Foreclosures and Short Sales are Comparables

February 29th, 2008

A debate recently in my office between another agent and I focused on whether foreclosures and short sale properties really should be used for comparables for “normal” sales.

My esteemed colleague believes that since foreclosures and short sales are sold under “distressed” situations, they are not good comparables for other homes for sale.  My counter is that many foreclosures and short sale properties are not in bad condition and so they should sell at a fair market price regardless of their “distressed” situation.

When it comes down to it, foreclosure and short sale listings most often do sell at a discount to regular listings and should have that taken into consideration, but even in a slow market houses priced appropriately are selling quickly, so those are market prices.

What we do find is a substantial disparity on how much of an impact those foreclosures have on the houses around them.  In areas with low numbers of foreclosure and short sale properties, we find that those properties have little effect on the market as a whole.  Where there are a high number of these properties in a single area, we find the the impact is more like an exponential impact: the higher the number, the more substantial the impact each additional listing has.

 

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Posted in Community Issues, Foreclosures & Short Sales, Info for Buyers, Info for Sellers, Opinion, Personal Experiences | Comments (0)






Minneapolis in a Housing Crisis

January 22nd, 2008

While this housing market has been tough on many communities, parts of Minneapolis are being hit extremely hard.  The foreclosure and short sales taking place in Camden, Phillips and North Minneapolis are not only often becoming eyesores in the community, they are also dragging average sales prices down substantially.

Based upon MAAR’s Top 100 report for Minneapolis for December 2007, I was able to construct the following chart of average sales prices in Minneapolis communities:

Average Sales Price Change in Minneapolis from 2006 to 2007

I wish this chart was wrong, I wish it didn’t show such a disparity amongst neighborhoods, and I wish I didn’t have to talk about it.  Alas, not talking about it will not solve the problem and this is an issue I simply could not be silent on any longer.

I have been working on some figures showing the number of homes for sale in these communities that are either in a short sale or foreclosure situation but the data isn’t complete yet and I want to make sure it’s right before I release it.  What I can tell you though is that these communities have been hit hard by the rise in short sales and foreclosures, as can be seen by anybody showing houses in these neighborhoods.

While there are still many homes for sale that are owner-occupied and in great condition, the sheer number of distressed properties for sale have a hugely negative effect on the market for the following reasons:

  1. Competition – Simply having so many homes for sale increases buyer’s options, which puts pricing pressure on sellers.
  2. Impression – Some homes in a short sale situation and a majority of bank owned properties have been neglected or even boarded up… having a few in a neighborhood brings down the perceived character of the neighborhood.
  3. Comparables – Eventually these distressed properties sell and then become comparables for appraisers and future buyers.  Though the condition may be terrible, that isn’t readily apparent in most MLS reports and therefore the appraiser or buyer may believe the home was in better condition that it actually was, thus pulling down the value of homes it is compared against.

As we are still in the middle of the subprime and ARM mortgage fallout, the high inventory and pricing pressure in theses neighborhoods is not likely to moderate for quite some time, which could lead to further price erosion this year.

While this is terrible news for the current homeowners in these neighborhoods, there is supposed to be a “silver lining” to this market downturn: housing affordability in these neighborhoods has headed substantially higher in the last year to the point that many people who could not afford to buy a home years ago can get into a home today.

I just recently closed on a deal with a 1st time buyer who purchased a 3 bedroom, 1 bathroom home with 1 car attached garage just a few blocks off the Parkway in North Minneapolis.  This home had quite a few cosmetic issues to fix but had a new furnace and newer roof and some great built-ins and woodwork.  Her total payment is under what she was paying in rent and her home has a lot more space for her family!

