Cheap Real Estate Property Is Hard to Find

When it comes to real estate in the post-subprime era, it’s really hard to find a cheap property, or even to identify one. Cheap property, including one-to-four family residential homes were very prevalent during the early part of the 1980s. They were ideal for people on a budget; and to give real estate agents a chance to do more business.

Agents could make a better impression on their buying customers by showing them how to buy a home at a low price, do some rehab work on it using the 203k rehab mortgage loan, and resell it at a higher price. Making money with real estate was much easier then – no matter how you approached it. Finding cheap property today is a totally different story.

Between 1987 and 2007 the price of real estate property increased by over 300 percent according to a Property Price Index chart I found on the Steadfast Finance website. While this post is not intended to be scientific in nature, it is necessary to use facts and figures to back up the main idea that, due to the balooning of home prices over the 20 year period mentioned, and the subequent crash, it is tough to find a cheap property which doesn’t have a mortgage that dwarfs its value.

There is not much room left to build equity for the foreseeable future without a dramatic rebound of real estate market prices, and I don’t see that happening anytime soon. However, there may be some instances where you may find cheap property throughout the United States, but the market areas – some being better than others – in which they are located will most likely be depressed, thus removing the motivation that would otherwise exist for you to purchase it.

Let’s face it, most towns/neighborhoods that offer the cheapest properties would normally be economically depressed in most categories. Even those areas that are considered middle class by the traditional definition suffered a great loss of property wealth and has none to offer you as an investor looking to turn a quick profit, or home buyer who is looking to build equity.

There is some indication that property values show signs of increasing but that increase in value, providing it is real and consistent will go towards leveling off the property owners’ existing underwater situations. It does not help prospective buyers simply because the property owners are unable to sell until they are able to satisfy their lenders from sale proceeds. It is unreasonable to assume that a property owner is willing to dig into his/her own pocket simply to make a sale to anyone and walk away that much poorer.

You may be thinking; well if all this is true, how will investors be able to stay in business? The answer to this question is rental income! Some investors buy to resell while others buy to rent. Short term versus long term investments; And you can safely assume that when the buy/sell market is tough, most of them will put their money into rental properties.

Keep in mind that when the market is tough for investors, it is similarly tough for home buyers to get reasonably priced homes to buy and mortgage money to finance them, so many of them become new tenants for the long term investors.

If you are in search of cheap real estate property in today’s (July 2012) market, you might get lucky and find that proverbial need-in-a-haystack property that is either free-and-clear or has a very low mortgage balance, where the owner has passed away and the estate is forced to sell…

Or a free-and-clear/low-mortgage-balance property that is in disrepair and perhaps uninhabitable without major rehabilitation and you have the means with which to purchase, repair and resell. However, you might have to look long and hard, so be prepared for the long haul.

If you have been in the market to buy a home for your own personal use, or you are an investor looking to buy cheap, repair and resell; I would be interested in learning about your recent experiences. If you have had some good luck and found the ideal property for your purposes, or you’ve had the worse time trying to find a property you can work with; tell me about your experience in the comment box. Good luck!

Building Blocks for the First Time Home Buyer

Building blocks for the first time home buyer outlines the entire process of home buying that a first time home buyer may benefit from in his/her preparation for home ownership. There are four blocks of preparation which can be described as Preliminary, Before, During and After the purchase.

In many home buying transactions the process will begin with the priliminary and before stages (preparing yourself to make the purchase, and finding a suitable home) as in blocks One & Two below; And during (the mortgage financing process as in block Three below.

Block four is treated a little differently because it occurs after the transaction closes, but it must have been initiated between blocks One & Two because a first time home buyer must decide on the specific mortgage type (whether it be a conventional, a FHA-type, or VA).

In the case a FHA 203k rehabilitation mortgage loan the mortgage clause in a purchase contract would have to indicate that 203k mortgage financing will be a condition of the purchase. The building blocks for a home-purchase include the following:

Block One Preparation (personal) – Things you can review in preparation for your home purchase, like;

  • Job – Length of employment, job security, and good to excellent prospects for continued employment.
  • Savings – Having put aside enough money for down payment, closing costs and at least 3 months reserves (one month reserve equaling one month PITI)
  • Credit – Reasonable to excellent payment history on all accounts, account balances at or below 50% of account limits and reduction in the number of accounts to six or below (including balance transfers if necessary).

Block Two Preparation (house) will include;

  • Searching for and selecting the best home for your money
  • Real Estate Broker – Interviewing brokers, including buyer’s agents, that you will make your purchase with (or through)
  • FSBO (For Sale By Owner) – Going it without a broker includes contacting the home seller(s), making your offer directly to him/her/them, preparing and making your initial offer, and setting up your contracting signing (things that a broker would usually do).
  • Mortgage Broker/Lender – Arranging your own mortgage financing through a lender of your choosing is a right bestowed upon you by federal law.

