Foreclosure Auctions

The short sale process (see prior entry) is meant to stave off a foreclosure by the lender in first position (generally the "first mortgage"). With that said, if the short sale process fails, at some point and time that lender will go forward with the foreclosure. In order to clear title and eliminate any liens of lower priority (second mortgages, equity lines, etc.), the lender must cause an auction to be held - commonly known as a "foreclosure auction."

In my opinion, the foreclosure auction is a riskier proposition than the short sale process, or buying a property which is bank owned. In many cases, bidders not allowed entrance to the propety. The interior could be in any condition, but odds are the property has been destroyed. Owners who lose their properties at auction are not happy and quite often destroy the home and/or remove everything from faucets to flooring. In addition, the information provided by the auctioneer is not guaranteed and cannot be relied upon to be accurate. The onus is on the bidder to do his/her due diligence to verify the title, easements, right of ways and what liens will stay with the property (generally government liens and, in some states, back condo fees). This lack of knowledge, combined with the kinetic pace at which these auctions are conducted, often causes the unsophisticated bidder to grossly overpay for properties.

Notwithstanding the above, if a bidder does his/her due diligence, foreclosure auctions present an opportunity to create instant equity. My advice is to go to the auction with a maximum bid in mind, so as not to get caught up in the frenzy that the auction process creates. Real estate professionals are useful in detemining property value and a reasonable maximum bid price. They can also point you in the right direction as to researching the title and potential liens that run with the property.

As an aside, keep in mind that the lender will normally set a minimum price and send an agent to bid on the property until that minimum price is met. If no buyer outbids the lender, the lender will then take title and eventually sell the property as bank owned.

Please feel free to contact me with any questions or comments via cell at 978-423-9309, or e-mail at john@jw-realestate.com.

Short Sales

From a procedural perspective, when examining distressed properties, or what many refer to as "foreclosures", the first opportunity to arise is the short sale. A short sale is when a seller cannot expect to sell at a reasonable price without being left with a deficit once all costs associated with the sale are paid. Thus, the property is marketed with the intent to negotiate down the debt once an offer has beeen accepted. This means a sale will be "subject to third party approval". In my opinion, this is the most flawed process of the three opportunities (short sales, foreclosure auctions and bank owned) presented by distressed properties. However, there is upside with respect to due diligence.

(For purposes of this discussion, I will assume only one third party exists, but keep in mind there can be several and all must agree to release their security interests and accept less than the amount to which they are entitled.)

In the vast majority of instances, the third party has given no indication as to the amount they are prepared to accept for payment. Moreover, offers are accepted contingent upon third party approval. With that said, a buyer can offer over the asking price and have the offer accepted, only to be informed at a later date that the third party is unwilling to consent to the sale. From a timing perspective, most third parties take, at minimum, 60 to 90 days to respond, during which time a prospective buyer is left in limbo.

The benefit of a third party sale - as opposed to auctions and bank owned sales - is that a buyer generally has the same due diligence opportunities as a buyer would have in a traditional sale. By due diligence, I mean thorough walk-throughs (including inspections), as well as gathering of the seller's first-hand knowledge relating to the property through conversations with the seller and/or the seller's agent. Written seller's disclosures may also be available which inform a buyer as to what the seller knows about the property condition (roof, heating, electric, foundation, etc.).

To summarize, the short sale process presents a great value purchasing opportunity with minimal risk. It is most suited for investors, or home buyers with no time constraints. Any buyer who is purchasing a home to live in and needs to meet a definitive timeline should avoid short sales at all costs.

Significant Distinctions

Over the last week or so, I have been seeing many articles and receiving inquiries which blur the distinctions between types of sales and/or ownership interests. Here are certain distinctions which may eliminate some confusion.

An auction is a way to facilitate a sale and has no bearing on who owns the property. Any party who owns a property, or a lien holder (usually the holder of a mortgage, or a government entity) may cause a property to be auctioned. Most auctions garnering attention today are being caused by holders of liens through the foreclosure process.

A short sale is subject to third party approval and involves a process wherein a homeowner tries to negotiate with the lender(s) to take accept less than what is owed on the loan(s). Thus, any sale needs to be approved by one or more third parties (lenders and/or lien holders).