While she was successful, it was a big struggle to get her into the home, mainly because of the catch-22 on the only loan we were able to get for her:

  • Like most 1st time buyers, she had little cash upfront.
  • 100% financing is almost completely gone, so the next best thing is FHA financing, with a 3% downpayment requirement and upfront Mortgage Insurance Premium.
  • This buyer was able to secure some downpayment assistance money and we had the seller pay the closing costs, so her total out of pocket cash to close was approximately $1000.
  • To meet FHA guidelines, the home had to be livable at closing.  This means the plumbing, electrical and heating all had to be in working condition and operating for the appraiser’s inspection.
  • Like a large number of homes that are bank-owned, the utilities were off when we saw it, but we were able to get the seller(bank) to agree to dewinterize and turn on the heating and water.
  • There were items that needed repairs to get it to pass the FHA appraisal and most banks do not permit a buyer to complete any work on the property prior to close, but we were able to secure permission from the listing broker to make minor repairs.
  • When the water was turned on we found out that that the water heater was broken and we had to have a plumber install a new one, which was an unexpected expense.
  • There was exterior paint on the foundation that was peeling (an FHA issue) but since it was too cold to fix it the money had to be set aside at closing for the repairs.

While this buyer was able to get into this home, most other first time buyers will not be as lucky.  As I said above, most banks will not let anyone do anything to repair the home prior to closing and so if the home is out of FHA compliance for almost anything, the buyer will not be able to purchase that home.  Homes that are in a short-sale position are typically in better condition and sellers would work with a buyer on repairs but if it is anything costly no one will have any money to fix it!

The other issue is the 3% downpayment… many buyers simply do not have that saved, but are more than capable of making the monthly payments.  There are some downpayment assistance programs available but they are a small share of the total market and many loan officers are either unaware of them or in the case of government-sponsored programs, are not approved to use them.  This will put many of the rest of the homes that are in good condition still out of reach.

If a 1st time buyer does have cash, they can go with a Conventional loan & eliminate most of the lender required repairs but most of those loans need a minimum of 5% down payment and if the appraiser or Fannie Mae or Freddie Mac describe the neighborhood as a “declining market,” then the down payment requirement would jump from 5% to 10% for most and the zero down payment loans would go to 5%.

What this all means is that only a limited number of 1st time buyers will be able to take advantage of this “silver lining.”  The rest of this inventory will need to be acquired by buyers who have significant cash: typically rehabbers and landlords.  Rehabbers are likely to remain on the sidelines for a while longer simply because the fundamentals of the market in these areas are still softening and that makes it risky to go in and try to fix it up and sell it for a profit.

That really leaves us with landlords.  As with my buyer, these landlords can come in and buy these homes for less than their rental value and make great cash flow off them.  While that will mean the neglected exteriors of many of these houses will likely get some attention, it could take largely owner-occupied neighborhoods to largely rental neighborhoods and I believe that most people would agree that strong neighborhoods are those that have a good balance between owner-occupied and rental.

This situation needs immediate attention by the community.  In the best of circumstances, a public-private partnership would be formed to help assist more 1st time buyers in acquiring these affordable homes and try to help keep these communities occupied and maintain the balance between owner-occupied and rental.  This assistance could be in the form of additional downpayment assistance or nonprofit rehabbers turning around and selling it to eligible buyers.  Either way this takes money that doesn’t appear to be just sitting around, so this will take a considerable effort to achieve.

 

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Posted in Foreclosures & Short Sales, Info for Buyers, Info for Sellers, Market Stats, Opinion, Personal Experiences | Comments (7)






Top 10 Reasons Why Countrywide is Being Stupid With REO's

December 14th, 2007

Time and time again, I see Countrywide Home Loans (CHL) listing their Real Estate Owned (REO) properties on our local MLS and requiring buyers to get pre-approved with a Countrywide Retail Loan Officer prior to submission of their offer.  In fact, in their required addendums, it is specifically noted:

If the Agreement is contingent on financing, as a sales condition, Buyer must obtain a pre-approval letter from a branch office of Countrywide Home Loans, Inc. (“CHL”) for a mortgage loan in an amount and under terms sufficient for Buyer to perform its obligations under the Agreement, and such letter must accompany the Agreement.  The pre-approval shall include, but is not limited to, the pre-approval letter, a satisfactory credit report, and proof of funds sufficient to meet Buyer’s obligations under the Agreement. Buyer’s submission of proof of pre-approval is a condition precedent to Seller’s acceptance of Buyer’s offer. Seller may require Buyer to obtain, at no cost to Buyer, loan pre-approval as Seller may direct. Notwithstanding any Seller required pre-approval, Buyer is not required to obtain financing from CHL or Seller- Buyer may obtain financing from any source.  As an incentive for the Buyer to obtain financing from CHL, CHL will offer a free appraisal and a free credit report if the Buyer finances and closes the purchase of the Property through financing from CHL.

