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Owner Financing Helping Sales on South Padre Island
1398 Views :: 24 Comments :: :: South Padre Island, Second Homes
Owner Financing Helping Sales on South Padre Island
Owner financing can help sell a property even in this challenging market.

Banks are also generally are willing to accept rent credits for an option to buy as an acceptable down payment, but both buyers and sellers must follow these guidelines for Fannie Mae and Freddie Mac to sanction the transaction.
  • The rental amount must be determined by a property appraisal with the credit for the down payment clearly calculated as the difference between market rent and actual rent paid for 12 months. For instance, if market rent is $1,000 and rent paid is $1,200, $200 could be credited monthly toward the down payment.
  • The rent/purchase agreement must be for a minimum of 12 months. The contract must clearly specify a rental amount as well as the portion to be credited toward the purchase.
  • The buyer will need copies of canceled checks or money order receipts for 12 months, proving rental payments to persuade the bank to credit the funds toward the down payment.
"There are more sellers willing to owner finance on South Padre than you'll see in the MLS" - says Alice Donahue - "Owner financing and cash sales are what we are seeing the most right now, with sale prices about 30% below the market peak"
Great news for sellers who finance in Texas: Texas Department of Savings & Mortgage Lending Commissioner Doug Foster has issued a notice that allows the continuation of the "de minimis" exemption until further action is taken by the Legislature. This exemption, which was briefly repealed by the federal SAFE Act, means that a seller can once again finance up to five properties in a 12-month period without being licensed as a residential mortgage loan originator.

Three reasons to consider buying a home now:
  1. Desperate sellers: Both home owners and lenders are eager to unload a flood of foreclosed and underwater properties. Buyers with the patience to push through these complex deals can save a bundle.
  2. Little competition. Because most people don’t have what it takes to negotiate their way through short sales and REOs, patient investors are winners.
  3. Low rates and seller financing. Mortgage rates are at their lowest level in 40 years. If you believe inflation is inevitable, lock in now.
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Comments
Netty @ Wednesday, August 25, 2010 10:56 PM
Aside from the "rent to buy" option already briefly mentioned, would you care to generalize about other owner financing terms that have been successful in this tough market? I realize it is a very nebulous topic, and every deal is different, but please continue the discussion. These days, what owner finance terms are reasonable, and which are not?

P.S. Here's your chance to distance yourselves from your competitors, by spotlighting your experience, unique perspective, deal making ability, and power of persuasion!
Christine Van Tuyl and Margaret La Grange @ Friday, August 27, 2010 1:14 AM
6 Reasons to Buy a Vacation Home Now

As the real estate market continues its bumpy road toward recovery, the vacation home market is heating up, causing homeowners around the country to seriously consider buying the vacation home they’ve been eyeing.

The drop in home prices, incredibly low interest rates and the increase in demand for vacation rentals make it an optimal time to explore a second home purchase.

1. Prices down 20-40%. you can pick up a beach cottage or high-rise condo at extremely low prices. That’s only the beginning. Lower prices and less competition are the tip of the iceberg-sized list of factors that make it a good time to consider a vacation home buy.

2. Interest rates. Rates, of course, are at historic lows. Lock in a good rate, buy a vacation home in a desirable location, and watch your asset appreciate over the long-term.

3. A relatively safe investment. Real estate has proven itself to be a safe place to park your money for the long-term. (Long-term is key). Stock market woes have always pushed people to look for alternate investments, and real estate is a consistent stronghold.

4. Make a profit. Or, better yet, make your vacation home pay for itself. Only planning on using your vacation home a few months out of the year? Rent it out short-term to vacationers looking for a great place to stay. Many homeowners make a killing listing their homes on VRBO.com. (Vacation Rental By Owner). When your monthly mortgage payment is less than or equal to one peak week rental, twelve weeks of rental will cover your mortgage payments for the entire year.

