THE TRUTH ABOUT HUD'S $100 DOWN PAYMENT PROGRAM

Met with a first-time buyer last week who was excited about purchasing a HUD home.  "The lender at my credit union said I could buy a HUD home for $100 down," she said, breathlessly.  "That's what I want!"

At that, my eyes rolled back into my skull and my forehead crashed down on the table.

What is a HUD home?

HUD homes are homes that have been taken back by the US Department of Housing and Urban Development (HUD) when FHA loans go bad. 

Simply speaking, HUD homes are foreclosed properties that had FHA financing attached to them.

HUD does have a program where buyers can purchase a HUD home for $100 down... in theory.  The language in the HUD guidebook says that HUD will allow buyers using FHA financing to purchase a HUD home for $100 down, if they make a full price offer.  Sounds good, right? 

Now here's the catch:

"If your purchaser is obtaining FHA financing, and you overbid the appraised value (HUD's list price), the purchaser must pay the overbid amount in cash at closing."

Did you catch that?

HUD is notorious for lowball appraisals, and they universally slap lowball prices based on lowball HUD appraisals on almost all of their listings. 

Case in point... last week, I submitted an offer for another first-time buyer on a HUD home in Northglenn listed at $130,000.  Comps in the area ranged from the $150k's up to $193k, and this appeared to that rare HUD home that was essentially move-in ready. 

My FHA buyer bid $135,100, although I would have been comfortable going a little higher.  (HUD basically facilitates a 10 day "blind bidding" process for its listings over the Internet, where certified agents can log in and place sealed bids for their clients.  On the 11th day, HUD reviews the bids and selects a winner.)

So who won?  In the end, there were 47 bids placed on this undervalued home with the top bidder offering $151,900.  If that buyer chooses to use FHA financing, he will need to bring in $22,000, plus closing costs.  That ain't $100, folks.

In the name of disclosure, I have pulled off the $100 HUD down payment before, but it's not easy.  And if the home is in decent shape and priced below $200,000, you are looking at 10 to 50 bids right now, on average.  At least until the tax credits go away at the end of April. 

I have talked to many people at the HUD office over the past few years, and one of their great frustrations is with agents who submit bids on HUD homes thinking their clients can buy them for $100 down.  Then they bid $15,000 over list price, the offer gets accepted, and the buyer gets blindsided when he's told he needs to bring in $15,100, plus closing costs. 

A week later, the home is back on the market and the buyer is looking for a new agent.

I'm not saying that HUD homes are bad, and I'm not saying the process is unfair.  But I am saying that you need to be educated about what's happening in the market so that you can make wiser choices.

My client knew he was going to have to bring money to the table to purchase that HUD home, had he been high bidder.  I wonder how many of the other 46 bidders thought they were going to move into this home for $100 down?

REFERRAL DIRECTORY UPDATED, ONLINE

Wanted to let you know that the first edition of my 2010 Referral Directory is back from the printer and in circulation. I have distributed over 300 copies of this year’s guide, which features an assortment of quality service providers and tradespeople throughout the Denver Metro Area.

You can also find the complete roster on my referral website at http://www.elevatedreferrals.com/

Everyone in this year’s directory is personally known to me, and I think you’ll be pleased with the quality of service and attention you receive. Have feedback? Want to be a part of my next directory? Drop me a line and share your thoughts.

15 WAYS TO KILL A DEAL, FHA-STYLE

In a market where foreclosures have presented some of the best values, there have been the inevitable challenges of working with banks.

Like, they won't fix anything.

For an investor, buying a property in "as is" condition may not be such a big deal, but with first-time buyers increasingly relying on FHA financing, it is a big deal.

In addition to a home inspection, FHA requires an appraisal process that not only seeks to determine value, but ensures the home is "move-in ready".

FHA guidelines identify 15 items an appraiser must flag in an FHA appraisal, all of which can drive a deal into the ground if not dealt with properly.

