor nets between $200 and $300 per month.

Mack says most tenants stay in the properties for five years. Obviously there are questions to be asked, but it is refreshing to see developers start to untangle the effects of the recession.  

With the pressure that buyers and sellers are under in today’s real estate market, the Department of Housing and Urban Development (HUD) has opened offices with home counseling services.  Many real estate companies and agents also provide comprehensive home counseling services.

Home counseling services cover a wide berth of topics ranging from home purchasing to preventing foreclosure.  Most brokerage houses provide these services free of charge and all HUD services are provided at no cost.

When you are purchasing, the counselor can help evaluate your credit, assist in correcting any errors on the credit report and explain the purchasing procedure from beginning to end. One of the most important parts of purchasing is understanding the amount of money the purchaser will need to cover the down payment and all closing costs. 

The counselor can provide everything the buyer needs to know about the mortgage industry.  Mortgage products change constantly and as the mortgage is such an integral part of homeownership, it only makes sense to get advice from a professional.

The best time to learn about the “offer for purchase and sale of real estate” is before you are ready to make your first offer.  That way when you find the property you want, you will be ready to act.  The counselor can explain all the parts of the purchase offer as well as explain the home purchasing process.  Purchasers will need to select an agent, find a property, make an offer, negotiate the contract, arrange for a mortgage and close the title.

Generally, the counselor can introduce the prospective purchaser to several lenders.  Purchasers should always obtain a pre-approval letter from the lender before submitting an offer.  The presence of the pre-approval will make the offer look more appealing and increase the purchaser’s chance to get the offer approved.

Private or public housing counselors can also help troubled homeowners.  Today, troubled owners have many options and opportunities to prevent foreclosure.  The housing counselor will be aware of all the federal and private workout programs.  Whatever course of action is on your horizon, consult with a housing counselor before you begin. 

Consumer confidence is one of the key indicators that investors always track.  For the past two years, consumer confidence has risen to surprising highs and fallen to desperate lows.  Every time there is a shift there is a reason why.

That’s the scary part.  Consumers are human.  They react to headlines, media and world events that really have very little affect on the overall marketplace.  Savvy investors not only watch consumer confidence but they analyze it.  In fact, the consumer confidence index published by the Department of Commerce affects every market from equities to currencies to commodities to real estate.  If you fancy yourself a real estate investor stay on top of this important index.  You will make many smart moves by staying on top of consumer confidence.

In July, the Certified Financial Planning Board of Standards released a survey through June 30^th, 2010.  The study revealed that consumers are worried about equity markets and currency markets.  The survey, which included more than 1,000 residences from all areas of the country and from all economic levels, indicated that 83 percent of those polled believed their finances would improve over the next six months.

These consumers believe that many sectors of the economy, including residential and commercial real estate, will also improve in the next twelve months.  Progress will be slow and delayed, but progress will be made.

Certain aspects of the June real estate market activity are surprising.  In Southern California’s six biggest counties, real estate sales increased by 7.2 percent in June compared to May.  In fact, activity in these counties was the highest since June 2006.

California trails Arizona and Florida in short sales and foreclosure activity.  Facts are facts.  More money was invested in Southern California last month than in the pat two years.  Additionally, more mortgages were written than in the last two years.

While this is not a complete endorsement, it certainly marks a trend worth watching.  Pick your investment area and follow the consumer confidence trail to short sale success. 

What a difference a year can make! Lending service companies have reversed last year’s mortgage modification resistance in a resounding way.  According to a HOPE NOW survey, more than 159,00 mortgage modifications were completed in May 2010.

That brings the number of modifications in the first five months of 2010 to 800,536.  With new government incentives, lenders are finding it less expensive to attempt workout programs and modifications rather than foreclose.  Typically, lenders are not in the real estate ownership business.  The cost of maintenance, real estate management and real estate commissions makes owning and selling real estate an expensive proposition for banks.

HOPE NOW includes counseling organizations approved by the agency and mandated to work with troubled homeowners.  These counselors are equipped to work with homeowners in credit counseling and debt management as well as short sale tutoring and foreclosure instruction.

Faith Schwartz, a senior adviser for HOPE NOW, said, “The latest results continue to support the industry’s unprecedented efforts to assist borrowers across the country using myriad foreclosure prevention programs.  The industry has made great strides and is organized around significant efforts.  It is incumbent that the industry, government and non-profit segments continue to collaborate until the housing market has stabilized.”

The Treasury Department reports that 49 percent of homeowners who do not qualify for permanent Home Affordable Mortgage Programs (HAMP) have been placed in alternative modification plans with comparable payment reduction benefits. In addition to the 159,000 mortgage modifications processed in May, another 213,000 trial alternative workouts such as forbearance and repayment through short sales were initiated.

These figures are definitely encouraging.  However, there remains some pretty discouraging news relating to then success of modification loans.  Almost 206,000 foreclosure actions were commenced in May.  Almost 100,000 foreclosures were finalized during the month.

HOPE NOW reports that 9.50 million mortgage workouts have been offered to distressed homeowners since July of 2007.  Nearly 3.2 million of these workouts are loan modifications.   

