FHA loans are  loans insured by the Federal Housing Administration, a part of the Department of Housing and Urban Development. The FHA is anxious to help first time home buyers get into the market and those with ugly rate adjustments refinance into more affordable house payments.

FHA loans used to be out of the question for San Francisco home buyers. The loan limits were way too small (around $417,000) and required squeaky clean credit and healthy incomes.

Today, FHA loan limits in San Francisco have been boosted to $729,750. With 5% downpayments acceptable to the FHA, this makes a $750,000 purchase price much more doable.

The FHA has also substantially loosened their lending requirements. Excellent credit is no longer required and buyers can get into a single family home or condo below the $750,000 threshhold with as little as 3% down (no you did not misread that–).

The FHA’s target audience for their loans are: First-time homebuyers, borrowers with mediocre credit (or even no credit), those with limited resources for a downpayment, and homeowners who want to refinance.

It may sound like there’s a catch to all this– but there’s not. These are real loans are we are closing deals at Paragon with buyers who are obtaining them.

Other FHA loan perks:

Easier Qualification - With the FHA backing the loans, lenders are willing to loosen their lending requirements– and will often lend more money to you than they might through other kinds of loan programs.

Low Downpayment OK - Other loans require at least a 5% downpayment and it has to be your own money, so gifting a downpayment isn’t allowed. An FHA lender is fine with downpayments as little as 3% down and getting that 3% from a friend or family member is not a problem.

Cash Reserves Not Required - Most lenders insist that you to have 3-6 months carrying costs in the bank. FHA loans don’t require that kind of cushion.

These loans are not for everyone. FHA loans are fixed for thirty years and those with itty-bitty downpayments will be required to pay a 1.5% fee for mortgage protection insurance. If you have at least 10% down, good credit and a job with W-2s and pay-stubs, you would probably be better off going with a different loan product.

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The most common legal arrangement in the business of buying and selling real estate is for a listing agent from one company to represent the seller and a buyer’s agent from another company to represent the buyer.  The advantage to this scenario is that each party their own representative acting in their best interests.

Dual agency, when a Realtor represents the buyer and seller, creates relationships with clients and customers that aren’t that clear-cut.  A Realtor who chooses to become a dual agent can no longer advocate on behalf of either party because each client has opposite goals.  She is also unable to disclose some types of information from each party, like how much the buyer is prepared to pay and how low the seller is willing to go.  And she is also not allowed to offer specific negotiation strategies to either party.

A different kind of dual agency is created when two agents from the same company represent the two parties. This happens with a fair degree of regularity at Paragon because we have so many productive sales people. Some buyers and sellers get confused when Paragon represents both sides. They worry that our company will place its own interests above theirs.  It helps them to understand that as independent contractors we individually represent only the interests of our client — and that their is no personal economic incentive for us to do a deal “in-house.’

Sometimes we list a property for sale and have a buyer ask us to represent them in the transaction. Their hope is that by having us represent both parties we will be able to either reduce the selling price or a cut our commissions. My practice has always been to reject requests for dual agency. I’m not comfortable representing both parties because it limits my ability to advocate for either side.  And even the appearance of not acting in my seller’s best interests is not worth the extra money to jeopardize my relationship with them.  This tactic is also unfair to other agents with buyers interested in the property who won’t have the advantage of a level playing field when competing with other offers.

If I do meet a buyer who wants to make an offer on my listing and they need representation, I refer them to another agent in my office.  If there are multiple offers on the home, I ask that they are all submitted at the same time so I can be sure not to give my associate an unfair advantage.  Again, this is to assure all parties involved that no one is getting inside knowledge on what price and terms to offer.

The best agents build their reputations one deal at a time. While I always guarantee my clients the best representation possible, I’ve also always make sure to treat all parties fairly on every sale I handle.

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This is a synopsis from the NY Times– two realistic views of the market, both quite valid:
 

A few years ago, when multiple bidders would show up at a real estate open house, the truly desperate resorted to writing love letters to the sellers, dripping with compliments for the property and ended with a plea for mercy (and a signed contract).

