For anyone out there who might be facing foreclosure in the Chicago area, I may be able to help you.
Right now, banks are doing everything they can to stop the bleeding and stop the foreclosure ratios. If you currently find yourself in a situation where you are "upside down," (ie you now owe more on your home than it is currently worth), have received a notice of Lis Pendis or notice of foreclosure, and want to weigh your options, (and you DO have options), please contact me.
I know it can be an overwhelming and traumatizing feeling. I can help simply, and clearly, clarify the path for you and help you towards making the best choices no matter how tough they may be.
If you are afraid about losing anything, you have nothing to lose by taking a few minutes to discuss your situation with me.
Rick
Monday, April 14, 2008
Wednesday, April 09, 2008
Options for serious buyers in a scary market.
I know it is incredibly confusing to wade through the information about the housing market. If you listen to the media, everything is gloom and doom. This has caused near panic among buyers and sellers alike across the United States. The market has been crippled by fear!Wake up America and don't be afraid! Yes there is plenty to be concerned about but, the bottom line is that we all need a place to live. At the end of the day we all need a place to go home, seek solace and shelter, house our families, and live out our lives.
There is no shame in hedging one's bets in the rental market right now; none at all. If, for whatever reason, you can't afford to buy, are credit restricted due to the new credit rules, or are simply concerned about buying a home that might not be worth what you paid for it in 6 months, your fears are legitimate.
On the other hand, if you aren't prevented from buying by credit; if you need to make a move, and if you are currently weighing the pros and cons of purchasing; I would urge you to read on.
1) Foreclosures: This is not as bad, (or as good for consumers), as it may sound. Foreclosures are up everywhere across the nation but, for the most part, have higher concentrations in some areas versus others. The factors are purely economic. The foreclosures in today’s market are mostly coming from situations where the buyer of the home bit off more than they could chew, (whether they overestimated their income, misunderstood an adjustable rate mortgage, or fell into the “sub prime” category). Many misrepresented or miscalculated their ability to pay a mortgage and were given the mortgage by the bank with little to no money down and little more than a handshake representation of their income.
Not smart.
When people hear about foreclosures, they often think that means they can get a “deal” on the home. Even in this market that isn’t necessarily the case. The banks will take losses, most definitely. They will also write off those losses and will, over time, weather the storm. Whether they market the home with an agent or through an auction, those commissions must also be factored in. In many cases, homes have lost value, (which is why the individuals who were foreclosed on walked away), which is where the “bargain” can come into play, but the banks aren’t going to give these homes away. Particularly if you are at an auction, there is generally a reserve price or, the minimum acceptable price that the bank will accept for the home. Auctions can have some hidden expenses for the buyers including the auction house’s fees which are, in many cases, passed along to the buyers directly at a cost of 7-10% or more of the final auction price. Say for example you are bidding on a home that was valued at the peak of the market at $1,000,000. Now it has been foreclosed upon and in an effort to recoup their expenses the bank has factored in a 25% loss on their side making the reserve price of the home $750,000 at auction. Now even if you are the only one to bid the reserve price, (you could very well be looking at higher competing bids), you then make this purchase and then have to pay 10% for the auction fee or an additional $75,000 making the total purchase $825k. This is still a relative bargain but, in most cases, these homes are being sold “as is, where is” and whatever needs to be fixed or updated will also become the buyer’s responsibility. This is where a perceived bargain might start to, in reality, be whittled down to very little. In a foreclosure or auction situation, as a buyer, you are looking to achieve an equity position. That is the goal. So back to the $1,000,000 house; if the entire neighborhood of million dollar homes is suddenly worth 10-20% less because of price corrections in the market, you can see how the price you pay for something at auction may not put you in the position you were hoping for at the end of the day.Foreclosures are certainly a problem in the current market, but remember, people who are facing foreclosure have many options at their disposal to stave off or delay the process. For one thing, people have up to 6 months to recover, (ie pay their back mortgages), after receiving the bank’s notice of intent to foreclose. This gives many people a window to save money or restructure themselves. Banks are also offering loan modifications to help cash strapped home owners prevent foreclosure. For the bank, the foreclosure process is long and expensive. The foreclosure courts are backed up which can also provide the person in default some breathing room simply because the court cannot keep up. In the current market, it can take the bank, in some extreme cases, a year or more to fully foreclose and even if a person is at the absolute end of their rope, they can always file for bankruptcy which can further delay the foreclosure process.The bottom line with foreclosures: they are not all they’re cracked up to be and, in many ways, the banks are at the disadvantage. With little to, sometimes, negative equity in the homes being foreclosed upon, the deals rarely live up to investor’s expectations.
