There has been lots of talk about the shadow inventory and what it is going to do to the market.  What we are seeing now is that banks don’t want to take a property back unless they absolutely have to.

Here is the real math.  A bank can expect to take a 41% haircut when they take a property back through foreclosure.  They have to buy insurance for it, maintain it, fix the things that are wrong with it, or at least some of them, market it, hold it through two or three buyers and then finally get out of it.

In a short sale situation, the bank isn’t outlaying any cash.  They don’t carry any insurance, they don’t fix anything and they don’t have a non-performing asset on their books.

The big banks get this.  The off shore investors in mortgage backed derivatives, not so much.

Currently a lot of loan modifications are what’s called “double tracked”.  That is, while they are working on the modification they are also going through the foreclosure steps in the background.  Unfortunately the result is the homeowner finds out the loan modification is denied and BAM! the home is foreclosed on the next day or so.  It’s a reprehensible practice.

Alternatively, a foreclosure can be held at bay with a short sale and the homeowner can leave with some dignity.  The National Association of Realtors reports that over 70% of the people who lose their homes to foreclosure never ask a professional for help.

What’s more, some banks are offering people up to $30,000 to short sale their home.  HAFA allows for a $3000 payment to the homeowner to short sale their home, but there are conventional lenders out there offering a lot more money to distressed homeowners to short sale rather than walk away from their homes.

If you or someone you know is in a tough situation, call me, I’m here to help.

I lost my job in the title business, but not before I studied and passed my real estate license.  I started as a buyer’s agent for a big REO guy.  I have a gift for being in front of the wave.  I found REO work to be soul sucking and after two years moved to a traditional business model.  The point being, I’ve seen a lot over the years.  And I saw this coming.  There’s a part of me that truly hates sales people.  And business.  Because the business model of more sales and more sales is what brought this country to it’s brink.  We forgot that sometimes the best sale is the one you don’t make.  A skilled, ethical Realtor knows the difference.

Unfortunately, we all lost our way from about 2001-2006.  The sales arm whittled away at the standards of the operation and compliance arm and sales were made for the sake of making sales with substandard lending standards.  Next, because the banks were caught flat footed as the market tumbled under the stress of the mortgage meltdown they hired a bunch of under paid under experienced staff who’s primary contribution to the process was the ability to sign their name.  And that’s blown up in their face.

We would like to think that the banks carefully reviewed each file and made rational, informed decisions on each home they took back.  In truth the right hand rarely knew what the left hand was doing and I think if they had someone who could sign with both hands they would have considered that a boon.

I’ve said since day one that any attorney could attack any foreclosure on behalf of the displaced homeowner and prevail.  Yes, I said that every single file has something wrong with it that could cause the foreclosure to be overturned in court.  When I was working for the REO guy we had two pulled back because the homeowner filed litigation.  Both prevailed.  And we were just one little company in one little town in this country.  In both cases the borrower was working on a modification where the bank had lost the documentation numerous times.  Five in one situation, nine in the other.  If it were the insurance business the claim would have been for bad faith the bank’s behavior was so egregious.

The banks have done a horrible job and the latest “robo-signing” scandel is just another example of how bad they really did.  But at the end of the day, in spite of all that’s going on, you still have to pay your mortgage.

Last month I sat in a presentation by Matt Vernon of BofA.  He’s the Executive in charge of REO’s and Short Sales, for the whole bank.  He laid out their go forward plan which was to, in order, modify the loan, if that failed short sale or deed in lieu and only if the borrower was unresponsive or the home was seriously not moving would they resort to foreclosure.  They expect this to be in full swing by Q1 2011. I figured out the answer before Matt was asked.

BofA is the largest consumer banking company in the country.  If they foreclose and act heartlessly today when a borrower is in trouble, that borrower will end all of their banking relationships with BofA and may never return.  BofA would be shutting the door, in an economic downturn, to millions of customers who, in a normal economy, would have never found themselves where they are right now.  Good people in a bad situation.  BofA recognized this and is positioning themselves to be the kinder, gentler big bank.  Why?  Because they want to salvage the banking relationship with minimal damage to their bottom line.  It is better to work out a short sale today and get the loan in three years when the borrower is back on their feet than to behave like a bunch of robberbarons.

