Clouds, followed by doom and gloom...The day of reckoning is here folks. Did you really think home prices would go up 15% per year for ever?
The retail market no longer exists: I know this sounds like a bold statement, but for the near-term it is the reality of our situation in Happy Valley. Between the Buena Vista auctions, foreclosures and short-sales there just is no market for "full retail" pricing. The huge volume of distressed homes in our area far out paces the current level of demand. Even using demand numbers from the peak year, 2005, there are more active listings than can be absorbed. So, why would a qualified Buyer (very rare right now) buy your home for $700,000 when they can get a similar bank-owned home for $500,000?
Buyer's above $417,000 are rare: One of the most severe consequences of the mortgage melt-down is the extreme cost of "Jumbo" loans. In the past Jumbo loans (above $417,000) were usually priced about .25% above conforming loans, and sometimes at PAR with conforming loans. In the current market place it is between 1.5% and 2.0% higher. On a $500,000 mortgage that can equate to an extra $835 per month! Many Buyers in this range are waiting for Jumbo Loans to retrace to their historical spread. Thus, these Buyers are on the sidelines.
100% financing is gone: Most first-time home buyers utilized some sort of 100% financing product to get into their homes. Now that a minimum of 3% is required, the market for starter homes has slowed dramatically. Why is that important in Happy Valley...the "move-up" Buyers that would normally be buying into our neighborhood are having a hard time selling their homes. If they cannot sell their starter homes, they can't move up to our homes.
What does this mean for us? This year is not the year to sell your home. If you must:
1) Hire a local experienced Broker who will be brutally honest with you.
2) Price aggressively.
3) Make yourself easy to do business with.
4) Expect that you still may not sell your home this year.
Thursday, April 3, 2008
Wednesday, April 2, 2008
The rebound is just around the corner, right???
That light at the end of the tunnel??? Well my friends, that is a TRAIN!
Without going into reams of numbers, stats (stats don't lie, Statisticians do) and a history lesson, I am just going to explain with the simple Theory of Supply and Demand.
We all understand that as supply goes up, prices come down and as supply goes down prices go up. Oil has been responding to that lately, as has corn, wheat and gold.
Real Estate Supply is: Developable land and/or finished property.
Real Estate Demand is: Willing and able Buyers (both consumer and Professional).
Let's look at supply: Inventories of listed homes are approaching 1-year nationally, well above the 3-month average we saw during the boom years. Not figured in that number are a lot of the REO (Bank owned) homes that are not listed, but actively for sale. Also, National Homebuilders are only listing a few token homes per development (maybe 10% of their finished inventory) to diminish the appearance of having too much standing inventory. Homebuilders are still building new homes at a rate FASTER than they are being purchase, further bloating the standing inventory.
1) Inventory is way outpacing current demand.
2) Inventory is UNDER reported.
3) Inventory is trending HIGHER.
Let's look at Demand: We often talk of finding a "willing' and "able" Buyer. With consumer confidence at 20-year lows, many potential Buyers are just not "willing" to jump into a declining market. Those that are "willing" are often unable. The continued tightening of lending standards and rising mortgage rates have rendered many "willing" Buyers UNABLE. During the boom an abnormally high number of qualified Buyers became homeowners, effectively taking a decades worth of demand and crunching it into a few years. Stealing from future sales to close sales "today".
1) Demand is rapidly declining.
2) Those Homeowners who have defaulted will be locked out of home ownership for 7 years.
3) Many first-time Homeowners are underwater and unable to move up the housing chain.
4) New Buyers are locked out of the credit markets.
5) Builders do not want to buy new land as they cannot dispose of their current product.
We are currently in a period where Supply and Demand are quickly moving in opposite directions. In very liquid assets the price moves quickly in response. In non-liquid assets, such as Real Estate, it takes much longer for the price shifts to show up in the national numbers. We are at the onset of a long and protracted decrease in Real Estate values.
Without going into reams of numbers, stats (stats don't lie, Statisticians do) and a history lesson, I am just going to explain with the simple Theory of Supply and Demand.
We all understand that as supply goes up, prices come down and as supply goes down prices go up. Oil has been responding to that lately, as has corn, wheat and gold.
Real Estate Supply is: Developable land and/or finished property.
Real Estate Demand is: Willing and able Buyers (both consumer and Professional).
Let's look at supply: Inventories of listed homes are approaching 1-year nationally, well above the 3-month average we saw during the boom years. Not figured in that number are a lot of the REO (Bank owned) homes that are not listed, but actively for sale. Also, National Homebuilders are only listing a few token homes per development (maybe 10% of their finished inventory) to diminish the appearance of having too much standing inventory. Homebuilders are still building new homes at a rate FASTER than they are being purchase, further bloating the standing inventory.
1) Inventory is way outpacing current demand.
2) Inventory is UNDER reported.
3) Inventory is trending HIGHER.
Let's look at Demand: We often talk of finding a "willing' and "able" Buyer. With consumer confidence at 20-year lows, many potential Buyers are just not "willing" to jump into a declining market. Those that are "willing" are often unable. The continued tightening of lending standards and rising mortgage rates have rendered many "willing" Buyers UNABLE. During the boom an abnormally high number of qualified Buyers became homeowners, effectively taking a decades worth of demand and crunching it into a few years. Stealing from future sales to close sales "today".
1) Demand is rapidly declining.
2) Those Homeowners who have defaulted will be locked out of home ownership for 7 years.
3) Many first-time Homeowners are underwater and unable to move up the housing chain.
