Size Matters: Little Bank beats Big Bank

In the last 9 months or so I've been watching a disturbing trend become a stark reality.  Larger banks are actively pursuing new purchases and do not seem to have the manpower to process them all.  Three of my last five transactions were with smaller lenders who ended up with the loan when the larger bank could not execute. How is this possible? Let's look at some factors.

Loyalty
Giant, monster mega banks (as Clark Howard calls them) originate the bulk of their loan refinances and new purchases from their current account holders.  People automatically feel comfortable dealing with their current financial institution because they figure that since their lender has all of their personal info already, they can trust them.  Also, another VERY common misconception is that since you bank with a financial institution for a number of years, you have a better chance of being approved or it makes the underwriting process simple. Sadly, both of these couldn't be further from the truth.  Large banks show no special treatment nor do they take into account the banking history you have with them when it comes to processing and approving a loan.  I've found this treatment to be exclusive to small, community banks and credit unions where you actually get perks for being a member and not just a customer.

Size Matters
Since the housing market crash and the new banking regulations were passed in 2009, larger banks began to put smaller players out of business and purchased some of the smaller competitors, and hired their loan officers, in the process.  The big banks became more powerful, but when as the housing market roared back, they were unable to provide the processing efficiency needed to accommodate of the influx of loans.  Since larger banks are always more strict, they used to broker out less attractive loans (sub 680 credit scores) to other banks/mortgage brokers to get them done.  Without those smaller banks/brokers being there to field those deals, the banks now have way more than they can handle.  Instead of hiring more employees, they seem to prefer to hold loans hostage for 45-90 days while smaller bank's and mortgage brokers are able to close loans in 8-18 days!!! This is fact, not fiction. I have a list of them that I use daily on my website. Don't let a giant, monster mega bank tell you that you cannot do a loan (FHA/VA included) elsewhere with competitive rates & pricing in under 30 days because it is simply not true.

Times Have Changed---AGAIN!
In the past mortgage brokers were synonymous with mortgage fraud, high yield spreads, higher closing costs, and higher interest rates. There was a time that mortgage brokers couldn't compete with a direct lender's rates/closing costs. But since the banking regulations of 2009 helped weed out all of the bad seeds, the mortgage brokers that survived are now reaping the harvest of stalled and even declined loans from larger banks and closing them in a week or two.  Sadly, I don't see this trend ending anytime soon unless the larger banks hire more processors/underwriters to handle the growing load of purchases, refi's, short sales, and loan modifications that they have on their plates. Larger banks also need to loosen the restrictions a tad to help get loans approved.  Large banks have become overly strict, since these regulations were passed, and seemed to have now lost the little common sense they had left.

RENT--A four-letter word in Real Estate

"I'm looking to rent" are usually not the words the average real estate agent likes to hear. While renting means little commission for an agent, it can be a source of solid leads and annual income if done correctly.  Renting can actually be a good thing for all parties involved and even a community.  Everyone knows the cons and horror stories of renters and renting- the noisy neighbors, the unkempt exteriors, tenants not paying rent, landlords not fixing major repairs, etc. But, let's look at the PROS of renting from all sides.

FROM THE TENANT SIDE
-When relocating, renting is usually the best option in order to get familiar with the surrounding areas, amenities, retail, and commute to work.
-Renting in an overpriced/spiking market is a great idea (refer to 2007-early 2008).
-Less at stake if you move or travel frequently
-Establishing a solid rental history is key when purchasing a home.
-The opportunity to live in more desirable communities that you couldn't normally afford to purchase and live in

FROM THE LANDLORD SIDE
-Great tax write off
-Having mortgage being paid in part (preferably in full!) by someone else
-Home secure from vandalism versus being vacant
- Potential for residual income

FOR REALTORS
-Create a database of potential buyers
-Database of sellers who may potentially sell or buy new investment properties
-Property management opportunities

FOR THE COMMUNITY
-Less eyesores of vacant/neglected homes
-Contributes to a diversity in the local community, which is important in my opinion
-Decreased crime activity from vacant homes being vandalized or occupied illegally
-Less potential foreclosures with landlords having ability to stay current on mortgage

LOCATION, LOCATION, LOCATION

You always hear the cliche' when it comes to real estate it's all about location, location, location.  That's easy to comprehend in California, Florida, or New York, but how does that translate to the Metro Atlanta area? The main thing you have to remember is inside the perimeter of I-285 the rules are different than when you're dealing with properties located outside the perimeter.