Here's the list:

 1.  missing handrails
 2.  lack of running water
 3.  plumbing leaks
 4.  cracked or damaged exit doors that are otherwise operable
 5.  cracked or broken window glass
 6.  defective paint surfaces for homes built prior to 1978
 7.  rotten or worn out counter tops
 8.  damaged plaster, sheetrock or drywall and ceiling materials
 9.  poor workmanship (a category that is wayyy to subjective)
10. trip hazards (heaving sidewalks, poorly installed carpeting)
11. trash or debris in crawl space (fire hazard)
12. lack of an all-weather driveway surface
13. inadequate ingress/egress from bedroom windows to exterior of home
14. leaking or worn out roof (again, subjective opinion)
15. evidence of structural problems

As more and more agents and buyers are finding out, FHA deals are not for the faint of heart. The good news is that good agents can still work together to solve problems, but it takes teamwork and commitment to get the job done.

Now, more than ever, who you are working with makes all the difference.

SHOULD I TELL YOU WHAT YOU WANT TO HEAR, OR WHAT YOU NEED TO KNOW?

In the mind of the seller, it's 2007. Sure, the economy has changed. Sure, other areas of town are losing value. But this home is the nicest one on the block, with great neighbors, granite counters and a finished basement.

In the mind of the buyer, it's 2012. Unemployment is at 14%, the stock market has dropped to 6,000 and employers are downsizing left and right. The buyer asks, "How much home can I afford if my wife loses her job?"

The seller is unreasonably optimistic, and emotionally attached to the past. The buyer is unreasonably pessimistic, and driven by fear.

Agents have a job to do right now, and it's called EDUCATING YOUR CLIENTS.

Show them the numbers. Explain the change in psychology. Talk about the conditions that drove values up during the first half of the decade, and the conditions that are affecting values now.

Talk about why all the builders are gone, as are half of the mortgage lenders. Talk about how one-third of the agents in business today will be doing other things in three years.

Talk about the strength in the market (under $250,000), and where the market is teetering (above $400,000). Show them MLS printous and listing histories for competing properties. Explain strategy, and why it matters.

Explain to your sellers that the tax credits are going away and interest rates are going up. Discuss the new layers of regulation that are making it increasingly difficult to finace condos. Show them why pricing their home correctly, or adjusting the price now, is essential.

Explain to your buyers that there will always be demand for the best homes in the best areas. There's plenty of junk for cheap, if that's what you want. But this present market calls for reality on both sides.

Recognize that this is a stressful market, with many stressed out participants. People are looking for agents with character and competence. Intentions don't matter. Results do. It is a professionals' market, and going forward you will be paid only for your skill (and not your time).

Selling in this market is the art of mastering what is possible. But that means finding common ground, tackling unrealistic expectations, and educating your clients to the point where they are confident in taking action.

It also means that negotiations are tougher than they have been in years. It means keeping emotion out of the deal, and fighting for your clients every step of the way.

So, should your agent tell you what you want to hear, or tell you what you need to know?

DENVER HOME PRICES UP 5.48% IN 2009, ACCORDING TO FHFA

I'll be the first to acknowledge that you should be suspect of statistics, but I've got good statistical news today for Denver and the entire state of Colorado from FHFA, the Federal Housing Financing Agency.

FHFA is reporting that the Denver MSA ranked third among the 25 largest metropolitan areas last year with home price appreciation of 5.48%, ranking only behind Alexandria, Virginia (+10.55%) and Orange County, California (+6.38%). The FHFA report studies resale homes only, and is based on information taken from Fannie Mae and Freddie Mac's portfolio of loans.

In terms of state gains, Colorado ranked second with appreciation of 2.8%, trailing only Oklahoma, which showed gains of 3.5%. Nevada was the biggest loser, showing losses of more than 17% year-over-year.