2) The Short Sale: This is a good situation to look for if you are in the market for a home at this time. A short sale is, essentially, what a bank and a current homeowner agree to accept for a home, (provided both parties agree), in an attempt to jointly liquidate a property and mitigate losses both to the seller and to the bank. In many of these cases, the homeowner is behind on their payments, is willing to sell and vacate the property, and is in a negative equity situation, (where they basically owe more than the current value of the home). In this situation, the bank independently assesses the current value of the home versus what is owed, and then reviews all offers that may result from the homeowner’s efforts to sell the home. The downside is that the bank can take several weeks, (sometimes a month or more), to reach a decision or make a counter offer. This is partially because these departments are currently overwhelmed. So while a potential buyer needs to be patient, the possibility of getting a good deal is definitely there. The bank understands that they will be selling the property at a loss but taking a certain percentage loss up front helps them avoid the expense and time involved with formal foreclosure proceedings. This method is generally favored by the bank as a way to further mitigate losses.
I’ll give you an example:
Say there is an urban condo that, with parking, sold just a few short years ago for 455k. Now, given the current market conditions, the unit with the parking is worth 415k at the top end. The loss to the current owner is 40k in value. Now let’s say that the owner made this purchase with a 100% loan product. The owner has negative equity or negative amortization in the property and is now having trouble paying the mortgage on a home that is suddenly worth 40k less than they originally paid for it. This is a troubling situation for the bank and the owner. When the owner considers selling they feel like they can’t because their place is now worth so much less. This is when a smart owner who is in trouble contacts their lender directly and speaks to someone in loss mitigation. Every loan service company or lender has a loss mitigation department that is there, specifically, to handle issues with struggling homeowners. When someone from the department and the homeowner discuss their options, the idea of a short sale often comes up. In this scenario, the bank considers any offers on the property. The seller can generally employ any real estate agent they choose at customary fees, and the bank then, in considering the offer, considers all of the expenses and losses and then, if the offer is acceptable forgives the seller the shortage.For example, in the case above: Let’s say that an offer of 400k comes in. The bank has an estimated value of 415k, down from 455k the home was purchased for. Now the bank must decide if, in order to facilitate the sale of the home, they are willing to accept 400k, the loss of 55k plus any brokerage fees and fees associated with the sale, and essentially forgive the seller those funds to get the deal done.
In the current market, this is happening more than you might imagine and it is, very often, a win/win situation.
So what do you do in today’s market?
True things look very uncertain, but there are so many opportunities, particularly in the “short sale” market, that a patient buyer who has good qualifying credit and money down, can do pretty well. Every individual needs to consider their own situation carefully before deciding.
Bottom line: The real estate market, long term and as a whole, has a track record as a place to build wealth.
Fair warning: If you aren’t ready to look at any real estate purchase you make in this market as a long term, “buy and hold” investment, then it may make sense for you to continue renting.
On the other hand, if you are looking at a purchase in this market as a long term investment, (at least 5+ years), then this market may have a lot to offer you right now. With the Fed lowering rates to near historic lows, and pumping much needed cash into credit strained markets, if you qualify for a loan at today’s restrictions, the deals are yours to be had. As a qualified buyer, right now, you have an incredible amount of negotiating power.The optimal position is that of someone with good credit and assets, and no contingencies such as a current home to sell. If you are a buyer in this category, you wield an incredible amount of power in this market.
What if you have a home to sell?
Well, I’ll start by saying that “move up” opportunities are better than ever. The sticky wicket is selling that house you already have.
Stay tuned. I’ll be covering that very topic in an upcoming post.
No one can predict the future, but fear is not the answer!
