Happy New Year! As millions of Americans salute the beginning of 2009 with expectations of a return to a more traditional economic and investing structure, experts agree things are likely to get worse before they get better a consideration for every short sale buyer but one that should also encourage potential investors to seek returns in areas outside of the financial markets; areas like short sale real estate. Even as hopes for a brighter financial future are likely to be conservative for most Americans the future never fails to bring change and change offers opportunity to those that understand how to take advantage of it. Let's examine several changes of both direct and indirect interest to short sale investors beginning with the minimum wage laws slated to go into effect for 2009.
While many small business owners rue every small increase in minimum wage law, it is actually good news for most short sale investors. An increase in minimum wage translates into slightly higher eligibility requirements especially for first-time homeowners and others seeking affordable housing. Let's take a few minutes to examine the basic eligibility requirements and sales prices to go into effect for 2009.
Federal Minimum Wages will increase on July 24, 2009 to $7.25 per hour but many states have already enacted higher minimum wage laws as of January 1, 2009. California, Illinois, Massachusetts and Vermont are each $8 per hour while Oregon is at $8.40 and Washington at $8.55.Using the Federal rate of $7.25 results in $290 per week earnings or $15,080 annually. A single person making minimum wage at a 30 percent income ratio would only be able to afford $377 per month toward mortgage and interest payments or roughly a $65,000 home financed for 30 years at a fixed 5.5 percent interest rate. With interest rates projected to drop to 4.5 percent fixed later this year, the same individual would have a mortgage payment of just $380 per month on a $75,000 mortgage....well within the reach of a short sale starter home in many areas of the nation.
Let's take a look at affordability levels for a two income household with both partners only making the new federal minimum wage of $7.25. The combined annual household income of $30,160 at a 30 percent debt to income ratio would allow monthly mortgage payments of $754 per month. At today's 5.5 percent fixed 30 year rates that equates to a selling price of roughly $135,000 or $150,000 at a 4.5 percent fixed 30 year rate.
Short sale investors need not fear an increase in minimum wage laws. It is downright good news since it allows marginal buyers to qualify for more house than ever. Combined with historically low interest rates, nearly any household in America can afford an entry level starter home even on a minimum wage household income.
With interest rates expected to bottom out around 4.5 percent fixed during 2009, many short sale investors are considering the option of acting like the bank by holding a note when reselling a property. If history provides an example, this could be a potentially lucrative move for those inclined toward longer term profits. For example, let's assume you purchased a $150,000 home via short sale and finance it for 30 years at a fixed rate of 4.5 percent. Monthly payments would be $760 per month. If you held the home until interest rates resumed their upward momentum then took a note at a higher rate the monthly difference would be yours to keep without the hassle of taxes, insurance, maintenance or other out of pocket expenses even if you sold the home for exactly $150,000 - taking NO profit on the sales price of the home!
Assume you sold the home for the exact same price but financed it at 9.5 percent fixed you would enjoy $500 per month profit for 30 years a total of $180,000 without making a penny more on the original purchase price of the home. As an added benefit, the buyer would be responsible for property taxes, insurance premiums, maintenance and other upkeep on the home. The home would act as collateral in the event of a default. Of course, as inflation moves upward and prices of real estate resume their normal trajectory, it would be reasonable to expect to make a tidy profit in addition to the interest rate premium. There is a downside to holding a note, you remain responsible for your portion of the mortgage (unless it is paid in full) and not every lender allows this type of arrangement.
Since the home itself acts as collateral for the loan the potential upside remains viable if the terms of your original loan allow for this situation. Oddly enough, one of the biggest threats to long term profitability is early payment of the loan by the buyer. Should the buyer refinance or pay the loan in full earlier than anticipated then it could severely impact your long term earnings.
In the 1970's interest rates peaked at nearly 14 percent fixed after a period of rapid inflationary pressures. Most experts agree, despite a temporary decline in prices of goods and services, the long term outlook for inflation remains high due to the unprecedented degree of stimulus currently being injected into the economy. How long it takes the economic stimulus to reach the average consumer is entirely up to debate but for those interested in holding a note for all or part of the purchase price of a home serious consideration should be given to the prospect. It is one more option to short sale investors interested in building a long term wealth solution.
Charles Gardner
2009 is Mine
Comments(0)