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Booming Housing Market: Friend or Foe?
Aired June 18, 2005 - 09:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
GERRI WILLIS, HOST: Think that offer for your dream house is the last word? Think again. The appraiser decides what it's really worth.
ANNOUNCER: Today on OPEN HOUSE, it's a problem in this overheated market, houses that don't appraise as high as the asking price. How can you protect yourself?
Then, with many buyers taking on more house than they can afford, foreclosures could be on the rise. Should you take advantage? We take a look.
Plus, our weekend project. Plant a vegetable garden that will thrive this season, next on OPEN HOUSE.
WILLIS: Hello, and welcome to CNN OPEN HOUSE. I'm Gerri Willis.
It's every homebuyer's biggest fear, overpaying for that new house, especially in this hot market.
Here's the problem. A home is appraised after you've agreed to the purchase price. If the appraisal comes in lower, you could be scrambling to figure out how to pay for it.
And that's just what happened to one woman we recently met in New York.
WILLIS (voice-over): For Jocelyn King, it was love at first sight.
JOCELYN KING, HOMEBUYER: I knew right away that this was it. And, you know, I fell in love with it. I thought it was beautiful.
WILLIS: Her dream apartment, a one-bedroom in Queens, New York, was on the market for $219,000. She put in a bid of $207,000, and the sellers accepted.
After researching neighborhood prices, Jocelyn thought she got a pretty good deal. Too bad her lender didn't agree.
KING: The number that I -- that the appraisal came back as was $185,000.
WILLIS: A $22,000 difference from what Jocelyn agreed to pay. KING: I was stunned, and so, you know, I had seen apartments listed for $185,000. And I didn't think that they compared at all to this place. So in my mind, I was sort of confused.
WILLIS: Confusion and frustration aside, she had a bigger problem, coming up with the extra financing.
KING: The bank said, We will lend you money, you know, we'll give you a loan package for $185,000, and that's it. And the rest you're responsible for.
WILLIS: Her solution, go for 90 percent financing instead of the 80 percent she initially planned for.
King's original lender wouldn't approve a mortgage for 90 percent, so she switched banks.
KING: I had to look for another bank. And you know, I lost my interest rate. You know, that was tough to swallow.
WILLIS: Through creative financing, King got her apartment, and the view she always wanted. But as for appraisals, she's got a whole different view.
KING: I'm interested in the fact that this is on the fourth floor, and there's a nice little view of the New York City skyline. The bank doesn't care, I don't think. And the appraiser doesn't care.
WILLIS: So how can you avoid problem appraisals?
Joining us now is Alan Hummel. He's former president of the Appraisal Institute.
ALAN HUMMEL, FORMER PRESIDENT, APPRAISAL INSTITUTE: Thank you. I'm glad to be here.
WILLIS: So tell us just exactly what an appraiser does when he's evaluating a home price.
HUMMEL: The first thing an appraiser is going to do is, view the property itself. They're going to try to ascertain the condition of the property, the size, the amenities that it has. From there, they're going to look at other properties in the neighborhood that have sold, and use those as what we call comparable sales, to compare to the property, to say if the sale sold for X amount of dollars, what should the subject property sell for in the open markets?
From there, they prepare a written analysis for the client.
WILLIS: And these written analyses are critical to the homebuying process. The bank doesn't get behind the loan until they get an appraisal that makes sense. Tell us what happens, though, when the appraisal comes in below what the buyer has agreed to pay.
HUMMEL: And that does happen from time to time. And what the appraiser is doing is looking at the property from an independent, unbiased nature. Therefore, it's not always at the same price or value that the buyer and seller have agreed upon.
When that occurs, there are several options that are available. The bank can look at the appraisal and have it reviewed to make certain that it was a proper appraisal. The buyer and seller might renegotiate the contract and come in at a different sales price. Or another option is always for the buyer to come up with a larger down payment or renegotiation of the loan terms.
WILLIS: Not always pleasant, obviously. There are other times, though, and I know you've been testifying to Congress about this very issue, where appraisers are being pressured, pressured in the marketplace to agree with, to go along with some inflated appraisals. Alan, what's happening?
HUMMEL: It's very unfortunate, that there are lenders out there that apply what we call inappropriate pressure on the appraiser to come in at a particular value to make the loan, regardless of whether that's really the value of the property. And, you know, while it's a nuisance to the appraiser, what's more scary is, it's a time bomb for the property owner.
