Do You Have Enough Equity To Refinance?

One of our clients recently expressed an interest in refinancing their home, given the incredibly low interest rates available today. Before they undertook such an ambitious effort, we thought it extremely important that they gave carful consideration to a more detailed view of current real estate conditions and became familiar with the projected real estate picture. To that end, we prepared a current market study of their home so they could compare it to the market study we had conducted just 60 days earlier.

We wanted to ensure for our clients, the information we offered would help them assess their next move and provided enough information to conclude that it was wise… or not… to invest additional capital into their home… given the current local and world economic climate.

Lori & I have been professional full time real estate practitioners well over two decades. We have been through four of these earth shattering real estate tsunamis but this is, by far, the worst one ever... even though we do see... light at the end of the tunnel, albeit a small dot at the moment.

In the market studies we prepared, we used properties that are as close to similar, to our client's home, as possible. We only used homes in their exact neighborhood and made all appropriate adjustments for differences between each of the 8 homes that have sold within the last 90 days.

We felt it was important that our clients stayed mindful that property values continue to plummet here in the valley. We explained to them that their home lost nearly $50,000 value in the last 60 days. [Side Bar - It is this REALTOR's opinion that until the flood of foreclosures comes to a halt and not until MI companies will once again underwrite conventional mortgages with less than 10% down, communities here in the valley will continue to experience depressed market values.]

The Market Study, also known as a CMA (Comparative Market Analysis), we conducted in of their home in October, found the value range to be between $190,000 and $275,000 which was consistent with the expected decline from when they first put their home on the market.

The market study we concluded most recently now placed the value range of their home between $132,000 and $213,000. You’ll see that the study was conducted in exactly the same search grid, their very neighborhood. These statistical models can be duplicated in nearly every neighborhood in the valley. The value disparities grow wider as the price point of homes increase.

Our clients had already been in touch with a lender, Morgan-Stanley-Chase. The maximum amount their lender would loan on their home was 80% of the appraised value and could be as low as only 75% of the appraised value. We suspect that the appraised figure could come in somewhere around $175,000. Our client owed about $175,000 on their home. If their lender agreed to an 80% LTV (Loan To Value) loan, that would mean that our client would have to supplement their re-fi with about $35,000 of their own money plus any additional closing costs. While their monthly mortgage payment would drop significantly, perhaps as low as $950.00 PITI, if they were successful in securing a loan at 5% interest. The challenge we saw for them was that the recovery time for such an investment could be very objectionable to them... and in fact it was.

The reality is that local real estate industry analysts project, in some communities of Maricopa county, property values could fall an additional 5% to 10% over the next 12 months. If industry analysts and pundants are even partially accurate about the future of the economy and if the downward landslide of property values finally comes to rest in mid to late 2010 and then flat-lines until the end of that year, that would mean that the upward march of property appreciation may not begin until the first ¼ of 2011.

A Few Numbers To Consider

Our clients purchased their home in August 2005 for about $265,000. They spent an additional $80,000 in upgrades, brining their total investment to $345,000.

Given our market studies, let’s assume today their home is valued, by an appraiser, at $175,000. If property values decline even... only... an additional 5% over the next 12 months, such depreciation would devalue their home an additional $8,700 down to $166,250. That puts their property value nearly $100,000 below their initial purchase price of $264,605 in August 2005. Now add in improvements and upgrades they expensed, and you see that the economic ground to make up will be considerable; nearly $180,000.

If we agree that property values will begin their upward appreciation value march by January 2011 and if we use a 20 year historic statistic, here in the valley, of 3.75% annual appreciation, that would translate into our client not recovering, simply the original value of $264,000, until about 2026. If they have hopes of recovering all of their investment, such an aspiration may not occur until 2037. The time could be a bit shorter given the reality that, statistically and traditionally, as real estate markets recover from each cycle of downward trending, the annual appreciation scale may grow by .5% to 1% per year. However… we would wager that it will be decades, if not longer, before the valley or the nation sees the kind of property value inclines that were experienced between 2004 and 2006.

We are hopeful that our clients will give very attentive consideration to investing any additional capital into, what is currently a depreciating asset.

Here’s a really head twister about the word “ASSET”. Dictionary.com defines the word "ASSET" as (a single item of ownership having exchange value). Hummmm… exchange value… hummm… if our clients will need to add an additional $30,000 to $35,000 of their own money… just to obtain refinancing loan approval… is their home truly an “ASSET” at this point in time?