Inside the perimeter, you're either trying to get as close to Buckhead, Midtown, or Downtown as possible. You want to be in an area with a nice surrounding area and low(er) crime rates.  Retail then comes into play especially when you're factoring condos. Can you walk to the grocery store, retail shops, or entertainment? These are things you don't usually get outside the perimeter in the suburban areas, however, an in-town area (Buckhead, Virginia Highlands, Brookhaven, etc.) with a suburb feel are highly in demand. School districts don't play as big of a role in property values since private/charter schools are the preference here.  Areas along public transportation lines are not the most desirable as you'd find in other areas of the country.

Outside the perimeter, the closer you are to an expressway is one of the leading property value boosters.  Commute times in Atlanta are some of the worst in the country so this is becoming a more popular requirement. Retail is the next property value indicator. The closer you can be to malls, retail stores, shopping centers, and grocery stores ensures that your area is desirable. I would say high school districts are just as important as retail since this is what drives most people to move into the suburbs or from a neighboring county.  The only exception to these rules are when you're assessing country club communities.  Country Clubs can be very isolated and still command a heftier price tag than a comparable home that fits all the other criteria I used to assess home values outside the perimeter.

When purchasing a home location is important, but only you know what YOU need to be located close to you when you are living in the property.  For investment properties, you want the property to encompass as many of these value indicators as possible in order to cater to as many potential buyers as possible.

Downpayment Assistance Programs

      Down payment assistance programs have sustained during the housing market roller coaster. Some of the more popular programs went away but some very attractive ones are available through various counties. They all have income limits and restrictions on selling the property within a time frame, but the question is---can you qualify? The answer may surprise you.

      The Georgia Dream Program is probably the most popular down payment assistance program in Metro Atlanta. It ranges from $5,000 to $7,500. It requires that the home be your primary residence, you haven't owned a home in 3 years, and that you attend home buyer classes. It is in the form of a second mortgage that is repaid when you sell or refinance the home. Income requirements for a couple are $69,000 in the Atlanta MSA with a max home price of $250,000 and $59,500 in the rest of the state with a max home price of $200,000.

     The HomeStretch Down Payment Assistance Program is unique to Gwinnett County. It is $7,500 and is only repayable in the first five years; after five years, the loan is satisfied and doesn't have to be repaid.  It has a $40,150 income cap on a single person and $45,900 for a couple. Gwinnett County also offers a Neighborhood Stabilzation Program (NSP) that gives up to $22,500 towards the purchase of specially designated homes up to $200,000.  I have a list of county-specific down payment assistance programs on my website.

     HUD still has one of the most attractive 'down payment assistance' programs it reduces your required down payment on an FHA insured loan from 3.5% of the sales price to $100. You have to pay full price for the home, but HUD homes are usually 10-15% less and competing homes in the area in my experience. Your lender can use the HUD appraisal on file if it's less than 90 days old, saving you another $400. HUD also does a BASIC inspection and list of escrowed repairs so if cash is tight, you can skip a home inspection, and have some BASIC insight of the home's condition saving you another $250-$400.

      So on top of the sub 4% interest rates & record low home prices, you can still get down payment assistance.  The down payment was usually the main inhibitor (along with credit scores) delaying people from buying homes.  While putting down 20%  is more favorable in the long run, it can be a staggering number once you add it up on the home of your dreams but now, it doesn't have to be.