REO (Real Estate Owned), bank owned and lender owned are synonymous terms which mean that a bank and/or lender owns the property. This almost always results from a mortgage default and a foreclosure auction wherein the lender has bought back the property at auction, thus clearing title and eliminating any loans in second position (of lower priority). In some instances, a lender will take ownership in lieu of a foreclosure at the request of the property owner.

(It is my understanding that many people are using the term "foreclosures" as a catch-all and this is where some of the confusion lies. By way of example,  "I want to buy a foreclosure" or "My friend is making a ton of money in foreclosed homes.")

Both short sales and REO's are most often handled by real estate brokers such as myself and the process is similar to the purchase of any other home listed for sale with a broker.  Auctions may or may not involve real estate brokers and, depending on the circumstance, you could have the option of being represented by a broker without adding costs to the transaction.

All of the above ownership interests and/or sales procedures present opportunities and pitfalls for potential buyers too numerous and detailed to delve into here. However, if in the interim you have any questions, do not hesitate to contact me (john@jw-realestate.com or 978-423-9309).

Happy Thanksgiving!

Here is something to chew on besides that drumstick...

As you are probably aware, the upcoming few months pose the greatest obstacle to sellers from a purely cyclical perspective. Think of the process from a common-sense approach. Who wants to travel from town to town and house to house in the middle of winter? The question is rhetorical, but the answer is: nobody! It is miserable outside...snow...cold. People are out straight...holidays...school vacation...

That is why only motivated sellers and serious buyers are normally out there in the market during the tail end of November, December and January. However, this season may deviate from the norm, as the extension and expansion of the tax credit (see prior post) should create a sense of urgency for many buyers.

My thought is that those of you who are thinking of waiting for the spring market to put your properties up for sale - while normally the prudent course of action - will be making a mistake given the time constraints of the tax credit. Moreover, as confident as I was that this extension would be enacted (see prior posts), I am equally confident that the credit will not be extended further. If it is extended, it will be limited in scope as compared to its current form so as to be phased out over time.

For those of you interested in statistical data for Massachusetts (Source: Massachusetts Association of Realtors 10/24/09), read on.

October sales numbers, year over year:

Single family home and condominium sales were both up 17-18%
Single family home selling prices decreased 2.4%
Condominium selling prices decreased 4%

Inventory on market, October 31, 2009 as compared to October 31, 2008:

Both single family home and condomium inventory decreased to just over 7 months from slightly over 10 months.

As always, feel free to contact me at your convenience with regard to any real estate needs.

Chance of a Lifetime!

For those of you who do not know me personally, I am not one to overstate the importance of things. With that said, the fact that a new homebuyer tax credit was enacted Friday is a tremendous win for anyone looking to buy or sell a home.

For buyers who qualify, it cannot possibly get any better than this: a significant tax credit to buy a home at a time when interest rates and home prices are at historic lows.

For sellers, buyers should be coming out of the woodwork to take advatage of this opportunity. The fact that the credit - although at a slightly reduced rate - now applies to current homeowners should open the market considerably for new purchases.

If you are even considering buying and/or selling a home, I urge you to click here for a detailed breakdown of the new credit promulgated by the Massachusetts Association of REALTORS. As always, for any real estate needs, please contact me at 978-423-9309 (cell) or john@jw-realestate.com.

Tax Credit Status

As you may have seen, a tremendous amount of information (and misinformation) has been circulated since the middle of last week regarding an extension of the $8,000 first-time homebuyer tax credit. Here is my understanding of where things stand.
 
Last week, Senators agreed in principle on an extension of the $8,000 credit for first-time buyers, as well as an expansion of the same to include a $6,500 tax credit for homeowners who are selling a primary residence that they have owned and occupied for at least five years. For either credit, buyers would need to close on their new homes by the end of June 2010 and have a signed "purchase agreement" by the end of April 2010. (Source: USA Today 10/29/09)

Please keep in mind that the above is a work in progress and no extension has been enacted. As is standard operating procedure, Senators are negotiating the details and what pet projects will be included in order to secure the necessary votes to pass the legislation. Assuming legislation passes, I will provide the relevant information once I am confident in my understanding of the particulars.