5. Vacation rental demand is heating up. Overall, vacation rentals are less expensive than hotel rooms, especially for longer visits and for families. Savvy travelers know this, and are heating up the demand for vacation rentals. In addition, the weaker dollar makes U.S. destinations attractive to travelers from countries with stronger currencies.

6. The pressure of bidding wars is off. Sure, you may not get bargain basement prices on a beachfront cottage—but you might if you’re willing to buy a few blocks away. Houses aren’t exactly flying off the shelves these days, but buyers now have less pressure to make a hasty decision. Buyers looking for deals on vacation homes can really do their homework.
NAR Reporting from Washington @ Friday, August 27, 2010 1:19 AM
Condominium owners who are trying to sell in today’s agonizingly slow housing market should make sure that their community is on the Federal Housing Administration’s approved list. Ditto for someone who is thinking about refinancing a condo.

Under a little-noticed edict put in place in December, the FHA is no longer approving mortgages on condominium units on a spot, loan-by-loan basis. Now the entire project must be cleared by the agency before a buyer can purchase a unit in the community with a government-insured mortgage or an owner can trade in his loan for a less expensive one backed by the FHA.

That’s important because FHA financing is being used more frequently today than at practically any other time in the agency’s 76-year history. Three years ago, Uncle Sam insured only 3% of all loans. Now the government backs almost 1 in 3 loans. If your condo project is not on the agency’s approved list, you could be missing a significant part of the market.

If yours is a $1-million condo, gaining approval isn’t important. But if it’s valued at no more than $729,750, the congressionally imposed ceiling on FHA financing, “it’s almost critical” to be on the cleared list “If you’re not, you are going to miss 30% of the market.”

The FHA doesn’t make mortgages — at least not directly. Rather, it insures lenders against the possibility that a borrower may not make his payments as promised. Consequently, lenders love the loans because the government, not the lender, is on the hook should someone default.

With their low down-payment requirements and liberal underwriting rules, FHA loans are highly coveted by borrowers too. That doesn’t mean they’re only for low-income borrowers. On the contrary, they’re open to anyone regardless of what they earn. And would-be borrowers are properly vetted just like those who are seeking conventional financing.

But with down payments of just 3.5% and “extremely liberal” debt-to-income ratios, borrowers with good credit scores and loads of assets, FHA loans are the hottest game in town.

Late last year, though, the government said entire condo projects must meet certain standards before the FHA will back even a single loan in any particular property.

Worse, perhaps, is that as of the end of June just slightly more than 32,000 properties had been approved, said Vicki Bott, deputy assistant secretary for single-family housing at the Department of Housing and Urban Development, where the FHA is housed.

If that doesn’t sound like many, you’re right. Although no one knows for certain exactly how many condominium projects there are, the Community Assns. Institute estimates that roughly 40% of the nation’s 305,400 association-government communities are condos. If the institute is on target, some 122,000 condo properties exist in the U.S., and only about one-quarter of them are on the FHA’s approved list.

To find out if your condo is on the list, go to the FHA website at http://www.fha.gov, look under “Resources” and select “HUD Approved Condominium Projects.”

The government site is a free service, but you’ll have to know the exact legal name of your project.

So it might be easier to pay $2.99 to http://www.CheckFHAApproval.com, a site that will launch by the end of this month and requires only an address to determine whether the property is approved and eligible, approved but possibly not eligible, or not approved and ineligible.

The CheckFHA report also notes whether the property is involved in litigation, the percentage of units financed by the FHA, the percentage occupied by owners and the percentage of investor owners. Because of the FHA’s strict condo rules, each bit of this kind of information is important.

“It’s like a Carfax for the FHA,” said Christopher Gardner, founder of a Westlake Village company called FHA Pros and a former loan broker, who said he quickly saw a need for such a service when the FHA stopped approving spot loans. CheckFHA is the outfit’s address-checking platform.

If your project is not listed, you’ll want to move as quickly as possible to gain approval because it could take some time. After all, said Thompson, the Beverly Hills agent, “this market is so soft that you don’t want to miss out on any potential buyer.”

