Market News & Commentary Compliments of My Friend Chris McLaughlin of ShortSalesRiches.Com

Market News & Commentary by Chris McLaughlin, September 25, 2008

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All eyes were on Washington, D.C., today as President Bush urged lawmakers to come together in a bipartisan manner to back the Administration's $700 billion Mortgage Bailout Plan. Bush met with lawmakers and invited both Presidential contenders Barrack Obama and John McCain to the White House for a full briefing.

Investors were pleased with the progress, sending the Dow Jones Industrial Average up 197, or 1.8%. But after the market closed, Senator Richard Shelby, a Republican from Alabama and Chairman of the Senate Banking Committee, emerged from the White House and said that there was no bailout agreement reached during the meeting. He then proceeded to strongly speak out against it. So hold on to your hats -- tomorrow's market may send a different signal if the plan is in trouble.

In real estate news, new home sales continued their downward slide. A government report shows that new homes sales were at their lowest point in 17 years, at a seasonally adjusted annual rate of 460,000, which was down from 520,000 in July. Only 39,000 new homes were sold in July, the lowest since December of 1991. The report also noted that median new home prices continued to slide, down 5.5% to $221,900, from $234,900 in July.

In a positive sign, inventory continued to shrink to 405,000, a level not seen since August of 2004. This drop in inventory is a positive sign for most Realtors and investors, as there will be fewer brand new homes selling at fire-sale prices from developers unable to make their interest payments.

Now on to our Realtor and investor tips, tricks, and traps for Realtors and investors...

Short Sales and Valuation Models

When it comes time to prepare a short sale offer, many novice investors or buyers are uncertain how to demonstrate a proper valuation model. Chances are your bank will prefer one method, the property tax office another and (of course) you will want to use the model which most benefits your position.

Take time to run various scenarios before making your final offer or when presenting your financial portfolio for review. Depending upon the situation, the numbers can present a dramatically different picture.

Here are a few alternative valuation models to consider:

Replacement Cost. This works very well when adding an older property or a major "fixer" to your portfolio. For example; an average price of a 1,000 square foot home in the late 70's or early 80's was often only $40 per square foot or $40,000. Today, the starting price to replace the same home would be at least $100 per square foot or $100,000. To calculate the replacement costs, you can use insurance industry averages or calculate the current cost to rebuild the property on the same lot including impact fees, labor, supplies, taxes etc...

Tax Assessed Values. This can work for or against you so be cautious. Properties that were recently sold at higher prices may have inflated tax assessed values which can make them appear more valuable than the current market price. On the other hand, when purchasing a short sale or foreclosure for resale, a high tax assessed value may make your asking price seem very competitive.

Comp Values. Most real estate agents use comparable sales data to determine home prices. Comp values are simply the average sales prices of similar sized homes within the same general area.

Income Potential. Another alternative valuation model is to determine the income potential of the property; essentially, what would the property rent for if placed on the market? If the rental rate plus anticipated vacancies, repairs, maintenance plus PITI would cover the mortgage then it is considered a strong "buy" opportunity.

Return on Investment or ROI. Another common method typically used by commercial investors is to calculate the return on investment or ROI. Using a simple example, if the total out of pocket cash expenditure was $20,000 and you made $2,000 then the ROI would be 10 percent - a rate considerably above the stock market this year!

Whatever valuation model you select, remember to maximize the numbers when showing banks or financial institutions your numbers and minimize when negotiating the purchase price of a property.

More tomorrow...

See you at the top!