Now back to the interpretation of these numbers. As I have said again and again in these posts, we are in the most segmented market I have seen in nearly 16 years as a real estate broker. Activity continues to be overwhelmingly titlted toward the lower end of the market (two-thirds of all sales last year were below $250,000, although homes under $250k make up only about one-third of the active inventory), and many single family homes in the sub $200k price range have seen appreciation of 10% or more in the past year (driven in large part by the first-time buyer tax credit).

Single family homes are performing much better than condos, while new construction remains near all-time lows as building operations have ground to a halt.

At higher price points, the market softens noticably, and by the time you reach the $400,000 range, the market is simply out of gas. Double digit appreciation at the lowest price points with significant values losses at the higher end... mix it all together and you get a net gain of 2.8% for Colorado, and 5.48% for Denver.

It's good news, because compared to the rest of the country, we are doing exceptionally well. But interpreting these numbers today takes considerable skill, because applying the value gains cited by FHFA across the board would simply be inaccurate.

For sellers, pricing your home correctly is critical to selling it for the best possible price. And for buyers, knowing how specific neighborhoods or subdivisions are trending in terms of values, NEDs, foreclosures and inventory is essential.

Buyers and sellers both must recognize that this is not the market of 2007. The psychology is different in so many ways. Buyers are ultra-cautious, and sellers are ultra-emotional. There's skepticism all around. There's not a lot of margin for error.

Now, more than ever, you need informed, skilled and competent representation.

ATTENTION FIRST-TIME BUYERS: FHA FINANCING GETS MORE EXPENSIVE APRIL 5

Just a reminder to those of you looking to buy a first home and capture the $8,000 government tax credit - you need to find a home and lock in a mortgage rate by April 5, not April 30, or you are going to be impactedly negatively by FHA's new mortgage guidelines.

To review, FHA (government-insured) mortgage financing has grown dramatically over the past four years as traditional lenders have scaled back or disappeared from the market altogether. FHA now accounts for over 40% of all new mortgage loans, whereas just a few short years ago FHA made up less than 5% of the market.

What does this mean? It means that FHA (and HUD, which oversees it) is taking on a huge amount of risk by being the dominant source for mortgages during a time when values are falling in many parts of the country. To offset this risk, FHA has been tightening guidelines and raising fees. Last year, for example, FHA raised its down payment requirement from 3% to 3.5%, and in Congress there is growing support for eventually raising the down payment requirement to 5%.

But back to today. Effective April 5, FHA will be raising its "upfront" MIP (mortgage insurance premium) from 1.75% to 2.25% of a buyer's base loan amount. On a $200,000 FHA loan, this is an additional $1,000 that will be added to the buyer's mortgage.

In addition, FHA will be raising the annual MMI (monthly mortgage insurance) premium from .50% to .55%, which will cause a small jump in the monthly payment, and reducing the amount a seller can contribute to an FHA's buyers closing costs from 6% to 3%. On lower priced homes, that 3% cap is going to mean that buyers will have to come up with money for more of their own closing costs on an "out of pocket" basis.

There will also be new credit score requirements that could negatively impact lesser-qualified buyers.

None of these changes are necessarily crippling, but they do add up. And if you're out looking at homes now, realize that you only have a very short time to take action before these new changes take effect.

A CONTRARIAN VIEW ON NEW HOUSING

A news bulletin from the Denver Post just flashed across my BlackBerry: NEW HOME SALES HIT RECORD LOW IN JANUARY.

My response: GOOD.

This story in the Post is meant to say the construction industry is in trouble, that builders continue to suffer, and that housing is falling off a cliff.

My response is different than that:

CONSUMERS HAVE FIGURED OUT THAT BUYING NEW CONSTRUCTION IS DANGEROUS, IF NOT CRAZY, IN THIS PRESENT MARKET.

Let me explain something that I have seen extensively over the past three years. It has to do with new construction. It has to do with builders. And it has to do with changing nature of consumer expectations.

