If you love the home, plan to live there and enjoy the amenities, then great, it’s the home for you. If you think you have another reason, you should remember that they can become a real estate nightmare for many, many different reasons. Here’s one of them, financing.

Lately condo financing has become much more difficult. On a recent transaction for a new construction condo conversion down in Littleton, I ran across a couple financing issues that I now know to check out early in the buying/selling process to make sure the property is salable.

Legal Actions A legal action taken by(or against) the HOA may make financing the unit impossible leaving only cash/owner financing as an option. This is a very bad thing if you own one of those units or don’t have cash.

Investor concentration. To high and the investor concentration in the condominium complex may tank your deal! This often information comes over on the HOA certification letter that is usually required for conventional financing. While the ratio may change and loosen up a bit in the future for conventional financing it is still important to find out what this ratio is as soon as possible. Sometimes a simple phone call to the home owners association may be enough, other times, it’s a little more formal. Anything over 30% should be enough to bring it up with your mortgage broker. Sometimes for conventional financing, that in itself is a deal killer. FHA financing allows the investor concentration to be up to 50% but the buyer should know about the issue as it could impact the future resale if the situation doesn’t chance. If you feel this could be a a concern, be proactive so that there are no surprises later.

HOA Default Rate. This is another piece of info from the HOA. Greater than 15% could be mean trouble. The lender would be concerned that the default in the HOA payments may suggest future deficiency in the HOA accounts and perhaps deeper problems. If the lender would be worried, so should your buyer. At the least, he should be informed of the potential issue.

HOA Financial Reserves This should be greater than 10%.

Now there is a home purchasing program that will finance these properties. FNMA (Fannie Mae) sells some homes with HomePath financing. That means that they’ll finance the property. They usually don’t require the HOA certification. The downside is still this, if the buyer wants to sell later, FNMA won’t be there to offer financing.

There are many more reasons to be concerned about the financing for a condo, especially these days.
Check out RealEstateUndressed for another possible issue.

1464 S Benton St - FlatGrass Realty

We have had multiple offers at, above and below the list price from investors willing to pay cash. Why? Because investors work from what it could be worth to them rather than the list price. Most of the offers (not all) we received from traditional buyers tended to net a value under the list price. If the traditional buyer did their homework, they would know that the home is worth much more than the list price. The list price was just a tool to attract attention or to get a cash buyer involved. The same home down the block sold earlier this year for around $170,000 and that wasn’t even a full remodel. This home could fetch $175,00-$180,000 with a good remodel.

This home’s value is being held down by a handful of local foreclosures that though comparable on paper, sold in days to investors. Some of which have already been flipped. I’m guessing most agents didn’t take the time to look at what it could be worth, the ‘adjusted retail value’ of the property.
This is just one example, if you want to see lot’s of examples, take a look at the HUD bid statistics that come out each week. You’ll be able to see all the bids. You’ll notice that the vast majority of buyers make a ‘shot in the dark’ approach to their bid rather than considering the actual value of the home. That’s frustrating for me to watch. Whereas I’m working to attract an investor offer, HUD prioritizes owner occupants over investors. This can be a great opportunity for the average buyer to put themselves into a home with a great equity position. If only they (or their agent) would do the math.

Here’s and example of the Green Valley Subdivision in Denver, Colorado

Notice that once current home values cross the value of what was paid on the 1st position loan, there is a spike in foreclosures.

Foreclosure rates in Green Valley Ranch

just to add some more perspective…

An example of a highly localized collapse of home prices common in many cities.

It’s something to think about. It’s not just a matter of a few bad loans, lost jobs and problems paying health expenses, for many neighborhoods that may be close to a similar tipping point. Because of the substantial amount of money invested into Green Valley Ranch, I would expect that they’ll recover from the collapse within 5 years as the foreclosure sales work through the system. For other neighborhoods in Denver, I’m a lot less optimistic.

The real estate market usually is subject to certain cyclical phenomena that vary by area. In Denver, winter usually brings a slowdown in the real estate market, marked by slightly lower prices and sales volume. Typically as early as January or February the seasonal market begins to turn around. Well..not this year.

This chart is a stochastic representation of real estate sales prices over the last couple years. I love technical analysis, almost to a fault. In evaluating stocks, charts like these help traders identify trends and compare the current market price to past prices to identify opportunities. To keep it simple, when the blue line crosses up through the red line, this marks the best time to buy in the market. When the blue line crosses down through the red line that’s when you should sell. When prices go one way when the stochastic suggests another, that’s when there might be a trend reversal coming.

Imagine how many REALTOR friends you would have if you bought and sold that often. Thankfully, this model is usually only applied to stocks. A stock’s liquidity makes it possible for it to be bought and sold in shortened time spans. While it is a poor tool for evaluating the length of a trend and potential buying opportunities, it’s great at determining cycles and safer entry and exit points.