HUD’s Bott says it takes an average of two weeks to process a request, but that can vary widely based on the volume and whether the initial submission is complete or additional documentation is needed. But Thompson says a new and small condo property she is representing in Larchmont has been waiting for six weeks and still no word.

There are several ways to go about getting a project approved. Lenders who have delegated underwriting capabilities can clear a property, but it’s doubtful lenders will do that on their own unless someone already has applied for financing — and buyers rarely line up their loans before they go shopping.

A condo association also can initiate the process, as can a property-management company, if there is one. So can a lawyer, but only one who is well versed in condo law. The builder can start the ball rolling too, if it’s a new project.

According to the government, the “vast majority” of requests for FHA approval go through smoothly. But there are numerous requirements, such as no more than half the units in the property can be financed with an FHA loan and owners must occupy at least half the units. A problem with any one of the rules can set the approval process back by weeks.
Zeff @ Friday, August 27, 2010 3:20 PM
Does anybody know which South Padre condo complexes are FHA approved, and which aren't?
Lois @ Saturday, August 28, 2010 1:20 PM
I don't think there have been enough owner finance sales on South Padre recently to make any generalizations about what types of owner financing are working, and which are not. Consider that during the whole month of July MLS lists only 18 properties as being sold.

The owner finance concept does however make a lot of sense in this market. It also makes sense that bank loans for vacation homes are extremely difficult to obtain. Just consider how much it costs to pay a full mortgage, maintenance costs, insurance, special assessments, and home owners fees for a typical SPI condo. That could easily add up to 10% of the condo unit's total value each year. Combine that with the 20 - 40% typical total property value reduction on the island over the last couple years, and a lot of investors who bought at the peak have already lost half their investment. (assuming they had no rental income, or valuable use of the property) Now put yourself in the bank's shoes, and you can easily see why they are so hesitant to loan money for vacation homes. Many banks are also overloaded with foreclosures, and more on the horizon.

So why are there so many sellers out there that are secretly willing to provide owner financing, but NOT willing to advertise it on MLS, as Alice claims? It's as if lease-purchase is the sellers least desirable option, and they're not ready for it until they're sure that all conventional sale options have been exhausted.

A lease-purchase concept could make a lot of sense in this environment. Investors could make a commitment to buy at a future date for a fixed price, hopefully after the property has appreciated somewhat in value. It also doesn't require much initial cash outlay from the investor.

For the seller, it gets the monthly expenses "off the monkey's back", and provides some meaningful chance of selling the property at some future date, free and clear. In other words, the final outcome is a little more predictable than renting the property for a few more years, hoping the market will rise, and eventually hoping to sell within a reasonable period of time. Also, it is very hard to find year-round renters, so the rental income associated with a lease-buy is healthy and steady. (I think the seller also gets the tax deduction, but I'm not a tax expert.)

Alice, I strongly recommend that you start advertising some deals like this, even if the owners won't let you get specific about the exact properties being offered until you get a serious bite. For example, you could just advertise the basics, like "Two bedroom beachfront condo, 3 year option to buy, total payments $2K/month, plus utilities and maintenance. Seller has option to purchase at end of 3 year contract, or sell to a 3rd party, for $256K."

I could be wrong, but an ad like that is bound to start your ringing the phones. I'm also sure that if you put your mind to it, you can come up with many more advantages to buyers and sellers than I have listed above. Deals like this could be just the medicine we need to rejuvenate the island market, even if it takes a LONG time to eventually pocket your commission.

Gayle Hood, Realtor @ Sunday, August 29, 2010 4:15 PM
Our MLS shows 9 Seller Finance deals in 2010 in the Residential category. There shows to be 77 available that are possible owner finance listed in our MLS. I would guess that there would be even more if someone negotiated those terms.

Owner finance is a win-win deal for the buyer and the seller. The buyer saves the origination fee or points. The seller gets a greater percentage of interest on his money than the banks or many other investments will net him.