Today’s real estate market calls for a different kind of letter, less a fuzzy valentine and more like a cold splash of water. . .

Dear Seller:

I’m writing to let you know that I would like to make a bid on your property. I love the area and am committed to buying a house nearby. And your home fits my needs.

But given that my offer is well below your asking price, I also feel I owe you an explanation.

First, consider the big picture. Nationwide, home prices in the first quarter of 2008 fell 14.1 percent compared with the same period a year earlier, according to the Standard & Poor’s/Case-Shiller U.S. National Home Price Index.

That’s the biggest decline in the 20-year history of the data. And just in case you’re wondering, during the housing downturn of the early 1990s, the decline was never worse than 2.8 percent.

Not only that, earlier this month, the National Association of Realtors pointed to the huge number of existing homes on the market. As of the end of April, the total number was 4.55 million. At the rate people are buying right now, that represents an 11.2-month supply.

So buyers have options right now. A lot of them. I’m no different. Your home is great, but it isn’t unique. Few homes are. I know this may be hard to hear, since you’ve spent years creating memories here. But you may be waiting a long time if you hope to find a buyer with the same emotional connection that you have.

My mindset is hardly unique. We’ve all been reading the headlines. The accompanying articles appear prominently in major newspapers and sit on the Web pages where people check their e-mail every day. Everyone sees them, and the psychological impact is real.

Has your real estate agent laid any of this out for you? Maybe so, and you didn’t want to believe it. But it’s also possible that your agent, afraid of offending you and losing the listing, simply doesn’t want to initiate that sort of discussion. It may be worth sitting down for a candid reassessment.

It will be tempting to view my low bid as an insult. Please don’t make that mistake. Your home is genuinely appealing, and I wouldn’t have written this note unless I was serious about buying it. Getting a firm offer in this market is an accomplishment. So congratulations!

Oh, and one more thing. You presumably need someplace to move. My guess is that you’ll find these same points compelling when it’s your turn to buy. You just might succeed in buying for a better price, too.

I look forward to hearing from you soon.

Yours Truly,

The Realist

Now for the Seller’s response:

Dear Bidder:

Thanks so much for your note. I’m truly glad that you like our home as much as we do. You’re right that my family and I have many great memories of this place, and we hope someday you will, too.

And I just want you to know that I’m not insulted in any way by your offer. The fact is, none of us are very good at buying and selling homes. We don’t do it often, and as much as we know we’re not supposed to let emotions get in the way, it’s hard not to. After all, few people buy or sell anything else as expensive as a home in their lifetimes.

That said, your offer disappointed me. You seem to believe that I’m not aware of how bad things are out there or that I’m in denial. But I do read the headlines, and I priced the house accordingly. I knew I might have to wait awhile to sell it.

I should point out that your data draws on what has already happened in the housing market. Instead, I’d ask you to consider what’s about to happen.

One big reason for the falling prices is that it’s harder to get mortgages. Lenders went from giving money to anyone with a pulse to demanding higher credit scores and larger down payments. All sorts of buyers simply couldn’t make the numbers work anymore.

That may now change. Starting June 1, Fannie Mae and Freddie Mac, which buy mortgages from lenders and help make it possible for them to lend more money, are loosening restrictions on the sorts of loans they’ll buy in many markets. That is supposed to make it easier for people to buy a home with a down payment of 5 percent, or even less. Many more qualified buyers should mean more bids, and I’m willing to wait to see if it turns out that way.

I know you talked about having choices, but presumably we wouldn’t be engaging in this correspondence unless you liked my home best. Given that, I’d ask you to think about something: How often do you find a place that you can actually imagine living in? Sure, there are a lot of other properties out there. But an increasing number are in foreclosure and probably have problems lurking within the walls. So don’t let fear of a falling market keep you out of a home that you truly want.

It’s probably obvious by now that I’m not going to counter with a particular number. This doesn’t mean that I do not want to negotiate. I’d just like you to consider what I’ve said and see if you find it convincing. In the meantime, other shoppers who are interested in my home now have a price to beat. So thanks for helping me out with that.