This is ludicrously stupid for the following reasons (not a complete list):

  1. Most buyers are pre-approved early in the home search process and have already chosen a lender they are comfortable with and are ready to buy NOW.
  2. Most buyers do not want to share private information with a stranger.
  3. Most buyers have no intention of working with the Countrywide Loan Officer.
  4. Countrywide pulls credit, meaning another inquiry on buyer’s credit report.
  5. Countrywide’s lending capabilities (product options) have been dramatically reduced since they are doing mostly/only loans that Fannie Mae or Freddie Mac will buy.
  6. Agents have existing relationships with loan officers that they know, trust, and can count on… they don’t like to have an ultimatium put to them any more than a buyer and don’t like interference in their client relationship.
  7. Agents often have such a long list of potential homes to show that they need to find reasons to eliminate some… this is an obvious candidate for removal.
  8. Countrywide doesn’t care who the approval is from or how solid the buyer is… if they are using financing, they HAVE TO get a pre-approval from Countrywide Retail. Period.
  9. Offering to do a free appraisal on a home that they own is akin to having the fox guard the hen house simply because he’ll do it for free… where’s the buyer’s protection when the seller is the loan originator?
  10. And finally- buyers are not stupid and they know when they’re being jerked around.  With so much inventory on the market, they can choose to tell Countrywide to keep their property and they’ll go find someone else who won’t treat them like a fool.

According to the Countrywide Foreclosure Blog, Countrywide had 14,442 REO homes listed on their site as of 12/5/07 at a total asking price of just over $3 Billion.  With so much inventory, so much competition, such a difficult buyer market, and tough times keeping Countrywide financially afloat, you would think that they would want to do everything they could to get their properties sold!

Recently I have seen several of Countrywide’s properties in the $200,000 range price reduced $30,000 and $40,000 all at once.  Such drastic price reductions have generated interest in the properties but also shows the motivation, and possibly desperation, of Countrywide to get these houses off their books.  If they eliminated their pre-approval requirement, they might see more interest from qualified buyers without having to so drastically reduce prices.

Some people suggest that Countrywide requiring a pre-approval is smart business, that it gives them an opportunity to pick up the buyer’s mortgage.  I would be surprised if they had more than a 20% capture rate on these leads (but I have no knowledgewhat their capture rate is), and the added holding costs for longer sale, disinterested buyers, and further price reductions make me think that this is a losing battle for them. 

Message to Countrywide: eliminate your CHL pre-approval requirement.  You’ll sell more houses, sell them faster, and likely at a higher price.

 

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Posted in Foreclosures & Short Sales, Info for Buyers, Mortgage Market, Opinion, Personal Experiences | Comments (14)






Foreclosed Homes Need Interior Photos

October 24th, 2007

I wrote in June about agents who still had snow pictures on the MLS.  Today I mention another thorn in my side: agents who represent bank-owned foreclosed homes that do not take photos of the inside.

In the Twin Cities, as in many other large metro areas nationwide, we have seen a sharp increase in foreclosures over the last year.  This has been a boon to the business of agents that work with the banks carrying this inventory.  Unfortunately, some of these agents are either too busy or feel they are getting paid too little to take the effort to snap interior photos of the house and also often do not measure room dimensions.  Sometimes the house’s interior is in bad condition, sometimes it is in remarkably good condition.  Either way, consumers want to see layout and general condition before they make the trek out to see the home.

When we have record levels of inventory on the market and many investors waiting on the sidelines, the consumer looking for a home for owner-occupied use is still the best buyer for most homes.  Since these consumers have so many choices, they narrow down their options using the photos and other MLS information provided online.  Fewer buyers seeing the home means less potential to sell the home quickly and at a good price.

Until banks wake up and demand the agents selling their inventory to do more to market the home, they will find that they are not receiving the full benefits of the MLS and are missing many potential buyers.

Posted in Foreclosures & Short Sales, Info for Sellers, Opinion, Personal Experiences | Comments (1)






Real Estate Clients – Breaking Up Is Hard To Do

October 18th, 2007

Agents will talk with other agents about it, but rarely speak publicly about it.  I’m talking about getting fired by a client.