Sapphire is a FHA approved building. Any of the buildings that have a front desk where you can just walk in and rent a condo are impossible to get FHA approved. There are a few more sources out there that will take foreign nationals and condotels now. Compass Bank and IBC and First National in So. Padre have some loans that they will keep in their own portfolio and not sell to Fannie Mae. Right now is an awesome time to buy with discounted prices and very low interest rates.
iPhone man @ Sunday, August 29, 2010 10:44 PM
Fannie sure cracked down on condo financing last year. I think they now want more than 70% of a new development sold before they'll even touch it. (I wonder if that's the real reason why Kirana was delayed, or at least contributed to the delay) Fannie also gets heartburn if more than 15% of the owners are delinquent on their homeowner's fees. I think there is also a new rule which says no single owner/entity may own more than 10% of the building's units. In other words, even if you can finance your condo today, there is no guarantee that it can be easily financed in the future when it is time to sell, especially in a marginal complex. I think there are also higher fees for condo loans, because they constantly have to figure out if the entire complex falls into the new expanded "crappy investment" category. All this helps explain why there is a glut of island condos on the market, and few buyers.

Since Fannie doesn't finance condotels, then many banks that sell mortgages on the secondary market aren't going to buy them either. I've heard of some small banks that will finance these things, but at what premium? Anybody got any recent numbers?

The shortage of condo financing is a significant problem for South Padre. Just look around and you'll notice a lot of beachfront complexes that fall into the "condotel" category, or at least marginally so. That seems to suggest there will be further price erosion for all island condos, if it hasn't happened already.

Anybody got an opinion on the possibility of further price erosion? The counterargument is that condotels provide current rental income, so investors can snatch these things up now at bargain-basement prices, and more easily wait for the market to recover while they're collecting rent. (And maybe, just maybe, financing is easier to come by when it's time to sell?)

From the taxpayer standpoint, maybe we should all be happy that Fannie no longer finances "crappy developments". I mean let's face it, look how much it cost ALL taxpayers when the house of cards fell. On the other hand maybe Fannie went a little overboard with their new definition of "crappy development". If I put down a hefty downpayment on a second home, then maybe it is still in the taxpayers interest to sponsor the loan, given the corresponding boost to the economy (and island realtors!) My own opinion is that as the economy starts to slowly improve, condotel financing will be easier to come by, but only time will tell.

With regards to 77 possible owner finance deals on the island - that sounds great, if you can get the sellers to advertise some specific terms they would seriously consider. If you agents are going to wait for the sellers and buyers to come up with terms all by themselves, you're going to be spinning your wheels forever. Time to get on the phone, and start boiling down those future deals.....

One more question/concern: How many realtors on that island are willing to wait a couple years for a lease 2 purchase deal to actually close? I bet there area a lot of realtors who wouldn't even list deals like that, because they fear they'll never get paid. However maybe in this tough economy a future paycheck is better than no paycheck?
Gayle Hood, Realtor @ Monday, August 30, 2010 4:50 PM
You are so right about Fannie Mae. Add having to verify a reserve in the HOA to the list of qualifications to get a building approved.

I have heard that some of the banks that are keeping these loans in their portfolios are indeed getting a higher interest rate but I believe it is in the 5% to 6% range. Of course, as we have seen, that changes often.

No one has a magic ball when it comes to guessing about the further price erosion. We all pray that doesn't happen and hope this is the bottom but that is our job to be optimistic.

I disagree that the sellers must advertise specific terms. If we wait until it is negotiated at the time of the sale, you don't run off a buyer that is really interested just because he is a little short on the down payment. Sellers change their minds often when their listing doesn't move fast. What they would have taken when they listed changes when they see that isn't working to get his place sold. It is our job to bring the buyer and the seller together on their negotiations so I never second guess them.

As far as the lease 2 purchase deals. Realtors here often wait 2 years for their commissions when it is a new project such as the Sapphire or now the new Kirana.