The Homebuyer Tax Credit Bill that provided qualified first time homebuyers an $8,000 credit and other qualified homebuyers as much as a $6500 tax credit carried two major criteria.  The first was that the homebuyer had to go to contract on or before April 30^th 2010.  The second clause required the homebuyer to close the transaction on or before June 30^th 2010.

As the closing date deadline drew near, real estate agents and lenders notified the purchasers that many of the closings would not be completed within the required timeframe.  Unforeseen delays, especially when third parties were involved, were causing closings to be delayed by as much as 30-60 days.

Senator Harry Reid, the Senate majority leader, attempted to gain an extension until September 30th for homebuyers who expected the credit and who were compliant with the April 30^th purchase date.  Reid tied the extension request to a bill extending unemployment insurance to workers whose benefits were due to expire.  Unexpectedly the larger bill did not pass so the homebuyer’s request was also denied.

On Tuesday, June 29^th, the House of Representatives passed by an overwhelming majority 409-5, a version of the Reid amendment.  Reid, a Senator from housing-troubled Nevada, must now find a way to bring the measure to a vote on Wednesday so that President Obama can finalize the extension until September 30^th.

While it appears that the bill will move forward and that the nearly 200,000 homes that could not meet the closing deadline will receive the extension. Reluctant homebuyers may technically have a way out of their contracts.  Most homebuyers put a contingency in the contracts reserving them the right to cancel contract if the closing date was not met.  Technically 180,000 contracts will be in non-compliance.

As long as the extension occurs, the majority of homes will most likely proceed as expected.  However, the frustration of Congress delaying the extension amendment illustrates the danger of relying upon government to deliver on their promises.  When dealing with Washington today, the best plan is to expect the unexpected.  There is so much political infighting that positive results are difficult to attain.

In order for first time homebuyers to realize the significant $8,000 tax credit, eligible transactions must close on or before June 30, 2010.  Those homebuyers who were engaged in short sales or in foreclosure acquisitions and who planned on receiving the tax credit stand to forfeit the credit if they do not close on time.  In turn, this stands to jeopardize some 200,000 residential sales.

Unfortunately, lenders are still slow in closing short sales.  While procedures are more uniform than in the past, unexpected delays continue to take place.  The delays in decisions by lenders are likely to cause more than 200,000 buyers to lose their tax credits.

Foreclosures still take too long to close.  The main reason is that home inspections required by lenders bog down the closings.  Very often foreclosed properties need repairs before the new lender will close.  With either short sales or foreclosures, delays can set the closing process back as long as six months.

Short sales generally close two to three months after an acceptable offer is made.  For those buyers that expected to close earlier and capture the tax credit, the sellers will lose their contracts.  Reversals of these contracts will cause many sales to fall through.  The distressed housing market can hardly afford to lose 200,000 existing sales.

As a result, Congress is considering extending the closing date on contracts signed on or before April 30, 2010. The new closing date would be extended from June 30^th until September 30, 2010.  If Congress fails to act in time, most of these residences will end up back on the market.

Unexpected delays in the appraisal process have also slowed finalization of the eligible tax credit transactions.  As it is, the Obama Administration is already under pressure to resume the tax credit or similar legislation to give homebuyers another tax incentive. 

The vote on a possible extension does not appear to be a sure thing.  As usual, the political atmosphere in Washington is mired in infighting.  The biggest loser stands to be the housing market, which hardly needs another 200,000 homes back on the market. 

Lewi Ranieri, the creative originator of the mortgage-backed security is not taking a removed, back-seat approach to help homeowners stay in the homes.  His Selene Residential Mortgage Opportunity Fund provides hands-on solutions for defaulting homeowners.

Ranieri has assembled a savvy group of experienced advisers to help struggling owners stay in their homes.  The counselors sound more like

upbeat, can-do problem solvers than debt collectors.  The prevailing attitude is positive, friendly and result oriented.

The Selene Fund advisers offer plenty of experienced advice about restructuring debt and improving the value of the residence.  Solutions have included advancing money to perform repairs, debt counseling and budget review.  These tools are used by Selene to get the homeowners back on track and repaying a much lower mortgage level than previously existed.

Ranieri has admitted a sense of guilt about his development in the mortgage-backed securities market.  His hope is that property owners will use his fund to save their ownership and that government will come to realize that the real cure to stemming the foreclosure tide lies in voluntarily reducing mortgage amounts rather than lose the bulk of the value.

In short, the Selene Fund appears to be a mortgage short sale.  Lenders may actually save more than they lose by giving back to the original buyers.  Ranieri’s plan addresses the two key obstacles facing millions of today’s owners.  These struggling and often unemployed owners cannot afford the current mortgage payments and are not motivated to keep paying on homes with mortgages that exceed the home’s value.

What makes this housing slump so unique is the stunning loss of value spread throughout the nation.  Federal government and state driven plans are not resulting in affordable mortgage modifications.  Through Selene’s willingness to negotiate lower mortgages, but the cost side and value side of the slump are being addressed. 