4) New Buyers are locked out of the credit markets.
5) Builders do not want to buy new land as they cannot dispose of their current product.
We are currently in a period where Supply and Demand are quickly moving in opposite directions. In very liquid assets the price moves quickly in response. In non-liquid assets, such as Real Estate, it takes much longer for the price shifts to show up in the national numbers. We are at the onset of a long and protracted decrease in Real Estate values.
Who is really in Foreclosure
The papers and news are full of stories of "2 million American Families losing their homes". If you listen to Congressional testimony on CSPAN it sounds like each and every home in foreclosure has the perfect American family about to have their dream ripped from them. Well....the truth is for from the perception....
1) Speculators: This group makes up the vast majority of early foreclosures and accounts for the 100,000's of vacant homes scattered across the country. They were purely playing a financial game, and when the tide turned...they bailed. Estimates are that fully 40% of the foreclosures currently reported are speculator activity. This group was comprised mostly of amateurs who lacked the knowledge and resource to properly function in the heavily leveraged Real Estate market. They artificially drove up demand, and the feverish bids drove prices to unsustainable levels. Think "Flippers". This group will be almost totally purged out of the market by early 2009 and will represent an ever declining share of foreclosures.
2) Investors / Private Builders: This group, who normally carves out a business in Real Estate using a more conservative approach to buying, selling and developing found themselves up against a huge wave of speculators who were bidding up the cost of the Real Estate that they needed to sustain their livelihood. Many started making bad decisions based on the "new" market realities. Initially they all profited handsomely, but when the market suddenly ground to a halt in 2007 they were left holding the bag on 100,000's of properties that they suddenly couldn't move. Many Investors / Private Builders use local banks to fund their projects. I know of two regional banks here in the Northwest that are on the verge of failure because of the non-performing loans to Builders and Developers. This group initially started to heavily discount their product to get any funds out that they could, driving down prices in their locals. Now that the markets have seized up, they are going into foreclosure by the droves. It is estimated that they account for 25% of the outstanding foreclosures. This segment will continue to falter and should be a larger segment of the foreclosure market for the foreseeable future.
3) Marginal Individual Homeowners: Enticed by ever easing lending standards and the perception that housing prices would go up in perpetuity. This group represents those that either should NEVER have become homeowners because they just did not have the financial means to do so (Liar Loans), or who bought much more house than they could actually afford (Pay-option ARMS). This group was sold on the American Dream and the chance to create 10's of thousands of dollars of wealth. This group also was blinded by greed and shares culpability. They only listened to what they wanted to hear, did not ask the tough questions of their Realtors and Mortgage Officers and turned a blind eye to the fact that every financial transaction contains risk. This group makes up approximately 30% of the current foreclosure market. This group will also be purged from the market by the beginning of 2010 and will see an ever decreasing share of the foreclosure number.
4) Traditional Homeowner: This group (Good credit, fully employed, has 20% or more equity) has benefited from the huge run up in prices and either cashed out through the sale of their home or tapped equity lines to get cash. Traditionally they rarely go into foreclosure (usually caused by job loss, divorce or death). Currently they make up only about 5% of the foreclosures. But, as prices rapidly deflate, the economy continues to cool and tighter lending standards make it more difficult for future Buyers to come into the market their numbers will soar. By 2010 this group should account for over 50% of active foreclosures.
5) National Homebuilders: Why am I talking about this group? They don't go into traditional foreclosure, right? Because they represent the single largest threat to home values over the next 2 years. Many are technically insolvent, only fighting of Bankruptcy through fiscal maneuvering. Once a major (my bet is Centex) goes BK, there will be a cascade effect. We are already seeing bulk land deals from the likes of Lennar, KB Homes and Centex where they are selling off lots in the $10,000 to $20,000 range. They continue to build homes at a rate faster than they are being absorbed. Once a large one goes into receivership, the value of their finished homes will plummet as they are sold off in a REAL auction, not these bogus auctions that we have been ready about, but a no-reserve highest bid wins...PERIOD type of auction. Once this starts, those traditional homeowners who thought they had 20-30-40% equity may find that they are under-water on their homes and that giving the keys back to the bank may be a better solution.
Bottom line, the current wave of foreclosures is not really affecting the solid homeowner, in fact most foreclosures are vacant homes held for investment or pure speculation. But, this first round of bad loans will have a prolonged effect on the market and put the rest of us at jeopardy....
1) Speculators: This group makes up the vast majority of early foreclosures and accounts for the 100,000's of vacant homes scattered across the country. They were purely playing a financial game, and when the tide turned...they bailed. Estimates are that fully 40% of the foreclosures currently reported are speculator activity. This group was comprised mostly of amateurs who lacked the knowledge and resource to properly function in the heavily leveraged Real Estate market. They artificially drove up demand, and the feverish bids drove prices to unsustainable levels. Think "Flippers". This group will be almost totally purged out of the market by early 2009 and will represent an ever declining share of foreclosures.
2) Investors / Private Builders: This group, who normally carves out a business in Real Estate using a more conservative approach to buying, selling and developing found themselves up against a huge wave of speculators who were bidding up the cost of the Real Estate that they needed to sustain their livelihood. Many started making bad decisions based on the "new" market realities. Initially they all profited handsomely, but when the market suddenly ground to a halt in 2007 they were left holding the bag on 100,000's of properties that they suddenly couldn't move. Many Investors / Private Builders use local banks to fund their projects. I know of two regional banks here in the Northwest that are on the verge of failure because of the non-performing loans to Builders and Developers. This group initially started to heavily discount their product to get any funds out that they could, driving down prices in their locals. Now that the markets have seized up, they are going into foreclosure by the droves. It is estimated that they account for 25% of the outstanding foreclosures. This segment will continue to falter and should be a larger segment of the foreclosure market for the foreseeable future.