Remember:
Amateurs built the Ark
The Titanic was built by “professionals”
There is no shame in hedging one's bets in the rental market right now; none at all. If, for whatever reason, you can't afford to buy, are credit restricted due to the new credit rules, or are simply concerned about buying a home that might not be worth what you paid for it in 6 months, your fears are legitimate.
On the other hand, if you aren't prevented from buying by credit; if you need to make a move, and if you are currently weighing the pros and cons of purchasing; I would urge you to read on.
1) Foreclosures: This is not as bad, (or as good for consumers), as it may sound. Foreclosures are up everywhere across the nation but, for the most part, have higher concentrations in some areas versus others. The factors are purely economic. The foreclosures in today’s market are mostly coming from situations where the buyer of the home bit off more than they could chew, (whether they overestimated their income, misunderstood an adjustable rate mortgage, or fell into the “sub prime” category). Many misrepresented or miscalculated their ability to pay a mortgage and were given the mortgage by the bank with little to no money down and little more than a handshake representation of their income.
Not smart.
When people hear about foreclosures, they often think that means they can get a “deal” on the home. Even in this market that isn’t necessarily the case. The banks will take losses, most definitely. They will also write off those losses and will, over time, weather the storm. Whether they market the home with an agent or through an auction, those commissions must also be factored in. In many cases, homes have lost value, (which is why the individuals who were foreclosed on walked away), which is where the “bargain” can come into play, but the banks aren’t going to give these homes away. Particularly if you are at an auction, there is generally a reserve price or, the minimum acceptable price that the bank will accept for the home. Auctions can have some hidden expenses for the buyers including the auction house’s fees which are, in many cases, passed along to the buyers directly at a cost of 7-10% or more of the final auction price. Say for example you are bidding on a home that was valued at the peak of the market at $1,000,000. Now it has been foreclosed upon and in an effort to recoup their expenses the bank has factored in a 25% loss on their side making the reserve price of the home $750,000 at auction. Now even if you are the only one to bid the reserve price, (you could very well be looking at higher competing bids), you then make this purchase and then have to pay 10% for the auction fee or an additional $75,000 making the total purchase $825k. This is still a relative bargain but, in most cases, these homes are being sold “as is, where is” and whatever needs to be fixed or updated will also become the buyer’s responsibility. This is where a perceived bargain might start to, in reality, be whittled down to very little. In a foreclosure or auction situation, as a buyer, you are looking to achieve an equity position. That is the goal. So back to the $1,000,000 house; if the entire neighborhood of million dollar homes is suddenly worth 10-20% less because of price corrections in the market, you can see how the price you pay for something at auction may not put you in the position you were hoping for at the end of the day.Foreclosures are certainly a problem in the current market, but remember, people who are facing foreclosure have many options at their disposal to stave off or delay the process. For one thing, people have up to 6 months to recover, (ie pay their back mortgages), after receiving the bank’s notice of intent to foreclose. This gives many people a window to save money or restructure themselves. Banks are also offering loan modifications to help cash strapped home owners prevent foreclosure. For the bank, the foreclosure process is long and expensive. The foreclosure courts are backed up which can also provide the person in default some breathing room simply because the court cannot keep up. In the current market, it can take the bank, in some extreme cases, a year or more to fully foreclose and even if a person is at the absolute end of their rope, they can always file for bankruptcy which can further delay the foreclosure process.The bottom line with foreclosures: they are not all they’re cracked up to be and, in many ways, the banks are at the disadvantage. With little to, sometimes, negative equity in the homes being foreclosed upon, the deals rarely live up to investor’s expectations.
2) The Short Sale: This is a good situation to look for if you are in the market for a home at this time. A short sale is, essentially, what a bank and a current homeowner agree to accept for a home, (provided both parties agree), in an attempt to jointly liquidate a property and mitigate losses both to the seller and to the bank. In many of these cases, the homeowner is behind on their payments, is willing to sell and vacate the property, and is in a negative equity situation, (where they basically owe more than the current value of the home). In this situation, the bank independently assesses the current value of the home versus what is owed, and then reviews all offers that may result from the homeowner’s efforts to sell the home. The downside is that the bank can take several weeks, (sometimes a month or more), to reach a decision or make a counter offer. This is partially because these departments are currently overwhelmed. So while a potential buyer needs to be patient, the possibility of getting a good deal is definitely there. The bank understands that they will be selling the property at a loss but taking a certain percentage loss up front helps them avoid the expense and time involved with formal foreclosure proceedings. This method is generally favored by the bank as a way to further mitigate losses.
