Friday, September 30, 2011

Appraiser Atrocity: Bureaucracy in Real Estate Hell

I just closed with some buyers after spending 75 days working on a small file that would normally take just 35 days.  You can read details about the negotiation and price points in JUST SOLD! Bargain Cottage Starter Home. 

Once we locked the home up at the $59,000 price point the first thing we did was order an inspection.  We found some ticky tacky problems but nothing serious.  We then ordered the appraisal.  The appraiser came to the home and several days later we received her findings.  To our surprise, the appraisal came in low with the appraiser indicating the home's worth at $57,000...the original list price.  This was disconcerting because the home was in very good condition for its age and we estimated that the home was actually listed several thousand dollars below its comparable market value.

An examination of the appraisal was shocking (click to enlarge):

A couple things popped out at me on this page.  First, the comparables the appraiser used were cash transactions rather than financed transactions as you would normally expect to see with retail owner-occupied homes (homes that are actually comparable to the home my buyers were trying to purchase).  A review of the MLS confirmed my suspicions.  These comparables are scratch-and-dent BANK OWNED homes!  Our appraiser was comparing apples to oranges in her work.  Tisk. Tisk.

Five minutes on the MLS revealed traditional non-distressed homes that sold just a block away. After I put our evidence together, my lender and I threw a Hail Mary pass and disputed the appraisal.  We were pleasantly surprised when the appraisal management company called us a week later to say that our dispute was successful and the value was adjusted to $60,000.  Whew!

Little did we know what kind of waves we had made by succeeding in our dispute.  As you can see on the appraisal form, the home called for "Exterior cracked and peeling paint needs to be scraped and painted."  When we notified the sellers they immediately scraped and painted the appropriate places.  We ordered our Own In Ogden inspection and the inspector passed us off except for a couple interior repairs.  Own In Ogden is picky about paint and they could find nothing wrong in their inspection.

Shortly after that, the original appraiser returned to review the paint work.  She was unsatisfied and identified several places that were not noted in the original appraisal that needed to be "fixed" according to her.  Flustered, the sellers scraped and painted those areas.  We called the appraiser back to the property and she refused to sign off on the repairs yet again, this time indicating she could see transition lines where the old paint had been scraped off even though it was all covered in new paint.  The appraiser said "I am the eyes and ears of FHA and this needs to be sanded, scrapped and painted to our satisfaction."  Wonderful.  It cost $150 each time the appraiser had to revisit the property.  Someone's ego had been bruised so they were running up the meter.

Finally, the appraiser signed off on the repairs.  When the Appraisal Management Companies are done away with and we go back to a free market again, this appraiser will be on my short list.

However, our problems did not stop there.  Just a few days before closing, our loan officer received a full page of conditions he needed to fulfill from the underwriter, one of which was a 2nd appraisal!  Our closing was delayed a month while we jumped though numerous other hoops.  When the underwriter discovered that I was the landlord of the buyers, they tossed out my Verification of Rents as unreliable and instead demanded proof of deposits.  It took my bank a full week to pull deposit images of my buyer's rent payments.  Finally, the underwriter was satisfied, miraculously waived our 2nd appraisal, and we were able to wrap up our transaction.

In my opinion, the HVCC has been a disaster in the market and has created an appraisal industry rife with bureaucracy and paranoia. I know some very competent appraisers.  Unfortunately, our freedom to employ them has been restricted and regulated by Federal law.  The sooner this regulation is done away with, the healthier our market will be.

Thursday, September 29, 2011

JUST SOLD! Bargain Cottage Starter Home

I just closed today with some buyers on this quaint starter home in Ogden.  My clients are also my existing tenants who over the past two years have been preparing themselves for home ownership. 

This home was listed in May for $57,000.  Given the price point, we thought that it might be a real fixer upper.  To our surprise, the home was in quite good condition.  Given such, I estimated that the home had been listed below fair market value.  Nevertheless, we pressed our luck and offered $54,800 while asking the seller to pay for $3,500 in closing costs.

The listing agent called me and we determined there was not enough equity room for the seller to pay closing costs even at the list price.  Knowing that we had some headroom on value, we agreed to the idea of increasing the sales price to $59,000.  The seller agreed to pay up to $3,500 in closing costs and also participate in the Own In Ogden program.  However, the seller would not agree to make any FHA or OIO required repairs.  This was a bit of a risk for my buyers because of the age of the home but we felt it was the only way to make the transaction work. 

After 75 days, and a long, precarious, and crazy journey, we finally closed.  Congrats to the buyers on their first home!

Tenacity certainly pays off!

If you are looking to buy a home, contact me.  Bargains abound.

