Value-Rite Appraisals Inc Blog

In an article I found on Investors Business Daily, authors Jeffrey Humel and David Henderson make some valid points about where the true blame may lie for the events that have unfurled over the last few years.  Many pundits and financial commentators placed a large portion of the blame on the Federal Reserve Bank’s financial policy since 2001 for creating the mortgage and real estate bubble.  Mr. Humel and Mr. Henderson make a different case, and a very strong one at that, that the feds, not the Fed were the ones responible. You might be sitting there asking yourself, “what’s the difference?” Well, the Federal Reserve Bank (The Fed) is an independent financial institution created with the responsibility of looking after our economy and our currency. They oversee large banks and make sure they are properly financed. The feds on the other hand are the U.S. Federal Government ie. Congress, Senate and the Treasury Department.

The main premise of the article is that even though the Fed set the target rate (the federal funds rate) at an incredibly low 1%, it did not mean they were in fact pushing an expansionary monetary policy. They argue that, in fact, we saw sharp decreases in the growth rate of the monetary supply over the last 6 years.  Although they put the numbers out there and show the decreases in the growth rate of the money supply that even with the slower growth rates,  what we had was still to high to be sustainable.  The increase in monetary supply can be most directly felt in the exchange rate of the dollar, and as you know, the dollar has not done well in the last few years.

The article lays most of the blame over the last few years at the feet of the feds. They argue that the Federal Government created to much of a moral hazard in the financial system by implying, either explicitly, or implicitly, that in the event of failure the government would step in pick up the tab. The authors argue that near government agencies such as Fannie Mae and Freddie Mac provided investors with an implied sense of security when investing in their mortgage backed securities.  The assumption was that the feds would not allow these securities to fail. They even go so far as to argue the government has essentialy, through policy action over the last 10 years, told banks that they are “to big to fail” and would step in if needed. We have seen just this type of behavior with the recent salvaging of Bear Sterns, they were in fact “to big” to let fail. 

Another argument the authors made was that it was the feds that were so aggresive in wanting banks to push sub-prime products in the first palce.  The goal was of course to increase homeownership to millions more americans. The problem was that it’s not very easy to extend credit to those who, quite simply, are not qualified for it. The feds, as the authors point out, praised lenders like Countrywide for their willingness to lend to sub-prime borrowers and would routinely use them as an example of how the markets were doing so well in providing homeownership to millions who normally wouldn’t qualify. Well, of course, now we see that we should have just stuck with the original plan: Lend money to those who can pay you back. Perhaps if the feds didn’t try so hard to push banks into making subprime loans in the first place, and didn’t create the moral hazard of implying they were to big to fail then maybe, just maybe, we wouldn’t be in the mess we are today.

Whether you're selling an investment property or flipping a house, there are thousands of projects you could take on in order to help increase the value of the property before you sell. However, not all improvements are created equal. Since you probably can't do every single upgrade that you'd like to, we'll let you in on the secret projects that will be sure to pay off - making certain you'll get the most bang for your buck when that property sells. And be sure to make a special note that the numbers below are only averages, including single-homeowner renovations; you could stand to see a return that triples your investment. Take a look below:

Number one in almost every situation is the bathrooms. Bathrooms have an average recoup rate of 102 percent - that's a great return on your investment. A minor bathroom update including sink, bath, tile, floors, toilet, vanity and fixtures will cost around $10,500, and a recently renovated bathroom like that will generally bring in an average of $10,700 at resale. Fresh paint and a tub re-glaze are inexpensive options that can really make an old bathroom look brand new. Bleaching grout and re-caulking around the tub can really take years off an outdated bathroom as well.

Believe it or not, the second best return comes from outside the house - landscaping. With an average recoup rate of 100 percent, fixing up the yard can make a big difference in drawing in potential buyers. Creating an interesting landscape won't require tons of cash, but possibly a little hard work (unless you plan to hire a gardener). If the grass is greener on your side, buyers will be attracted to the property much more than one with a dried-up, brown lawn. Sod costs around 30 cents per square foot so depending on your yard size, it shouldn't be a major expense. You could do a 5,000 square foot yard for about $1,500. Adding native plants that are hardy but beautiful will make a big impact for little money as well. And with a resale rate of 100 percent, that's a project that would be well worth your effort.

If the kitchen in your property needs a minor update, meaning mainly cosmetic as opposed to a complete overhaul, then taking on the project will get you an average 98.5 percent return on your investment. The average kitchen remodel costs $14,913 and is worth $14,691 at resale. This nearly $15,000 investment should cover floors, countertops with sink and fixtures, oven, and 30 feet of cabinet and drawer re-facing. Simple touches that will impress buyers include recessed lighting, lit cabinets, and uncluttered spaces. Try to make the kitchen appear as roomy as possible by choosing a light paint color and lots of cabinets to stow kitchenware.