I’ll give you an example:
Say there is an urban condo that, with parking, sold just a few short years ago for 455k. Now, given the current market conditions, the unit with the parking is worth 415k at the top end. The loss to the current owner is 40k in value. Now let’s say that the owner made this purchase with a 100% loan product. The owner has negative equity or negative amortization in the property and is now having trouble paying the mortgage on a home that is suddenly worth 40k less than they originally paid for it. This is a troubling situation for the bank and the owner. When the owner considers selling they feel like they can’t because their place is now worth so much less. This is when a smart owner who is in trouble contacts their lender directly and speaks to someone in loss mitigation. Every loan service company or lender has a loss mitigation department that is there, specifically, to handle issues with struggling homeowners. When someone from the department and the homeowner discuss their options, the idea of a short sale often comes up. In this scenario, the bank considers any offers on the property. The seller can generally employ any real estate agent they choose at customary fees, and the bank then, in considering the offer, considers all of the expenses and losses and then, if the offer is acceptable forgives the seller the shortage.For example, in the case above: Let’s say that an offer of 400k comes in. The bank has an estimated value of 415k, down from 455k the home was purchased for. Now the bank must decide if, in order to facilitate the sale of the home, they are willing to accept 400k, the loss of 55k plus any brokerage fees and fees associated with the sale, and essentially forgive the seller those funds to get the deal done.
In the current market, this is happening more than you might imagine and it is, very often, a win/win situation.
So what do you do in today’s market?
True things look very uncertain, but there are so many opportunities, particularly in the “short sale” market, that a patient buyer who has good qualifying credit and money down, can do pretty well. Every individual needs to consider their own situation carefully before deciding.
Bottom line: The real estate market, long term and as a whole, has a track record as a place to build wealth.
Fair warning: If you aren’t ready to look at any real estate purchase you make in this market as a long term, “buy and hold” investment, then it may make sense for you to continue renting.
On the other hand, if you are looking at a purchase in this market as a long term investment, (at least 5+ years), then this market may have a lot to offer you right now. With the Fed lowering rates to near historic lows, and pumping much needed cash into credit strained markets, if you qualify for a loan at today’s restrictions, the deals are yours to be had. As a qualified buyer, right now, you have an incredible amount of negotiating power.The optimal position is that of someone with good credit and assets, and no contingencies such as a current home to sell. If you are a buyer in this category, you wield an incredible amount of power in this market.
What if you have a home to sell?
Well, I’ll start by saying that “move up” opportunities are better than ever. The sticky wicket is selling that house you already have.
Stay tuned. I’ll be covering that very topic in an upcoming post.
No one can predict the future, but fear is not the answer!
Remember:
Amateurs built the Ark
The Titanic was built by “professionals”
Is the government REALLY doing anything to help?
So we've all seen that the housing market has been sliding backwards for some time now. As a real estate professional, I watch the market intently on a daily basis. As I saw this happening, I saw the Federal Reserve and the various houses of Congress get up and talk about how to deal with the "subprime" crisis. I would hear news of rate cuts and "stimulus" and would get excited thinking that, as we've seen in past years, some minor adjustments would be all it would take to get the housing economy back on track.
Sadly, that has not been the case. Now, although I am listening intently, I give these promises less and less sway as it pertains to the real estate busines. I have begun to see a lot of these moves on the part of our government to be disingenuous in so many ways. For example: the Fed put a cash influx of $300 billion, yet the consumers saw no relief. The Fed has made drastic and aggressive rate cuts yet we, as consumers and borrowers have seen no movement in rates on the consumer side and, in fact, have actually seen a tightening of credit and lending policies.