Selene’s program also is designed to restore the traditional homeowner’s pride of ownership, which has slumped badly in the recession.  Ranieri wants owners to want to remain in their homes and is offering principal reductions that make it hard to say no.    

Lewie Ranieri is a famed mortgage dealer.  He learned his reputation at Salomon Brothers in the 1980’s.  His staff of mortgage traders was depicted in Michael Lewis’s Liar’s Poker.  Ranieri developed the concept of mortgage-backed securities that helped open the mortgage market to billions of dollars of newfound investors.

When the housing industry began to tumble, these mortgage-backed securities were vulnerable.  Many people blame Ranieri’s plan for the near collapse of many financial institutions and hundreds of billions of dollars lost by investors.

Since leaving Salomon Brothers, Ranieri has stayed active in the mortgage industry.  Unlike investors in his products, he has amassed quite a fortune.  Now, Ranieri has a plan that he hopes will serve as a model to save the homeowner.

His prototype is called the Selene Residential Mortgage Opportunity Fund.  The program’s mission is clearly stated.  The fund buys mortgages at a deep discount, works with homeowners to get them back paying a revised obligation and then resells the new mortgage at a profit. 

To encourage homeowners to get back on track, the Ranieri fund passes along a greatly reduced mortgage obligation.  The key component is Selene’s willingness to cut the loan balance.  Ranieri points out that this opportunity serves a higher purpose than government plans to lower payments by lowering interest rates.  The Selene Fund gives the homeowner unexpected equity at realistic values.

Thus far, Ranieri has raised $825 nm=million form foundations and corporations like the South Carolina Retirement Systems.  Ranieri hopes that the government will develop similar programs.  Ranieri realizes that his small fund will not solve the U.S. housing crisis.  He hopes that it will serve as a prototype for future programs.

Ranieri’s hand-on approach is refreshing and has given frustrated owners a ray of hope in an otherwise dismal environment. 

In the past, condominium financing from the FHA was fairly loose.  A 3.5% down payment was all that was needed.  During the recession, the FHA was caught off guard with the number of complications experienced by many condo associations. 

These loosely managed associations fell far short of the requirements detailed in the group’s prospectus.  As a result, many new purchasers were surprised to find they were liable for previously unpaid condominium fees or that they had invested in associations that were not fiscally responsible.

Effective February 1, 2010, the FHA has added stipulations for associations that expect FHA approved loans.  The new requirements mandate associations to be fiscally responsible and solvent before the FHA will approve a development.  The down payment will remain 3.5% but only associations that comply with the new guidelines will be eligible for FHA loans.

These guidelines will protect purchasers and should actually serve as benefits to condo associations who meet the standards.  To qualify for FHA approval, associations are now required to:

·                     Maintain a cash reserve equal to 10% of the annual budget

·                     Adopt as policy a standard assuring that no more than 15% of its owners are more than 30 days late with condominium dues

·                     Allow potential lenders access to financial and insurance policies

·                     Assure that one investor cannot own 10% of the units within the association

·                     Fidelity insurance must be purchased for associations with more than 20 units

·                     A maximum of 25% of the condominiums may be used for commercial space

Fannie Mae revised its FHA lending practices in 2009.  The two agencies have put pressure on condominium associations to bring their financial houses in order.  Condominium boards need to establish adequate reserves, comply with collection policies to reduce delinquency rates and to apply sound, audited bookkeeping. 

Failure to comply will eliminate the possibility of FHA and Fannie Mae financing.  Before investing in a condominium association, make sure the association c0mplies with the FHA terms.

Though most of the news is gloomy in the real estate market, some are still benefiting and there is a brighter side. On one side of the coin are the increased defaults, delinquencies and foreclosures, which have been spurned by the increasing rate of unemployment in the country.

There is an air of skepticism and disbelief of what the situation will be in the coming months or year. Though there is government help and tax credit, most are not interested in investing right now, at least in the new properties. The interest rates and the actual prices of homes have reduced, but this has not helped the underlying sentiment of the market.

The other side is the fact that this is a buyer’s market; someone with the money in hand and a settled future financial flow is bound to have a good deal. The interest rates have dropped further from last month’s 5.3 percent to 5.0 percent for a 30-year fixed-term mortgage loan. This rate is much better compared to 6.4 percent, which existed last year during the same period, making it conducive for any loan seeker.

The first time home seekers also now have a good array of choices in the new constructions and the resale properties. There are many good properties, which are now available not only in the fair price range, but many in the lower bracket. This makes the situation exciting for the buyers who have been waiting for the prices to turn favorable.

Mortgage Bankers Association reveals that there has been a significant rise in the application for loans in this year. Since the federal government cut in the prime lending rates, the mortgage loans have seen a significant reduction in the interest rates. Homeowners who are facing financial difficulties can also look at refinancing their loans and survive the harsh winter.

In this market, there are some happy people as well, such as the brokers who may have reduced earnings from the sellers and are now getting a good commission from the buyer’s end. Sometimes the sellers are also willing to shell out attractive incentives to push their property at the best prices and get it done quickly. This sure is good news for brokers in these deflated market conditions.