I think their strategy is brilliant.  I think they will use the robosigning scandel as an excuse to implement this new policy.  It’s the time out they needed to catch up.  And while you still have to pay your mortgage, short selling will be much easier.  While the media will make a big deal calling this a “foreclosure moritorium” the truth of the matter is that most of the big banks have suspended foreclosures over the holidays for the last three years.  This is just a different way of ending up at the same place.  This should be the break that a lot of homeowner’s need.  This holiday season may end up a great time to buy a short sale and a better time for drowning homeowners to get out from under the mortgage that’s killing them.

First up, the term the started this mess REO.  It means, Real Estate Owned.  That simple.  Now how does that translate into the real world?  Real Estate Owned is actually a line item on a business’s balance sheet.  It is considered an asset.  Cisco has a line item for Real Estate Owned.  Pepsi has a line item for Real Estate Owned.  McDonald’s has a line item for Real Estate Owned.  The acronym has become a noun in today’s market, meaning the same thing as bank-owned.  When the balance sheet belongs to Citibank or Chase or Bank of America, the REO is bank-owned.  Cisco and Pepsi and McDonald’s do not market their REO properties as such, even though that’s what they are.  When those sorts of large corporations own real estate it is not “distressed”.  (Although a lot of property owned by a lot of large corporations today is upside-down)  When a property is respossessed by the lender and then placed back on the market, it needs to be disclosed that it is owned by a bank, or bank owned.  Pepsi and McDonald’s do not need to disclose in the marketing that they own the property, even though it shows up on that line item of their balance sheet.

When a bank sells one of their REO’s, (also called a bank owned property) they are exempt from a lot of the disclosures that a normal seller would be required to provide in the State of California.  The bank has probably never seen the property.  They don’t know if there is a leak in the roof.  They don’t know if the property previously had a termite infestation, or if water runs into the garage when it storms.  They don’t know if Uncle Fredo passed away in the third bedroom after a long illness.  I had one last week where the insurance company wanted to know the age of the roof.  That kind of information is not available in the sale of a bank owned property.  Two years ago I would have told you that those inspections were worth about $40,000 in the marketplace, depending on the value of the home and what area it was located.  Today, the market has adjusted and while I still believe them to be valuable, the market is no longer placing value on them.

It is essential that the buyer does their inspections on bank owned real estate.  It is also essential to have a competant inspector complete a home inspection on your property.  I’ve seen P-traps pulled out of the sinks, electrical yanked out by bitter former owners, disconnected appliances and everything in between.  Unless the buyer is a contractor, it is incumbant that they purchase a home inspection.  One of my buyer’s recently renegotiated with the bank after the inspections were completed for a $100,000 price reduction, and got it!  That’s the benefit of working with a Realtor experienced in bank owned property.

The next term is Short Sale.  Short Sales are not the same as a bank owned property, they are not REO’s either.  In a Short Sale the borrower is still in possession of the property.  That owner will provide the new buyer with full disclosure on the property.  The bank is being asked to take less than what is owned as satisfaction of the obligation.  In the last three years, banks have done a terrible job of handling these transactions.  Many real estate agents don’t understand how to handle them either.  In order to consider a Short Sale, the bank has a large package of information that they require, including all of the seller’s financials.  If the seller has access to funds, the bank will ask them to bring those in to escrow.  As an example, the seller is selling a piece of investment property and they are a businessperson with $250,000 in an investment portfolio.  They owe $750,000 on the property but in today’s marketplace they can only get $560,00 for it.  The bank is going to ask them to bring in the short fall.   Conversely, if it is a owner occupied property and the owner has lost their job and can no longer make the payments, the bank will review the seller’s financials, see that they are maxed out and make the Short Sale.

There are three different ways a Short Sale can come to market.  As a pipe dream, the package submitted or fully approved.  They don’t call it a pipe dream, but the listing agent has brought a property to the marketplace with no idea what the bank will accept as a settlement.  Sometimes the banks require an offer before they will look at the package.  These are the toughest ones to get to close.  A lot of the time these Short Sales are grossly underpriced just because the agent needs an offer to work with.  They don’t care if that offer closes or not, the bank won’t give them a pay off number without an offer.  I think this is a lousy practice on the part of the agent and the bank.  I just took over a property last week that had been priced at $500,000 on a Short Sale.  The offer had been accepted by the seller but the bank wanted $575,000 and the buyer wouldn’t come up the last $75,000.  In doing my research, the bank was right, the property was worth $575,000 and the agent grossly underpriced it, costing the owner the home and all the credit damage that goes with that.

