Smart Real Estate Investing

Chicago Real Estate

Gaining momentum in the 2nd quarter this year, Geneva, Illinois, has seen a significant increase in real estate prices this year.

Geneva is a suburb of Chicago, that is known for its historic downtown and charming neighborhoods. Experts are reporting that the market, while growing, is neutral at this time. It is neither a home buyers paradise nor a home sellers paradise, but rather a level playing field. Real estate prices are trending upward at a modest pace and average times are also creeping down.

Homes are seeing a strong 9 percent appreciation rate and an average home sales price of $364,197. A typical home attains 96 to 100 percent of the listing price upon sale -- in anywhere from 1 to 4 months depending on the conditions.

Helping to spur on the local real estate scene -- new commercial real estate developments (retail and otherwise) are taking shape -- bringing renewed focus to the area. The city also has commuter trains available that can easily take residents to the center of Chicago.

Chicago itself has seen steady rates of appreciation this quarter. New condos are selling in the $275,000 range, with appreciation rates at a healthy 3 to 8 percent depending on the neighborhoods. Up and coming neighborhoods can expect as much as 20 percent appreciation rates at this time.

It was once a real estate seller's paradise where they were getting top dollar for their homes, sometimes more than the house was even worth. Now with the interest rates increasing, home sellers are now waiting longer for offers and a lot of price reductions are being seen. This is good news for home buyers, as they are getting better deals. They have more power in the negotiating.

Mortgages Credit Scores

What do you do if your credit score is high enough to obtain the rate and product you are seeking, but is not as high as you think it should be?

"Leave it alone," says a Southwest Florida mortgage broker.

"This is not an ego trip," Cicione advised his colleagues who were taking a four-unit continuing education course in understanding credit scoring at the Florida Association of Mortgage Brokers annual convention last week in Tampa.

If it ain't broken, don't fix it.

Not messing with a good thing is sound advice for consumers. Why? Because trying to improve your score could actually result in a lower score, not a higher one. Some steps to a higher number are counterintuitive, such as opening a new account and closing out an old one, a step that you could really mess up your score.

Another common mistake borrowers make is showing up at a broker's office with a credit score that has been purchased over the Internet. More likely than not, Cicione told the class, the score you have in your hands is going to be 50-60 points lower than the classic FICO score the mortgage business goes by.

"It's going to be lower than our industry-specific score almost every time," the 36-year mortgage industry veteran said of generalized scores designed for sale to consumers, but not businesses.

A savvy broker trained in the nuances of credit scoring will advise borrowers right away that the score they purchased off the Internet is not the same as the one used by lenders so that there will be no surprises.

But if your broker didn't mention that and the score he receives is much lower than the one you pulled, don't be alarmed. He's not trying to rip you off by forcing you into a higher-rate loan.

Cicione, a broker in the Ft. Myers area who was president of his state trade association in 1999, also pointed out to the class that mortgage scores are nothing more than a "snapshot" of the consumer's credit profile at a particular point in time. "Thirty-days later," he said, the score "could be very different, even if they don't do anything rash," like buying furniture or a new car on time.

Credit scores "are active things," he said. "They're vibrant, and a new score is generated every single time" an inquiry is made.

To understand why you didn't score better than you expected, Cicione told the class to ignore late payments and look instead to the four reason codes or key factors given with each score.

"These codes are your roadmap," he said. "They are listed in the order of importance or weight causing a negative impact when calculating the score. And they should be relayed back to the consumer to explain how they can change their credit profile and increase their score over time."

Although other things often contribute to a lower score, he added, the reason codes list the more important problems that lead to lower scores. And here's another tip: While four factors will be listed, the first two "are the ones you really want to pay attention to," according to the long-time broker. "The lower ones are probably not worth worrying about."

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Silicon Valley residents who've decided they can't afford to buy a home had better lock down the best deal they can get in a rental because they soon could be priced out of that market too.

Rents in the San Jose-Sunnyvale-Santa Clara metropolitan statistical area (MSA) were apparently at an average $1,414 a month, up 9.1 percent in the second quarter this year, compared to the second quarter last year when they were only $1,296.