Certainly the banks are wary now that they are feeling the impact of their loose lending practices; practices which have significantly contributed to the current economic crisis. Of course banks want to ratchet up the lending standards a bit to stave off any future issues. The problem is that the correction has been too steep and the pendulum has swung too far in the opposite direction. Instead of moderating and moving to a more reasonable and logical set of standards for lending, what was once a flood of money to consumers has not eased to a trickle. But there is more to it; much more! In the background, behind the scenes, the banks are scrambling over the fallout of the loose lending practices of the last few years as homeowners who now owe more than they paid for the home, are simply walking away from their properties or are, in fact, waiting out the foreclosure process and living, essentially, for nothing. Banks are cutting their losses and attempting to avoid the financial disaster of putting more cases into the already clogged foreclosure courts, cases which cost the banks ridiculous amounts of money, and are mitigating these losses by accepting pittances over what is owed by a current borrower in order to "short sell" a home.
Case in point: In a case I worked on recently, a seller was over 50k upside down in value versus what he paid for the home. He had negative equity and the need to sell. Furthermore, the values in his particular situation, were still in flux and trending downward. He had borrowed on a 100% loan, so he had no money into the home and this loan was structured by two lenders where one lender held an 85% stake and the other a 15% stake, (these types of loans were common practice whereby borrowers were able to avoid the 20% equity stake necessary to avoid private mortgage insurance or PMI). In this case, the lender with the 85% stake had the power position and agreed to take a significantly lesser sum in order to get the loan off their books. They then gave the 15% lender a total of $1,000 for their troubles which the 15% lender accepted knowing full well they would get NOTHING if the property were to go into foreclosure.
So, behind the scenes, the banks are working hard to stop the bleeding. Or so it seems right?
Not necessarily because when the Fed is bailing out big firms like Bear Stearns, infusing 300 billion into the economy and lowering rates, all without any quid pro quos, this has amounted to nothing but a stealth bailout of all the banks. This hasn't benefitted main street, it has benefitted Wall Street!
So now that we know these steps haven't worked and, just last month it was announced that real estate sales are off by 21% this year alone and are down to lows not seen in 7 years, what's going to happen?
There are a lot of ideas flying around. On Monday, the Washington Post reported about this dismal failure:
http://www.washingtonpost.com/wpdyn/content/article/2008/04/06/AR2008040601727.html
This is about a proposed incentive program from congress that will give incentives to people who buy foreclosed properties. The writer of this article called this a "pro-foreclosure" article as it, basically, promotes foreclosure and doesn't address stopping the foreclosure issue.
Now if you're a buyer this could be a very beneficial windfall. You can get a good home, at a good price, and get a bit of a government incentive for doing so.
But if you are a homeowner who is being threatened with foreclosure, then it puts you in a much stickier situation, particularly if you want to stay in your home.
The banks are working with people. Their loss mitigation departments are completely overwhelmed but even when mortgages are reworked, that doesn't guarantee that the problems won't continue for these beleagered and cash strapped homeowners.
The answer: We may need to consider that there might come a time where all values need to be scrutinized and reassessed and, if necessary, the banks are going to have to lower the principle on these homes to reflect their actual valuations. After all, with so much of the homeowner's payments going to interest we all know how much money the bank makes on the sale of a home. If people think Realtors make too much on a home sale, look at what your bank makes over the life of your loan. It's sickening!
There needs to be fair credit, maybe even a credit revolt to inspire a movement toward a truly fair system of credit for consumers.
For now, we can only hope that if the government is going to get involved at all, they do the right thing.
Mr. Bernanke: No more rate reductions or influxes of cash to benefit these banks. It is time to institute a quid pro quo; a price for the bail out. That price? Make your rate cuts and your cash influxes contingent on these banks making loans and not just "A" paper loans, but fair loans across the spectrum.
THAT is what will spark the economy. Accountability for these huge financial institutions is the only thing that will truly keep them from hording the money you infuse in order to mitigate their losses and truly put the money into the greater economy where it will benefit the average American.
Richard Doty
Sadly, that has not been the case. Now, although I am listening intently, I give these promises less and less sway as it pertains to the real estate busines. I have begun to see a lot of these moves on the part of our government to be disingenuous in so many ways. For example: the Fed put a cash influx of $300 billion, yet the consumers saw no relief. The Fed has made drastic and aggressive rate cuts yet we, as consumers and borrowers have seen no movement in rates on the consumer side and, in fact, have actually seen a tightening of credit and lending policies.
