You Can’t Buy This Home!

I have gone through this scenario many times. The buyer is qualified for a FHA loan, has found a home that they can afford, falls in love with it and then finds out they are not allowed to buy it. Why does this happen? There are many reasons. I have flat out seen communities where FHA loans are not allowed, I have also seen where some of the homes in a community allow FHA loans and the rest of the homes do not, and I have seen where communities that have lost their certification because they can’t meet FHA’s minimum requirements.

FHA loans use to have a bad reputation. They were used to get a buyer in with a small minimum down payment, minimum requirements and all kinds of options where the buyer could include things like credit card debt in their loan. Buyers did not understand how property taxes worked and builders apparently did not explain it well. The first year there were no property taxes on just-built homes. The second year property taxes kicked in and could increase the monthly mortgage payment $100 or more on average. In a year or two the loan would go bad and the home got foreclosed on.

During the 1990’s Pike Township was the fastest growing Township in Marion County. By the end of the 1990’s and the beginning years of the 2000’s builders were in high gear building high density/low cost communities. They were using FHA loans and closing the buyers any way they could. In my experience, new home salespeople that work for a production builder are some of the best salespeople I have ever seen. They are trained extensively, listen intently and know when and how to close the deal. What also helped was when they threw in appliances and upgraded carpeting, etc. for free. The way they decorated new model homes made buyers drool. It was the perfect storm for production builders.

Two things happened by 2004. Foreclosures were happening fast in these new communities. The effect was that it would drag down comparable prices in the community. I remember reading then that for each foreclosure in a community, market prices in the community would drop an average of 1 percent. In my mind and doing research, this was about right.

In 2007 I did research for a zoning commission hearing where a developer wanted to put in a new high density/low cost community next to a community that had been started in 2001 that had about 275 houses. In the years from 2001 to 2007 the existing community had a foreclosure rate of 24 percent. The average home in this community was bought new for $128,000. By 2007 the average market value of a home in this community was $82,000. That means if you bought a house in this community in 2001 and 6 years later had to sell it, you were in trouble. Using a FHA loan and paying $128,000, in 6 years you still owed $116,000. The average market value of a home in that community being $82,000 you were $34,000 upside down. So what do you do if you were the owner? In many cases the owner “walked away” from the home. There could be many reasons for this. The owner could have had a job transfer out of state, the couple divorces, one of the spouse’s dies, etc. You either “walk away” or you bring $34,000+ to the closing table when you sell it. In 2007 the short sale option was there but no mortgage company would let you use it. (A short sale is where the mortgage company allows you to sell your house for under what you owe them). The difference is forgiven. This does have an effect on your credit but not as bad as a foreclosure. The mortgage company would rather do this than have the cost of taking the house through foreclosure. It is a business decision for the mortgage company. Today short sales are very common. I also found other new communities in Pike Township that were approaching 50 percent foreclosure rates. I also know that the houses in them were bought with FHA loans.

I believe this is why FHA loans had such a bad reputation.

The second thing that happened by 2004 was sub-prime loans. There were lots of variations of these loans but basically the one that stood out was no money down and higher interest rates. This opened the flood gates for challenged home buyers. The federal government fined mortgage companies if they refused to give these loans. Once sub-prime loans were available, FHA loans almost did not exist.

I can remember an industry joke being if a buyer could fog a mirror that was held in front of them, they could get a sub-prime loan.

In my mind this was the worst thing that could have happened to the housing industry.

“Why can’t I buy this home?” asked the motivated home buyer. “Because you qualify for a FHA loan and this community is not certified for FHA loans” replies the Realtor.

As you can see, when sub-prime loans were made available, FHA loans trended down until the fall of the housing market in 2007. In 2008 sub-prime loans were no longer available. All of a sudden FHA loans took off. FHA loans financed 34 percent of the home sales in Pike Township in 2012. In 2009 it was 45 percent.

As a Realtor, I cringe when I think that I am going to lose potential sales because of a no-FHA-loan community.

The foreclosures that we have seen in the past 5 years are mostly due to sub-prime loans that were made between 2004 and 2007. The other major factors for them are job loss and the economy in general.

