REO

Duplex in desirable Sherman Oaks

Totally renovated duplex in desirable Sherman Oaks with granite countertop and newer cabinets and paints! 1 unit is 3 bed/1 bath, 1 unit is 1 bed/1bath. Great Location.  Not a short sale or REO. Call today to make an offer!

REO

The “Shadow” knows.

Back in July, I mentioned the growing phenomenon of the so-called “shadow” inventory, which are the properties that by all rights should have been foreclosed on a long time ago, but where the banks are, for reasons of their own, not taking any action. The mainstream media has caught up, and there are two recent articles about shadow inventory that you should know about. One is in the Wall Street Journal (subscription required), the other is in The Atlantic Monthly, which helpfully quotes at length from the original Wall Street Journal article. As the Journal puts it,

“there were 217,000 loans in July where the borrower hadn’t made a payment in at least a year but the lender hadn’t begun the foreclosure process. In other words, 17% of home mortgages that are at least 12 months overdue aren’t in foreclosure, up from 8% a year earlier.”

What is the cause of shadow inventory? It does not appear to be exactly clear what is motivating the banks’ lack of action on these properties. There may be differing reasons: a lack of personnel qualified to process the foreclosures or loan renegotiation; an unwillingness to add a flood of foreclosures to a brutalized real estate market (which might trigger other foreclosures as homeowners’ equity evaporates); or, perhaps the most sinister reason of all — the banks are simply hiding their toxic assets. While it is one thing to have a nonperforming loan on your books, it is another thing entirely to have to write down the entire loss that a foreclosure will entail. Once this loss is realized, bank regulators may require a concomitant increase in reserves, at a time when cash is in short supply. The end result could be bank failure, and we’ve seen plenty of these already this year.

What does this mean for the real estate investor? One possibility is that the banks will be able to carry a lot of this inventory until the broader market recovers, then start selling it off in in an orderly process. The other possibility is that the housing crash might not be over until all of REO inventory is cleaned out, whether or not the bank acknowledges it as an REO. What will happen? Only the shadow knows.

REO

Obama Administration Moves to Incentivize and Standardize Short Sales

Short sales are great, in theory. They can be a win-win-win situation – the seller gets rid of an unaffordable house; the buyer gets a great deal, and the bank avoids the costs and delay of another foreclosure and possible eviction. But, up until now, the short sales process has been somewhat of a mess. The lack of transparency and what often appear to be arbitrary bank decisions has turned the process into a deal killer. When it takes more than three months to even hear back on an offer, all but the most committed buyers have moved on down the road. Indeed, in many markets, a three-month-old offer is no longer close to the original market price, as a result of depreciation.

Fortunately, as part of a recent amendment to the Making Home Affordable Program, the Obama administration has instituted a new “Foreclosures Alternatives Program” designed to streamline and standardize the process by which banks agree to short sales and deeds-in-lieu of foreclosure. (A deed-in-lieu is an under-utilized arrangement in which the owner simply conveys title back to the bank in order to avoid a foreclosure.) Not only does the FAP offer some (admittedly rather minor) incentives to banks to permit short sales and deeds-in-lieu, but, according to NPR’s Morning Edition on June 2, 2009, the Obama administration intends to create “standards around the application and approval process” and publicize those standards within a month.

If it pans out, this will be great news for buyers, would-be short sellers, and the market as a whole (to say nothing of frustrated real estate agents!) It would be great if we could simply all agree to live by a set of fixed rules and reduce the uncertainty and transaction costs which have bogged down short sales and lead to unprecedented numbers of foreclosures. (Did you know that each foreclosure has been estimated to reduce the value of every property within an eighth of a mile by .9 percent? This usually equates to a couple of hundred thousand dollars in lost equity for the neighborhood. That isn’t good for anyone, least of all for the banks’ bloated REO inventory.)

REO

The San Fernando Valley is Hot, Hot, Hot!

Just in: the latest information from the Southland Regional Association of Realtors, as reported in the Daily News, is that the San Fernando Valley is heating up – with home sales reportedly leaping 26 percent in April, 2009. Moreover, the median price of a previously owned Valley house actually increased by 3 percent in April!

I can’t say I’m completely surprised by these stats, having recently seen lower priced houses fly off of the market, being snatched up by eager investors and homebuyers, frequently with multiple offers. The reasons are straightforward: historically low interest rates and excellent housing affordability. Many people recall what happened after the last real estate crunch of the early 90’s and are eager to buy in at such attractive prices, and many, many more can afford to buy now. In particular, the SRAR’s data on housing affordability makes the case:

“The minimum household income needed to purchase an entry-level home at $213,040 in California in the first quarter of 2009 was $38,090, based on an adjustable interest rate of 4.96 percent and assuming a 10 percent down payment. . . . The monthly payment including taxes and insurance was $1,270 for the first quarter of 2009.”