3) Marginal Individual Homeowners: Enticed by ever easing lending standards and the perception that housing prices would go up in perpetuity. This group represents those that either should NEVER have become homeowners because they just did not have the financial means to do so (Liar Loans), or who bought much more house than they could actually afford (Pay-option ARMS). This group was sold on the American Dream and the chance to create 10's of thousands of dollars of wealth. This group also was blinded by greed and shares culpability. They only listened to what they wanted to hear, did not ask the tough questions of their Realtors and Mortgage Officers and turned a blind eye to the fact that every financial transaction contains risk. This group makes up approximately 30% of the current foreclosure market. This group will also be purged from the market by the beginning of 2010 and will see an ever decreasing share of the foreclosure number.
4) Traditional Homeowner: This group (Good credit, fully employed, has 20% or more equity) has benefited from the huge run up in prices and either cashed out through the sale of their home or tapped equity lines to get cash. Traditionally they rarely go into foreclosure (usually caused by job loss, divorce or death). Currently they make up only about 5% of the foreclosures. But, as prices rapidly deflate, the economy continues to cool and tighter lending standards make it more difficult for future Buyers to come into the market their numbers will soar. By 2010 this group should account for over 50% of active foreclosures.
5) National Homebuilders: Why am I talking about this group? They don't go into traditional foreclosure, right? Because they represent the single largest threat to home values over the next 2 years. Many are technically insolvent, only fighting of Bankruptcy through fiscal maneuvering. Once a major (my bet is Centex) goes BK, there will be a cascade effect. We are already seeing bulk land deals from the likes of Lennar, KB Homes and Centex where they are selling off lots in the $10,000 to $20,000 range. They continue to build homes at a rate faster than they are being absorbed. Once a large one goes into receivership, the value of their finished homes will plummet as they are sold off in a REAL auction, not these bogus auctions that we have been ready about, but a no-reserve highest bid wins...PERIOD type of auction. Once this starts, those traditional homeowners who thought they had 20-30-40% equity may find that they are under-water on their homes and that giving the keys back to the bank may be a better solution.
Bottom line, the current wave of foreclosures is not really affecting the solid homeowner, in fact most foreclosures are vacant homes held for investment or pure speculation. But, this first round of bad loans will have a prolonged effect on the market and put the rest of us at jeopardy....
Wednesday, February 13, 2008
How to chose a Mortgage Broker
I don't know who is more hated...a Used Car Salesman or a Mortgage Broker. Both suffer from the reputation of not being honest and forthright in negotiating. So, how to chose one who is.
1) Education: All Loan Originators in Oregon are required to go through the same basic training and continuing education. Beyond that...its a free-for-all. Ask your Loan Originator prospects what formal education they have (AA, BA, MBA). Ask them if they have ever applied their education in traditional business. Look for a Lender with a strong background in business, finance, contracts and taxation.
2) Experience: Try to find a Lender who not only has broad experience and many years of transactional history, but specific experience to YOUR needs. If you need a VA loan make sure your lender knows them inside and out, and preferably, is a Veteran! Verify that your Lender knows what he/she is doing.
3) Reputation: Your Mortgage Broker shops your loan to multiple Banks. The better Brokers with good reputations and a strong history get better deals from the banks, and can therefore get you better rate/terms. Be sure the Lender you chose is very reputable and is on good terms with the banks they originate for.
4) Full Disclosure: There are three basic areas where Brokers take money from your pocket:
1) Pass-through costs. These include credit reports, appraisals, courier, underwriting, Escrow, title and impounds (Taxes and insurance). These are not allowed to be marked up and should be the same from Broker to Broker.
2) Broker fees. Origination, Broker fee, Processing fee. These all vary wildly from Broker to Broker. A 1% origination and up to $495 for processing are considered fair.
3) Rebate or YSP. This is the biggy...this is what the bank pays back to the Broker for your loan after closing. The higher the rate the Broker gets you to commit to, the higher the rebate payment they will receive. On the norm most reputable Brokers will try to make about 1% in rebate. A good Broker will tell you what their target rebate is so you can balance all fees and costs while evaluating your loan options.
Reasons not to hire a Mortgage Broker:
1) They are a friend, family member or some other associate. That in and of itself is not a reason to hire someone.
2) They tell you what you want to hear and push a loan product that they want to sell. You are paying for quality advice based on your unique financial needs.
3) It is always the right time to refinance....WRONG. A good Broker turns away a lot of applicants because the timing is not right (Rates, credit, LTV and other considerations).
4) They are super busy, so they must be good. If they are that busy, when will they help you? There is an art to locking in the best rate and watching the markets. Make sure they are not swamped and unable to attend to your file.
Reasons to hire a Mortgage Broker:
1) Personal reference from someone who you trust.
2) They thoroughly evaluate your situation before offering a product.
3) They are not stretched too thin with other clients.
4) They fully disclose all costs and show you how much they will make on your loan...including Rebate/YSP..
Hiring the right Lender can make a huge difference in the outcome of your transaction. They can save you thousands of dollars and make the process much easier. Buying /selling or refinancing a home will probably be the largest single financial endeavor you undertake in your life. Make sure the Lender you hire is the best suited to your needs.