FHA Loan Facts
• The loan limit for a FHA loan in Marion County is $271,050. 56 percent of FHA loans in Pike Township were between $100,000 and $266,000 in 2012. That means that your main stream buyer is using the product.
• An FHA loan requires the owner of the home to live in the home. That means that an investor cannot get a FHA loan and rent out the unit.
• FHA loans today are much more restrictive than they were 10 years ago. In fact all loans are more restrictive.

My Personal Thoughts as a Realtor;

When you are dealing with buyers of homes in the under-$75,000 price point, they generally don’t have much cash on hand. The difference between 3.5 percent down (FHA) and 5 percent down (Insured conventional) could kill the deal. That could be $750 on a 50,000 Home. I know it may seem small to you and I but these people may be living from pay check to pay check. They may have excellent credit, a good job, and moving from an apartment to a mortgage may save them plenty – especially since rents are so high and mortgage interest rates are at record lows.

I have lost many sales due to the fact that the community was not approved by FHA. I think it is in the Board of Directors fiduciary duty to make sure that units can be sold any legal way that will help increase/maintain the value of the community. If you have few or no sales in a community because of no FHA sales, appraisers have to go to other like communities to get comparables. Realtors don’t like that because once you have to go outside the subject community, the variables can change dramatically.

In order to have increased value in a condo community you must have sales. It is the only true way of knowing the value of units. Without sales in a community in the past 6 months (now I am starting to see lenders, appraisers and asset managers drawing the line at 3 months) you have no true method of valuing properties. Yes you can have an appraisal done but they will look outside your community.

I guess my bottom line is that you are going to lose a lot of buyers without FHA approval.

Here are some comments about FHA loans from my good friend Todd Callen. Todd has been in this game of real estate in one facet or another since 1985. He has sold it, appraised it, and now he has been lending on it for about 9 years. Todd works for Caliber Funding and is one of the most knowledgeable loan officers I have ever met.

Take it away Todd;

Virtually all HPRs (that spells Condo in the legalese of our state) have “fallen off” HUD (FHA)’s list. Those approvals given back in the day had an expiration date on them, and we in the lending world had ways of circumventing that fall-off on given individual units by doing “spot loan” approvals on them under FHA’s guidelines up until about 18 months ago. It was at that point that HUD took away all lender’s ability to do “spot loans” under their guidelines anymore – and now to give an FHA loan to anyone in any true condo development that has fallen off HUD’s list – we would have to get that entire development back onto HUD’s list of approved condos.

On top of Tim’s perception of FHA loans and their need – I would like to add a couple of things he didn’t touch on.

1. The smallest down payment permissible in the current lending world comes with an FHA loan, and there is absolutely still a way to actually buy with no down payment to this very day. FHA itself mandates a 3.5% down payment, but our state (through an entity called Indiana Housing) has created a down payment assistance program that can allow a borrower to get what is in essence a grant for that down payment – and have no down payment of their own.

2. FHA is the most permissive of all the mortgage “granddaddies” when it comes to less-than perfect credit. One of the travesties of the world of credit scoring is that someone with a long and excellent credit payment history can see a $50.00 medical collection recently sneak onto their credit report, and have it drop what was a great credit score 120 points!!

3. I can point to a reason for the drop in the average sales price of condo units that Tim didn’t – and it is the inability of typical and qualified buyers to get financing on them… And the preponderance of first-time homebuyers (and that’s what the price point you are talking about here lends itself to) need FHA loans because of a lack of depth in their credit profile, the need for the ability to receive a gift from a family member for down payment (if they don’t go with Indiana Housing), and the need for the world of lending to let them in with small dollars even without great credit.

In addition, conforming to the rigors of FHA’s mandates actually pay dividends to Condo developments when buyers pursue Conventional (non-FHA) small down payment loans in them. How many condo volunteer boards have heard (through their hired management companies or unit owners attempting to sell) that “those mortgage company’s questionnaires are killing us!” Those questionnaires actually originate from the predominant Non-FHA “granddaddies” in the world of mortgage. Their names are Fannie Mae and Freddie Mac. Those questionnaires ask about a development’s percentage of tenant occupancy, whether a development has 10% of its annual budget in a reserves account, whether any single entity owns more than 10% of the units, etc., etc.. And the “wrong” answer(s) on these questionnaires can absolutely Kill a deal on a condo unit that has no appraisal challenge and whose buyer/borrower has no “issues” relative to credit, income, debt load, or anything else.