I don’t believe there are deals in Short Sales.  The Short Sales I see show a lot of deferred maintenance.  Many times the sellers don’t bother to stage the home or even clean it up.  Some of the dumpiest homes I’ve seen have been Short Sales.  Things that were so bad that I would be embarrassed to put my sign on them if I weren’t advertising them as a fixer upper.  If the seller isn’t making payments during the Short Sale process, the possibility of it becoming foreclosed is always looming.  The default department does not stop the process because the seller is attempting to Short Sell the property.  I’ve seen many Short Sales crushed two weeks before close because the bank took the property back.  Short Sales are not for the weak of heart.

Hopefully this has helped demystify the difference between a bank owned property, an REO and a Short Sale.  Kind of makes you wish for the good old days eh?

The other reason I like Broker’s Opens, besides it’s an easy way to see all the homes in the area in about ninety minutes, is the conversations I have with other professionals. Something that I noticed, and I always notice trends on the ground before everyone else, is that the phone quit ringing.  I call it “crickets”, because it’s so quiet all you can hear is the crickets singing.  I’m currently advertising seven properties, I have signs on another 11 properties and no one is calling.  I listened to the lenders talking and the interest rate is below 5 with a point right now.  That’s beautiful money.  So why is it so quiet?  I talked to several of my colleagues about it yesterday.  They all noticed it too and one of the prevailing theories was that people are scared.  We are living in scary financial times.

We’ve just watched businesses go under, many of us have lost our jobs and can’t get new jobs.  We’ve watched friends lose their homes.  We’ve watched families on the brink of ruin and marriages collapsing under the pressure.  It’s scary out there.  For the risk adverse home purchaser it’s very hard to get off the sidelines right now.  But it’s necessary, because the market is going to change again later this year.  The opportunities that exist right now will be gone forever.

I’ve talked before about how real estate is one of those industries that anyone thinks they can be an expert at, whether they’re in the industry or not.  Last week I fought a traffic ticket.  I haven’t been in traffic court to fight a ticket since 1989.  I got demolished.  Because I don’t do that every day.  It should have been a simple process, but I should have hired an attorney.  If you’re not living and breathing an industry every day, you’re going to get demolished going it alone.  Real estate is no different.

Yesterday one agent told me that he heard that the banks were going to release all the foreclosures in June.  Really?  No, he laughed.  Some soccer mom told him that while he was waiting to pick up his kids from soccer practice.  I work for one of the biggest REO brokers in the area.  We’ve been hearing that directly from the asset management companies since March of last year.  It’s just wishful thinking on the part of the asset management company.  They ain’t coming.

Why?  Because 2008 was essentially a run on the banks.  It sent this country to the brink of ruin. Banks failed under the weight of it.  They drove down prices by dumping into the market which made people walk away, driving the market down even further in a snowball effect.  The banks aren’t stupid.  They’re not going to do it to themselves again.  They will release these foreclosures, but in a measured fashion over a long period of time.  There are several factors that make this favorable to the banks.  One, tax treatment.  There have been changes in the rules that allow the banks to go back three years and take the whole loss off of their profits.  Win.  Two, some of these loans are government insured so they are made whole anyway.  Win.  And dumping them on to the market has been a PR nightmare.  I truly believe that the CEO’s of the banks saw what Obama did to the CEO of General Motors and don’t want to be next.  They like their salaries and bonuses.  If hanging on to these assets for an extra six months keeps them off of Obama’s radar, that’s a good thing to them.

How does that affect the local market?  We’re bottomed out.  We’ve been skipping along the bottom for a while now. I called the bottom back in April and I was pretty darned close in most local markets.  In spite of the gloom and doom reporting out there, we’re done.  It’s over.  Now is the time.  It’s not going to get any better than this.  The one thing that is going to change is if the interest rates pop up.  That will lessen affordability and box some people out of the market.  That’s why the time is now.  Are you ready?

