This is a guest post by Angie Espiritu of Filben Realty

The term “real estate bubble” sends shivers to many spines because of the fairly recent sub-prime bubble that happened in the United States. Stripping the word of all its technicalities, a real estate bubble is simply about spiraling prices and disappearing buyers, leaving some people holding a bunch of flaming balls with nobody to pass them on to. The flaming balls burn their cash.

To see if this will happen to the Philippines, let’s dissect the bubble.

Photo: marcusrg via flickr

The flaming ball allegory

Going back to the simple description above, there would have been no flaming ball if everyone was paying for real estate in cash. Like, one lifts Php4 Million from his pocket and buys a house from a convenience store, then sells that house a year later to a second owner who dips his fingers into his pocket, lifts Php6 million cash, and pays the first owner.

When a third owner buys it in cash for Php10 million and can’t sell it for any price higher than Php8 million, he’s the only one having a problem. The rest of the world goes on. The third guy can choose to hold the property until prices swing back up again. No big deal.

The flaming ball allegory happens when someone borrows money to acquire the property. Say, the third buyer above acquires the property for Php10 million through financing. He pays the bank Php100,000 monthly. Next thing he knows, prices have gone down and his property is now worth only Php7 million in the market. A friend who has bought a similar property at that price is paying the bank only Php70,000 a month.

The bubble bursts…

The third owner either keeps the flaming ball and waits it out til prices get better, or he cuts his losses by selling the house for Php7 million immediately and repays the bank for the balance some other way. This is when we say that the bubble bursts…

Or … he stops paying the bank and lets the bank take the overpriced property back! Imagine a million borrowers doing that. Cash flow stops and financing companies close down…or rescued. This is when we say there is a crisis.

Will that kind of thing happen in the Philippines?

Not likely. Here’s why.

1. We’ve been there. Banks won’t allow it the second time around.

In 1997, the scenario described happened. Banks learned from the lesson. The government learned a lesson too.

To rescue the banks, Congress passed The Special Purpose Vehicle (SPV) Act of 2002 or Republic Act 9182 (RA 9182 has been amended by RA 9343) to help banks get rid of non-performing assets and clean up their balance sheets. That helped substantially.

In turn, the banks made sure that they checked home mortgage loan applications more closely. They don’t want non-performing assets as much as restaurant kitchens hate rats, get the picture?

So, they made sure that a buyer made more than enough money to pay for the amortization of the loan, or they disapprove the application. Processes were (and are) strict, and this prudence paid off big time in succeeding crises that rocked the world.

2. Most of our buyers are end users of the properties, not speculators.

The likelihood that people buy a property with the intention of reselling it at a higher price is nil. Therefore the bubble is likewise nil.

(Jay Castillo: I believe true real estate investors are different from speculators as real estate investors buy properties that are below market value. Speculators on the other hand buy at market value and speculate property appreciation)

Most people in the market today buy a property for keeps. That’s a good thing. Even those who are paying Php15,000 or more a month have no qualms about renting their places out for less than that. “With money from the rent, I only need to raise Php ____ to pay the amortization,” you’d hear them say. That’s not the mindset of people who can cause a bubble.

In short, Philippine banks are effectively weeding out speculators with not enough capital to pay for the loans, while those who are able to secure the loans are not likely to resell them. Why would they? It’s their home!

Where can the bubble come from in this case? If you find it, tell me.

Have a great day!

Angelina B. Espiritu

Angie Espiritu is the owner of Filben Realty – Your partner for optimal real estate investments. She is a PRC registered licensed real estate broker and an MBA graduate of De La Salle University.

Will there be a Real Estate Bubble in the Philippines? is a post from: Foreclosure Investing Philippines

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Have you seen the low interest home loans being offered by a few banks out there lately? Several months ago, the lowest home loan rate I have seen was 5.99% per year. Now, it is even lower at 5.75% (turns out 5.88% is no longer the lowest home loan rate available). Personally, I believe these are the best home loan rates I have ever seen in my lifetime. This even beats the 6.0% interest rate offered by the GSIS before.

This sounds tempting , not just for real estate investors, but also for home buyers.