By the way, Kirana's delay was because they were still getting their building permit. That is now in place and they have put the building out for bids. They already have several general contractors they like to compare so it won't be long before they select one.

Have a great day!
Kavita Mokha - Wall Street Journal @ Monday, August 30, 2010 10:59 PM
Finders Fees are also helping to Bring in Buyers

Some home sellers are offering finder’s fees to encourage people to connect them with willing buyers.

A finder doesn’t have to be a real estate pro. It could be a co-worker, a friend, or an acquaintance.

"A finder can become entitled to a fee by using his unique connections to introduce two parties that ultimately reach an agreement on their own, without any further input from the finder," says Jonathan Cooper, a New York-based attorney who has been involved with some of these transactions.

Cooper said anyone offering a finder’s fee should put the details in writing, so it’s clear under what circumstances the fee will be paid.
buy South padre @ Wednesday, September 01, 2010 7:20 AM
Finder's fee? I thought the best thing to do is offer the agent an increase in commission if they sell it, so it gets in the top of the queue when serious buyers stop by the real estate office. Offering a finder's fee to a third party sounds like a lack of faith in the existing agent, and a nightmare at the closing table. I mean really, if your agent isn't producing, why not just get a new agent after your contract expires, like most sellers do? On the other hand the market is rather soft right now, and if a third party can help bring a buyer, it could help everybody. Does anybody have any recent experience selling island property using an extra finder's fee incentive? If so, how much extra money did it take? Since you probably don't need a real estate license to pick up a fee like that, I wonder if it would be an ideal opportunity for a college student studying marketing. Humm......
Gayle Hood, Realtor @ Wednesday, September 01, 2010 9:11 AM
In the state of Texas, the title company nor the broker can pay a commission unless they are a licensed broker or agent. Rather than offer a finder's fee, I think offering concessions to the buyer is a better idea. It is the buyer making the decision about which one to buy rather than the agent. Yes, the agents love a selling bonus and they will show those properties but they can't make that buyer pick that one. Maybe doing both is a good idea.
J.D. Steinhilber @ Thursday, September 02, 2010 8:13 AM
A staggering 14% of mortgages are in foreclosure or delinquent, and there will be an estimated one million foreclosed homes this year.

In this context, the weakness in housing is not surprising. In addition, the government’s efforts to boost home sales with tax credits in the second half of 2009 and early 2010 provided a short-term boost, but took away future sales that would otherwise be occurring now.

The steady flow of negative economic news and the weak stock market have pushed investor pessimism into extreme territory.

Distressed real estate assets could gain favor over stocks soon for investors. Most of the second home markets will become a sea of distressed asset sails.

and

More owners of second homes will look to get some income from them by: 1st, trying short term rentals (but too many will eventually be on the market) and then 2nd, trying long term rentals or owner financing.
Gayle Hood, Realtor @ Thursday, September 02, 2010 9:03 AM
We subscribe to a service that posts the foreclosures that will be coming up in the sale at the courthouse steps on the first Tues. of each month. Our most recent list shows 12 in South Padre Island, 3 in Laguna Vista and one in Bayview. Those foreclosures still have a chance to redeem themselves so there will not be that many that will sell. I don't think that is anywhere near 14% for us. We are truly in much better shape than most areas of the U.S. Could it be better? Of course. Our numbers are down but a market is a market whether it is a buyer's market or whether it is a seller's market. Like you said, there are those looking for a place to invest and real estate is a good buy right now.
curious george @ Thursday, September 09, 2010 9:29 AM
Which is greater, shadow inventory or pent up demand? Both seem impossible to accurately gauge. To give us a better idea maybe you could add a fast pop-up question to this web site, asking the simple question: "Are you a potential buyer, seller, or neither?"
Rate Watcher @ Monday, September 27, 2010 12:24 PM
The latest statistics indicate that if a buyer has less than a 620 credit score, even with 15% - 25% down, they're unlikely to get a conventional loan. In this type of environment owner financing has never made more sense. We're now entering the slow sales season, and there are currently more than 600 SPI properties on the market (more than a two year supply at the current sales rate). Serious sellers simply must offer attractive terms to get the attention of buyers.