Please understand that no matter whether Chase, PNC, Fifth Third, Stonegate Mortgage, or Caliber Funding writes a mortgage loan – we DON’T own that loan – or in reality set the base guidelines for getting it. You may very well pay us every month, but the Owner of that note ultimately is one of the “Granddaddies” – and they make the rules for the writing of it. Conform to their rules (as either a borrower or a Condo development) and we can give you their money. Don’t – and we can’t. And it is their money all us consumers pursue – because it is that money that has a very low fixed interest rate, a long fixed term, and is given with a low (or no) down payment.

Thanks for your thoughts Todd.

2012 – Year In Review For Pike Township


  • 968 houses were sold in 2012. Up 14% from 2011
  • 80% were single family homes and 20% were condos
  • Average sale price was $122,728
  • Median sale price was $99,500
  • Highest price paid was $934,000
  • Lowest price paid was $10,000 (fire)
  • Average Days on Market – 105

The following chart shows a breakdown in sales price and how many DOM (Days On Market)

Currently there is a little over 5 months of inventory (415 actives)

Data taken from MIBOR’s(Metropolitian Indianapolis Board Of Realtors) Broker Listing Cooperative on 1/07/2013

Home Builder Confidence Highest Since 2006

The positive news for the real estate sector continues, as home-builder confidence is at it highest level since 2006, according to the National Association Of Home Builders. The National Association Of Home Builders/Wells Fargo Housing Market Index rose two points in December to a seasonally adjusted level of 47, from it downward-trending November level of 45.

2012 Indianapolis Five Star Real Estate Agent

2012 Indianapolis Five Star Real Estate Agent – Tim Lord

From the July 2012 Indianapolis Monthly

Five Star Professional partnered with Indianapolis Monthly to determine the real estate agents in the Indianapolis area who provide exceptional service and overall satisfaction. The Five Star Professional research team contacted clients, peers and industry experts, and asked it they had experience working with a real estate agent. Those who participated in the research provided the name of a real estate agent and rated that individual according to criteria such as integrity, communication and customer service. The survey data was collected and scored, resulting in the list of 2012 Indianapolis Five Star Real Estate Agents. The research methodology allows no more than 7 percent of real estate agents to be named a Five Star Real Estate Agent.

Things That Will Make Your House More Attractive To Buyers

1. Curb appeal – This is the first impression. A well manicured yard with no overgrown bushes or trees makes it look like the seller really cares for their property. Make sure the gutters are not clogged and overflowing with leaves. Don’t leave garbage cans in front of the house. Make sure all kids bikes and toys are in the garage or are in the back of the house. How old is the roof? Does it have streaks and stains? I believe the roof is the most important thing about a house. If the roof leaks then you are going to have major problems. I have shown houses where the buyers were turned off by the curb appeal and did not want to see the inside of the house.

2. Front door – Make sure the front door looks good. In my opinion the front door is extremely important. This is the first part of the house that the buyer will see. It should not need repairs or painting. If there is a storm door, make sure that it works well. If there is a hydraulic system to close the storm door, make sure it is set so that the door will close fully. The locking system on the door should not have any problems and be easy to use. I have spent 5 minutes trying to open a front door with a key that was not cut right. That is a big turnoff for buyers. Lock alignment is also important. You should not have to push or pull the front door in order for it to lock. The biggest turnoff for a buyer is to see that someone kicked the front door open. Cracked or broken door frames should immediately be fixed so there are no signs of someone breaking in.

3. Carpet and Paint – Two things that will increase value. Make sure that you use neutral colors when you paint. Child’s rooms that have been painted in the past with cartoon scenes rarely sell well. Buyers have a hard time envisioning the room with their furniture when they are staring at a Garfield Cartoon scene on the wall. If you can’t get your carpets to look new by cleaning and shampooing them then it is time to replace. You don’t have to go top of the line. Here is a trick. Once you put in new carpet, put a sign at the front door to “remove shoes”. Psychologically buyers think you really care about your house. I am impressed with Frieze carpeting and my buyers are also.

4. No personal pictures, certificates, degrees or trophies should be hanging or out to be seen – The less buyers know about you the better. When I am representing a buyer, while they are looking at the house I am trying to find out about the owner. A doctor’s degree on the wall would suggest that the owner has money and might let the house go for less or I could negotiate more out of the owner. An accountant’s degree on the wall might suggest that negotiations might be tuff. On the other side of this, the buyers might end up staring at the personal pictures on the wall and not be looking at the house. Keep these distractions to a bare minimum.