I wrote a post over the weekend called “The Consumer is Angry”, and three days removed from that post I stand behind it 100%. The consumer in America today is mad (and I could use stronger language). There is anger at government, institutions, banks, Wall Street, real estate brokers, and yes, builders.

Builders got rich during the boom. And that’s because builders sell a retail product, with thicker profit margins, because the product is shiny and new. And when times were better, consumers would pay for it. But there’s another reason that new construction soared between 1995 and 2007, and that is because anybody who wanted to buy a shiny new house could do it, thanks to the magic of “easy financing”.

Let’s talk about financing today – it’s hard to get, if not impossible. So what did that do to the buyer pool? It killed it. And what did that do to values? Caused them to fall. And what did that do to homeowners? Put them under water. And what did that do? Made it impossible to refinance, made it difficult to sell, and made it hard for many to “get out” without simply mailing the keys back to the lender and suffering the consequences of foreclosure.

Those of you who know me know that I operate in an ultra-protective mode with my clients these days. Unless you have money to burn, why would you even look at new construction right now? Builders have deeper pockets than you do, they can discount in ways you can't, whenever they need to, and most don't care what happens to the buyer once he closes.

Just yesterday, I received a promotional email from a local builder boasting about “Huge Price Reductions” at a high-profile condo tower downtown. I looked at their email and shook my head, thought about it, and then fired back a note (which will probably never be read) – “what about everyone who already paid retail to move into your development?”

So here’s what I see in the Post’s newsflash this morning – I see a wiser consumer, xxxxed off, who says he won’t be fooled again.

That’s good news.

THE CUSTOMER IS ANGRY

I ran across a post online recently from sales trainer Jeffrey Gitomer, who always seems to have a handle on how the world of sales is changing. And believe me, it’s changing.

Gitomer can say things that are shocking sometimes, but the truth is that I share a lot of his sentiments. The “customer”, as we identify him, has been laying low for the past 18 months, sorting through his stock market losses and wondering what to do next.

He’s been watching in disbelief as his 401k fell apart, his home lost value and his company dropped 30% of its workers.

Roger Daltrey once sang “We Won’t Get Fooled Again”, and I think the consumer of 2010 is singing the same song. Trust has been burned. The consumer is angry.

He (or she) is also (most likely) in worse shape financially than he was two years ago, and that means he’s coming back more cautiously, wiser, and he’s going to do his homework before signing on the dotted line. As he should.

Here’s Gitomer’s list of what the new consumer looks like, post economic meltdown:

• He's going to decide somewhat slower. He's been hesitating for more than a year.

• He's angry about the value of his home, and the value of his investments.

• He will not be doing business the same way it's been done before.

• He will not be advertising the same way he advertised before.

• He will not be buying a car the same way he did before.

• He will not be investing the same way he did before.

• He will not take your word for things anymore. He’ll need to see the proof, please.
• He's online. Checking out your blog (or wondering why you don’t have one).

• He's socializing. Telling everyone what's happening in his world.

• He's Tweeting, Facebooking, he’s on Linked-In. Social media is a firestorm.

• He's blogging about his experiences with you, for the world to read.

• He's Googling everyone.

• He's texting. A lot.

• He's using his mobile device to do pretty much everything.

• He's WiFi-ing in his hotel room, on the plane, in Starbucks, and at home.

• IF he's reading a paper, or getting the news, it's online.

• He wants technology in the transaction – his time is more valuable now.

• He is value oriented, but will look to price as part of the decision.

• He wants a relationship, based on trust, which you will have to earn.

• He wants, needs, and expects GREAT service after the sale.

• He does not want to wait for anything or anyone.

• He needs help and expert advice – but it better be legitimate.

• He's looking to you for ideas and answers.

• He knows as much about your product as you do.

• He demands the truth. All the time.

• He no longer trusts the institutions he used to hold sacred.

• He needs to be understood and feel your sincere concern.