Wednesday, September 28, 2011

Consumer Unconfidence: Making Hay In A Buyer's Market

One of the sites that I follow is Gallup.  I find their polls quite interesting and a good way to take the temperature of public sentiment on a variety of topics.  One of the topics related to my real estate business is the consumer confidence index.  I have reproduced one of Gallup's charts and adjusted it with a 6 day moving average trend line:

My gut feel lately was that the market has changed since June.  Buyer behavior has changed and seller's are increasing in their motivation in general.  Gallup's data here illustrates what my gut had been telling me.  We have had a significant move down in consumer confidence. 

The last time confidence was this low was in 2008 and 2009.  Interestingly, I closed several seller finance transactions during that period.  Similarly, I just closed a seller finance real estate transaction within the last couple of weeks.  Clearly, this shift in consumer confidence changes the way we conduct business.  

Monday, September 26, 2011

Ogden Redevelopment: September 2011 Update

I thought I would do a follow up on development projects I spotlighted in April and in several other posts.  Construction continues:

Weber Morgan Health Department

The last time we saw this site it was just a couple concrete walls being held up with beams.  Its coming  along nicely.  This building is located on 23rd Street between Adams Ave. and Washington Blvd.

The Lincoln Center

If you have traveled to Ogden and come into the city on the 24th Street viaduct, you can't miss this enormous project.  For the longest time work was being conducted on the interior concrete stairwells.  Finally, and quickly, they have assembled the walls and floors of this attractive edifice.

The Ogden Hilton

Construction just began on this building and they are making serious headway.  The first floor is nearly framed.

Its great to see this project moving forward despite the tough economic challenges we are facing.  It will provide a boost to surrounding businesses.  Here is what the finished project will look like:

As the economy rebounds, I anticipate a surge of new redevelopment projects in the city.  I know of several plans by developers who are just waiting for the macro economic climate to thaw a bit before they move forward with their designs. 


Thursday, September 22, 2011

Photo of the Day: Porch Ornament

I was cruising to work today and saw this unusual scene:

Front porches can be such useful storage places.


Tuesday, September 20, 2011

Depreciation Delusions: Why Falling House Prices Don't Matter

There are a few folks out there writing headlines about another down leg in housing prices.  Here is one from HousingWire:

Home prices could dip another 6% to 7%, before hitting rock bottom in early 2012, according to analysts at JPMorgan Chase.

If that is the case, prices will fall about 37% from peak levels reached before the 2008 housing meltdown.

For obvious reasons, this kind of headline puts a lot of prospective buyers on the sidelines while they wait for some good batch of housing news to come about.

The questions I ask is: If the market is going to fall another 7%, can it be to anyone's advantage to buy today? Or can anyone make money buying real estate today if it will be worth less tomorrow?

The answer is an emphatic YES!  How? The key is buying the right property.  There are two kinds of properties in the real estate market 1) RETAIL which is your sparkly shiny homes that are at full market value and 2)WHOLESALE which are the scratch-and-dent bargain bin properties that are typically bank owned, short sales, or estate sales.   

Fortunately, wholesale properties can be purchased for anywhere from 90% to 50% of Retail market value depending on condition.  What does this mean?  Well, it means that you can still pick up a lot of equity in a home in today's market and still keep a majority of that equity even if the market slides 7% or even 15%.

Let's say that you purchase a wholesale property today for $65K.  The retail value of the home is $95K.  You have $30K equity.  Now lets say the market slid 10% over the coming year.  Your equity position is reduced to $20.5K.  Yet, your net worth is still $20.5K better than it was before you purchased the property.  If you waited to buy the property after the market slid you could have purchased it for $58K  and its retail value would be about $85K.  You would have about $27K equity.  The questions one has to ask themselves is: What is the opportunity cost of waiting a year to net a possible $7K in additional equity?  Would that time have been better spent by acquiring additional bargains rather that waiting for the "perfect" property at the perfect moment?

Obviously, if you were going to just purchase one property in your entire life and you had the luxury of purchasing whenever you wanted, timing the market exactly right would be to your favor.  However, if you are interested in creating wealth through real estate acquisition, this is an unreasonable proposition.  Instead, wealth builders look for opportunities as they arise in any market.

Wealth builders and smart home buyers look to the wholesale real estate market for such opportunities.

Another fallacy out there is that owning real estate is not good if there is an overall trend toward lower home prices.  House prices are a product of supply and demand with an overlaid component of household income.  If population levels are declining like they are in Russia, Iran, Japan and Detroit, you can expect house prices to decline as demand declines and existing structures maintain supply.  If economic malaise arrives and wages decline, house prices will decline too.  That is what we have experienced as a nation over the last several years.

Keep in mind though, that over the long term that if house prices decline, typically so will the price of milk, clothes, and every other thing that has a price attached to it.  We call this deflation.  If you own rentals and the rents have declined because of deflation, typically it won't matter much because the cost of living will have declined as well.  Your standard of living will be unaffected...that is, unless you have mortgages on your property.