Bidding Wars Are Back

Over the last 12 months, the Metro Atlanta real estate market has seen competition on homes increase. Is it because there are less homes available? Are there more buyers entering the market? It's a little of both but there are other factors at play here. Let's look at why buyers are seeing bidding wars in the current market.

Short sale backlash. Buyers have heard the horror stories of short sale sales taking months and not getting approved or worse, the house foreclosing while they're under contract.  Because of this, buyers are avoiding these homes if they are looking to move within 60 days. Some agents avoid them all together even when the listing agent advertises being a 'distressed property expert' or designations insinuating so.  Truth is no one can force a bank to approve a price no matter how good the file is put together. The bank has the final say so and while an experienced agent and speed up the process, they cannot make a decision for the seller's lender.

First look periods. Fannie Mae, Freddie Mac, HUD as well as banks now have initial periods where they will only look at offers from owner occupants.  Some banks have implemented a similar process and even have the 1st 3-7 days designated as marketing only and will not look at any offers from anyone. While these owner occupant only periods fend off investors to give buyers a chance it causes a frenzy and almost always causes a multiple offer situation before the bidding period is up. Fannie Mae and HUD both utilize online bidding so it enables them to track (multiple) offers more efficiently rather than waiting on listing agents to upload offers to them manually.

FHA loans.  Most home buyers are utilizing FHA loans to finance their home purchases rather than conventional loans or paying cash.  This means the homes must pass an FHA appraisal / criteria and be inhabitable.  Buyers with FHA loans have to pass up on homes with excessive repairs needed, town homes/condos with HOA's that aren't FHA approved, and incomplete homes. This automatically narrows the field and concentrates these buyers to homes that are move-in ready.  If a home is FHA ready, you can bet the attention and number offers will reflect it's condition.

Savvy Buyers & Investors. Savvy buyers and investors who have little or no emotional attachment to their upcoming home purchase will usually submit offers on multiple properties and negotiate multiple offers until they secure one at the desired price.  Because of this, you will see homes that have been on the market less than 24 hours with offers. Some of these types of buyers will submit a 'blind' offer on a home where they've only assessed the value and not the home's condition since they bid on them sight unseen.

So with all of the homes with multiple offers and bidding wars causing sale prices to exceed the list price, is it still good time to buy? A resounding YES! With the right strategy, you can bid and win and secure the house you really want no matter how many offers are at play.  How you ask? That's at least a 3 part series blog.........

Property Value Insurance & Reverse Mortgages

You may begin to get offers in the mail for home value insurance coverage. It sounds great: Purchase this policy and if your home value drops within 10 years, you can sell it for whatever the current market value is and get an insurance check for the difference.  At first glance this appears that you would not have to entertain a short sale because for $40-$50/mo. you can cover any deficiency.  However, with most housing markets being in the valley and flat, it's unlikely that you would have a substantial drop in value in the next 10 years that would make this a good idea.  Purchasing this type of insurance in say 2006-2008 would have been a great choice, but of course, there are no conversations about insuring losses in booming market.  The housing 'bubble' was always a looming topic, but with the meteoric rise of housing prices year after year since 2002, most thought it would last....well, forever!

Reverse Mortgages are probably not even a thought if you are under 50 yrs old, but they become as common as offers for free dinners to attend a sales seminar as you enter old age. In short, a reverse mortgage is when you take a mortgage out on your primary residence in order to be paid a monthly amount until you die.  In most cases, it is a bad idea to take a mortgage out on a property you own free and clear.  The few people who it makes sense for have no relatives, no income, and need money to survive. Outside of that, there are usually many other options that don't put your home at risk. As with any financial decision, do as much homework as possible before considering any decision/expense that will affect your long term financial well-being.

Using Your 401K to Invest in Real Estate?