• He wants you to know that while you are qualifying him, he is qualifying you.

The world of sales is a tougher place today than it was two years ago. But as I have said in conversation after conversation, we are now in a market that demands skills. A market that demands ethics. A market that won't tolerate BS from anyone, at any level.

We are not going through a "cycle", in my opinion, but rather, we are going through a "revaluation". I'm talking about the stock market and real estate prices... but I'm also talking about each one of us. I'm talking about employees, salespeople and professionals. I'm talking about pastors, construction workers and CEOs. Our value is being tested in this new market, and skills are the new currency of the 21st Century.

You can fear this new market, or you can embrace it as the impetus for positive change in your own life. As always, it comes down to attitude and perspective.

Game on.

IT'S ONLY FEBRUARY, BUT THE SPRING MARKET HAS OFFICIALLY ARRIVED

February has been an interesting month, at least for statistical geeks like myself. The inventory of homes for sale in the Denver MLS tightened up at every price point between January and February, signaling that the “tax credit rush” is now on and even though the calendar says February 17, the spring market of 2010 is officially here.

For the next 71 days, it’s going to be crazy, especially below $250,000. If the $8,000 first-time buyer tax credit of 2009 pulled in all of last year’s first time buyers, plus many of those who otherwise might have waited until 2010 to buy, the extension of the tax credit is now shoving the 2011 crop off first-time buyers off the fence and probably pulling in some 2012 buyers as well.

The $6,500 so-called "move up" buyer's tax credit is also driving activity, with buyers who have owned a principal residence five of the previous eight years eligible for this credit, which also expires April 30.

Let’s recap the influence the tax credits have had on the market.

As of today, homes priced under $250,000 in the Denver MLS account for 34% of the overall listing inventory, but 67% of all transactions. By comparison, homes above $600,000 account for 18% of the inventory, but just 5% of the transactions. So it’s obvious the activity remains concentrated at the lower levels of the market.

Inventory continues to fall. At the end of January, there were just 17,465 single family homes listed for sale in the Denver MLS. That was down 19% from one year earlier, and 45% from the August 2007 peak, when we had more than 30,000 homes for sale in the Denver MLS.

The absorption rate for homes priced below $250,000 fell sharply this month, from a 4.22 months supply in January to just 3.25 so far in February. That’s the clearest evidence of the “spring surge” I referenced at the start of this post.

There was also significant improvement in the $250,000 - $400,000 category, where inventory dropped from a supply of 9.98 months to just 6.16 months. While six months of inventory is considered a "balanced" market (favoring neither sellers nor buyers), the tightening we have seen suggests that you've got both first-time buyers and move-up buyers hitting this sector of the market in force.

However, the question must be asked again: what happens to these numbers after the tax credits expire April 30? Keep in mind, as someone who is "out on the streets" every day working with clients at many different price points, it's clear that buyers are driven by price and value, and they simply will not overpay for anything as long as they have fear about the economy.

Above $400,000, the inventory of unsold homes spikes up to 13.77 months. And so you can see how things just start to tail off as you work your way up the pricing ladder (above $1 million, the inventory of unsold homes is nearly 32 months).

What can we expect going forward?

Well, here’s what we have we have for buyers for the next 71 days: 1) a pair of generous (and highly motivational) tax credits that expire for good April 30; 2) interest rates that are still in the low 5’s, but almost certainly headed higher as the Fed stops purchasing discounted mortgages; and 3) enough motivated sellers and bank-owned listings to find a good deal.

And for sellers? It comes down to one thing – motivated buyers. For the next eight weeks, buyers are out in full force, particularly below $400,000. That means the time to be on the market is right now. When the tax credits expire and rates go up, who’s going to buy your home? There’s a buyer for every home, but when the “gifts” of tax credits and low rates go away, it all comes down to price. And that’s not what sellers want to hear.