This amounts to a 41% lower qualifying income than just twelve months ago. No wonder Valley buyers are getting back into the game. I’m guessing that the real estate weather this summer will get even hotter – barring any radical spiking in the interest rates, of course.

REO

A Tale of Two Cities: The Divergent Fortunes of High and Low End Properties in the Greater Los Angeles Area

From my perspective, many cheaper houses in close-in, desirable San Fernando Valley neighborhoods have reached a price point where they make sense to purchase as flips, long-term investments, or shelter, when viewed in relation to market rents. The higher-priced properties, in contrast, are still selling for an extraordinary multiple of their rents. In addition, the spread on interest rates between conforming and jumbo has been out of whack ever since the beginning of the financial crisis, as the secondary market shunned anything that was not Fannie Mae/Freddie Mac backed (and, as transpired, ultimately backed by us, the taxpayers.) Thus, it seems like this recovery will be a “tale of two markets”: sales are brisk a the low end, but the jury is still out on what will happen to the higher priced markets. Is Malibu REO an oxymoron? Not anymore, it seems.

REO

The New Real Estate Feeding Frenzy – Are You A Shark or A Minnow?

The last investor-friendly house we looked at was a fixer in West Hills. Within a couple of days of it hitting the market, it had attracted 8 offers. I’m confident it will sell for well over asking price. No wonder that the San Fernando Valley Business Journal reported on May 11, 2009 that “first time homebuyers and investors are snatching up an increasing number of homes in the San Fernando Valley . . ..” It is well past the stage of a few isolated occurrences. When I recently looked at two months worth of closed transactions in Encino, the average sold to asking price was slightly over 100%. These are strange times indeed. When you figure that some of the inventory had to be “normal” – i.e., not distressed properties, that typically sell for some kind of a discount from asking, the fact that the average house sold for more than asking gives you an idea of the way that the REOs and short sales are affecting the market. How to play this game? You have to be aggressive, have all your financing together (or cash – best case scenario) and jump on a property before someone beats you to the punch. The days of waiting around to see if someone else bids are history — at least if the property is distressed.

REO

Bidding wars on foreclosures? What does the future hold? Investors want to know!

Yes, according to the Wall Street Journal and local brokers, bidding wars are breaking out over REO properties. Certainly there is a lot of money on the sidelines, and investors are getting ready to snatch up the best deals. Some investors are aggressively pursing deals right now. However, the New York Times reported on 4/22/09 that “Fannie Mae, like many banks, is inundated with foreclosed properties. In recent weeks, banks have begun accelerating foreclosures again, after having held off while waiting to find out which homeowners would be eligible for the Obama administration’s assistance program.” So, these multiple-offer situations may be a result of (1) banks deliberately underpricing properties (shades of the go-go days!) ; (2) the simple fact that a lot of distressed inventory has been kept from the market over the last few months; and/or (3) investors who write up dozens of offers on REOs, hoping that the bank will take the bait on at least one — thus inundating sellers with “multiple offers” — although few serious ones.

An observation: a few weeks ago, I found a very nice looking property in North Hollywood while I was working an open house on the same block. The property looked like it had been extensively rehabbed in the not-too-distant past. It may have been someone’s flip. To make a long story short, it was vacant, and had been broken into and vandalized on the inside. From what I could see, it was mostly cosmetic damage, so I thought it might make a good property for one of my investor clients. So, I jumped on my computer to see who owned it. The answer was: WaMu now known as Chase, and it was an expired listing. Since I have a personal relationship with Chase, I thought I’d have a go at trying to get the listing, or at least find out what they intended to do with the property. The result, after many phone calls and emails — I could not get anyone to give me an answer. So the property is still languishing there, waiting for some more vandalism, or perhaps some squatters to move in. What a shame!

On a similar note, I heard a story (about relatives of my friends) who stopped paying their mortgage last year. Figuring it was only a matter of time before foreclosure, they moved out into a rental. After a few months went by, one of their old neighbors told them that nothing had been going on at their “old” house. So, they promptly moved back in where they have been living mortgage- and rent-free since then.

What’s the lesson here? If these stories are evidence of a larger trend, we will see a lot more inventory and even better prices over the next year. You should get your ducks in a row now, and start investigating interesting markets so that you will know a great deal when you see it.