Some common Lender tricks:
1) "No closing costs": This is a lie. All loans have costs. Any Lender can pay those costs for you, but MUST charge a higher interest rate to get a larger rebate from the bank to cover them. Most loans with 'no closing costs' have an interest rate 1% higher than a traditional loan.
2) "We have the best rates". This is a lie. All Brokers have access to the same rate sheets and can offer the same rates in any apple-to-apple scenario.
3) "Now is the best time". Maybe...maybe not. Each financing scenario is unique. Where it may be perfect for Client A to refinance right now, client B may actually benefit from waiting.
1) Education: All Loan Originators in Oregon are required to go through the same basic training and continuing education. Beyond that...its a free-for-all. Ask your Loan Originator prospects what formal education they have (AA, BA, MBA). Ask them if they have ever applied their education in traditional business. Look for a Lender with a strong background in business, finance, contracts and taxation.
2) Experience: Try to find a Lender who not only has broad experience and many years of transactional history, but specific experience to YOUR needs. If you need a VA loan make sure your lender knows them inside and out, and preferably, is a Veteran! Verify that your Lender knows what he/she is doing.
3) Reputation: Your Mortgage Broker shops your loan to multiple Banks. The better Brokers with good reputations and a strong history get better deals from the banks, and can therefore get you better rate/terms. Be sure the Lender you chose is very reputable and is on good terms with the banks they originate for.
4) Full Disclosure: There are three basic areas where Brokers take money from your pocket:
1) Pass-through costs. These include credit reports, appraisals, courier, underwriting, Escrow, title and impounds (Taxes and insurance). These are not allowed to be marked up and should be the same from Broker to Broker.
2) Broker fees. Origination, Broker fee, Processing fee. These all vary wildly from Broker to Broker. A 1% origination and up to $495 for processing are considered fair.
3) Rebate or YSP. This is the biggy...this is what the bank pays back to the Broker for your loan after closing. The higher the rate the Broker gets you to commit to, the higher the rebate payment they will receive. On the norm most reputable Brokers will try to make about 1% in rebate. A good Broker will tell you what their target rebate is so you can balance all fees and costs while evaluating your loan options.
Reasons not to hire a Mortgage Broker:
1) They are a friend, family member or some other associate. That in and of itself is not a reason to hire someone.
2) They tell you what you want to hear and push a loan product that they want to sell. You are paying for quality advice based on your unique financial needs.
3) It is always the right time to refinance....WRONG. A good Broker turns away a lot of applicants because the timing is not right (Rates, credit, LTV and other considerations).
4) They are super busy, so they must be good. If they are that busy, when will they help you? There is an art to locking in the best rate and watching the markets. Make sure they are not swamped and unable to attend to your file.
Reasons to hire a Mortgage Broker:
1) Personal reference from someone who you trust.
2) They thoroughly evaluate your situation before offering a product.
3) They are not stretched too thin with other clients.
4) They fully disclose all costs and show you how much they will make on your loan...including Rebate/YSP..
Hiring the right Lender can make a huge difference in the outcome of your transaction. They can save you thousands of dollars and make the process much easier. Buying /selling or refinancing a home will probably be the largest single financial endeavor you undertake in your life. Make sure the Lender you hire is the best suited to your needs.
Some common Lender tricks:
1) "No closing costs": This is a lie. All loans have costs. Any Lender can pay those costs for you, but MUST charge a higher interest rate to get a larger rebate from the bank to cover them. Most loans with 'no closing costs' have an interest rate 1% higher than a traditional loan.
2) "We have the best rates". This is a lie. All Brokers have access to the same rate sheets and can offer the same rates in any apple-to-apple scenario.
3) "Now is the best time". Maybe...maybe not. Each financing scenario is unique. Where it may be perfect for Client A to refinance right now, client B may actually benefit from waiting.
How to chose a Realtor
Not all Realtors are created equal. In fact the vast majority of licensed Realtors are not full-time professionals, but rather part-timers looking for a quick buck. They lack experience, education, focus and industry knowledge. So...what to look for:
1) Education: All Realtors in Oregon are required to go through the same basic training and continuing education. Beyond that...its a free-for-all. Be wary of Realtors who dazzle you with industry designations like; GRI and ePro, but have little to no formal education. Ask your Realtor prospects what formal education they have (AA, BA, MBA). Ask them if they have ever applied their education in traditional business. Look for a Realtor with a strong background in business, finance, contracts and taxation. All very important aspects of every Real Estate transaction.
2) Experience: Try to find a Realtor who not only has broad experience and many years of transactional history, but specific experience to YOUR needs. Currently short-sales are all the rage. If you think you qualify for a short-sale make sure the Realtor you chose knows how to execute them and has experience with them. Or, say you are an investor who needs to do a 1031 exchange. Verify that your Realtor knows what he/she is doing.
3) Area Knowledge: Many Realtors will claim to service very large geographic areas. I can guarantee that their specific knowledge of neighborhoods will be nominal and they will have extreme difficulty physically servicing listings or Buyers who are far from their place of business. Chose a Realtor who lives in the local area, or at a minimum does a lot of business in the area and knows the local market thoroughly. A Happy Valley Realtor would be a bad choice to sell a home in Beaverton...
4) Reputation: The wrong name on your listing can scare away many Buyer's Agents. Quality Realtors do not like doing business with the group of Brokers who don't follow the industry ethical standards and generally create problem transactions. If an unreputable Realtor is submitting offers on your behalf as a Buyer, the Listing Realtor will be more likely to counter back with tighter contract terms, larger earnest money and even a higher price to protect their client from possible problems during the transaction.