That's the greatest rent increase -- nearly 12,000 apartment complexes of 100 units or more, in a swath of 15 states concentrated to the west of the Mississippi River, but also Florida and Indiana. The average rent is based on a mix of everything from studio apartments to three bedroom townhome rentals.

In Silicon Valley's slow but steadily improving economy, the upward pressure was strongest on two bedroom townhomes (up 12.3 percent), small junior one-bedroom apartments (up 10.7 percent), larger one-bedroom, one-bath apartments (up 9.8 percent) and two-bedroom two-bath apartments (up 9.3 percent).

Compare those increases to the median price of single-family homes -- $819,950 in June, up less than 8 percent from last year.

Experts say higher home prices in Silicon Valley and elsewhere are forcing more and more buyers into rental homes where landlords now hold the market and are pulling back incentives as their properties fill up.

That makes long-term contracts a better deal than month-to-month or shorter term rental contracts for new renters, moving renters or contract-renewing renters.

Silicon Valley also yielded the greatest quarter-to-quarter increase in rents, which rose 4 percent since the first quarter as occupancy, at nearly 97 percent, left little room for renters to negotiate.

California regions led the way in year-over-year rent increases with the Oxnard-Thousand Oaks-Ventura MSA (up 7.3 percent), Los Angeles-Long Beach-Santa Ana MSA (up 6.8 percent -- with the database's highest average rents at $1,150) and San Francisco-Oakland-Fremont MSA (up 5.9), following Silicon Valley.

The highest occupancy rate at 97 percent was in Fresno, CA, where rents averaged only $747 a month, up only 4 percent from last year. However Fresno, with an ailing owner-occupied housing market, was the only region tracked revealing a slip in its rental occupancy rate, down from 97.6 percent a year ago.

Among the markets tracked, only Colorado Springs, CO, lost ground in year-to-year rents which fell from an average $711 during the second quarter 2005 to $708 in the second quarter this year.

None of the areas revealed occupancy rates below 90 percent as more and more would be buyers, pushed out of the owner-occupied housing market, found shelter in a rental home.

Compared to a year ago, twice as many MSAs yielded annual rent growth of more than 3 percent. The complete database of rentals revealed an average occupancy rate of 94.3 percent, up 2 percent for the year. Rents, throughout the database, rose an average 3.7 during the same period.

During the second quarter, MSAs joining others with previous annual occupancy increases and subsequent rent growth included Tucson, AZ; Denver-Aurora CO; Indianapolis IN; Kansas City KS-MO; and Oklahoma City, OK.

California real estate news

California Out To Slash Title, Escrow Fees

Concerned, repeated million dollar fines levied against the escrow and title insurance industry amount to little more than a slap on the wrist. The California Department of Insurance wants to slash escrow and title fees so much that a home buyer could save more than $2,300 on closing costs.

The consumer rate cuts would shave $1 billion a year off the title and escrow industry's $4.5 billion annual revenues in California.

The department says that's necessary because the title and escrow industry is a dysfunctional system of illegal kickbacks, gratuities and questionable partnerships where the lack of competition squeezes consumers.

Insurance Commissioner John Garamendi is seeking an average 23 percent roll back on the cost of title insurance alone -- a potential savings of up to $2,370 on a $600,000 home.

The median price of a home in California was $564,430 in May, according to the California Association of Realtors.

"I have repeatedly fined these companies $1 million and more to put a stop to their illegal schemes that have dashed the hopes of consumers looking to realize the American Dream," said Garamendi.

"But to these companies, given their excessive rates, a $1 million fine was merely a small cost of doing business," he added.

The commissioner also said without competition, skyrocketing housing prices take title and escrow fees along for the ride because insurers base their fees on a percentage of the home price.

The title insurance industry vehemently insists competition is alive and well in the Golden State, and suggested fines are the way to go to punish wayward companies.

It vowed to fight the proposed rate reductions at the policy level and in the courts.