The origin of the word “asset” comes from the French word “asez” – “enough”. Now... there's a real enlightening word, "enough". When is it time to simply call it a day and say... "enough is enough"? One could argue that in today's economy, real estate is hardly an "ASSET". Oh... don’t misunderstand… real estate values will incline and rise again, they always do. The question is, how long is a property owner willing to wait to reach the point of ROI (Return On Investment?)

If you have sufficient equity in your home, to refinance at the terrific fixed interest rates that are on the table today, DO IT NOW. If you wait to see... "...just how low rates will drop..." you might just miss out on a golden opportunity. Simply use good judgment when you select your lender. It is usually best to stay with the lender who currently holds your note. You can usually work out relatively favorable closing cost concessions. Oh yes... the term, "sufficient equity" should not be confused with having to add additional capital to your investment in order to complete the refinance. If you plan on remaining in your home for a length of time that would translate into a recapture of any additional cash investment within a fixed and acceptable period of time, then take the step and make the investment. However... if you're upside down to the magnitude of the example in this BLOG, you may want to rethink carefully if such an investment is a prudent place to warehouse your hard earned dollars.

For buyers, it couldn’t be a better time to invest in real estate, as long as they have the intention of remain in their new home for, at a minimum, of 3 to 5 years. Anything less could prove to be a challenge when it comes time to sell their home. Real estate will always remain the fulcrum that helps balance the economic scales of our economy. The recovery time may take just a bit longer this time, when compared to other cyclical downturns then upswings.

Lori & G-II are licensed REALTORS® with Coldwell Banker Residential Brokerage. They can be reached by cell phone at either 602.574.5674 for Lori or 602.796.5674 for G-II or via eMail at mailto:Lori.and.G-II@RealEstateInPhoenix.net.

If you would like to chat with us live, simply click the Google Talk Icon.

REOs vs. The Short Sale... Sale Prices

Well... another bumpy ride on Wall Street last week... but then again... that's not news to anyone. Here's what you may not know though, the Real Estate Market may be in the beginning stages of stabilizing.

The Arizona Multiple Listing Service reports that there are over 6,200 residential properties currently in the Sale Pending category. This is about the same number of homes that were in the SOLD category in 2001, 2002 and 2006. Of the 6,200 homes in the Sale Pending category, a little over 2,000 were placed in the Sale Pending category between October 1st and 12th. Of that number over half are distressed property sales and of that number, over 80% are REO sales.

In the $125,000 to $175,000 price range REOs were reduced, from list price to sale price by as much as 24%. The difference between list and sale price for Short Sale transactions is only about 20% (*source ARMLS 10/2008). These statistics encompass all of ARMLS, an area spanning over 200,000 square miles. Nevertheless, the statistics demonstrate two important facts for real estate agents, sellers and buyer. First for the buyer; if the buyer is looking to purchase a Short Sale property, the buyer should be aware that lenders who negotiate Short Sale's for sellers are more inclined to hold out for sales closer to the actual value of the property. Second, these statistics also demonstrate the probable naïveté of the REO asset manager. ARMLS statistics show a growing trend for REO asset managers to accept offers that are far below the list price and even substantially below market value.

Buyers should understand that if he or she makes a purchase of an REO that is below probable market value, their purchase price helps set the value of the neighborhood. Therefore, making such a purchase could be considered a double edged sword; a great buy in terms of cash outlay but perhaps a detriment in terms of perceived value for future buyers of product in that community.

Why is this important? Because it is important for the buyer to know and understand market trends and to nderstand that these swings between list price and actual sale price can vary widely from community to community, city to city and state to state.

Here's an example. In the first 12 days of October 2008, in Surprise or El Mirage Arizona, the difference between list price and sale price for REOs was about 16%. Oddly enough, that was about the same statistic for sales of Short Sale transactions in the same cities. However, in Goodyear, REOs sold for about 13.50% less than the list price while Short Sale transactions closed only 9% less than list price.

It's important for sellers and buyers to seek out licensed REALTORS® who are well schooled in conducting these types of analyses. Making a real estate purchase in today's real estate market can be a huge win or a costly undertaking.

Lori & G-II are licensed REALTORS® with Coldwell Banker Residential Brokerage. They can be reached by cell phone at either 602.574.5674 for Lori or 602.796.5674 for G-II or via eMail at Lori.and.G-II@RealEstateInPhoenix.net.