Options for serious buyers in a scary housing 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”

Anatomy of a foreclosure

Hello again!

A lot of people have been asking me questions about foreclosures lately. I think there area a lot of misconceptions out there so I thought I'd post something I've been sending out to all of my clients and prospective clients.

Real estate is something that interests everyone. When the market is down, it seems that there are even more opportunities for buyers. While this is true, I understand there is still a lot of trepidation. Even more so, I understand there are a lot of misconceptions.

Today, I want to address the idea of foreclosures.

It seems that, every time we turn on the news or listen to the radio, there is a gloomy report on the housing market. The concept of “sub-prime,” “ARM’s” and “foreclosures,” are big news all around. I think that has been giving a lot of prospective buyers a sense that, if they just wait it out, there are going to be loads of properties available for rock bottom, next to nothing prices.

This is a real misconception among many people.

One of the biggest sources are these infomercials that tell people they can make “big money” in foreclosures if they just follow the simple system that costs “x” amount of dollars. If that were the case, don’t you think everyone would be rich on foreclosed properties?

So, just to help you understand, (if you don’t already), a foreclosure is a pretty complicated series of events. It isn’t simply a matter of someone missing a payment or two and then being kicked out of their home. The foreclosure process can take a year or more in some cases and with the foreclosure rate rising, banks are actually starting to help people avoid the foreclosure process in a number of ways.

Generally, by missing one or two payments, the bank or lender sends an “intent to foreclose” letter. This notifies the homeowner that if they do not make the payments the formal foreclosure process will begin. By the 3rd or 4th payment missed, the lender has employed legal assistance in the matter and is filing the proper legal paperwork for foreclosure. At any point, the homeowner can stop the process by making the payments including any late fees and/or legal fees.

The homeowner also has other options. They can retain an attorney or even declare bankruptcy which effectively stops the bank and slows the foreclosure process considerably.

It is at this point that, many banks, are encouraged to work with struggling homeowners in an attempt to help them keep their homes. The lender can elect to restructure the loan, defer payments or set up a payment arrangement.

And remember, at any point during this process, a distressed homeowner can always put the home on the market and sell it!

The bottom line, for those facing foreclosure, there are many options. Couple that with recent programs the government and the Federal Reserve are sponsoring to keep people in their homes and foreclosures may not be all they are cracked up to be.

That doesn’t mean there aren’t opportunities.

The market has corrected in many ways and sellers have definitely become more realistic. Prices have moderated and come down; perhaps not as much in the Chicago area as they have in other markets but they have come down. In my opinion that reflects the overall strength of the Chicago area as far as real estate is concerned.

So the opportunities are there, you, as a buyer, have more negotiating power than you’ve had in at least 5 years. Prices are down to more reasonable levels. Money, while not as easy to borrow as it was, is still readily available at excellent rates to qualified buyers.

And there are also “short sale” opportunities. This is a, relatively, little known way for people facing foreclosure to get out of their loan. If you can find one, this can be a great opportunity for you as a buyer. Basically, a “short sale” is an agreement by where the seller’s bank/lender, review any offers and, if the bank agrees, will actually allow the seller to sell you a home for LESS than they owe on it and will absolve the seller of any deficit on the loan. These situations can be win/win situations for everyone. YOU, as the buyer, are often able to negotiate a great deal while the seller, who is facing foreclosure, is able to get out of their home and loan and their lender is able to cut their losses without having to deal with the expense of legal action.
Expect that, if anything, we’ll see more “short sale” opportunities in the market if it continues to be sluggish. All signs are pointing to a recovery as soon as Spring so it is definitely hard to predict exactly what we can expect