But wait, before you apply for a home loan, you need to know that the low interest rate is fixed only for a year and can be quite risky…

Lower home loan rates mean…

Before I discuss the risks, let me first focus on the positive. Obviously, the biggest impact of having a low interest rate on your home loan would be a significant drop in the monthly amortization payments.

Let’s say you are going to buy a foreclosed property and the loan amount is Php2,000,000. If we use the usual 12% as the annual interest rate, at 10 years to pay, that would mean a monthly amortization of Php28, 694.18. (I used this site’s free mortgage calculator which can be found here: Real Estate Mortgage Calculator).

In contrast, if we used an interest rate of 5.88%, using the same loan parameters above, the resulting monthly amortization would be just Php22,083.76. This means a discount of Php6,610.42 per month in monthly amortization payments.

The savings in monthly payments is quite significant right? Imagine if you had several rental properties. This could translate to more positive cashflow.

In addition, I checked one of the banks that offer these low interest rates, and found out that the same rate is also applicable if one wants to refinance a home loan. I was surprised because I was expecting different home loan refinance rates.

This could be useful for real estate investors who want to get some cash out of their equity through refinancing, provided they are in good standing. I guess getting a new home loan for people with bad credit is out of the question.

Here’s the fine print

As with most things, there’s a fine print. In this case, the low interest rate is only fixed for the first year, and is subject to yearly repricing thereafter. This means that after the first year, one is at the mercy of interest rate fluctuations.

What if there was another financial crisis (knock on wood), and interest rates suddenly went up?! If that happens, there would be an increase in the interest rate to be used come repricing time, and would result in a corresponding increase in the monthly amortization payments.

By the way, some banks also offer some form of rate protection where the increase of the interest rate is limited to 2%. This is similar to the practice of Pag-IBIG. However, if one chose the option to have the interest rate fixed for only a year, it’s possible that the interest rate will be increased yearly right?

Scenarios

If you are a real estate investor and have rental properties purchased through home loans, the increase in monthly amortization payments can turn a nice positive cashflow generating property into one that is negatively geared, which is like a money pit. It can swallow up all of your money.

Raising rents can only work up to a certain extent and may not be enough, especially if a property is covered by the rent control law. Besides, market forces dictate rental rates and increasing it might drive tenants away, making the situation worse.

The same applies to non-investors. Unless one’s source of income, which is usually just one’s salary, more than covers any sudden increase in the monthly amortization payments, he is in danger of defaulting on his mortgage loan payments. A salary increase would help, but usually the opposite happens.

This can even lead to foreclosure down the road. In such harsh economic conditions during a financial crisis, my tips to avoid foreclosure may offer little help.

Nevertheless, I believe that the scenarios described above can be easily avoided by simply going for fixed interest rates.

Why go for fixed interest rates?

I believe that the proactive thing to do would be to go for fixed interest rates for the longest term possible. This eliminates the risk of being subject to sudden interest rate fluctuations, all throughout the loan term.

Sure, the interest rates usually become higher, the longer they are fixed, but at least, you are protected just in case prevailing interest rates shoot up due to economic conditions.

Anyway, If you are really concerned about the higher fixed interest rates for longer terms, my suggestion would be to have something in the middle, let’s say 5 years for example, provided you are prepared to have the loan fully paid before the end of the 5th year, if needed.

This seems to be a more balanced approach as you still get protection, but interest rate at the start should not be too high.

What the heck, if you believe you can pay in full for a property in one year, then by all means, go for the lowest home loan rate you can find, even if it is just fixed for a year.

My point is simple, I suggest going for a fixed interest rate, with the longest term possible, so that at the very least, you will have enough time to pay-off the home loan to avoid any repricing, if interest rates really do go up.

This will help minimize your risks, and have peace of mind, which I believe is priceless.

Happy investing!

To our success and financial freedom!

Jay Castillo
Real Estate Investor
Real Estate Broker License #: 20056
Blog: http://www.foreclosurephilippines.com
Follow me in Twitter: http://twitter.com/jay_castillo
Find us in Facebook: Foreclosure Investing Philippines facebook page

Text by Jay Castillo and Cherry Castillo. Copyright © 2011 All rights reserved.