To beat the deflation effect you have to be out of debt on your properties and have little debt elsewhere.  This is why I advocate aggressive amortization or sizable down payments on property when possible.

A couple years ago I wrote We're Turning Japanese! and explored this scenario.  Here are the charts I put together:

Click to enlarge.  The point of this chart was to show where equity was in a financed retail property if long term deflation were to occur.

The other chart I put together shows what happens with a 10% downpayment:

As you can see, it would take a catastrophic hit to house prices over a sustained period to affect equity in retail homes with 10% down payments.  Otherwise, equity is sustained and grown over the long haul regardless of long term declines in value.

The way to make this situation even more favorable in the long term is to shorten the mortgage time to 15 years.  However, Utah has never and likely never will experience protracted price declines like you see illustrated here.  Population growth and limited supply of land will moderate our prices on the downside.  Even the worst housing collapse since the Great Depression has only knocked about 15% off Utah's house prices while the U.S. has suffered a 37% decline on average.

The bottom line is that house prices can't go down much more.  Even if they do, the wise investors and wealth builders will be pocketing the bargains while they are available now in today's market.  Why make money tomorrow when it can be made today?

Bargains abound.  Call me and I will show you where they are.

Monday, September 19, 2011

JUST SOLD! Arts and Crafts Era Home - Seller Finance Bargain

You may recall that I just listed this home less than a month ago.  One of the special features of this listing was that the seller was savvy enough to offer seller financing terms for the home.  The day I listed the property, I presented it to several experienced investors I work with.  We wrote an offer the following day.

The seller was savvy but also very cautious in their approach and it took us about a week of fine tuning things to come to terms on the contract.

The transaction was closed at a price of $73,800 (just $1,100 off of list price) after inspections revealed a few maintenance items that were unanticipated.  The buyer paid $7,490 as a down payment.  The first mortgage payment was due 15 days after closing.  The buyer opted for a 15 year note with a payment of $577 and a note rate of 6.5%.  The seller asked for and the buyer agreed to a 3 year prepayment penalty in the amount of 6 months interest in the event the buyer refinanced or paid the note off early.  Finally, the seller wanted a larger down payment than we ultimately agreed to.  However, to appease the seller and reduce risk for all parties involved, the buyer agreed to make capital improvements to the home within 60 days after closing that included installing new kitchen cabinets and finishing some space in the basement.  

This home was listed and sold in under 30 days.  If you want your home to sell fast and near full price, give me a call and I can show you how it is done.

Wednesday, September 14, 2011

Mortgage Lending: Signs of Life In The Wasteland

The mortgage lending market has gone through some trauma since 2007.  For illustrative purposes let's liken the damage done to the mortgage lending business to the effects of a volcanic this case Mt. St. Helens specifically.

Here is a picture of the as a lush forest pre-eruption.  Look at all those pretty trees living happily basking in the sun.  Think of each tree as a mortgage lender and the abundance and health of the trees in this photo as a representation of the Mortgage Industry in 2007.

Then, trouble brews and a cataclysm befalls the forest as Mt. St. Helens blasts the life out existence.

Uh oh!  Think of this as a visual representation of what happened to the mortgage industry after the housing crash of 2008.

Yet, with every disaster, there is renewal.  Here is a photo shortly after Mt. St. Helens erupted:

This looks like a lifeless moonscape.  How could anything live in this environment?

Well, lo and behold, there is life!

Please forgive the labored analogy.  The point I wanted to make today was that, as in all natural disasters, life goes on and nature has a tenacious way of springing up and clawing its way back from obliteration.  The same goes for the mortgage lending market for housing.  Just this week we get two very interesting headlines from Housingwire:

Redwood Lines Up Another Jumbo RMBS
Redwood Trust, the only company to launch private-label residential mortgage securitizations since the financial crisis began in 2008, is issuing the RMBS.  Redwood will bond 473 loans with a total balance of approximately $375 million.

This is good news!  Morgtage backed securities have been dead for nearly three years with Redwood being the recent innovator and initiating the creation of more of these products.  They anticipate doing another $1 Billions in RMBS this year.  Good for them.  Good for us.

Also we read today:

Banks May Skirt GSE Uncertainty With Covered Bonds
More banks based in the United States will establish covered bond programs to fund future mortgages on the perception of less risk and still lingering uncertainty over private and agency securitization markets, according to Moody's Investors Service.

New covered bond frameworks could take the place of mortgage-backed securities issued by either the government-sponsored enterprises or the private market.


