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You are here: Home » 2012 » February

BEN = CASH BUYERS?

The “Ben” I’m talking about above is Ben Bernanke, chairman of the Federal Reserve. He announced recently that the Federal Reserve is aiming to keep interest rates low through the end of 2014. So what has that got to do with real estate? Plenty, in my opinion. It’s driving a frenzy of cash buyers into the marketplace like I’ve never seen.

Mortgage rates have been dropping the last few years to nearly historically low levels. That is helping drive some buyers back into the market to buy homes because they can qualify, but not at the rate we’ve seen in the past. This could be due to tougher underwriting, or pessimism from buyers, or damaged credit scores.

But the biggest increase has been in 100% cash buyers, not buyers getting financing. One big reason is that along with mortgage rates, rates on savings accounts, CDs, etc. are also plummeting. So this low-rate environment is really punishing savers. It’s not very exciting to get .4% (please note the decimal point) on your cash. So that is driving many people, both foreign and domestic, to put their cash to work by buying real estate and then renting it out. While you have the challenges of being a landlord, at least you can hope to get a higher rate of return on your cash, and then also hopefully enjoy some appreciation in the future. On top of the low rates on savings accounts, you also have all the upheaval and uncertainty across the globe, which is sending foreign investors here in droves as a safe haven. They look at the collapse in our real estate prices as a buying opportunity.

So if you are a pre-approved FHA 3.5% down buyer, or even a 20% down buyer with conventional financing, don’t be surprised to get beat out quite often by 100% cash buyers, especially in the lower price ranges.

UPDATE ON MORTGAGE SETTLEMENT

Last week I wrote about the $25 Billion mortgage settlement. As this things always go, as time passes more information comes to light so I wanted to let you know what I’ve learned recently. The early negotiations were focused on the banks trying to settle with all the states, paying a big fine, but at the same time getting immunity for future claims, even if new information comes to light. This was one of the sticking points that was keeping the State of California from joining the settlement. That’s why I was initially disappointed when I heard that California had finally caved and joined in with the settlement.

I come to find out now that it’s possible that future suits and settlements ARE still possible, so the banks did NOT get the 100% immunity from future claims that they were seeking. This changes everything! So while I still think that this $25 Billion settlement is too small and didn’t go far enough, I also think we are going to see more settlements later, so there is still hope!

If you are a distressed homeowner currently, the hard question you have before you is whether you should take a loan mod now, or wait for either this settlement, or some future settlement, to come along and save the day. They keep talking about principal reductions, but so far no far-reaching, comprehensive program is even being considered. What if you take a loan mod now and get current, and then a program comes out 6 months from now that WOULD have helped you, except now your payment is “affordable” by their measurements because of your loan mod, so they turn you down?

MORTGAGE SETTLEMENT

Boy, did my phone ring off the hook last week with people wanting to know about the mortgage settlement and what it could mean for their situation. I have two basic responses. 1. It’s too early to tell because the details haven’t been worked out. 2. The settlement is too small to make much difference for most people.

In regards to the details, it’s going to be a while until we know exactly how the $25 billion will be spent, and who qualifies. For information, you can go to www.NationalMortgageSettlement.com but even that website admits that borrowers will not immediately know whether they are eligible. Within the next 30-60 days, an administrator will be chosen to oversee the settlement. Eligible homeowners will be identified over the next six to nine months, and will be notified by mail. They have three years to disburse the funds.

There are three areas where they will try to help: 1. More and better loan mods, including some principal reductions. 2. Ability to refinance at current interest rates for those who are current but upside-down. 3. Cash payments for those who lost their home to foreclosure, but this may only be $1,000 to $3,000 each.

The settlement may only apply to loans that are still held by BofA, Citibank, Chase, Wells Fargo, and Ally/GMAC. This means if they sold the loan off to an investor, the settlement may not apply because they are only “servicing” the loan. Loans owned by Fannie Mae and Freddie Mac are also not included. This leaves a LOT of loans out of the mix. With some accounting “magic” and for taking losses on loans they were already going to take a loss on, I’m afraid that the $25 billion will evaporate rapidly without making much of a difference for the majority of borrowers.

PROPERTY TAX “NEWS”

The California Franchise Tax Board has been making it known that they plan to start enforcing a law that up until now has been mostly ignored regarding what real estate taxes you can deduct on your income tax return. Most people assume that if you itemize your deductions, you can deduct 100% of your tax bill. Bad news–looks like that’s not true!
Apparently, according to the letter of the law, you are only supposed to deduct your “ad valorem” taxes, which are the taxes that are figured as a percentage of your assessed value. These are found on the right side of your tax bill. But you are not supposed to deduct most taxes that are a flat amount per property (there are some exemptions). These are the “Special Taxes and Assessments” you’ll find on the left side of your property tax bill. For some people, this may reduce your deductions by thousands of dollars!
This is not a change to the law, the tax board will just be taking steps in the near future to step up enforcement of it. Look for next year’s California state tax return form to ask you for your parcel number, your total property tax bill, and then the amount of the bill that is deductible. For more info go to: www.ftb.ca.gov and search for “Real Estate Tax Deduction.” They claim they are just following the federal rules, so this could impact both your federal and state deductions when you comply with this rule.
There is a bill pending in the CA legislature that would make Mello-Roos fees tax deductible. With California’s budget crisis, this will be hotly debated as there are millions at stake so there is no guarantee it will pass.
I AM NOT A TAX EXPERT. PLEASE CONSULT A TAX EXPERT FOR SPECIFICS TO YOUR SITUATION.

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