WILLIS: How come?
HUMMEL: Because the property owner may not even find out till later in the stage of the life of the loan, or of their house, that it was overappraised. They go to refinance, they go to sell the property, and they are what we call upside down. They owe more on the house than what it's worth.
WILLIS: And they couldn't sell the property at what they bought it for, obviously. That would be another issue, too, right?
HUMMEL: That's exactly right. And they can't sell the property. And now we start having burdens not just on the property owner but on the lender and ultimately, possibly, the taxpayer.
WILLIS: Alan, do you think this is affecting the market more broadly right now? Do you think it's part of the price run-ups we've seen in so many markets across the country?
HUMMEL: I believe that, you know, there's a combination of a lot of factors that are causing the prices to rise as rapidly as what they are. And a portion of it is improper appraisals and improper pressure on appraisers.
WILLIS: Wow. So what can consumers do? Now, obviously, the consumer is not hiring the appraiser. The lender does that themselves. Does the consumer have any role at all in making sure their appraisal is accurate and fair?
HUMMEL: Well, the first thing the consumer might do is interview their lender before they actually make application for the loan. Make certain the lender is using qualified appraisers. And then from there, before they actually sign the closing papers, go ahead and ask to see the appraisal report before closing, maybe a couple days before closing.
Look at the appraisal report and comfort yourself that it appears that the properties that were compared to yours were in the neighborhood, that realistic adjustments were made for differences, and be comfortable with that fact.
WILLIS: Alan, quickly what do you mean by a qualified appraiser?
HUMMEL: Qualified appraiser, at minimum, should be state licensed or certified. There's many other qualifications beyond that, such as a professional designation, the SRA or the MAI, conferred by the Appraisal Institute. Look for someone with experience in the neighborhood that the property is located, someone with education well beyond what the state licenses require.
WILLIS: Alan Hummel, thank you so much for helping us today.
WILLIS: Getting a good appraisal, obviously, is not easy, but the process should start even before you attend your first open house. Work with a top-flight real estate agent who's seen one or more business cycles and can help you understand pricing trends in detail. That will help you make sure that you're bidding a price that isn't too rich or too low.
Now, once you land your dream house, alert your lender that you want an experienced appraiser, and that you'll be reading his or her report. That will prompt your lender to give it extra attention too.
Coming up on OPEN HOUSE, think you can make money investing in foreclosed properties? We show you the ins and outs of this risky business.
And our weekend project. Plant a beautiful vegetable garden. We have tips on everything from watering to composting. And we'll map out which plants are the easiest to grow.
But first, your tip of the day.
(BEGIN VIDEO CLIP)
ANNOUNCER: Finding the right home inspector can save you lots of money. But be wary of referrals given to you by your real estate agent. Instead, check out the American Society of Home Inspectors Web site to find a reliable professional. Members of this group are required to have conducted at least 250 paid inspections.
Simply go to www.ashi.org. Go to Find an Inspector, enter your location, and you'll get an extensive list of qualified home inspectors in your area.
And that's your tip of the day.
(END VIDEO CLIP)
WILLIS: Welcome back to OPEN HOUSE.
Plenty of real estate investors make money buying and selling foreclosed properties. It can be a good way to buy a home at a deep discount.
But as we saw with one investor, you have to be willing to do your own research and take on substantial risk.
WILLIS (voice-over): When Toni Menchetti isn't cutting hair at her salon...
TONI MENCHETTI, HAIR STYLIST: Sixty-five.
UNIDENTIFIED MALE: Number 7, $65,000.
WILLIS: ... you're likely to find her bidding on bargain properties.
UNIDENTIFIED MALE: Any other bids?
WILLIS: As a divorcee and single mother, she was doing well for herself and her daughter with the salon, but Toni had an eye toward the future.
MENCHETTI: I was self-employed at my hair salon. And there's no retirement fund, no 401(K), anything like that. So I was thinking later years, as far as retirement, to have something to fall back on.
WILLIS: Despite no real estate background, Toni started buying foreclosed properties five years ago.
MENCHETTI: The first house I purchased was in Newport, Rhode Island. And I purchased it on credit cards for my down payment, yes. So -- and that was a multifamily. It was in a really rundown area, but it was right on the outskirts of downtown Newport. And it's doing really well now, that area. It was scary, but you just kind of have to do it.
WILLIS: She says she favors foreclosures because they tend to have better profit margins.