As it turns out, sometimes things just don’t work out right.  For me it is terribly frustrating when it happens.  I’ve had quite a few clients that decide not to buy or sell, but I’ve also had a few clients over the years that have fired me.  They either choose to cancel their contract early (which I always offer to all my clients if they are dissatisfied) or they choose not to renew upon contract expiration.  This has happened for both buyers and sellers.

Truth of the matter is that while this is just the cost of doing business and I typically have not given much thought to it after it happens, there are a few situations that have really bothered me:

  • In one case the clients went and bought a FSBO without me and without giving me a chance to negotiate a commission with the seller.  It was after I had spent many hours showing them other homes and discussing the neighborhoods and market.
  • In one case we wrote an offer, the deal went sour, and then the buyer decided that they didn’t like Dual Agency, even though it had been disclosed and discussed months before and the deal fell apart due to the seller and buyer not being able to negotiate out the inspection, not because of dual agency.  In that case I asked them to let me show them more houses and offered to walk away if they decided they wanted to buy another house listed by my broker (1 in 5 chance), but they refused.  Bye-bye 6 months of a client relationship.
  • Most recently, I was working with a buyer for about a month.  We had made one offer that didn’t go through and were having conversations via email and SMS almost daily.  On Thursday we decided we needed to do another search for homes and I promised to email him some that night, but forgot.  I had a busy Friday and some personal and business activities over the weekend.  Monday morning comes and I get an SMS message saying: “Since you don’t seem to be interested in my business, I am going to find a different agent.”  Apparently the fact that he didn’t contact me to inquire about the email doesn’t seem to matter.

While there is a significant cost to that lost business… probably $15,000 in total… it is more a personal frustration than a financial one.  In all of these situations I felt that I had established a good client relationship with these people and that they would be loyal because they knew I was working hard for their best interests.  So that’s a total of three times in five years that I felt personally hurt… given the number of customers I’ve worked with, that is extremely low!  The problem is that even one is hard to handle, because I always want 100% customer satisfaction!

This is definitely a business, but it is a people business.  When you spend so much time with a client that you get to know them, breaking up is hard to do!

Posted in Personal Experiences | Comments (6)






House Sold in Under 36 Hours!

September 3rd, 2007

There are still plenty of buyers in this market!  While sales year-to-date are down approximately 14% over last year, and there are 10% more listings for sale today than last year at this time, buyers are still out there.

On Monday August 27th a listing east of Lake Harriet came on the market for $470,000.  On Tuesday afternoon my clients and I went to see the house.  In the less than 36 hours it had been on the market there were a total of 8 business cards left in the house.  When we arrived there was another agent showing it and while we were there another group came through as well.  I call the agent back that evening to let him know we have interest and he informs me that the house sold that afternoon before we even showed the house!  This home was in top-notch condition in an in-demand neighborhood and was priced to drive significant numbers of buyers through the home… it worked!

Morals of the story:
1. No matter how bad it may be, it isn’t as bad of a market in most areas as people think.
2. A house with the right price, right condition, and right location still sells quickly.
3. Buyers need to be ready to jump on a property if the right one comes along…

Posted in Info for Buyers, Info for Sellers, Market Stats, Opinion, Personal Experiences | Comments (0)






Water Intrusion – Not Just a Caulking Issue

July 25th, 2007

I recently did an inspection where water intrusion & moisture was an issue.  The sellers had done limited exterior maintenance in the 20 years they had been there so consequently there we a few areas of concern.  Additionally, of the things they did do, some were done wrong.  Here’s some general suggestions:

  • Windows are an area to be watched carefully.  It doesn’t matter what type of windows you have, you should be inspecting the caulking around the windows, the drip cap, the weep holes, and any seams in the window.  Caulk is your friend… don’t forget him!
  • Flashing around roof lines, bay windows, chimneys, etc will eventually need to be replaced… if you are replacing the roof you should look at the flashing as well.
  • Trees should be trimmed away from the house.  If a tree is rubbing up against a wall or roof, it can damage the home.  Also, without a “gap” between the house and trees, it is difficult for air to circulate around the home and keep it dry.
  • When repairing/remodeling/rebuilding decks, make sure that you have the flashing installed correctly.  Incorrectly installed flashing may actually encourage more water penetration.
  • Look at the bottom of exposed studs & sheetrock for water damage.  If there’s been water on the floor, it is usually quite easy to find signs of it on the walls.
  • Gutters are good.  Getting water further away from a home is always a good idea, so I always recommend gutters.  6′ downspouts are great.
  • Poorly maintained gutters are bad.  If gutters are left without maintenance, they will clog with leaves and start coming apart.  The only thing worse than no gutters are gutters that dump an entire roof’s rainfall on little spot against your foundation.
  • “Settling cracks” can be a sign of more problems.  If the house has cracks running between, or worse yet through, bricks or concrete blocks, it could be a sign of excessive settling.  Many times this is an issue with gutters.
  • Humidifiers should be used SPARINGLY.  I saw a house that had significant moisture staining on every single window in the house.  It was so bad in fact that some parts of some windows were replaced due to rot.  These were 20-year-old double-paned wood casement windows… which are very energy efficient… and should not have seen even 1/2 that damage.  If water is condensing on your windows, it is also condensing on your drywall, studs, sheathing, etc.  It’s a great way to ruin your windows and encourage mold growth in the wall cavity.  If you do use a humidifier, keep it set low and lower it even further when the weather gets extremely cold.  Also, keep your blinds partially open to allow air circulation.

Posted in Personal Experiences | Comments (1)






I'm a Buyer Too, You Know

July 13th, 2007

After having made an unsuccessful bid to purchase a house via short sale back many months ago, an agent in my office suggested I take a look at a house which I hadn’t considered.

The homes I had been looking at were primarily ramblers (or ranch, or one story, depending on your area).  Actually, I had a pretty detailed set of criteria:

  • One story
  • 3/4 master bath or better (full highly preferred)
  • Big master bedroom (15 x 12 minimum)
  • 1980′s and newer
  • 1500+ sq ft on the main floor (bigger room sizes)
  • 4+ bedrooms (for roommates, office, guest bedroom)
  • Walkout basement
  • Big 2 car garage
  • .4 acre lot or bigger
  • Privacy off back yard
  • Inside the 94/694/100/394/494 NW quadrant
  • Under $375k

Needless to say I didn’t find much for sale!

What I’ve always hated about a traditional two story home (I call it a center stair two story) is the formal living room.  See, I don’t have a piano, don’t read books (Google is my library), and don’t know why you would sit in a room without a TV/DVD/stereo/computer/etc. so I see it as space that I have to fill with nice looking crap that won’t get used!  I LOVE modified two story homes and those with stairs on one side of the house or the other because it eliminates that room but keeps all the other goodies that a two story offers:

  • Separation of bedrooms from living areas
  • Big master suites
  • Most/all bedrooms on one level
  • Bigger room sizes, since foundation size isn’t the issue
  • Dramatic curb appeal (when done right!)

Due to the area I was looking, there aren’t really any two story homes with the floorplan I liked, so consequently I was looking at ramblers.  You have to get pretty big on the foundation size for ramblers before you get those bigger rooms and layout.  So, I made an offer on one in a short sale and several months later found out that we were $40,000 off in price and they didn’t want to budge.  So, bye-bye offer!

I went around and looked at some other ramblers, but none of them really caught my eye.  I was very disappointed and had decided that things were not going to work out right now when one of my coworkers suggested a property she had seen.  She said: “Aaron, I know it is priced higher than you wanted to go and it’s a two story, but it is a really nice house and you should take a look at it.”

I got the address, pulled it up online and decided to take a look.  Long story short, she was right… it was a great house!  Went back with another coworker who thought it was solid too, had him write an offer (more on that in a future post) and some back-and-forth with the seller and now I’ve got a new home!

I’m still doing inspections and whatnot so I don’t want to get into details but needless to say I have a lot of things I’d like to tell you.  Stay tuned for updates!

Posted in General, Info for Buyers, Info for Sellers, Opinion, Personal Experiences | Comments (0)






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Edina Realty Aaron Dickinson
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