Reasons not to hire a Realtor:
1) They are a friend, family member or some other associate. That in and of itself is not a reason to hire someone.
2) They tell you what you want to hear. You are paying for the truth and quality advice, not for a "Yesman".
3) They offer you a financial incentive. It is illegal in Oregon for Realtors to give financial kickbacks to clients.
4) They are super busy, so they must be good. If they are that busy, when will they help you?
5) They have a Team. Teams' often play bait and switch and stick you with less experienced members of the Team, while the Principals focus on marketing to new customers.
Reasons to hire a Realtor:
1) Personal reference from someone who you trust.
2) They tell you the bad with the good during your interview.
3) They are not stretched too thin with other clients.
4) They seem to understand your specific Real Estate needs and demonstrate expertise with your particular type of transaction.
Hiring the right Realtor can make a huge difference in the outcome of your transaction. They can save you thousands of dollars and cut the time it takes to complete a transaction by months. Buying or selling a home will probably be the largest single financial endeavor you undertake in your life. Make sure the Realtor you hire is the best suited to your needs.
1) Education: All Realtors in Oregon are required to go through the same basic training and continuing education. Beyond that...its a free-for-all. Be wary of Realtors who dazzle you with industry designations like; GRI and ePro, but have little to no formal education. Ask your Realtor prospects what formal education they have (AA, BA, MBA). Ask them if they have ever applied their education in traditional business. Look for a Realtor with a strong background in business, finance, contracts and taxation. All very important aspects of every Real Estate transaction.
2) Experience: Try to find a Realtor who not only has broad experience and many years of transactional history, but specific experience to YOUR needs. Currently short-sales are all the rage. If you think you qualify for a short-sale make sure the Realtor you chose knows how to execute them and has experience with them. Or, say you are an investor who needs to do a 1031 exchange. Verify that your Realtor knows what he/she is doing.
3) Area Knowledge: Many Realtors will claim to service very large geographic areas. I can guarantee that their specific knowledge of neighborhoods will be nominal and they will have extreme difficulty physically servicing listings or Buyers who are far from their place of business. Chose a Realtor who lives in the local area, or at a minimum does a lot of business in the area and knows the local market thoroughly. A Happy Valley Realtor would be a bad choice to sell a home in Beaverton...
4) Reputation: The wrong name on your listing can scare away many Buyer's Agents. Quality Realtors do not like doing business with the group of Brokers who don't follow the industry ethical standards and generally create problem transactions. If an unreputable Realtor is submitting offers on your behalf as a Buyer, the Listing Realtor will be more likely to counter back with tighter contract terms, larger earnest money and even a higher price to protect their client from possible problems during the transaction.
Reasons not to hire a Realtor:
1) They are a friend, family member or some other associate. That in and of itself is not a reason to hire someone.
2) They tell you what you want to hear. You are paying for the truth and quality advice, not for a "Yesman".
3) They offer you a financial incentive. It is illegal in Oregon for Realtors to give financial kickbacks to clients.
4) They are super busy, so they must be good. If they are that busy, when will they help you?
5) They have a Team. Teams' often play bait and switch and stick you with less experienced members of the Team, while the Principals focus on marketing to new customers.
Reasons to hire a Realtor:
1) Personal reference from someone who you trust.
2) They tell you the bad with the good during your interview.
3) They are not stretched too thin with other clients.
4) They seem to understand your specific Real Estate needs and demonstrate expertise with your particular type of transaction.
Hiring the right Realtor can make a huge difference in the outcome of your transaction. They can save you thousands of dollars and cut the time it takes to complete a transaction by months. Buying or selling a home will probably be the largest single financial endeavor you undertake in your life. Make sure the Realtor you hire is the best suited to your needs.
Wednesday, January 9, 2008
Short Sales - Buyer Edition
Many investors are thinking there may be some good buys in short sales...there are...but there are also some important hurdles to be aware of:
1) Just because a Realtor has listed a property and advertised it as a short sale, does not mean it really is...
a) Has the Seller completed a short sale package and received tentative approval from the lender?
b) Is there a second or HELOC and have they been contacted and given approval?
c) Are there any other liens that could encumber the transaction?
2) Are you willing to jump through hoops and wait for up to 180 days?
a) Banks are currently swamped with requests and can take up to 30 days to respond.
b) You may plan to use financing, but the rate/terms you banked on may change radically during the negotiations. I recommend at least 60-day locks.
c) They may drag their feet for 20, 30, 60 days...then say no.
How do you package an offer that banks will accept:
1) Hire a Realtor familiar with short sales.
2) Have him/her prepare your own BPO to support your offer price.
3) If possible offer cash.
4) Limit contingency to the bare minimum to protect you.
5) Submit all documentation together, complete and legible.
Short sales can offer good value, but for the average person looking to buy a Principal residence I would say they are not your best option. Leave them to Investors.
1) Just because a Realtor has listed a property and advertised it as a short sale, does not mean it really is...
a) Has the Seller completed a short sale package and received tentative approval from the lender?
b) Is there a second or HELOC and have they been contacted and given approval?
c) Are there any other liens that could encumber the transaction?
2) Are you willing to jump through hoops and wait for up to 180 days?
a) Banks are currently swamped with requests and can take up to 30 days to respond.
b) You may plan to use financing, but the rate/terms you banked on may change radically during the negotiations. I recommend at least 60-day locks.
c) They may drag their feet for 20, 30, 60 days...then say no.