Certainly the banks are wary now that they are feeling the impact of their loose lending practices; practices which have significantly contributed to the current economic crisis. Of course banks want to ratchet up the lending standards a bit to stave off any future issues. The problem is that the correction has been too steep and the pendulum has swung too far in the opposite direction. Instead of moderating and moving to a more reasonable and logical set of standards for lending, what was once a flood of money to consumers has not eased to a trickle. But there is more to it; much more! In the background, behind the scenes, the banks are scrambling over the fallout of the loose lending practices of the last few years as homeowners who now owe more than they paid for the home, are simply walking away from their properties or are, in fact, waiting out the foreclosure process and living, essentially, for nothing. Banks are cutting their losses and attempting to avoid the financial disaster of putting more cases into the already clogged foreclosure courts, cases which cost the banks ridiculous amounts of money, and are mitigating these losses by accepting pittances over what is owed by a current borrower in order to "short sell" a home.
Case in point: In a case I worked on recently, a seller was over 50k upside down in value versus what he paid for the home. He had negative equity and the need to sell. Furthermore, the values in his particular situation, were still in flux and trending downward. He had borrowed on a 100% loan, so he had no money into the home and this loan was structured by two lenders where one lender held an 85% stake and the other a 15% stake, (these types of loans were common practice whereby borrowers were able to avoid the 20% equity stake necessary to avoid private mortgage insurance or PMI). In this case, the lender with the 85% stake had the power position and agreed to take a significantly lesser sum in order to get the loan off their books. They then gave the 15% lender a total of $1,000 for their troubles which the 15% lender accepted knowing full well they would get NOTHING if the property were to go into foreclosure.
So, behind the scenes, the banks are working hard to stop the bleeding. Or so it seems right?
Not necessarily because when the Fed is bailing out big firms like Bear Stearns, infusing 300 billion into the economy and lowering rates, all without any quid pro quos, this has amounted to nothing but a stealth bailout of all the banks. This hasn't benefitted main street, it has benefitted Wall Street!
So now that we know these steps haven't worked and, just last month it was announced that real estate sales are off by 21% this year alone and are down to lows not seen in 7 years, what's going to happen?
There are a lot of ideas flying around. On Monday, the Washington Post reported about this dismal failure:
http://www.washingtonpost.com/wpdyn/content/article/2008/04/06/AR2008040601727.html
This is about a proposed incentive program from congress that will give incentives to people who buy foreclosed properties. The writer of this article called this a "pro-foreclosure" article as it, basically, promotes foreclosure and doesn't address stopping the foreclosure issue.
Now if you're a buyer this could be a very beneficial windfall. You can get a good home, at a good price, and get a bit of a government incentive for doing so.
But if you are a homeowner who is being threatened with foreclosure, then it puts you in a much stickier situation, particularly if you want to stay in your home.
The banks are working with people. Their loss mitigation departments are completely overwhelmed but even when mortgages are reworked, that doesn't guarantee that the problems won't continue for these beleagered and cash strapped homeowners.
The answer: We may need to consider that there might come a time where all values need to be scrutinized and reassessed and, if necessary, the banks are going to have to lower the principle on these homes to reflect their actual valuations. After all, with so much of the homeowner's payments going to interest we all know how much money the bank makes on the sale of a home. If people think Realtors make too much on a home sale, look at what your bank makes over the life of your loan. It's sickening!
There needs to be fair credit, maybe even a credit revolt to inspire a movement toward a truly fair system of credit for consumers.
For now, we can only hope that if the government is going to get involved at all, they do the right thing.
Mr. Bernanke: No more rate reductions or influxes of cash to benefit these banks. It is time to institute a quid pro quo; a price for the bail out. That price? Make your rate cuts and your cash influxes contingent on these banks making loans and not just "A" paper loans, but fair loans across the spectrum.
THAT is what will spark the economy. Accountability for these huge financial institutions is the only thing that will truly keep them from hording the money you infuse in order to mitigate their losses and truly put the money into the greater economy where it will benefit the average American.
Richard Doty
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