As an aside, be very cautious as to timing issues. For example, buying a home in Massachusetts is generally a 2-step process with respect to the contracts. Would a "Contract to Purchase" executed by the end of April suffice, or would a "Purchase and Sale Agreement" need to be executed? Further, the $6,500 credit will no doubt include parameters for the purchase of another primary residence. It will be crucial to understand the timing and/or trigger mechanisms necessary to qualify for the credit. With that said, if you are considering buying and/or selling property in Massachusetts or New Hampshire, I am always happy to assist you through the process.

$8,000 Tax Credit

Although, in my opinion, it is still more likely than not that the tax credit will be extended past the November 30, 2009 deadline (and perhaps expanded to include all primary home purchases), there is a disturbing article on page A3 of today's Wall Street Journal.

$139 million was paid out on fraudulent claims regarding the credit to, at minimum, 19,000 people. The most common scam was for people who did not qualify because their income exceeded the cap to use their children's names and social security numbers to file. Although there are simple remedies to ensure this will not continue - such as requiring a copy of the HUD settlement statement - no such measures are currently in place. With that said, many of the proposals to expand the credit include such safeguards. (Source: WSJ)

Let's hope that the negative press attributable to the fraud as referenced above is insufficient to derail any possible extensions of the credit.

Important Mortgage Information

Bank of America, Wells Fargo, Citigroup and J.P. Morgan are all significant players in an experimental government-backed loan modification program. In most cases, in order to qualify for the program, a buyer must be at least 60 days delinquent on the loan. If you think you may qualify, or are heading in that direction, I encourage you to contact your lender. Also, as of now, or in the very near future, standard forms to apply for this program will be available on the govenment website entitled Making Home Affordable (http://makinghomeaffordable.gov). (Source: WSJ 10/9/9).

Also of note in the article referenced above is the following quote. "[S]everal senior House lawmakers expressed support for extending an $8,000 tax credit for first-time home buyers."

Better Late Than Never

I meant to comment on an article in The Wall Street Journal last week, the thrust of which was that holders of distressed mortgages are more inclined to write down principal than they have been in the recent past. While it is more likely for a lender to negotiate an interest rate adjustment, in certain instances they are now willing to reduce principal as a last-ditch effort to avoid foreclosing on homes. 

Regardless of one's political inclinations, this is good news for home values. By way of example, assume you have a neighbor who is under water on his mortgage payments. He cannot afford to sell, because of his home value in relation to what he owes on the property. If renegotiating his interest rate is inadequate to alllow him to make his payments, traditionally there are only two likely results. He would either negotiate a short sale, or let the home go to foreclosure and thus the home would ultimately be sold by the lender. The result would be disasterous regarding your home value. Assuming your neighbor's home is similar to yours, that home (which was sold under distressed cirumstance) would now be used as a comparable home in any appraisal or comparative market analysis of your property.

Now assume in that same instance, the lender writes down the principal of your neighbor's home to such an extent that the mortgage now become affordable. The result is no impact on the value of your home. Your neighbor keeps his home and the bank loses less money than it would going through the foreclosure process. Moreover, the principal write-down should not affect an appraisal or comparative market analysis on your property, as there is no mechanism for this information to come to light when these reports are promulgated.

On a lighter note, I recently heard an amusing interview on CNBC with a woman who follows anecdotal evidence relating to the economy. At the inception of an economic recovery, the rate at which men purchase denim products, pink ties and underwear increases. Take that for what it is worth.

In the Media, Glass is Now Half Full

The headline in today's The Wall Street Journal, page 1, upper right in bold and in the second largest font on the page (just smaller than the name of the publication itself):

"Global Economy Gains Steam"

The subtitle of the same article in roughly half the font size:

"Jobs Still a Worry, but Factory Output Rises in U.S., China, France; Markets Falter"

The first two paragraphs were entirely positive except for the second paragraph's last sentence which placed a positive spin on a negative stating, in pertinent part, the "pace of contraction...slowed markedly."