Make no mistake – 2010 is not a normal year in real estate, and this is not a normal market. The lion’s share of activity this year is happening right now, and both buyers and sellers may find the market a lot less attractive when rates start climbing and the tax credits expire.

DENVER HOMEOWNERS POCKETED $7.87 BILLION IN EQUITY GAINS LAST YEAR

In a new survey released this week, Zillow.com reports that homeowners in the Denver Metro area pocketed a total of $7.87 billion in home equity gains last year, by far the best performing U.S. market in 2009.

Boston was the second best performing market, showing gains of $3.47 billion, while New York reported the ugliest losses, with homes dropping a staggering $93.4 billion in aggregate value last year.

The Denver Post published a Zillow.com map with its coverage showing which neighborhoods have performed best and which areas remain soft. North Aurora and the I-70 corridor of East Denver remain the hardest hit parts of town, while much of Adams County showed surprising strength after several years of value declines.

Of course, as I say in post after post, generalizations really don’t work in this market. There is such disparity between what is happening at the low end of the market (3 month supply of homes) compared to the high end (32 month supply of homes) that the Zillow report may or may not have much relevance to your particular situation.

Many sub-$200k single family neighborhoods have seen values jump 10% or more in the past year, while homes above $400,000 have lost value. Condos continue to perform below expectations at all levels, while investors have made huge profts by fixing and flipping starter homes for the past two years.

The strong numbers reported by Zillow are likely driven by the fact that, in sheer numbers, there are more entry level homes appreciating than high-end estates depreciating, so the net bottom line looks pretty good.

Overall, it’s good PR for Denver and indicative of a market that is further along on the path to recovery than many other metropolitan areas. If you have questions about how your particular neighborhood has performed, give me a call.

THE "HIDDEN STRENGTH" IN TODAY'S MARKET FOR INVESTORS AND LANDLORDS

Interesting article in John Rebchook's blog today about the long-term prospects for landlords in the seven-county Denver Metro region... although rents and vacancy rates have basically been unchanged over the past year, signs point to a fairly serious shortage of rental units over the next five to seven years.

With more than 30,000 high school seniors graduating each year, and only about 5,000 new apartment units per year coming online since 2001, you can see the opportunity that exists for landlords over the next few years. Add in the fact that Colorado was the fourth-fastest growing state in the country last year and you can see that sooner or later we're going to start running out of housing, again.

It is true that the difficult economic times of today are affecting behavior... the home ownership rate is falling, kids are moving back in with their parents, families are "doubling up" to save money... but sooner or later people will want to get back out on their own, and there simply isn't enough new inventory coming online to meet that future demand.

After the 2001 economic downturn, vacancy rates in Denver spiked by 10% or more and rents crashed hard. But go back and reread the first paragraph of this post... in 2009, in the worst economy in 70 years, vacancies and rents were essentially flat. That's called "hidden strength", and it's an indicator that this decade could be a really good one for Colorado investors and landlords alike.

JOB PROSPECTS BRIGHTER IN DENVER

A theme I have been hitting on repeatedly in this blog is that, in my estimation, there is no such thing as a “jobless recovery”. Until jobs come back, the economy will remain in a broken state.

Jobs are also the biggest impediment to the housing market, now, as well. While the first round of foreclosures (2005 – 2008 in Colorado) were primarily the result of “everyone qualifies” financing, round two is tied to the loss of jobs.

Good news today comes from job search engine JuJu.com, which ranks Denver 9th among 50 metropolitan areas in terms of availability of employment. The JuJu.com survey shows that there are currently about four job seekers for each advertised position in the Denver market. Some of the worst performing areas, such as St Louis and Detroit, currently have more than 15 applicants in pursuit of each advertised job opening.

The JuJu.com survey is more “interesting” than “scientific”, since it doesn’t consider the problem of “underemployment”, which I consider to be a serious issue both in Colorado and throughout the country.

But it does show the relative strength of Colorado, which continues to outperform the rest of the country during these difficult economic times.