UNIDENTIFIED MALE: Sold to number five at $116,000.
MENCHETTI: You will have some equity in the house already, even at the closing, because you're getting it for under market. It's almost like a savings bank automatically that you can go in and cash out the property and pull the money out to use it to renovate.
WILLIS: The hardest part, Toni says, is the legwork involved.
MENCHETTI: You have to do a lot of research on your own. And that's the tricky part. I usually go down to the town hall of which the property's being sold. Everything's is on record, any contact numbers you need are really there, as far as mortgage companies, liens for taxes, sewer, water liens. Those are usually the major costly debt that's on the property.
WILLIS: She's learned it's important to give herself enough time and the right tools for research.
MENCHETTI: I got a navigational system in my car, and I punch in the addresses, and I do a lot of driving around. I'll go out during daytime, nighttime, just to see the areas, to see what's going on around the property addresses.
WILLIS: Toni's strategy seems to work. She owns six foreclosures that she's turned into rental properties and has flipped as many as 10 others.
Real estate is now her primary source of income. And because she owns her own salon, she's created the best of both worlds, with a schedule that lets her keep her day job.
MENCHETTI: I still have the hair salon. I only work there about four days, sometimes three days. It depends.
WILLIS: Toni really took a risk deciding to buy that first foreclosed property with her credit cards. It worked out well for her, but that's not always the case.
So you need to make sure you educate yourself before investing in a foreclosure.
Joining me now from Fort Lauderdale, Florida, Brad Geisen, who's president of Foreclosure.com.
BRAD GEISEN, PRESIDENT, FORECLOSURE.COM: Hi.
WILLIS: So tell us the first step you want to take if you want to buy a foreclosed property.
GEISEN: Well, your first step is finding the property and finding a property that suits what you're looking for. We recommend that, you know, you get out and you look at as many of them as you can, make comparisons, and find, you know, a property that's, you know, meets all of your criteria, and everyone's criteria is going to be a little bit different.
WILLIS: Well, shopping around is always important no matter what you're buying. How do you find those houses in the first place? GEISEN: Well, years ago, you used to have to either contact the banks directly, or you would pull up legal newspapers or go down to the courthouse and do a bunch of research. And those means are still available.
But today, with the Internet, it's so much easier to pull the properties up. You can pull them up online, you can search for them by county, by city, by price. And you can pretty much access all the information you need right online. And it saves quite a bit of time of -- from running around of years in the past.
WILLIS: Wow, that makes a lot of sense.
Brad, once you identify several properties you want to look at, then how do you go and evaluate those properties?
GEISEN: Well, I usually recommend for somebody that's first starting out and buying their first property or buying their first foreclosure is to start off in an area that you're familiar with. It's always best to know your market. I recommend a neighborhood either that you live in, that you have lived in, or that you're just familiar with. What properties are selling for, what type of homes are in the neighborhood, and what type of people are purchasing those properties.
And that way, when you find a property, it's pretty easy to -- or when you find a foreclosure, it's pretty easy to compare that foreclosure to other properties that you're familiar with in the area, and you have a fairly good idea, you know, what type of value you're buying it for, versus what they're selling for in the neighborhood.
WILLIS: You know, research makes so much difference when you're doing any kind of purchasing. You say, though, that you can buy preforeclosure. You can buy before the property even is -- goes into foreclosure. How do you do that?
GEISEN: Correct. But, well, the difference is, a foreclosure is when a bank actually has foreclosed on the property, and they're the ones that own it, and they're the ones that would be selling it. A preforeclosure is a property where a buyer has a mortgage, they're behind in their payments. And the bank or the lender or government agency is in the process of foreclosing on them. They're going through the legal process.
Well, this creates a tremendous opportunity, because you have an extremely motivated seller. You have the person that's going into foreclosure that's motivated to sell it under, you know, a certain time window. And that creates an opportunity where you can buy the property at fairly close to the mortgage, or maybe just a little bit above, which will give you instant equity.
WILLIS: Is it difficult to identify people who haven't filed for foreclosure yet?
GEISEN: Well, no. Today, it's all available online. And if you are looking for properties in a certain area, if you check the foreclosure listings on a daily basis, every day there's new foreclosures that are listed. And, you know, usually, what an investor will do is, he'll pick a neighborhood, and every day the new ones come up, they search them, and, you know, it may -- might take them a number of weeks before they find one that meets their criteria. Then they contact the person in foreclosure, and they start their negotiating.