Nobody says you have to give it away! If you're a seller, and can finance a reasonably qualified buyer, consider offering your SPI property for 20% down (non-refundable), 5% interest rate, 2 year term, at a competitive price suggested by your professional realtor. Don't be afraid to let your realtor advertise your terms, or you'll end up in the dead pile of other listings that advertise nothing more than "possible owner financing". Remember that if the listing contract is properly worded, you'll always have the ability to decide who is worthy of your credit, and who is not.
Zeth @ Wednesday, September 29, 2010 1:00 PM
Banks don't have much incentive to lower lending standards. Right now they're making a nice profit holding existing mortgages - borrowing money from the government at almost 0%, and lending it out to mortgage holders for considerably more. Banks desperately need these generous margins to help rebuild their balance sheets after the beating they have (and are still) taking from so many failed mortgages, and credit card defaults. With 81% of mortgage applicants simply looking to refinance at lower rates, there really isn't much incentive for banks to offer easy financing.

Fortunately this situation can't last forever. The average mortgage length is only about seven and a half years, so if banks want to stay in the mortgage business, there will always be some pressure to offer competitive financing. It could however take a few years before the mortgage business returns to more friendly lending practices. In the meantime the reluctance of banks to lend will be a significant drag on the island's real estate business.

On the bright side, good agents know who is lending, and at what terms. If you're in the market to buy island property, have good credit, and your agent simply tells you that it is impossible to get a loan in the current environment - then you might want to seriously consider finding a new agent. In the current tight credit environment, real estate agents have become more valuable than ever before.
Rate Watcher @ Saturday, October 23, 2010 12:37 PM
Owner financing could make a great deal of sense in this market. And the sooner the better. Latest data indicates nationwide home prices have slipped 5.9% during just the past two months:

http://www.cnbc.com/id/39798920

Note that Bank of America has also re-started the foreclosure process, and when those foreclosures eventually hit the market it will likely drive down prices even further.

That's bad for property owners, but not necessarily real estate agents. At some point prices are going to come down far enough that serious bargain hunters will step in, and get the market moving again.
Reuters @ Wednesday, November 03, 2010 6:54 AM
Are you a seller holding out for a better price? Well, the way the Fed is gearing up to dilute the value of the dollar, you may just get your asking price a couple years down the road:

http://www.cnbc.com/id/39957072

But oh now, wait a minute! Since the Fed is getting ready to dilute the dollar, then those dollars you're going to get for your condo two or three years down the road aren't going to be worth nearly as much as they are today, right? And in the meantime those HOA fees, taxes, and maintenance costs are going to eat you alive. So it really doesn't make sense to hold out for your asking price, now does it?

My advice is to talk to Alice and/or one of her friendly & knowledgeable agents today, and price your condo to sell ASAP!

Still skeptical? Consider that the Sapphire developer just slashed the price of his condos by $100K. He wouldn't have done that if he thought it would be profitable to wait a couple years and hopefully get a better price.
Gwen Flores @ Thursday, November 04, 2010 5:31 AM
Owner financing isn't enough these days. Just look at the Palisade Palms auction, taking place later this month in Galveston. The first 5 beachfront luxury condos will sell for no minimum bid, they'll take a personal check for 10% down, and give you an additional 1.5% discount to close the deal the same day. They'll even work with your favorite broker. (Alice, of course!) Any seller who thinks they actually have a chance to sell their SPI condo at 2007 prices by just advertising "possible owner financing" is just plain nuts.
Policy Owner @ Monday, November 22, 2010 7:14 AM
I wonder if the unpredictable future of flood insurance is scaring away buyers. Or is flood insurance something that many buyers just don't pay much attention to, as long as it is currently available?

http://www.cnbc.com/id/40261171/

Another thought: A lot of sellers have their property on the market at an unrealisticly high price, hoping that some buyer from heaven will drop down and give them the price they really want for their "special" property, instead of what the property is really worth.