5. Kitchens and Bathrooms – If you are going to update anything in the house, this is where to start. Make sure your bathrooms have adequate lighting, newer vanities and NOT carpet flooring. The plumbing hardware should be modern and not from the 1950’s. Make sure your bathtubs and toilets are clean and the shower curtain is new. The vanity counter top should not be cluttered. Having nothing on it is better. Also make sure the mirror is clean.

Kitchens where the appliances are going with the house sell faster especially if the appliances were bought in the past few years. Make sure there is no clutter in the kitchen. Organize the pantry and all kitchen drawers. Give the buyer the impression that you are well organized. If they open your “junk” drawer and have a hard time closing it, chances are that they will be distracted by it. Kitchen counters should be as clean as possible. Kitchen sink hardware should be newer. Kitchen floors should stand out. Ceramic tile floors are nice but if you or the kids tend to drop things, the tile can crack. Otherwise a good linoleum floor will do if it is neutral.

6. No clutter – Think in these terms; the less clutter you have the bigger the house looks. If you put clutter in closets or the garage ORGANIZE IT! Use boxes or plastic bins. Buyers don’t like to open closet doors and see a mess. They would rather see an empty closet. That way it looks bigger. If you just can’t seem to get rid of the clutter, rent a Pod. They will bring it to your house, you can fill it up and then they will come and get it and store it for you. I have shown many starter houses that were bursting at the seams with clutter. Many of them ended up using the garage for storage and would leave the car in the driveway. I can remember showing a house to some buyers once where there was so much in the garage that you could not get within 10 feet of the furnace, hot water heater or the circuit panel. They immediately lost interest in the house.

7. Furnace, AC Condenser and Hot Water Heater – If these items are at the end of their life expectancy they should be replaced. I have seen many deals fall though because during a home inspection these items were rated at the end of their life expectancy and the sellers would not replace them. If they are in the beginning or middle of their life expectancy, make sure they are serviced regularly. I like seeing service/date stickers on a furnace. Tells me the seller cares.

8. Water Spots, Nail Pops and Ceiling Cracks – Water spots on ceilings is a sign that there was water intrusion from the roof, attic area or second floor. If a one story it came from the roof or attic. If two story, depending on what floor, it could have come from the roof/attic or second floor bathroom or second floor laundry. Even though the water intrusion was repaired, it could leave tell tale water stains behind. My experience is that when buyers see these stains, they see issues even though the water intrusion has been repaired. If you paint over these stains, you first need a primer. Otherwise the stain will show though the new paint. You can find a good primer at any hardware store specifically for this issue.

Nail pops are caused by an imperfection between the drywall and the attachment. The average nail pop is the size of a quarter and either bulges out of falls in. The drywall has either moved and the nail stayed, or vice versa. Roofing causes a lot of vibrations, and if your sheetrock was not installed properly or the nail was not covered properly, your nail may indeed pop. I see a lot of nail pops in houses that are between 2 and 5 years old. It is not a big issue and easy to fix. It is a large distraction for buyers looking at a home.

Ceiling cracks are common in older homes (over 30 years) although I have seen them in homes that were 10 years old and younger. They are usually caused by stress or foundation settling. Although there is no need for alarm if the crack is not pulled apart, it is a big distraction for buyers. A home inspector can usually tell if it will be an issue.

9. Doors and Windows – Today’s window’s and doors with windows come with double or triple pane glass. If the seal on the window breaks and moisture gets in, it causes the window to fog up. This is common on older vinyl windows. You can either replace the window or have it repaired. There are several companies today that can repair the window for a fraction of the cost of a new window.

10. Seller Home Inspection – This is one of the best ways to eliminate surprises. Usually the buyer in their purchase agreement requests that they are allowed to do a home inspection. The buyer pays for a home inspector to look at the house and tell them if there are any defects or issues with the house. Defects have to do with health and safety or would have a significant adverse effect on the value of the property. A lot of times defects show up where the seller had no idea there were issues. In many cases the buyer will ask that the defect be fixed or they don’t want the house. This may cause the seller to have to spend money to repair the defect in order to sell the house. An unexpected expense.