Here are a few things you might notice by examining your market in this way.
1. When is typically the best time of year to buy a home? If we look at the chart, it becomes obvious that the best time to buy a home would be between August and February. Of course, if you look at the actually sales stats, you would notice that August might just be the best month to buy a home during the year because not only is there a slight drop in pricing, there is a larger supply of homes to chose from. Deep down, I would never suggest that you rely on the time of year as the number one reason to buy or sell a home, but it always helps to know where you’re at in the cycle so you know what to expect.

2. How has the credit crunch affected home sales in Denver? From my observations, the availability of credit for lower income and even middle income buyers with lower credit scores has significantly slowed the market. Notice how the chart shows a longer, flatter curve all the way into April (2008) compared to previous years with the market bottoming between December and February. This means sellers can expect continued pressure on high home prices. It doesn’t mean things aren’t selling, it just means your going to need to work harder, show better and price lower than you used to.

3. How long will this last? Who really knows. I wouldn’t expect to see stability return next year at this time without significant improvements in the economy. (I here Microsoft wants more sun and is considering Denver…not really but that’s the instant boom I’m looking for.) Additionally, if REALTOR’s out there still think next year will be better, think again. Foreclosures are driving the market down by far out weighing the slowing local economy. Until lender owned inventory starts drying up, expect more of the incredible buying opportunities and poor selling prices. That being said, I’m keeping an eye on the price of ownership when compared to renting, the ratio of home prices to median income, the economy and inflation. There are encouraging signs and improving signs in many of these statistics.

If you saw one of my previous posts regarding the real estate bubble, you would know I don’t believe Denver is a true bubble candidate and thus has a shorter fall. I would expect that prices would continue to decline through Spring of 2009 finally bottoming during that Summer. I wouldn’t expect an immediate recovery either. Prices will likely stabilize before racing back up. Denver homes will start to look pretty affordable by spring of 2010. To arrive at that, you have to make a few leaps of faith regarding inflation, demand and foreclosures peaking this summer. But I’m sure I’m still more accurate than NAR’s method.
Sometimes though, an opportunity can come along that would likely never come again. Housing is very inconsistent and resists almost every opportunity to have an absolute value price. Most great opportunities will appear only for a couple of days before a savvy waiting investor would pounce. At this moment there are hundreds of homes in Denver that didn’t last a week on the market before being snatched up. If it’s a good deal, it’s a good deal. Who cares if you could of saved $5000 here or there when you get what you want and it has a great long term outlook either for you and your family, your pocket book or both?

Not to mention, the smart money loves these down turns. They need them to get into positions they couldn’t normally get into in strong upswings.

A long bottom can represent a real opportunity for some people in some areas. Of course, in most instances, we don’t usually refer to ourselves as the smart money, though we all wish it to be true.

1.  You are an investor with a long term view to acquire properties that should appreciate during the next cycle while cash flowing in the short term.   Great investors don’t buy in hot markets, they buy when no one else wants to.  In Denver, one of the best deals of this type are in close proximity to current and planned transit oriented developments all across the city. Check out the Overland neighborhood of Denver and the University Hills neighborhood.

2.  You are not a current home owner and have good credit.  You sir/or maam are a hot commodity.  You should take advantage of that.  The smart money may realize that the current low interest rates on mortgages + downward pressure on home values = A great deal.   You have a chance to ‘lock in’ a payment for your living space.  Your rent in many areas of Denver is expected to rise along with inflation and eventually demand.  Inflation when you own a home is a good thing.  In many ways, inflation can actually help the home owner.  The payments over time ‘seem’ more affordable as competitive wages adjust to the cost of living changes.  In addition, home values traditionally keep pace with inflation over the long term.  By picking the right area, you can combine the gains from inflation with actual appreciation that comes when an area is revitalized (Gates redevelopment in Southeast Denver, Platte Park) or business moves into the area (Check out the Fitzsimmons area of Aurora).

3.  You need a place to live.  Sure you could rent a place, but you’ll soon be back in  the same situation again.  Many homeowners will now be open to leasing a home with the option to buy it.  This is rarely an option in a hot market.

4.  Your current home is inadequate.  Often, you just need to make a move.  In this case, the overall market just doesn’t matter.  When you sell a home and buy a home in a similar market, it’s likely that the value that you think you are losing is balanced when you consider both sides of the home equation.  The increased inventory can make it hard to sell but it can be also give you more choice when its your turn to buy.

5.  You just want a good deal.  Good deals are to be had if you know where to look.  If you want a good deal, buy a home in a market that is continuing to appreciate even now.  For example, Denver Highlands up 10%.  “But I thought this was a buyer’s market”.  Or buy in an area that you expect to recover first such as DU, Rosedale, Washington Park.  These are all close to the popular parks, nightlife, and of course Denver University while still having easy access to downtown and the Denver Tech Center.  Trying to locate a foreclosure deal in one of these neighborhoods is highly unlikely.  Rather than looking elsewhere at foreclosure in depreciating areas, buy the best VALUE in the best neighborhoods that you can afford.  Now that would be a good deal.