The next update may not be feasible in every property, but if you can swing it, it's worth the investment. Adding an attic bedroom may not spring to mind when considering improvements to your property, but it can get you an average resale rate of 92.5 percent. If your property happens to be located in the western side of the country, you may get closer to a 105 percent return! An attic addition costing $39,188 can cover a 15' x 15' bedroom, 5' x 7' bathroom with a shower, a closet, four new windows, and a 15 foot skylight. Not to mention, you can then market your property with one more bedroom - and that's major value added.

Another great way to invest in your property is by finishing off the basement. The average cost of adding a 20' x 30' entertainment area complete with wet bar, laminate flooring, recessed lighting and a 5' x 8' bath is just over $51,000. And on average, you will get about 90 percent of that back when you sell your property. And again, if your property is out West, you'll get more like 108 percent recouped. But before taking this project on, you'll want to make sure your basement is in proper shape - that means no flooding. If flooding is an issue in your basement, there are several ways to remedy the situation: try putting in bigger gutters, re-sloping the yard, or adding French drains. Be sure your solutions work before putting in the time and money - you want a wet bar, but not in that sense.

Replacement windows are often not a luxury improvement, but a necessity for older properties. Nothing can turn a potential buyer away faster than rotten, old stuck-shut windows. And with a recoup rate of nearly 90 percent, there's no reason to skimp on this update. The cost will vary depending on the size of the house, but replacing ten standard size windows will cost about $9,700, of which you'll get an average of about $8,700 back upon sale. However, if you happen to be renovating in a big city, you're actually likely to get more cash back than what you put in. Properties in Miami, Seattle, Orlando, Boston, Chicago, San Francisco and New York City get a recoup rate of over 100 percent on replacement windows. But, if you're in the sweltering deserts of Las Vegas, where windows rarely need opening, you'll get less than 62 percent payback. So, take a look at your region and decide if replacement windows would be worth the extra cost for your property before going all out.

A final high-paying improvement is new siding. If your property is in need of a facelift, siding can be a quick fix with a great recoup rate of 95.5 percent. The average national cost of replacing 1,250 square feet of vinyl siding is $7,239 and you'll get $6,914 back at resale. If you want to go a little more upscale, spring for fiber-cement siding - it will costs you around $10,400 but it has an amazing return rate of 103.6 percent. Either way, replacing your property's siding makes a big impact to potential buyers and pays off with a decent return in the end.

Out of the innumerable options for property improvements, the above choices will net you the most cash back when you're ready to sell. You won't want to waste your time and money making improvements that won't recoup your costs at the sale, so you can safely ignore home office renovations, family room additions and fancy master suite additions as these are some of the improvements that won't pay off very well. While you may not be able to make all of the improvements we listed, choose the most needed from the list and watch your money come right back to you.

Many homeowners have seen their equity drop in the last year and it’s likely that this trend will continue in the near future.  The question you may be asking yourself, and the question we are being asked quite often lately, is what effect the decline in the housing market will have on Reverse Mortgages.  This question really actually breaks down into two seperate questions and they are both very important to those concerned. The first question here is what effect the declining home values will have on those trying to get a reverse mortgage, and the second question is what the effect will be on those who already have a reverse mortgage. Lets look at both these questions to see what this housing debacle might mean to you.

First things first, for those who already has a Reverse Mortgage, you have nothing to worry about. Many homeowners have been contacting us asking about what will happen if their home values drop to much and the reverse mortgage they have becomes more than the homes value.  One of the best parts of a reverse mortgage is that once you take one out the terms of the loan cannot change. If you have a line of credit or are receiving monthly payments you will continue to receive them according to the terms of your loan.  If the value of your home drops below the amount due on your loan the lender cannot come ask for more money or file any deficiency judgement in the event they lose money.  Reverse Mortgages have been designed to provide you security for these very circumstances.

 For those who are contemplating taking out a Reverse Mortgage the declining home values could pose some problems. If you in an area that has been hit pretty hard by the real estate downturn then there is a chance the amount of equity in your home will no longer qualify you for a reverse mortgage. With this being said, some of the hardest hit areas are places where the average home value is more than the maximum HUD limits anwyays so it might not actually change anything for you. If you are concerned about what your county limits are or if the downturn in the market has changed if you qualify for a Reverse Mortgage you can always get a free loan analysis.

Another issue that becoming more common is that homeowners at risk of foreclosure with little equity in the property are able to do what’s known as a “short refinance” to allow the homeowner to qualify for a Reverse Mortgage. What this means to you is that even if you think you don’t have enough equity in your home you may be able to work out a deal with your lender to allow you to pay less than you owe in order to get into a Reverse Mortgage. You may be asking yourself why a lender would be willing to do this and the answer is quite simple, it’s cheaper for the lender. Instead of going through all the costs of foreclosing, it is just simply easier for the lender to forgive part of the loan inorder to quickly get their money back. 