How do you package an offer that banks will accept:
1) Hire a Realtor familiar with short sales.
2) Have him/her prepare your own BPO to support your offer price.
3) If possible offer cash.
4) Limit contingency to the bare minimum to protect you.
5) Submit all documentation together, complete and legible.
Short sales can offer good value, but for the average person looking to buy a Principal residence I would say they are not your best option. Leave them to Investors.
Short Sales - Sellers Edition
Determining if you qualify:
Many Sellers are under the false impression that just because they are underwater on their mortgage they can do a short sale.. That is simply NOT true. If you made a bad investment and have the means to cover the loses, the bank will expect you to either keep making payments as prescribed in your mortgage, or cover the losses of the sale through your other assets. Do not expect the bank to take losses while you walk with assets...including IRA, 401K, other properties or tangible assets. You MUST be effectively insolvent to get a bank to agree to a short sale.
How to get started:
Find a Realtor knowledgeable in short sales and have them help you pull together a short sale package. The package will differ from institution to institution.
1) You will need to send a written request and authorization for your Agent/Broker to discuss the loan(s) with the Servicer.
2) You will need to provide a complete accounting of your finances (Income, assets and liabilities) and a letter of hardship detailing why you feel a short sale is appropriate.
3) Your Broker will need to do a BPO.
What will the short mean for you:
1) You will be able to stay in the home during the process.
2) The bank may accept smaller payments during the marketing time.
3) You may be able to negotiate the limitation of derogatory comments on your credit report.
4) Sellers cannot get ANY cash from the proceeds.
What can trip you up:
1) Some Lenders will compare your original loan application to what you claim on your financial disclosure package. If there are discrepancies, they may go after you for loan fraud (Say you did a stated income loan, claiming a $150,000 a year income, but you provide your pay stubs and only show $100,000 in income).
2) The second mortgage. Don't forget about the second or HELOC.
3) Other recorded liens against the property that could encumber the transaction.
4) Buyer patience. The process can take months. Be sure your Buyer has the time and patience to wait it out.
Short sales can be very complex and there is no one formula, as each transaction is its own animal. Do not attempt to do it on your own. You cannot get paid on it anyway, so bring in an experienced Realtor to guide you through. The Bank will pay their commission out of the sale proceeds.
Many Sellers are under the false impression that just because they are underwater on their mortgage they can do a short sale.. That is simply NOT true. If you made a bad investment and have the means to cover the loses, the bank will expect you to either keep making payments as prescribed in your mortgage, or cover the losses of the sale through your other assets. Do not expect the bank to take losses while you walk with assets...including IRA, 401K, other properties or tangible assets. You MUST be effectively insolvent to get a bank to agree to a short sale.
How to get started:
Find a Realtor knowledgeable in short sales and have them help you pull together a short sale package. The package will differ from institution to institution.
1) You will need to send a written request and authorization for your Agent/Broker to discuss the loan(s) with the Servicer.
2) You will need to provide a complete accounting of your finances (Income, assets and liabilities) and a letter of hardship detailing why you feel a short sale is appropriate.
3) Your Broker will need to do a BPO.
What will the short mean for you:
1) You will be able to stay in the home during the process.
2) The bank may accept smaller payments during the marketing time.
3) You may be able to negotiate the limitation of derogatory comments on your credit report.
4) Sellers cannot get ANY cash from the proceeds.
What can trip you up:
1) Some Lenders will compare your original loan application to what you claim on your financial disclosure package. If there are discrepancies, they may go after you for loan fraud (Say you did a stated income loan, claiming a $150,000 a year income, but you provide your pay stubs and only show $100,000 in income).
2) The second mortgage. Don't forget about the second or HELOC.
3) Other recorded liens against the property that could encumber the transaction.
4) Buyer patience. The process can take months. Be sure your Buyer has the time and patience to wait it out.
Short sales can be very complex and there is no one formula, as each transaction is its own animal. Do not attempt to do it on your own. You cannot get paid on it anyway, so bring in an experienced Realtor to guide you through. The Bank will pay their commission out of the sale proceeds.
Short Sales - Q&A
Many people have asked me about short sales lately, so I thought I would put together a quick Q&A:
Q. What is a short sale?
A. A transaction where the proceeds are insufficient to cover all costs and liens.
Q. Can any Seller do a short sale?
A. No. You must prove financial need. The bank must first say OK...then you need to find a Buyer and complete the transaction before the auction date.
Q. Are there restrictions to Buyers making offers?
A. Generally no, but the banks look at many factors, not just offer price.
Q. I saw a listing advertising a short sale, does that mean that a short sale is pre-approved?
A. No. Many Realtors and Sellers do not pre-complete the short sale package and the bank does not have knowledge. Also, even if the bank has indicated they will "review" short offers, does not bind them to accept any offer.
Q. Are short sales always a good buy?
A. No. Many short sales are in that position because the previous Buyer over-paid, or the property has other issues!
Q. Are short sales always difficult?
A. No, but much more intensive than a standard transaction. An experienced Realtor who knows how to present the package on behalf of the Seller can go a long way to make the transaction easier. Also, all banks handle them differently and each one is its own animal.
Q. Are short sales a good idea for the average Buyer?
A. Yes and No. Depends on your appetite for difficulty and how long you are willing to wait. It may take 120 days to complete...or it might get yanked from you at the end.