PS. I will be a facilitator at the Think Rich Pinoy Seminar on February 26, 2011, and I hope to see you there. Click here to learn more about the seminar!

PPS. Don’t be the last to know, subscribe to e-mail alerts and get notified of new listings of bank foreclosed properties, public auction schedules, and real estate investing tips. Mailbox getting full? Subscribe through my RSS Feed instead!

Low home loan rates – what you need to know before it’s too late is a post from: Foreclosure Investing Philippines

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A guest post by Samantha from MortgageFit

Taking out the right kind of mortgage can be a harrowing experience unless you know your mortgage requirements well. Many consumers take out mortgages only to repent later as they are unable to negotiate with mortgage lenders on favorable terms. It is best to walk into your lender’s office and talk it out at length about your finances. Talking directly to the mortgage lender has an edge over online mortgages.

Online mortgage loan will undoubtedly help you to save a lot of time, money and energy and you don’t have to run around to look for a mortgage lender or rates offered. But you take out a mortgage depending on your individual requirement. Do online mortgages treat mortgage applications taking into account individual needs? Not to a very large extent.

If you approach a mortgage lender personally, you can discuss about your finances directly. You may also get valuable guidance from the lender and settle upon a mortgage that suits your needs best. In fact lenders will co-operate with you since the mortgage market is still fragile and lenders will not want to lose consumers.

How will you identify the best online mortgage lender?

If it is easier for you to apply for a mortgage online, do a bit of research that will prevent you from being duped.

• When you are looking for the online mortgage lender, find out if the lender is a member of Mortgage Bankers Association (MBA) and National Association of Mortgage Brokers. Visit the websites of the above to find out whether or not the mortgage lender is a current member.

• A good and reliable website will have a security and privacy statement. So, look for the same. A reliable and legitimate website will always try to protect your privacy.

• Online mortgage lender will not make use of pop up advertisements for promoting themselves.

• If the data or information you enter into the website is encrypted, it is likely to be a legitimate website

Repeat the same procedure for all the websites you visit. Once you have done your homework, it is time for selecting the right mortgage deal for yourself. If you adopt the above measures, chances are that you won’t get duped easily and you will be able to decide upon the right lender better.

Samantha is a contributing Financial Writer, Moderator and Community Mentor of MortgageFit. She has been an active participant in the forums wherein she offers mortgage advice and suggestions to people in loan problems.

Are online mortgages reliable? is a post from: Foreclosure Investing Philippines

Bahay Financial Services or BFS currently has a vast inventory of pre-owned or foreclosed properties for sale that includes investment/budget homes and lots. Their current listing includes properties in attractive locations in the National Capital Region (NCR), CALABARZON, Visayas, and Mindanao.

I have checked the listing and I noted that it includes more than 3,000 properties that are still in “Available” status.

The foreclosed properties for sale are very affordable and easy payment terms are also available. For more information, you may contact BFS directly using the contact details found here: http://www.bfs.com.ph/contactus

The BFS foreclosed real estate listing is available online and you may access it through the following link: http://www.bfs.com.ph/propertylist. For those who want to download the complete list by copying it online, you might get frustrated as it could take a long time to download due to the large amount of data, even with a fast internet connection. At least that was what I experienced when I tried it. Anyway, after a long wait, I was able to download the complete listing. If anyone wants to download my copy (which I have already zipped) to avoid the long time to download I encountered, you may download it here.

I know a fellow real estate investor who has already purchased two repossessed houses from BFS which are now part of his portfolio of real estate investments. He is already receiving positive cashflow from these properties.

Bahay Financial Services, Inc. is a pioneering multi-national mortgage servicing platform that combines functional competencies in Mortgage Finance Origination and Credit Underwriting, Loan Servicing, Default Management, Property Management and Secondary Market Development. More information about BFS is available here: http://www,bfs.com.ph/aboutus

Don’t forget to subscribe to my mailing list so you won’t miss any new listings. If your mailbox is getting full, you may also subscribe via RSS reader.

Bahay Financial Services (BFS) Pre-owned Properties for Sale (January 2009) is a post from: Foreclosure Investing Philippines

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