Just one more thing. Please take another look at whatever mortgage calculator you’re using and see how your monthly payment will change if you brought your price up a bit. It almost certainly is not going to be enough to break you. But it may be enough to get us to a deal.

I look forward to your reply.

Yours,

The Undaunted

The Seller’s best points are scored with asking the buyer to calculate mortgage payments at a slightly higher price. At 6% interest only, each $10,000 increment costs $50/month.

But thanking the Buyer for offering a ‘price to beat’ sounds a little snarky. I’d leave it out if I sent a letter like this.

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This is a synopsis of a recent Chronicle article which outlines an important way we calculate supply/demand for homes– by measuring how long it would take at the current rate of sales to sell all homes on the market. It’s often a good indicator of where prices are headed based on supply and demand. In San Francisco this number is dropping.

Home Sales Get Lift, But Lid Still On Prices

On Tuesday, DataQuick released numbers showing that sales of existing Bay Area homes jumped 33 percent in April from March - the biggest month-to-month increase in at least 20 years. Compared with the previous April, however, sales were still down a painful 14.2 percent.

Some people saw last month’s unusually big surge as a sign the market may be bottoming out. Others see no relationship between the volume of sales and prices, and believe home values will continue to drop.

One of the more useful ones is days of unsold inventory, which measures how long it would take, at the current rate of sales, to sell all homes on the market. It’s often a good indicator of where prices are headed based on supply and demand.

In Santa Clara County, it would take 149 days to sell all the single-family homes on the market. That’s way down from the 335 days it took at the beginning of this year, but still well above normal. Historically Santa Clara homes would take 45-90 days to sell.

What’s most striking about the inventory numbers is how they vary within the county. Outlying areas like Morgan Hill, San Martin and Gilroy hit 600 days of unsold inventory last fall. Now they’re around 250 days.

In the county’s expensive northwest quadrant - Sunnyvale, Cupertino, Los Altos, Mountain View and Palo Alto - they are only at 60 days unsold inventory. Prices in these communities are continuing to rise.

Different markets in the same county - even in the same city - are wildly different. In San Mateo County, it would take 122 days to sell all the single-family homes on the market. The normal range for San Mateo is 40 to 80 days.   Foster City and Redwood Shores have roughly 80 days of inventory and the balance of San Mateo County is at 100 days with the exception of the coast, which is at 200.  Experts speculate that slower sales in some communities involve the commuting costs.

Subprime lending was concentrated in affordable and outlying markets. From 2002 through 2006, these areas saw rapid price appreciation. Expensive communities were having more normal increases.  

When the financial crisis hit in 2007, lower-end neighborhoods were hit hardest. Because they had not gone up as fast, prices in higher-end neighborhoods didn’t come down as much. In some cases they continued to rise.

San Francisco, for example, has 4.6 months’ worth of inventory. ,  While that seems like a large number, it’s actually reflective of a fairly balanced market.

The same ways inventory amount varies from city-to-city, in SF it varies neighborhood-to-neighborhood. Inventory in Bayview is seven to eight months. And Prices in some lower-priced neighborhoods have come down so far they are beginning to attract buyers.

Sales in Solano and Contra Costa counties, which have been hit hard by the housing crisis, were up 5.3 percent and 8 percent, respectively, in April compared with the previous April. They were the only Bay Area counties to post annual sales gains. Prices in all Bay Area counties, however, showed annual declines.

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This article comes from Bloomberg Newswire– High point in it for me is  that San Francisco runs second to San Jose as the most expensive housing market in the country. Our median price as of end of April was $701,700.

California Home Price-Cuts End Losing Streak

Housing demand in California, where one out of every eight U.S. residents lives, is reviving as bargain hunters buy foreclosed properties, reversing a two-year slide in home sales.

Sales in the state increased 2.5 percent in April, following 30 consecutive declines, the California Association of Realtors said in a May 23 report. The median home price tumbled 32 percent in April from a year earlier to $403,870, the biggest drop in at least three decades, dragged down by sales of foreclosed properties, the Los Angeles-based trade group said.