Q. What is a short sale?
A. A transaction where the proceeds are insufficient to cover all costs and liens.
Q. Can any Seller do a short sale?
A. No. You must prove financial need. The bank must first say OK...then you need to find a Buyer and complete the transaction before the auction date.
Q. Are there restrictions to Buyers making offers?
A. Generally no, but the banks look at many factors, not just offer price.
Q. I saw a listing advertising a short sale, does that mean that a short sale is pre-approved?
A. No. Many Realtors and Sellers do not pre-complete the short sale package and the bank does not have knowledge. Also, even if the bank has indicated they will "review" short offers, does not bind them to accept any offer.
Q. Are short sales always a good buy?
A. No. Many short sales are in that position because the previous Buyer over-paid, or the property has other issues!
Q. Are short sales always difficult?
A. No, but much more intensive than a standard transaction. An experienced Realtor who knows how to present the package on behalf of the Seller can go a long way to make the transaction easier. Also, all banks handle them differently and each one is its own animal.
Q. Are short sales a good idea for the average Buyer?
A. Yes and No. Depends on your appetite for difficulty and how long you are willing to wait. It may take 120 days to complete...or it might get yanked from you at the end.
Buyer forecast for 2008
You are entering a great window that will last at least 18 months. Take advantage of it, but with caution.
1) Sit down with an EXPERIENCED Lender who will clearly and openly disclose all fees and costs. Make sure that the rates and terms that they discuss are based on your FULLY documented income, a RECENT credit score and true cash reserves. Get pre-qualified, and check in with your Lender weekly to ensure that the program you want to use is still offered.
2) If you have challenges that prevent you from getting the best rate/term available on the market I would recommend not buying now, but spending some time cleaning up your credit, building cash reserves and building time of employment. The credit crunch is making it more difficult for challenged borrowers to get decent rate/term. As the fed rolls out new programs and the credit markets ease you will have more options. Plus, you do not need to worry about values going up as you repair your credit.
3) Use an experienced LOCAL Realtor. Their commission is paid by the Seller and their services can save you tens of thousands of dollars. Don't use a buddy or family member out of a sense of obligation. This is a huge financial commitment that you are making and you deserve the best representation you can find.
4) Take your time and view as many homes as you feel necessary to find the home best suited to your needs and budget.
5) Look closely at comparable sales and have your Realtor determine if the sales prices of the comps are real or inflated. Also have the realtor do listing/transactional research on the property. Find out if there is a notice of default, a recently recorded certificate of death, or divorce filling. All factors that could influence Seller motivation.
6) Be aggressively low in your initial offer, but not so low that you turn the Seller off.
7) Ask for a minimum 45 day Escrow, if not 60 day. Loans are taking MUCH longer to process and you may need the time.
8) Fully exorcise your Inspection rights and demand that Sellers make all necessary repairs at Sellers expense.
Finally, during the negotiations if you ever get that gut feeling that you are paying too much, or there is something wrong...STOP. Realtors only get paid when deals close, so they may get pushy to get you to sign and commit. If it doesn't feel right..wait. The home most likely isn't going anywhere, and if it does there are another 100 just like it looking for a Buyer.
1) Sit down with an EXPERIENCED Lender who will clearly and openly disclose all fees and costs. Make sure that the rates and terms that they discuss are based on your FULLY documented income, a RECENT credit score and true cash reserves. Get pre-qualified, and check in with your Lender weekly to ensure that the program you want to use is still offered.
2) If you have challenges that prevent you from getting the best rate/term available on the market I would recommend not buying now, but spending some time cleaning up your credit, building cash reserves and building time of employment. The credit crunch is making it more difficult for challenged borrowers to get decent rate/term. As the fed rolls out new programs and the credit markets ease you will have more options. Plus, you do not need to worry about values going up as you repair your credit.
3) Use an experienced LOCAL Realtor. Their commission is paid by the Seller and their services can save you tens of thousands of dollars. Don't use a buddy or family member out of a sense of obligation. This is a huge financial commitment that you are making and you deserve the best representation you can find.
4) Take your time and view as many homes as you feel necessary to find the home best suited to your needs and budget.
5) Look closely at comparable sales and have your Realtor determine if the sales prices of the comps are real or inflated. Also have the realtor do listing/transactional research on the property. Find out if there is a notice of default, a recently recorded certificate of death, or divorce filling. All factors that could influence Seller motivation.
6) Be aggressively low in your initial offer, but not so low that you turn the Seller off.
7) Ask for a minimum 45 day Escrow, if not 60 day. Loans are taking MUCH longer to process and you may need the time.
8) Fully exorcise your Inspection rights and demand that Sellers make all necessary repairs at Sellers expense.
Finally, during the negotiations if you ever get that gut feeling that you are paying too much, or there is something wrong...STOP. Realtors only get paid when deals close, so they may get pushy to get you to sign and commit. If it doesn't feel right..wait. The home most likely isn't going anywhere, and if it does there are another 100 just like it looking for a Buyer.
Seller Forecast for 2008
Let me start by saying that if you do not have to sell for the next few years...DO NOT.
If you must sell I would recommend the following:
1) Contact a local Real Estate Broker who knows and lives in the community and who plans on staying in the business through the downturn. It may take 12 months or more to sell your home and you do not want your Realtor bailing on you before your house has sold. Do not hire a Realtor because you feel obligated to a family member or friend. Hire a Realtor because they are the best qualified to sell your home.