If the seller, before listing the house pays for and has an inspection done, it eliminates all the surprises. A seller then can decide if they want to pay for the repairs or sell the home as is or list some of the defects on the Sellers Disclosure. A pre-listing inspection can determine what the real market value of the house is and if repairs would make the house worth more than the cost of repairs. After the seller has the inspection done and makes repairs, they can have the inspection report and paid repair invoices out where the buyers can see them when they are viewing the house. This should impress buyers knowing that the house has already had an inspection and defect repairs have been made. In some cases buyers if making an offer on the house will not want an inspection because one has just been done and defect repairs were made.

Bottom line – Make sure there are no distractions in the house that will make buyers find reason to lower what they perceive market value is. Many times I have seen buyers look at a home that was properly priced at $100,000 for the condition it was in and want to make an offer of $75,000 because they found issues with the house. They will go out of there way to find issues with the house so that they can low ball the price. If you eliminate the distractions and issues most likely you will get fair offers on your house.

What happens when a home does not appraise…

Recently I closed on a home that did not appraise. It was a 2 story, 4 bedroom, 2.5 baths with an unfinished basement. It was listed for $214,900. The buyers, my clients, made an offer of $206,500. The sellers countered at $209,900. My buyers accepted the counter offer.

The next step for my buyer’s mortgage company was to get the appraisal done. The appraisal came back at $205,000. Usually this can be a deal breaker. Buyers and sellers have four choices at this point.

1. The seller can agree to reduce the price to the appraisal price. If this is the case, the buyer and seller sign an amendment showing the reduced price and the sale goes on. Sometimes a seller can not afford to reduce the price. It might mean having the sellers bring money to the closing table to do the deal. The sellers need enough money from the sell to pay off their existing mortgage on the home. Otherwise the sellers cannot sell the house. Maybe the sellers don’t have the money to bring.
2. Re-negotiate the deal. In my deal we were $4,900 above the appraisal. If the sellers were not willing to reduce the price, maybe they would split the difference. In other words the seller will be willing to sell the house for $2,495 less and the buyer would be willing to pay $2,495 more for the house. The house ends up selling for $207,495 and the buyer has to bring $2,495 more than the appraisal to closing. It does not have to be split 50/50. Anything that the buyer and seller agree to will work out as long as the price of the house is the appraisal price or higher. Sometimes this does not work. Maybe the buyer refuses to buy the house for more than the appraisal price. If the buyer only plans to live in the house for one or two years, they may not want to pay more than the appraisal. If the buyer is planning to live in the house for 10 or more years and really wants the house, they are more likely to pay more than the appraisal.
3. Contest the appraisal. This is the most difficult choice in my experience. It also has to be contested by the buyer. Their Realtor can help them out with comparables in the community, how to read the data what will make a house more valuable BUT the buyer has to put the pieces together on their own.
4. Walk away from the deal. The buyer may not budge from the appraisal price. The seller may not budge from the agreed upon price. They both walk away from the deal. The purchase agreement states that it is contingent on financing. The appraisal is a part of the financing. If neither one wants to negotiate it, then they can sign a mutual release and it is like it never happened. The seller might then take their house off the market thinking that they will never get an appraisal for what they want for the house. They may leave the house on the market thinking the next buyer may get an appraisal higher than the last one (possible but not probable). The seller also could hope for a cash deal which does not require an appraisal. Although there are now significantly more cash deals today than three years ago, the likely hood of a cash deal above $200,000 are slim. Most cash deals today are far below $100,000.

All though the Loan Officer wanted to contest the appraisal, after I did a lot of research, I came to the conclusion that it was a fair appraisal. What was unusual with the appraisal was that it looked at comparables as far back as one year. Typically appraisers only go back six months. The other thing that was unusual was that the appraiser used four comparables. I am use to only three.

When I looked at two story, 4 bedrooms, 2.5 baths with basement that sold in the past year in Royal Run, I came up with 16 listings. The top 2 sold for $233,000 and $234,000 and were much bigger. The bottom 10 were all under $200,000. That left the middle four. Those 4 happened to be the ones the appraiser used in his appraisal. Three were priced between $200,000 and $201,000. One was priced at $208,000. The appraiser’s bottom line was $205,000 which I thought was fair.

As I said before, the buyers and sellers ended up splitting the difference. The house sold for $207,495 and we closed the deal. Everyone was happy.