Block Three Preparation (mortgage financing) includes;

  • The mortgage type and lender selection is left to the buyer to decide without any undue pressure (from anyone else).
  • Mortgage Type – Generally your choices would be Conventional, PMI, FHA and VA
  • Mortgage Application – Depending on the lender you select this application could be done by mail, the internet or in person. It really depends on how much of the work you want to do.
  • Appraisal Report – Although you pay the appraiser’s fee, you do not get to select the appraiser. This is done by your lender; And while you are entitle to a copy of the appraisal report, many lenders do not release it before the closing and/or without a written request from you.

Block Four Preparation (finding a licensed and insured general contractor);

  • The contractor plays a key role in a 203k-financed home purchase.
  • Contractor’s Estimate – Required to provide the mortgage lender’s personnel with an amount to be financed into the mortgage.
  • HUD Consultant’s Work Scope – Required by HUD to inspect the home, keep the work estimate figures in line with reasonable market rates, and establish the required contingency reserve.
  • HUD Consultant’s Work Inspections – Also required by HUD to insure that work is being done without any extended stoppages (30 days or more), as well as to authorize release of funds to the contractor.

For more about FHA-insured financing, visit the HUD website

Humor or Irony:

If the government can’t run business, how come businesses always run to the government for a bailout when it runs into trouble? FHA-insured mortgages… Government-run for over 75 years! Lest we forget?

203k! The Mortgage Loan That Gets Work Done

Should the HUD Section 203k Rehabilitation Loan be among the first choices of a first time home buyer? To answer this question we’ll have to do two things. First we have to determine what exactly is a HUD Section 203k loan, and second we have to find out what useful purpose it will serve to a typical first time home buyer. So, what is a HUD Section 203k Rehabilitation Loan? We’ll temporarily shorten the title to 203k which should help in avoiding any kind of tongue-twisting or shortness of breath while pronouncing the full title.

Having said that, we’ll begin by placing 203k into the mortgage loan category, so it becomes a 203k mortgage loan and like any other mortgage loan the 203k mortgage loan is used to finance the purchase of one to four family residential properties. Unlike other mortgage types, the 203k mortgage loan can be used to finance a mixed-use (combination residential office or retail structure) property as residential unit(s) as long as one of the units was occupied by the property owner.

It is clear – just based on the last sentence above – that this 203k mortgage loan is indeed different from most mortgage loans. Most popular among residential mortgage loans are conventional mortgage loans (controlled by Fannie Mae & Freddie Mac) and FHA-insured mortgage loans (insured by the Federal Housing Administration or FHA). VA (Veterans Administration) loans are popular only among veterans and their spouses because they are the only persons qualified for a VA-guaranteed mortgage loan.

Before going any further let us agree here that 203k is also insured by the FHA, but the more popular FHA program is known as 203(b) which is utilized to finance up to 96.5% of the purchase price of a one to four family residential property. That is where similarities between the two FHA-insured mortgage loans end. The 203k mortgage loan differs from any other mortgage type in the sense that it is a residential mortgage loan and a rehabilitation loan (in some cases a construction loan) combined into one mortgage.

Therefore, the answer to our original question – Should this type of mortgage be among the first choices of a first time home buyer? – may be more apparent if the right people are being asked. Another way of asking the question may be, why would a first time home buyer want or need a mortgage loan that makes extra mortgage money available to pay for repair/replacement of the home they are buying? Is the home in need of repair? Does anyone know for sure? Is there a professional engineer’s report that documents such a need? Or a home inspector’s report that points to areas needing repair or replacement?

Shouldn’t a first time home buyer be given the benefit of the extra funds held in escrow until such repair or replacement become necessary as they probably will during the first year of home ownership? Take for example, a “Home Ownership Counseling Course”, in which prospective home owners are questioned about every aspect of their responsibility as home owners/mortgagors and quizzed on their ability to afford the debt they are about to take on with current and expected available income. It is a course well worth the time and money invested because of the awareness created for first time home buyers.

One question, however, that is not asked in such a course, but pergaps should be, is: How will you pay for emergency repair(s) or replacement(s) of a major working component in your new (“new” home ownership experience) home without it affecting your ability to make your mortgage payments during such occurrence(s)? If we agree that a majority of resale homes in most metropolitan areas range in age between 20 to 50 years in age, then the answer to that question is not readily apparent to many first time home buyers utilizing the standard FHA-insured mortgage loan to finance their purchases.

If, on the other hand, the FHA 203k rehab loan was among the first choices of a first time home buyer, the need to find a suitable answer for the above question of “how would you pay for emergency repair(s) or replacement(s) of major working components…” may not exist because the repair(s)/replacement(s) would have been completed as a result of the escrow proceeds held at the time of closing to pay for needed repair/replacement per the HUD consultant work write-up, so that the question would not have to be asked.

A message to Prime Mortgages readers:

Thank you for your support. We will continue working to provide the most relevant and useful information about current FHA-insured programs and related topics. Please provide any comments, opinions or preferences which you would like us to be aware of. Thanks and God Bless!


For more about 203k, please visit the HUD website

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If the government can’t run business, how come businesses always run to the government for a bailout when it runs into trouble? FHA-insured mortgages, government run for 75 years. Lest we forget?