About 30,000 foreclosed homes have been auctioned in California so far this year, the most of any U.S. state, according to RealtyTrac Inc. in Irvine, California. Banks holding repossessed properties are so eager to unload them they’ll give buyers discounts of as much as 40 percent, said Celia Chen, an economist at Moody’s Economy.com in West Chester, Pennsylvania.

“Lower prices will certainly entice buyers back into the market, especially in a state like California where the median home price is so high it’s made it very difficult for people to afford a home,” Chen said.

Foreclosure auctions are removing inventory and may lead to a faster housing market recovery as prices drop, Karl Case, co- founder of the S&P/Case-Shiller home-price index, said today. The measure of 20 U.S. metropolitan areas fell in March from a year earlier by 14.4 percent, the most on record.

`Prices Adjust’ Rapidly

“Banks don’t wait around,” Case said in an interview today. “They put it on the market and get rid of it. That means prices adjust more rapidly.”

Sales jumped 20 percent or more in April in Las Vegas, Fort Myers, Florida, and Riverside and Sacramento, California, areas that had “strong and sudden price drops,” said Walt Molony, spokesman for the National Association of Realtors. Those cities also ranked among the top 10 U.S. metro areas with the highest foreclosure rates, RealtyTrac said.

The most expensive U.S. metropolitan market for single-family homes in the first quarter was San Jose, with a median price of $780,000, the National Association of Realtors said in a May 13 report. The national median home price was $196,300 in the same period, the Chicago-based trade group said.

High-Price Sales

San Francisco had the second-most expensive home sales, with a median of $701,700, followed by Honolulu, at $620,000, and the Anaheim and Santa Ana, California, areas at $597,900, according to the Realtors’ report. The metropolitan area surrounding New York was fifth, with a median single-family home price of $491,900.

The biggest U.S. state also led the nation in home-price drops. Sacramento saw the biggest price decrease in the nation during the first quarter with a loss of 29 percent, followed by the Riverside and San Bernardino areas, down 28 percent, the Realtors said.

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Here we see that lower priced homes, by far the largest segment of our real estate market by quantity of sales, have been the most negatively affected by market changes: year to year, house and condo sales under $1,000,000 declined by 28% and 40% respectively. Conversely, at the highest end, house and condo sales increased by 34% and 100%, though the actual number of sales is small. (Due to the small number of sales and the huge range in sales prices, changes in median price at the high end are not particularly meaningful.) The middle range declined by 12 – 16% in unit sales, with mixed results in median sales prices.

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Comparing 1st Qtr 08 to 1st Qtr 07, the number of home sold in San Francisco decreased about 27%, with properties below $1,000,000—condos in particular—showing the largest drop. The lower end of the SF housing market—to a large degree fueled by first-time buyers—has been the most affected by market upheaval and new financing conditions. The middle price range, $1,000,000 to $1,999,999, showed a much smaller decrease, while sales of $2,000,000 and above actually increased.

Median days-on-market for all houses and condos sold barely changed (37 days in 07 vs. 36 in 08), but for homes on the market that didn’t sell stayed on the market longer (60 - 69 days in 07 vs. 80 - 89 in 08)—i.e., the homes selling are generally selling relatively quickly, but those not selling are staying on the market for longer periods of time (and so price reductions are increasing too). The quicker a home sells, the higher the sales price as a percentage of list price: those selling within 30 days average 4 - 7% more than those which do not. The below graph does not adjust for price reductions—which would significantly increase the difference.

Sale Price to List Price (SP/LP) by Days-on-Market, First Quarter 2008

The number of homes for sale has gone up about 20%, and the months-supply-of-inventory has increased by 1 month (3.2 vs. 2.2 months). The median sales price of all homes sold increased by about 3%. Though down from its peak in May 07, San Francisco is the only Bay Area County still showing median price increases year over year. (Some counties have shown declines in excess of 40 %.)

City-wide averages and median numbers mask dramatic differences between different SF neighborhoods. Some areas still feature low inventory, high demand, multiple offers and quick sales; others—generally the less affluent—are on the opposite end of the spectrum.