WILLIS: Brad, if you could give people out there who want to invest in real estate one single piece of advice to reduce their risk buying foreclosure, what would it be?
GEISEN: I think the number one thing is, put your time in. You need to do your homework. You need to get out there. And it's not advisable just to look at one property. You know, the more property you look at, the more educated you'll become, the more you'll know about the different neighborhoods, and the more you'll know comparing one to another which property is truly a good investment.
WILLIS: And that's what we're all looking for. Brad Geisen, thank you so much.
Next on OPEN HOUSE, our weekend project. Now's the time to plant that vegetable garden. We'll tell you what to plant where, coming up.
But first, the mortgage snapshot.
WILLIS: For Jack, it was a magic bean that helped his beanstalk grow. But for the rest of us, it's simply good gardening that can turn a few seeds into a full-fledged vegetable garden.
Recently I met up with Suzy Bales, the author of "The Down to Earth Gardener," to get her tricks of the trade for growing great greens.
WILLIS: Oh, Suzy, this garden is beautiful.
SUZY BALES, AUTHOR, "THE DOWN TO EARTH GARDENER": Thank you.
WILLIS: But you know, you must spend a lot of time working on this. I know people are so concerned about a garden that wouldn't be a lot of work if you've never done it before. What's your suggestion in terms of the best vegetables to plant?
BALES: Well, there's many vegetables. But nothing is hard if you know how to do it.
First of all, Swiss chard will grow in almost anything. It's one of the most nutritious vegetables.
WILLIS: We have Swiss chard. What else do you...
BALES: Tomatoes. WILLIS: Tomatoes. Are they easy to grow, though?
BALES: Very easy.
WILLIS: How many tomato plants do I need for a family of four?
BALES: I would say about 10. But what you would do -- because they're not all ripe the same day.
BALES: You get some that are called indeterminate, that just keep going all season.
WILLIS: You talk about low maintenance, but what do you really mean here?
BALES: What I really mean is, put all your energy into making a nutritious soil using a raised bed, adding lots of compost, and mulching. This is shredded bark mulch. And if we take it and put it on this, it looks beautiful too.
WILLIS: But you recommend for the typical vegetable garden, how much compost?
BALES: Two or three inches, at least.
BALES: Yes, save your leaves. Don't put them out to be picked up. You can shred them, put them right back.
WILLIS: There aren't necessarily a number of vegetables that are perennials, but some will reseed. What are your top three for reseeding?
BALES: Parsley is wonderful. But you have to leave a few plants in, let it go to seed. Leeks will reseed, and they have a beautiful flower head. Of course, the Egyptian onion is fabulous, because it drops its seeds all over. Lettuce even reseeds.
WILLIS: You like these garden -- what are they called, garden rugs, (INAUDIBLE)...
BALES: Garden blankets. And...
WILLIS: And how do you use them?
BALES: ... they're very lightweight. And they speed germination and speed growth. So you just put it -- after you put your seeds in -- this is a bed of carrots that has been planted. And you can cut it to size. And you spread it down. And then you hold it in place, just like that, with these hooks.
WILLIS: How does this make me a more efficient gardener? How does this improve my investment? BALES: It speeds germination. And you can use them year after year. You get these blankets, they're the size of double beds. You can cut them up to any size you want. And they cost about $6. It's a great investment for the money.
WILLIS: In terms of watering the plants, what's the most efficient way to do it?
BALES: The most efficient way is to do it once or twice a week, and do it really deeply. You want to train the roots that they have to go deep in order to get water. If you're watering every other day, or every day, then the roots are going to grow sideways, and they're going to stay shallow at the top of the soil.
And the first time you get those days in the 90 degree, it'll burn up the roots.
WILLIS: Now, that's a beautiful garden.
Coming up, we'll look at next week's show. We'll be right back.
WILLIS: Coming up next week on OPEN HOUSE, our home safety special. Protect your family this summer with our tips on pool safety, avoiding indoor hazards, and securing your home from burglars.
Plus, we want to hear from you. Send us your comments, your questions, to firstname.lastname@example.org.
Thanks for watching OPEN HOUSE.
Coming up, "DOLANS UNSCRIPTED," fighting the taxman. The Dolans take a look at changing the tax-and-spend ways of Washington.
First, a look at the day's headlines.
Have a great weekend.
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