I’ve said this before, but it bears repeating. The real estate market is like San Francisco weather. If you don’t like the real estate market, just wait 10 minutes. By the time the news media catches up to what’s happening, it’s happened and we’re on to something else. If you saw it on the television, it’s yesterday’s news. That $200,000 screaming deal in Hayward? Gone. I sold several of them, but that deal isn’t there anymore. There’s a conga line out the door of those properties now and the price is being driven up. And they’re in terrible condition. What a lot of people didn’t understand was that $200k “deal” in Hayward was not move in condition. It generally came with a cracked foundation, subterranean termites, mold, missing appliances, a leaky roof and a roach and rat infestation. Furthermore, they aren’t selling for under asking any more. They aren’t even selling for asking. They’re getting bid up. That portion of the market is stabilizing. Last month a home that was very popular, fell out of escrow. It was my broker’s listing, so I knew it fell out before it hit the MLS again. I called a guy who was red hot for that property and said “Look, if you want it we have to write it now”. His response “How can you expect me to make a decision in a day about a transaction this large?” I told him it didn’t matter to me, if he didn’t want to make the decision in a day he didn’t have to, but he wasn’t going to get the house either. He didn’t get the house. He still doesn’t have a house and the neighborhood he was looking in has passed him by. I doubt he’s going to ever get into this market. The opportunities are on a train out of town right now while he stands motionless on the platform.

What I’m seeing is Hayward low end stabilizing. Concord’s low end is stabilizing too. Neither is rising, they’re just stabilizing. Oakland is a giant food fight. If you’re not willing to throw down, you’re just going to get roughed up in that market. In Oakland in particular, I’ve noticed that sellers and agents are pricing properties deliberately low in hopes of creating a frenzy and driving up the price. I think this practice is obnoxious. I’ve seen properties bid up $90k over asking in Oakland in the last three months. Those properties were improperly priced. Things aren’t what they appear to be in Oaktown.

The tide is turning on some of the selling practices too. Three months ago the bank/seller wouldn’t even consider replacing a stolen stove. Now we’re seeing them make the insurance claim and getting the appliance installed. I think the party is over on this one. Thousands of foreclosed owners sold thousands of appliances on craigslist. I think that it’s just a matter of time before the banks say “Enough” and start filing police reports. I have a house that the former owner vandalized on Monday night as they moved out. I’ll be picking up the police report on that one next week. I think some folks are going to be very surprised to have ruined credit and a criminal record. I had a friend ask me about that one a couple of weeks ago. Her husband was going to give parts of the house to his brother-in-law who was doing some remodeling of income property. She was worried and rightly so. I just asked her “do you want to be the person who did that?” She didn’t. I told her I was concerned that the banks were taking steps to end these practices behind the scene and that they were going to start pursuing and catching people in the act. The brother-in-law got his stuff on sale at Yardbirds.

There’s only one way to keep up with what’s actually happening in the market. Hire a realtor who’s working in the market. What you hear on the news and what somebody tells you at a cocktail party is interesting, but it might very well be yesterday’s news.

Now there was a guy you could trust.  I lost faith in the news around 20 years ago.  I was involved in a criminal case that was well reported.  The guy stole millions, we caught it, but the story was complicated.  I realized that the people who were reporting were just trying to get the story out and didn’t really care for the nuances of how it actually occurred.  I learned to take all media with a grain of salt.

In September 2005, I got on a plane and flew into Jackson, Mississippi.  I got the last hotel room in town, rented a car and the next day drove down to Gulfport, Mississippi.  There, the MGM Grand, which previously sat on a barge in Gulf, sat half a mile inland, aground.  I met a friend and we went down to Walmart and bought cheap jeans and waders.  That night we drove to Baton Rouge and the next morning we were at Lamarr Dixon awaiting our assignment.  I can say unequivocally, that the stories reported at the time and the reality on the ground were diametrically opposed to one another.  They just don’t take the time to learn the full story when they report it to us.

I take buyers out nearly every day of the week.  They tell me that it isn’t a good time to buy or it isn’t a good time to sell or other broad stroke generalizations about the housing market.  There is no such thing as a bad time to buy or sell for everyone.  There may be a bad or good time for YOU to buy or sell.  Your neighbor’s situation might be entirely different.  Mathematically, it’s a great time to look at purchasing for folks that couldn’t get into the pricey market before and for investors in particular.  I like move ups too.  You get less for your current place but you pay less for the next place and taxes are based on the lower number.  I like it.  Mortgage rates are very pretty right now.  It’s a great time, unless you’re in an industry that’s spotty and you’re concerned about losing your job.  Then it’s not a great time for you, it’s a scary time for you.  Most importantly, don’t let something you saw on the 5 o’clock news dictate how you invest your money, and where you choose to live.  Check things out for yourself.  There’s a lot going on right now.  Talk to those of us who are on the ground doing the work right now.  We know what’s going on out there and we’d be pleased to share the information..