"New covered bonds in the U.S. will also not have the low quality assets that were common in pre-crisis residential mortgage-backed securities." Moody's said in a research note released Tuesday. "We expect future U.S. covered-bond deals will have much less market risk following a bank default than pre-crisis U.S. covered bonds because we assume future covered bond legislation will establish mechanisms permitting liquidation of a portion of the pool over a period of time."
What this is saying is that banks are seeing the writing on the wall that Fannie Mae and Freddie Mac's days of market dominance are numbered.  If the demand for home loans is going to be satisfied, banks will need to find other ways of meeting that demand than originating loans and sending them to Fannie or Freddie.  Thus, traditional banks have started to use tools called covered bonds to provide incentives for the creation of new home loans.   

Both of these reports show that the market is innovating and adapting to survive in the inevitable post-government-dominated mortgage market. 

Tuesday, September 13, 2011


I just listed this amazing architectural gem located at 2508 Jackson Ave. in Ogden, Utah.  It was designed by Eber Piers who was a protege and student of Frank Lloyd Wright at the Chicago School of Design. The home was built by Royal Eccles in 1919.  The floorplan is very progressive for the year in which it was built with broad open spaces and sweeping views.  A true architectural masterpiece.  The home has over 4800 SQFT, a two car garage, three kitchens, five beds, a pool, and nearly .70 acres in the highly coveted Eccles Historic District neighborhood.  This home is a must see.  Please contact me for current pricing.

Call me to view this historic treasure: 801-390-1480.

(Note: Some improvements and repairs are currently underway. Contact for an update.)

Saturday, September 10, 2011

Mortgage Interest Rates Lowest In 60 Years

If you listen to the radio you hear mortgage lenders announcing "Rate are at historic lows!  Refinance today!"

Is this claim even true?  Que today's chart from CalculatedRisk please....

This chart only goes to 1971 but other records show that rates were in the 4% range dating back to the 1950's.  Interestingly, it wasn't until the 50's that American's decided that we were not going to return back to a depression economy.  America's psyche had been scarred by a stymieing depression and then austerity and sacrifice during WWII.  Once the Great Depression began, it took 20 years for the economy to become vibrant again...long enough to have a lasting impact on the behavior and attitudes of an entire generation.  Lest I digress...

If you can qualify for it, money is incredibly cheap right now.  If you combine today's low rates with the near rock-bottom prices of bank owned and short sale properties, monthly payments on home loans are ridiculously low.  If you are an investor looking to purchase property, this translates into more positive cash flow.

Can rates go any lower?  They can and likely will for a short while as Europe's debt crisis creates a mass money exodus and everyone piles into U.S. Treasuries as a safe haven (relative to risk elsewhere in the world).  Much of the interest rate declines we have seen since 2008 have been the result of this activity.

So, when things start stabilizing in the rest of the world, look for rates to start climbing again.  Or, if we hit a bout of inflation here at home, look for the same.  In the meantime, lock in your rate, buy some real estate, and laugh your way to the bank.


Saturday, September 3, 2011

Historic Home Restoration: Stripping Paint From Brick

The wife tasked me with getting our back porch ready for paint.  When we purchased our home with a hard money loan back in 2005, our short-term renovation plan did not included painting the exterior of the property.  However, our appraiser changed his mind at the last second and demanded that we paint the exterior just 48 hours before our refinance deadline for the hard money loan.  Of course, the appraiser was then several days slow in getting back to inspect our home and we had to pay additional interest and fees for busting our hard money deadline.  But this is a whole separate story...

The bottom line is we painted very fast and with little prep work.  You would think that with us in such a hurry we would just avoid taping the brick and paint like complete slobs.  Not so.  But what we discovered when we did our painting six years ago was that the previous painters were.  I always thought that it was the property owners just previous to us that did such a lousy job.  The fun thing about old houses is that there are often clues that let you know who did what and when.  Here is such a clue:

A previous owner had the bad taste of writing directly on the brick; but, since they wrote over top a paint drip, we now know that the sloppy painters did their damage prior to October 15, 1969 when someone named Mike was about 4 feet tall.  Interesting clue.  Here is the travesty that we have been fixing:

Just ignore the peeling green paint.  That's a relic from the quick fix paint job to satisfy the appraiser.   Check out the total neglect in cutting in the paint to the brick.  Pure laziness.

Fortunately, paint stripper and goof off are just the right chemicals to fix this.

And of course, don't forget a putty knife and some elbow grease...

Here is what I was up against:

Here is the finished product:

There are several more areas that need attention but this is a good start.  It took me about six hours to undo poor craftsmanship from 50 years ago.  There were 2,600 Saturday mornings between now and the time that this paint was first put on the brick.  The question I want answered is why didn't somebody do this before now?  Certainly they have had an abundance of opportunity.

Posted by Jeremy Peterson
Ogden, Utah Real Estate Broker
Mountain Real Estate Companies