"It's absolutely true over the decades there have been occasions where companies have engaged in rebates to try to get business and we have tried to work with what is legal vs. kickbacks, but now he (Garamendi) wants to take a sledge hammer and reduce everybody's rates. If there are companies doing bad things, he should go after them," said one lobbyist.

Calling plans to lower rates a "media-friendly regulatory stunt" the Escrow Institute of California (EIC) said in a prepared statement, because the state Department of Corporations, rather than the insurance department, regulates escrow companies, lowering rates would unfairly, perhaps illegally impact escrow companies. In southern California, escrow companies, typically smaller independently-owned companies, work in tandem with title companies. In northern California title companies offer both title and escrow services.

The industry argues because escrow companies order title insurance from title companies they would also be forced to lower their rates even though they are not regulated by the insurance department. Because they are smaller, independently owned companies, their bottom line could suffer.

"In his haste to make headlines, however, Commissioner Garamendi failed to consult with DOC or with EIC to gauge the impact his actions would have on small business owners. In fact, he refused repeated requests by EIC to discuss this draconian decision, which will adversely affect thousands of independent licensed escrow companies in California," the statement said.

The action is the latest in a series of punitive measures against the title and escrow industry dating back decades in California and elsewhere. The repeated battles put the industry's reputation at stake.

One of the most recent, spawned by Colorado investigators, became a nationwide investigation of several major title insurance companies. Among the settlements, First American agreed to give back $24 million to consumers nationwide while denying any wrongdoing after it was charged with kickbacks to real estate agents, lenders and developers. Kickbacks are a violation of many state laws as well as federal law known as RESPA (Real Estate Settlement Procedures Act).

Because the title and escrow industry is quick to pony up fines and institute policy reversals in response to investigations about questionable practices, Garamendi decided lower rates would provide a better long term solution.

He also vowed "to do something about it" last year when a department-commissioned report, "An Analysis of Competition in the California Title Insurance and Escrow Industry," found alleged anti-competitive practices in the title and escrow industry, practices the industry denies.

What Garamendi wants to do includes:

Set "interim maximum rates" based on each company's rates in 2000, before the sharp rise in home prices. The result will be an immediate 23 percent reduction in title insurance rates for a home purchase, a 16 percent reduction in the cost of title policies for refinancing, and a 27 percent decrease in the cost of escrow services provided through escrow companies controlled by title insurers.

Beginning in 2008, mandate that companies report to the insurance department comprehensive data showing their costs and operations to help the commissioner better determine reasonable cost-based rates for title insurance.
The commissioner plans to use the data collected to determine a maximum amount that a company may charge for a title insurance policy and escrow fees. The maximum is expected to be well below current rates.

A public hearing on the new rules is scheduled for August 30.

"This is real money that will help reinvigorate the housing market in California by enabling more of us to become homeowners," Garamendi said.

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Suicide Loans: Piggyback Mortgages Default by up to 50%

"This is precisely what I have been warning the public about. It's the first sign of the tsunami of defaults and foreclosures that are coming," cautions Consumer Advocate and International Mortgage Reduction Expert, Harj Gill.

Gill, who is also the Founder, President and CEO of American Mortgage Educators, Inc., has been on a one-man crusade warning homeowners of the risks associated with exotic mortgages and urging them to take immediate action to avoid going into default.

Apparently, piggyback mortgages, which are a combination of two loans packaged together and closed simultaneously, represent just one of many non-traditional mortgages that have put homeowners at risk of losing their homes.

Typically for people with little or no down payment, the amount for the first mortgage is set so it does not exceed 80% of the home's value. This allows the borrower to avoid paying Mortgage Insurance (MI). The remaining loan amount is financed as a second mortgage by way of a Home Equity Loan or a Home Equity Line of Credit (HELOC) and "piggybacked" onto the first.

"I have always said this is a good solution to avoid MI, but a terrible long term strategy," said Gill.