If the whole government flood insurance program goes haywire, and rates go through the roof as the article suggests is a possibility, that's really going to hurt property values. Can you imagine being able to sell ONLY to a cash paying customer, because insurance is not available? That's the unlikely worse case situation, but at this point you can't completely rule out such a situation.

The way I see it the government is already up to their neck with the current implementation of the flood insurance program, and in the current economic climate they can't afford insurance subsidies forever. That situation could come to a head the next time a major storm hits the USA. The fact that most private insurance companies won't touch this market with a ten foot pole should be sending every buyer and seller a very strong message.

So what's going to happen in the coming years with respect to flood insurance? Good question. Mortgage companies will continue to require it, that much seems clear. Perhaps insurance requirements will force communities like South Padre to make their communities more flood-resistant, or at least show some progress in that direction, to continue receiving flood insurance. That would be a major undertaking for South Padre, and I'm not even sure how you would do it. Suppose property owners were forced into building a Galveston-like seawall. To do that the city would probably have to issue a lot of municipal bonds, and paying those bonds would significantly raise property taxes. Not to mention the serious disruption to the community while the project was ongoing.

Another scenario is that the government forces the issue of making the island more flood resistant, by simply raising rates high enough to cover the actual costs associated with coastal flooding. That would add significantly to the cost of owning island property, and make property ownership less affordable.

I think the bottom line is that we'll be OK for a while, until the government gets hit with claims from the next major hurricane. After that, all bets are off. Somehow property owners are going to be forced to dig deeper into their wallets. The government is deeply in debt, and can no longer afford to subsidize the cost of flood insurance for coastal areas that have little or no hurricane flood resistance.
Bean Counter @ Tuesday, November 23, 2010 10:29 AM
Low mortgage rates don't matter if you can't get a loan. To underscore that point, consider that 29% of all homes sold in October were CASH DEALS. In this extreme environment, owner financing has never made more sense.

http://www.realtor.org/press_room/news_releases/2010/11/october_retreat
Rate Watcher @ Tuesday, December 07, 2010 3:46 PM
The value of the 10 year treasury fell like a rock today, down 1.7%, which increases the yield to 3.13% Yikes, that's a jump in interest rates of more than 0.2% in just one day! No matter how many treasuries the Fed is buying under the new quantitative easing program, old Ben Bernake can't seem to keep a lid on interest rates. I sure hope the South Padre city manager already sold the bonds necessary to build that new fire station, because the cost to do so just went up today. Muni debt is getting hard to sell.

Of course the rise in treasury rates will quickly bleed over into the mortgage market, making it even more expensive for buyers to purchase South Padre condos. I sure hope we don't end up in a market where the only options to sell are cash or owner finance, but we seem to be slowly creeping in that direction. Many analysts are now predicting the likely forthcoming rise in interest rates could cause property values to take another significant step down, further slowing the national economic recovery.
Rate Watcher @ Wednesday, December 15, 2010 10:36 PM
The overnight average rate on a 30 year mortgage just jumped above 5%. Some would argue that isn't going to make much of a difference to the island's property market, given that that rate is still very low by historical measures. Others argue that higher rates will scare away buyers, especially in the lower end of the market, where mortgages make up a larger percentage of sales. Some optimists totally disagree and believe higher rates will actually encourage buyers and undeclared sellers who have been sitting on the fence to jump in, before rates go any higher. (Over the next month I would LOVE to hear from some of you realtors about what actually happens. You could see a short term "panic pop" in business. At the very least you should let all potential market participants know that mortgage rates have suddenly jumped, and may experts predict they are likely to go much higher.)