Jon Stewart laid out the media’s shortcomings last week.  Here’s your moment of zen.  Enjoy.

www.youtube.com/watch?v=cTAk54c8tFQ

The market is currently bloated with bank owned properties.  Owners who aren’t upside down are grousing about these sales.  The truth is, these properties don’t reflect the real market.  They reflect what could be expected from the market in a fire sale.  They reflect what you could expect if you were forced to sell by a divorce or job loss.  Only worse.  Bank owned sales, REO transactions do not give typical disclosures, and they don’t have to.  Some value is lost there; I would consider it to be between $20-40k.  I have people ask me questions all the time about the properties we have for sale.  Some I know the answers to and some I don’t.  I endeavor to ask the neighbors about the property.  I had one guy tell me that the previous owner had some electrical work done.  Later a client asked me about the electrical.  I could tell him was that I had heard that some electrical had been done but in this particular case, I couldn’t see what they’d done and I told the client that.  I then recommend he get an inspection.  When a property is in owner possession and that question is asked, the owner has to answer truthfully.  Additionally they have to disclose all the conditions they know of at the property.  The day my last home was foreclosed on was a very happy day for me.  All previous potential liability on that property to me was gone.  I believe I disclosed everything about that house, but truth be told, they could have found some little thing that slipped my mind and sued me.  With the foreclosure, that ship just sailed.  As an agents, we don’t have to crawl under the house to see if there are leaks.  We suggest to potential buyers that they get a termite and home inspection.  Bank owned properties are definitely buyer beware.

People who are successful in this market are people who see something that no one else sees.  If you can walk into a home and see the potential, you’re going to get a good deal, but you also have to not be afraid.  You can’t be afraid of termites or vandalism or half remodeled houses.  You have to be able to look at it and see what it could be.  You have to be able to guestimate the work.  This market is not the sort of market where you fall in love with a property.  Some get 30 offers, others get one.  You have to know your number and stick with it.  You have to see what no one else sees about that property and then move decisively.

A couple of days ago I talked about why a real estate professional is more important now than ever. I’m a big fan of the website “It’s Lovely, I’ll Take It!“. She gets bad MLS pictures from all over the country. There are a lot of not great “professionals” out there. If, as a professional, you can’t make the home look attractive to a potential purchaser, you really need to rethink your vocation. But there are things that a professional will see that an owner won’t even notice that will put the owner in the position of leaving money on the table.

First, they didn’t get the picture level. This cheapens the property in the eye of a potential purchaser. (Actually, it’s so off kilter it makes my website appear lopsided) Then the photographs of THEIR children are front and center. A potential purchaser can’t visualize their children in a home when they’re busy looking at your children. The television is left on. Is that a tupperware container full of bon bons on the end table? No, no and no. While we love to goof on the internet, this FSBO is leaving a lot on the table. They highlight the Berber carpet in the ad. Nice you think, but then you see the picture of the four kids and you just imagine what the Berber looks like. They even say “Willing to Negotiate” in the ad. Translation “Desperate”. They’re going to become more and more desperate as the market moves against them and no one looks at this home because they can’t see themselves living in it. The home itself is lovely, the pictures they posted make it difficult for the untrained eye to see. Their “Willing to Negotiate” tag line will get all the sharks circling. Not a great position to be in. I doubt this couple saved any money by not going with a professional.

It doesn’t address the things that really caused the problem in the first place.  I’m not big on fixes.  I’m big on prevention.  The loosy goosy underwriting that went into the loans that became mortgage backed securities was a huge contributor to this problem, as was the designer loan products with teaser rates and huge interest rate adjustments.  These loans which allowed for artificially low payments allowed people to bid up homes to numbers that the property should never have seen.  It was the market then.  Now the market has changed.  I knew a guy who bought in 1991 at the height of the last run up.  He held that house for 8 years while the market worked it’s way back up.  In 2001 he could have sold that property for twice what he paid for it.

The market here will recover.  We have the infrastructure to keep people working.  If we were in an area supported solely by one factory, we could have issues but we aren’t.  We’re in a robust area with diversified business.  We’re feeling this, but we won’t become an dying steel town.

California is getting whacked. If you have a good mortgage and can make the payment, stay pat. If yours is adjusting call a reputable mortgage broker or bank for help getting your loan re-written. At some point these lenders are going to realize that re-writing loans is more beneficial than taking beating after beating on property that they over lent on. Get the payments in line and cut your losses. This is just like the 80′s when people were signing deeds and mailing them to the bank with their keys. Don’t get caught flat footed. Be proactive in protecting your family’s home.