The assertion is supported by the latest analysis by Standard & Poor's, an influential Wall Street ratings agency, which analyzed nearly 640,000 piggyback first-lien mortgages in bond pools. It was discovered that first-lien mortgages connected with piggyback loans are 43% more likely to go into default than stand-alone first mortgages of comparable size. The default rate increases to a whopping 50% for real estate borrowers with a FICO credit score of 660 or less.

According to SMR Research, lenders and mortgage brokers whose commissions are based on loan size, have aggressively promoted these loans because the first-lien portion of piggybacks tends to be larger than standard first mortgages.

Gill warns that borrowers with these loans should be ultra concerned because they are concentrated in metropolitan areas with the greatest risk of experiencing a fall in housing prices. "If borrowers start to go into default in a declining property market, they will be committing financial suicide by having their credit destroyed and still being burdened with a debt well after they lose their homes," said Gill.

A 2005 SMR Research study confirmed that many of the largest U.S. counties in population and mortgage market size have huge portions of home loans as piggybacks, some by as much as 62%. These include California, Washington, Colorado, Virginia, Arizona, Nevada, Oregon, Illinois, Georgia, Massachusetts, North Carolina, Utah, Florida, Texas, and Missouri.

The danger, is that unlike standard mortgages with fixed-interest rates, borrowers with adjustable rate piggybacks are not prepared for rate hikes that increase their payments. Gill has recommended that borrowers immediately reduce their interest payments and get a forecasting tool to determine the critical interest rate at which they are likely to go into default.

He says those with HELOCs can use a little known Banking Principle to reduce their interest payments.

Boston Massachusetts real estate

Boston, Massachusetts, is just one city having a difficult time with the current adjustments real estatet is making.

One expert reports that the greater Boston area has been under tremendous pressure this spring to perform in a manner much like last year. It cannot. In fact, the South Shore is off 9.2 percent in the number of home sales.

Boston itself is still seeing rising real estate prices -- up around 3.4 percent over last year. This is considerably less than in years past, and shows that real estate has had to cool to make housing more affordable.

Inventories are skyrocketing, as many home sellers are rushing to cash in on the current real estate prices. But as real estate prices rise, fewer home buyers decide, or can afford, to enter the real estate scene at this time.

Real estate experts are reporting that the prices are already moderately in favor of buyers and are seeing slightly dropping real estate prices compared to previous trends.

Currently there are 696 single family homes on the Boston real estate lists with median price of $440,000 and average price of $635,791.

Florida foreclosures

Florida foreclosure filings jumped by 6 percent from April to May, according to a study by RealtyTrac Inc., an online data concern. That’s one new filing for every 821 Florida households.

By contrast, national foreclosure filings rose by less than 2 percent, averaging about one new filing for every 1,247 U.S. households.

The numbers for St. Lucie County were even more grim. One of every 719 households there was the subject of a foreclosure filing in May. And in Palm Beach County last month, one of every 561 households faced a new foreclosure action — almost double the national average.

Unfortunately, this is not a blip. It is apparently going to be a trend for quite a period of time. The uptick in foreclosure activity is linked in part to the popularity of “exotic” mortgages. Given the area’s white-hot housing prices, it has been the unconventional loans, including no-interest and flexible interest-rate mortgages offering optional monthly payments, that allowed buyers to squeeze into modest homes with inflated price tags.

As the flexible interest rates of such loans reset, though, payments and overall debt can balloon. You just can’t have a median income of $58,000 to $60,000 and live in a $400,000 house,” said David Levin, a Delray Beach real estate consultant. “It just doesn’t work.

But, people wanted to believe. More than one of every two mortgages inked in 2005 had an adjustable interest rate. The Post’s review of mortgage defaults in Palm Beach, Martin and St. Lucie counties from Jan. 1, 2005, to March 31 of this year found that roughly half of the more than 2,100 troubled borrowers had loans with adjustable rates.

Yet, many believe defaults linked to adjustable rates are only the beginning. Interest rates on more than $1 trillion in such mortgages will be adjusted in the next 18 months.

Many can go up as much as 2 percent in the first adjustment.