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With prices falling in many parts of the country and the number of foreclosures rising, a small yet growing number of bargain-hunting buyers are seeing an upside to the real estate market. Here are three categories of buyers who see silver linings in all these thick clouds of foreclosures.

First Time Buyers - Beyond the Bay Area and California’s borders there are happy stories about first-time homebuyers who used to be frustrated by the pricey market of yesteryear. Today, they are among those most attracted to real estate today.  In November 2007, 39 percent of buyers nationwide were first-timers, up from 36 percent in 2006, according to NAR. 

In San Francisco, first-timers on a budget head to neighborhoods in what we call “District 10″ — places like the Bayview, Portola and Silver Terrace neighborhoods. (See my sale in the Bayview for an example of the kind of deal you can get in these neighborhoods today).  Within San Francisco, these neighborhoods have the highest foreclosure rates (although they are not nearly as bad as other parts of the country).

International buyers are also jumping into the market. In San Francisco, we hear all the time about Pacific Rim buyers snapping up the high-end units in luxury buildings like the Infinity or the Millennium.  Foreign investors also looking at opportunities in the U.S. real estate market because their Euro goes so much further– declines in the value of the dollar against other currencies and lower prices translate into a discount of up to 30 percent for some foreign buyers.

Investors also cross state borders, seeking bargains in those markets hardest hit by the real estate downturn.  Some even buying properties sight-unseen for conversion to rentals until the market heats up again – a risky proposition, according to some observers.

You can read the full story in USA Today–

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Retail condos, according to a recent article in the San Francisco Business Times, are becoming a popular alternative for small businesses. Owning your own space instead of renting it is a great way to for shop owners to eliminate ugly rent increases when it’s time to renegotiate the lease. It also eliminates the threat of a landlord easing you out when more favorable tenants come a courting. .

Many developers also see a benefit to retail condos.  With hundreds of living spaces stacked on top of one another in neighborhoods like Mission Bay or SOMA, retail goods and services that can serve the residents is a big draw. Usually the market for a retailer lives within 1/2 a block,  so these larger new building off an immediate customer base. Whole Foods Market, which occupies two contiguous commercial condos on the ground floor at The Potrero, is a perfect example. The store is one of the project’s biggest draws for prospective buyers who love the idea of running downstairs for a cup of Peet’s or healthy grab-and-go food.

To buy their condos, many small businesses are turning to the SBA’s 504 loan program. These loans are designed specifically for property acquisition and only require 10% down. That’s far less than the 25-30% a traditional lender requires for a commercial investment.

(Caveat– last I heard, the SBA loan process is onerous and requires copious amounts of paperwork– so look carefully before you leap at this option).

Purchase prices for new retail condos run about $500/square foot.  but you can occasionally find a retail space in an older mixed-use building. Right now there’s a storefront office on Divisadero at Pine– approximately 750 square feet listed for $429,000, and a tiny storefront at the corner of  Larkin and Jackson that used to be a nail salon listed for $155,000. Keep in mind that both of these listings are TIC units and will not qualify for the SBA financing.

At Paragon we have a handful of commercial condos for sale and/or lease along the Van Ness corridor.  Please call me if you would like more information.

Purchase prices for retail condos in the city are running around $500 per square foot, she said. The demographics for the buyers of the new residential condos are also attractive — lots of young couples without kids and downsized baby boomers who are clearly not living on fixed incomes.

Retail condo buyers, House said, represent a varied landscape — restaurants, home decor, wine bars, coffee cafes and service business that include optometrists, dentists and spas.

Things to ponder
Business condos certainly come with their own set of potential problems — just as with residential condos, retail condo owners are part of an owners association and must agree on marketing decisions, which might include who they allow to buy in the building and other provisions. But there are no lawns for a neighbor’s dog to soil and no one will complain about late night piano practicing.

Some developers and management companies are being as cautious as little old ladies crossing a busy street — building in soundproofing, extra ventilation and thicker walls and flooring to buffer upstairs tenants from restaurants. One Florida mixed-use project, next to a busy port, is requiring that residents to agree not to sue over noise.

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