The media loves to overstate fact in order to generate some fear.  They love to stumble across the financial equivalent of the ’if it bleeds it leads’ statement targeted to get the public to stop and stare.  Scared out of their wallets, afraid to make a move.   Combined with their love to oversimplify, they start getting dangerous.  They love to pretend their audience isn’t intelligent enough to make their own decisions.  Instead, they make the decisions for you.  That’s not conducive to good investing in housing or otherwise.   Most investors know they can’t just buy the stocks that get hyped each day on CNBC.  They know they need to dig a little deeper.  Sometimes when most people are saying sell, that’s when you need to be buying.

Real estate can be just as complicated as the stock market but thankfully, real estate moves a little slower.  There’s a lot more real estate markets and homes out there than all the stocks that Mr. Cramer claims to have in his head. (I think he’s claiming 2000…)  Certainly, the opportunities in housing have to exist.  I know what and where they are in my area and I’m sure if you work hard enough, you’ll find them in your area too.  

Anyway,  Cramer was on his show yesterday and mentioned that with the rate cuts, he thinks it could be a good time to buy a house again.   Funny part is that, during the time between his first public denunciation of real estate and his recent reprieve, not much has changed in Denver or anywhere else.  Just the Fed’s interest rates.  Mortgage rates will eventually follow but truth is they weren’t bad three months ago.  Some of the outlying areas of Denver will have some issues with the foreclosures, that hasn’t changed.  Maybe the only thing that changed is the fact that media feels it needs to put a new twist on the news.  

 For the most part, the new urbanism movement in Northwest and Southeast Denver has helped those areas of the city through most of the slump.  In fact, I pity the people that passed on the home they wanted in these areas based on news that they should be waiting for a better deal.   Most buyers are looking for the 20% price reduction that will never come.   It’s their loss.  I’ve said it before.  The rest of the country’s problem isn’t necessarily Denver’s problem.   We are not immune from the problems but all the factors that contribute to a strong local economy are still in place.   So don’t get worked up when you hear incredibly outlandish statements saying to ‘do this’ or ’don’t do that’.   There are always opportunities if you know where to look.  I’m sure a sane Jim Cramer would admit to that.

 …have you ever noticed Mona Lisa’s wandering eye?  Maybe she spotted a deal over the artist’s shoulder.

1.  Buying a house?  Do your own homework. Validate the comps the agent supplies to you with at least a drive-by.  Develop your comfort level with the price and learn to ask the right questions.   Your Realtor isn’t there to try to second guess your decision to purchase the home.  He’s going to provide you with information about whether the price can be supported or not.  Most of the time they may try to show you what else is available even though many buyers just get sick of looking and want to buy the house they think they fell in love with.   The more experienced agents aren’t going to talk you out of buying a home.  They are there to sell you one, remember?

 2.  The appraisal isn’t really what the home is worth.  There’s no absolute value for a home.  It’s simply an estimate of what the home could be worth on the open market at a particular moment in time when compared to other homes that have sold.  It just means that the price can be supported, at least theoretically….that’s it.   The only time there is an absolute value for a home is the moment it is sold.   At that very instance it has a value.  Ten minutes after you walk out of closing…things might have changed. 

3.  Trying to compare your home to another persons home just isn’t that easy.   It would be like trying to compare two similar women that were 5’6″, 115lbs with blond hair and saying they can both do the same job.  Upon further examination you discover that one is a the female executive of a Fortune 500 company and the other is the meth-head that lives in her alley.   Every home has unquantifiable characteristics that will make the home different from the neighbors house.  The wear of the carpet, the view from the yard, the smell as you enter.   Not to mention the motivations of the seller that may have influenced the final ‘value’.  All of this could easily turn into 100k or more on a million dollar home. 

4.  A home is worth what you pay for it assuming of course that you know what you’re paying for it,  how much that works out to a month, what similar homes have sold for in the past, and most importantly what other homes were available when you were shopping for a home. 

5.  Start asking questions when you don’t understand.  If you don’t trust the answers you get or don’t understand the answers you get, ask again.  Ask other people.  And most of all, ask yourself.  If you don’t know the answer, look it up. 

I don’t mean to be condescending to homebuyers.  On the contrary.  I simply want them to make sure they are awake to the truth that they are the ones that will be paying for the home.  So instead of just saying it’s the biggest investment of your life, act like it really is.  Otherwise, Caveat Emptor.   Finding the right Realtor for you and educating yourself as to the process (or even allowing yourself to be educated) are very important parts of the home buying process.   If you’re not ready to do the work, you probably aren’t quite ready for home ownership.