To me it seems like overall economic prosperity in the USA and Mexico most impact the island's real estate business. When the economy eventually returns to healthy levels, and it will, banks won't mind writing loans for beachfront condotels, and buyers won't mind the old fashioned 9%+ jumbo mortgages. The way I see it, the prosperity of the island vacation property market has more to do with national unemployment rates than interest rates. Unfortunately that doesn't look like it will improve significantly anytime soon.

My predictions for the island property market in 2011:

- 30 year rates hit at least 7%, further driving down the demand for condos, most notably in the sub $175K inner-island condos

- More sellers will be forced into owner financed deals, and actually advertise their acceptable terms, instead of only allowing their realtor to use the wimpy standard slogan "Possible Owner Financing".

- Average island condo prices will further decay, perhaps 5% or so. In other words, no price bottom in sight. The effect will be most noticeable in the lower end properties, and perhaps less so in nice beachfront units.

- Condo inventory levels will remain incredibly high, currently in the current 3 - 4 years of supply range. Even with these absurdly high levels, an improving economy isn't going to reduce inventory levels much due to all the lurking overhang (pending foreclosures, sellers not even bothering to list until the market picks up, etc., will probably negate the positive effects of a slowly improving economy)

- The overall rental market slowly improves in 2011, but owners won't feel any richer. Even though an improving economy will encourage more tourists to visit for longer periods of time, more desperate condo owners waiting to sell are likely to enter the rental market, keeping a lid on rental rates. It's strange to see "cave-ins" or "sink holes" still suddenly appearing like this during an improving economy, but already stressed property owners can only hang on for so long before NEEDING the rent money.

- Few if any new major projects will be started in 2011. You may start to hear some hyped up talk, but probably won't see many actual bulldozers. Current inventory levels are just too high to support serious new development projects. Assuming it takes about two years to build the typical condo project, you probably won't see many developers start new projects until MLS statistics indicate there is less than a two year supply of existing condos on the market to squeeze prices up. Right now we're nowhere near that critical market parameter.

- Some speculators may start to bite at the all-but-left-for-dead land tracts and empty lots, but the buying won't be very aggressive. This could be good for places like The Shores, but it will be an uphill battle against all those silly building restrictions designed to put $$$ into the hands of the Franke brothers. Smart developers adjust their standards and plans to meet economic realities, not just lower their prices. (If you've ever seen a mostly unsold retirement community open up to young families so the developer can make a quick exit, you'll better appreciate how core community restrictions can be changed to speed up sales.)

- A slowly improving economy could mean more tourists, assuming the situation in Mexico doesn't decay much further (hard to imagine). That would be good for local business, and will at least bring more "lookers" into the island real estate market. Realtors may not make much extra money in 2011, but they will probably see a little more traffic after the tourist season starts.

- I doubt if the Mexico situation will get much worse, but it probably won't get much better anytime soon - at least until they elect a new president in another two years who agrees to peacefully coexist with the drug cartels - as the PRI used to do. The current war is going to keep a lot of wealthy Mexicans from Monterrey preoccupied, and out of the island property market. When you're worried about being kidnapped or hit by stray bullets on a daily basis, it's hard to think about the South Padre condo market. What may actually happen is that the percentage of gringos on the island may actually INCREASE in the coming year, so adjust your marketing plans accordingly.

- As more tourists return to the island, the commercial property market will stabilize, though it may not be enough to significantly impact the current vacancy rate. Restaurant and souvenir shop owners may finally earn enough to pay their bills, but overall profits probably won't be enough to encourage many new businesses. (Will the island's Whataburger ever fetch that $2M the owner has been desperately waiting so long for? With a declared net operating income of only $137K, that's a tough sell.)

*** Well, that's the way I see 2011. Considering the thousands of dynamic variables involved in making any market prediction, nobody can really predict the future with any accuracy, however all other opinions are welcome! ***
Mike @ Sunday, December 19, 2010 12:41 PM
I need an owner financed condo. kristophermontemayor@yahoo.com. I am a licensed Realtor but Iam looking for something for myself
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