Adding to the financial burden are two unexpectedly big bills facing Florida homeowners: Mortgage rates are resetting upward just as post-hurricane rate hikes in home insurance are pummeling property owners. And Florida Power & Light Co. bills have grown an average of 19 percent since January.

Not every area has been hard-hit. Martin County, for instance, recorded just one foreclosure-related filing for every 2,112 households.

But with 8,898 properties entering some stage of foreclosure last month, Florida earned the unsought distinction of recording the second-highest number of mortgage defaults of any state in the country, trailing only Texas. In rate of growth of foreclosures from April to May, Florida is one of the top 10 states nationwide.

Even the relatively positive national figures are tinged with a sobering footnote: The rate of increase in foreclosures across the country may have slowed to 2 percent from April to May, but it is still 28 percent higher than May of last year.

Golden belt real estate

...is of better quality than in most states.

More New Homes Contain Life-Threatening Defects

New homes built in the West in 2005 were constructed with better quality than those elsewhere in the nation, according to a risk management services firm from San Diego, CA.

Unfortunately, the study also says, wherever you go, life-threatening defects too often show up when you need your home to protect you the most.

The study of new homes and condos in 27 states, constructed by more than 900 different builders, commonly found window flashing problems, improper roofing, missing structural hardware and other defects to be more prevalent in the eastern and southern states.

Rather than questionnaires used in other studies to sleuth quality construction, the firm says it used data collected by hands-on independent inspectors trained to identify high-risk construction defects. Data for the study was gathered on 20,867 single-family and 11,128 multi-family homes inspected in 2005.

Among all homes, the three most common construction risks discovered in single-family homes were in the building envelope (41 percent), which could lead to moisture intrusion and mold; framing and structural elements (34 percent), which can affect a building's integrity during rough weather conditions or earthquakes; and in the plumbing and electrical systems (8 percent).

That indicates new home quality has worsened since 2004 when Consumer Reports' "Housewrecked" reported, based on scores of interviews with home owners, builders, inspectors, industry representatives, government officials, and lawyers, that as many as 15 percent of all new homes sold -- 150,000 a year -- had a serious defect.

Using up-close, multi-family home inspections, life safety defects appeared 29 percent of the time; framing and structural problems were in 26 percent of the homes and building envelope issues existed in 23 percent of homes. That also means some homes likely had two or more of these defects.

The single highest risk problems identified in single-family homes included improper framing around windows and doors (a structural issue), building paper and house wrap installation flaws (moisture intrusion and energy loss) and missing structural connections, a major hazard.

In multi-family homes, the greatest danger was found in building paper and house wrap installation flaws, unprotected penetrations in life safety assemblies and missing fire-rated materials (a severe safety issue).

High risk components and systems, when improperly installed, can lead to serious safety, comfort and durability issues during home ownership, Quality reported. Some flaws, such as missing structural connections, are insidious and would not be noticed by the homeowner because they show up in the approved plans, but a catastrophic event such as an earthquake or high wind event would make the defect appear suddenly, perhaps with deadly results.

"It concerns me that we routinely find missing structural connections in buildings around the country. This is the exact type of component that builders pay thousands of dollars per home for municipal inspectors to catch. It shows and is supported by litigation evidence, that the municipal inspection process is failing and a different direction is needed.

Of course, some of the responsibility must rest on the shoulders of builders who obviously don't get it right the first time.

The study surmised growing labor shortages and more complicated housing styles are also to blame for greater incidents of construction defects, which are not isolated events as some building officials have indicated.

California's building industry's progressive approach to the product -- builders embracing quality metrics and cultures used by other industries -- account for better quality homes in the Golden State.

Builders are learning very quickly through new computer technologies that we can track quality metrics to justify these changes, and the changes are very good for business. Everyone wins when defects are eliminated in the construction process.

This study clearly indicates a pattern of improved real construction quality, which cannot be measured by a homeowner answering a questionnaire.

These findings tell us that west coast builders are building a much better product than ever before, despite the increased complexity of the product and the diminishing labor talent. It is vry pleasing to see this, however it is also of concern that the eastern U.S. and Hawaii rankings have fallen over the prior year study.