So as home values continue to fall it does not mean that you are unable to get a Reverse Mortgage. It may be that your home is more than the county limits anyways, or it may be that your lender is willing to forgive some of the loan balance in order to help you out either way there are options available and with a little creativity and a knowledgeable loan officer you should be able to make your Reverse Mortgage work, even if the housing market is falling to pieces on your doorstep.

According to AARP's study, 90% of senior homeowners who had undergone HUD counseling classified themselves as being "satisfied" with their experience with reverse mortgage lenders.  This is certainly a positive statistic both for the reverse mortgage industry, as well as for homeowners who are looking into getting a reverse mortgage.  But what kept the other 10% from being satisfied?  What could have been done differently to make sure more senior homeowners answered "very satisfied"?  Incidentally, 73% of senior homeowners that were surveyed did say that they were "very satisfied", but that means that 17% of senior homeowners saw room for improvement in some portion of their experience.

Nine percent of HUD counseling clients said that they were to some degree "not satisfied" with their lender.  The AARP study asked them, open-endedly, "Why were you not satisfied with the lender?"  In response, the senior homeowners most often cited one of the following seven reasons.

"The loan cost too much," was cited by 17 percent of dissatisfied senior homeowners.  This is an important concern for homeowners since the typical costs of doing a mortgage exist, in addition to paying a large mortgage insurance premium.  It is sometimes difficult to see all of the benefits of a Reverse Mortgage when you are looking at all of the costs of doing the loan.  Remember that the origination fee can be negotiated in most cases.  If you feel a reverse mortgage is right for you, but can't see yourself paying so much for it, make sure to discuss the fees with your loan officer, and see if there is room to reduce the origination.

"Gave me incorrect information," was cited by 16 percent of the dissatisfied senior homeowners. "The lending process took too long," was cited by another 16 percent of the dissatisfied group, and "Did not answer all my questions," was cited by 13 percent of the group.

It is important to work with a trained, licensed, experienced reverse mortgage professional.  There are many details to know about, and sometimes it will happen that a question will be asked that even a trained and licensed loan officer will not know the answer too.  They should, however, have the resources available to get the answer for you.  If you ask them a question that they do not immediately know the answer too, they should have established relationships with title and escrow professionals, as well as be able to have dialogue with underwriters or managers that can answer more specific questions.  Some questions that homeowners may have about Reverse Mortgages, or even mortgages in general, however, should rightfully be referred out to either a licensed tax preparer or an attorney.  For example, a real estate professional cannot answer questions about tax implications of proceeds for a reverse mortgage or give legal advice.

"My loan application was not approved," was cited by 14 percent of the dissatisfied senior homeowners, and "The amount of money I would have received was too small," was cited by another 9 percent of the group.

Whether or not a homeowner is approved for a Reverse Mortgage, and how much money they can receive, if they are approved, is dictated by guidelines based on how old the youngest borrower is, how much is currently owed on the house, how much an FHA appraisal says the home is worth, and what the FHA lending limits are in the homeowner's zip code.  Credit score, income and the borrower's liquid assets are not determining factors at all, so senior homeowners should not take it personally at all if they happen to not qualify for a loan.

Nonetheless, it is always disappointing to be told that you are "not approved," so it is very important for loan officers to be sensitive and respectful when telling a homeowner that they do not qualify for a Reverse Mortgage at this time.  It would also be appropriate for the loan officer to explain why  you don't qualify for a Reverse Mortgage at this time, if that is the case, and to point out what may change in the future that might allow you to qualify at a later date.  Since your age, the value of your home, and the lending limits are factors that change over time, just because a senior homeowner doesn't qualify for a Reverse Mortgage today, shouldn't discourage them from applying again in a year or two. 

If the homeowner is in a needs based situation, for example if you have payments that are adjusting, or are just too high for your current living situation, or extra cash is needed for necessary purchases, your licensed loan officer should be able to look into other traditional mortgage options for you.  If other mortgage options exist, your licensed loan officer should be able to explain all of these options to you, and answer all of your questions thoroughly so that you can make the best decision for your situation.

"Did not treat me with respect," was a reason cited by 8 percent of the dissatisfied senior homeowners.  Being polite and respectful is always critical.  Although this was given as a seperate answer, it probably played a role in the other reasons cited for dissatisfaction.  If loan officers always make an effort to be as respectful and thorough as possible, senior homeowners might not be dissatisfied even if they are not approved at this time.  Ideally, they can walk away from any meeting with their loan officer, whatever the outcome.