Would you empty your 401k to buy real estate in hopes of a better return on your money? Depending on the amount you have saved, your current rate of return, and your appetite for adventure (aka becoming a landlord) this could be a viable option.  Initially most people would cringe at taking 'secure' money and using it to purchase 'volatile' real estate in the Atlanta market, with an election year upcoming.  However, if you do your homework, you may wonder, "Why didn't I do this LAST year?"

A conversation I had last week with a savvy investor & his contractor peaked my interest as they discussed bidding on an auction property in Dallas. He's pulled out $45K to purchase two homes totalling $50K. The first home was $23,000 and is already rented at $1200/mo. and he's in the process of purchasing the second. He has enough to cover the tax implications at years end.  He explained how his gains were 36-40% higher than what he was currently getting through the investments in his 401k.  The basic math on the first property is that outside of what was spent to get the home rent ready, at $1,200/mo barring no major repairs, he stands to have repaid his 401K in under 22 months. So after the break even, he's looking at a 'free & clear' positive cash flow property after repaying himself the initial investment. But with the prices of some homes that I've sold in the last 36 months (the cheapest $8,900), I know that these numbers are not only realistic, but can be even better!

Right now there are 178 homes listed for sale under $15,000 in Gwinnett, Cobb, Fulton, Dekalb, Clayton, Henry, Douglas combined. These are all metro area counties within a 40 minute or less drive to Atlanta.  Even with $850 in monthly rent you can pay off one of these properties in 18 months.  Now before you empty your nest egg, there is a LOT of homework you need to do regarding your 401k plan. Talk to your 401k administrator to find out what types of investments are permitted in the plan. If your plan allows you to buy real estate, examine whether it would be easier to buy the property outside of your 401k. The IRS imposes numerous restrictions on real estate purchases in a retirement account. Most 401k plans allow loans, which you can use for any purpose. The IRS limits 401k plan loans to the lesser of 50 percent of your account value or $50,000. After the 401k homework you'll need to create a strategy to pursue properties in a certain area, within your price point, and condition requirements--don't want to put $20,000 into a $20,000 house! You'll also need to prepare to be aggressive as the competition on $30,000 & under properties is fierce as you would expect, but someone has to win the bid.  With the right price, the right terms, some timing, and a little luck, that someone could be you!

Three Ways to Lower Your Mortgage in 2012

First off, if you just purchased your home, you can file homestead exemption with your county. All counties now have the same deadline of April 1, 2012 to file for this.  Since the home you purchased is your primary residence your are eligible for a discount on your property taxes. Even if you you already have a home check your drivers license. If you're over 62 (especially over 65) there are NUMEROUS discounts that you could be eligible for! If you're not eligible yet, I'm sure someone you know is so inform them.

Second, you can dispute your current tax assessed value with your county. If you haven't been mailed a new tax value in the last year or so, this is crucial since it's likely that your tax assessed value is not reflecting your home's current market value! In some cases, the local municipalities have raised the millage rate (Millage is the tax rate used to calculate your ad valorem taxes) to offset the slew of homeowners successfully lowering their tax assessed value by tens of thousands of dollars.


Third, contact your mortgage company and see if they collected more for property taxes than they paid out with the mortgage payments you made. Most mortgage payments have escrows which divide your tax/insurance bills over 12 months and pay them annually so you don't have to come up with a chunk of money when the bill is due.  The problem is that if your insurance premium or tax bill goes down, your mortgage payment remains the same and now there is extra money being collected! When you contact your mortgage company and discover an overage, they'll give you an option to mail you the difference or apply to the next year's taxes--I'll let you decide what to do with that. This will also in turn lower your overall mortgage payment since the previous year's payment is based on collecting more in escrows.


Notice I did not recommend a loan modification. That is a new blog all by itself! Loan modifications have become THE most frustrating and sometimes demeaning processes next to doing a short sale on your own. Don't attempt a loan modification on your own use a third-party housing counselor (NACA is my favorite). Only used HUD approved housing counselors and NEVER pay anyone to do a loan modification for you.