2) Review your loan docs and all liens against the property. Be sure that your REALISTIC sales price is enough to cover your outstanding mortgage(s), pre-payment penalties if any, taxes or other liens and Escrow/title/ commission costs. If not you may need to consider a short-sale or other means of disposing of the property.
3) The days of selling "As-is" are over. Take care of the deferred maintenance, clean up the landscaping, de-clutter the inside and stage the house.
4) Remove barriers to doing business with you. Make showing the home easy. Have your disclosures filled out and readily available for review.
5) Present yourself as a Qualified Seller.
6) Pick your price carefully. Use only recent comps and expect to get less than that. Buyers do not care about what you "need" to make or "want" to clear. Buyers only care about what they feel the house is worth to them.
7) Respond to ALL offers, no matter how low-ball you feel they are. If you get a live Buyer on the line, do not let them ago until it is clear that what they are offering is truly unrealistic to what the market is doing.
Lastly, monitor your asking price. Make sure that the broader market is not lowering around you, thus making your home seem over-priced. Price is going to be the single biggest driving factor this year. I suggest that you stay ahead of the curve, not chasing it.
If you must sell I would recommend the following:
1) Contact a local Real Estate Broker who knows and lives in the community and who plans on staying in the business through the downturn. It may take 12 months or more to sell your home and you do not want your Realtor bailing on you before your house has sold. Do not hire a Realtor because you feel obligated to a family member or friend. Hire a Realtor because they are the best qualified to sell your home.
2) Review your loan docs and all liens against the property. Be sure that your REALISTIC sales price is enough to cover your outstanding mortgage(s), pre-payment penalties if any, taxes or other liens and Escrow/title/ commission costs. If not you may need to consider a short-sale or other means of disposing of the property.
3) The days of selling "As-is" are over. Take care of the deferred maintenance, clean up the landscaping, de-clutter the inside and stage the house.
4) Remove barriers to doing business with you. Make showing the home easy. Have your disclosures filled out and readily available for review.
5) Present yourself as a Qualified Seller.
6) Pick your price carefully. Use only recent comps and expect to get less than that. Buyers do not care about what you "need" to make or "want" to clear. Buyers only care about what they feel the house is worth to them.
7) Respond to ALL offers, no matter how low-ball you feel they are. If you get a live Buyer on the line, do not let them ago until it is clear that what they are offering is truly unrealistic to what the market is doing.
Lastly, monitor your asking price. Make sure that the broader market is not lowering around you, thus making your home seem over-priced. Price is going to be the single biggest driving factor this year. I suggest that you stay ahead of the curve, not chasing it.
What to Expect in 2008
I wish I could say more of the same (as bad as that was)...but I am afraid it will continue to worsen.
The macro issues facing the broader Real Estate Market continue to worsen:
1) Lending standards continue to tighten, pushing up to 50% of potential Buyers out of the market.
2) Consumer sentiment towards Real Estate continues to decrease, moving many qualified Buyers who, in a normal market, would ordinarily buy to the sidelines.
3) Banks will be Sellers this year...and aggressive Sellers they will be.
Local factors influencing the Happy Valley market include:
1) Inventory of 3 years at current sales levels.
2) Recent closed transactions and the Auction of Beuna Vista homes will provide a new round of comparables that Appraisers MUST use to value property...meaning the amount banks will lend against Happy Valley homes WILL be coming DOWN. I have personally witnessed a very large increase in appraisal reviews by the banks.
3) Very large number of Toxic mortgages resetting this year. The loan to value ratio on most of these mortgages is above 100%. That means that a large number will have to be short-sales or foreclosures. Many homeowners will just chose to walk instead of making escalating payments against a depreciating asset.
4) The very abrupt end to in-flow Buyers from California.
Summary:
I fully expect prices in Happy Valley to continue downward and re-approach 2004 levels. The Spring Selling Season should see a flood of new listings hitting the market, but Buyers will sit on the sidelines and truly dictate the terms of the transactions. As we overshot on the upswing, we will undershoot on the way back down. I fully expect final Seller capitulation by the 4th quarter of 2008 and a bottom in prices the first half of 2009.
The macro issues facing the broader Real Estate Market continue to worsen:
1) Lending standards continue to tighten, pushing up to 50% of potential Buyers out of the market.
2) Consumer sentiment towards Real Estate continues to decrease, moving many qualified Buyers who, in a normal market, would ordinarily buy to the sidelines.
3) Banks will be Sellers this year...and aggressive Sellers they will be.
Local factors influencing the Happy Valley market include:
1) Inventory of 3 years at current sales levels.
2) Recent closed transactions and the Auction of Beuna Vista homes will provide a new round of comparables that Appraisers MUST use to value property...meaning the amount banks will lend against Happy Valley homes WILL be coming DOWN. I have personally witnessed a very large increase in appraisal reviews by the banks.
3) Very large number of Toxic mortgages resetting this year. The loan to value ratio on most of these mortgages is above 100%. That means that a large number will have to be short-sales or foreclosures. Many homeowners will just chose to walk instead of making escalating payments against a depreciating asset.
4) The very abrupt end to in-flow Buyers from California.
Summary:
I fully expect prices in Happy Valley to continue downward and re-approach 2004 levels. The Spring Selling Season should see a flood of new listings hitting the market, but Buyers will sit on the sidelines and truly dictate the terms of the transactions. As we overshot on the upswing, we will undershoot on the way back down. I fully expect final Seller capitulation by the 4th quarter of 2008 and a bottom in prices the first half of 2009.
Subscribe to:
Posts (Atom)