I take the time to break this down in order to fully illustrate my thesis from my prior entry and to hopefully emphasize the correlation between presentation of information in the media and consumer sentiment. As a practical matter, the more articles written with this slant, the better for a real estate recovery.

Anecdotal Evidence

I reiterate as aforementioned: I hate statistics. They are always backward looking. We are currently analyzing June and July numbers to predict where the real estate market is at this point and time.

So as I was lamenting this flawed system, I recently listened to Ron Insana. A stalwart of empirical data, Insana said, "The economy is getting better. I can feel it. I was just at Disney and it was very busy. Everywhere I go, I see the economy bustling." (I am paraphrasing.) Moreover, at the beginning of last week, positive housing numbers came out across the board. (Mid-week, all positive articles regarding real estate, from The Boston Globe to The Wall Street Journal.)

My thought is this: read three newspapers next week. Look for any articles discussing the economy and/or real estate. If two out of three articles do not articulate any negative economic sentiment until the third paragraph, the recovery has begun. Perception is reality. ("When the legend becomes fact, print the legend." - John Wayne, The Man Who Shot Liberty Valance)

Battle of the Subsidies

Riddle me this...Why should we not have pumped the "Cash For Clunkers" money into the first-time homebuyer tax credit by expanding it to all buyers, or increasing the amount?

From what I understand (under the car program), when a car is turned in, the engine has to be destroyed. Destroying an engine which could have been re-sold for use in other cars appears meritless and will ultimately be an economic burden on people of lower income brackets who generally drive older cars. Supply and demand dictates that scarcity will drive up the price of used engines. Moreover, there is the unintended consequence of the lost revenue of automotive repair centers.

It is universally agreed that the crux of the recession is the housing market and that we cannot have an economic turnaround without a real estate recovery. Further, no tangible asset need be destroyed in order for the tax credit to have its intended effect. Thus, it seems far more efficient and beneficial to invest our limited resources in a housing recovery. That being said, both programs are nearing their demise, so the point is moot, but I thought it was at least worth visiting.

Speaking of the tax credit which is due to expire at the end of November, keep in mind that you must CLOSE by the end of November. This means that as a practical matter, you would need to identify the property and have it under agreement by mid-September. On a positive note, there are more and more rumblings of the credit being extended. (Various drafts of a new tax credit are currently circulating in Washington.) However, if I were a betting man (and I am), I would take the credit now! My instinct tells me the likelihood of an extension is 50/50, but the likelihood of better terms in any new credit is de minimis at best.

As always, I welcome your thoughts and urge you to contact me for any real estate related needs.

Naysayers

For those who refuse to believe that the housing market in the majority of areas and/or price ranges in Massachusetts has bottomed and is beginning to improve, here are some statistics recently released by the Massachusetts Association of Realtors:

The median single family home price for June 2009 was $306,000. This is the first time the median home price has been over $300,000 since August 2008. Moreover, the June 2009 median price is up 21% from its low of $252,000 in February of this year. With that said, this is still a decrease of 8.6% year over year (June 2009 compared to June 2008). As a frame of reference, consider today's prices to be in line with those of 2003. (Source:MAR)

In my opinion, the more important - and thus more impressive - turnaround has been in residential home inventory. (Home inventory is based on a fiction wherein we assume no more homes will become available for sale. In that instance, at the then current rate of sales, how long would it take to sell all the homes on the market at that point and time? The answer represents the "home inventory".) A decrease of 16% in inventory from June 30, 2008 as compared to June 30, 2009 should markedly improve real estate sales conditions. As of June 30 of this year, inventory was at 7.2 months. This is actually considered to be at the low end of the spectrum for inventory levels in a healthy market. (Source: MAR)

In short - and I am not a fan of statistical data - one cannot deny that these numbers show an improvement in the housing market. If you prefer to rely on perception/consumer sentiment as do I (statistics are, by definition, backward looking), pick up a newspaper or turn on the news. Fewer and fewer of the real estate related stories are solely negative. This could not be said three months ago. In fact, as I write this, the story on CNBC relates to the drastic rebound in stock values of home builders.

Tax Credit - Added Benefit

Yet another incenitive has been put forth to entice potential first-time buyers to take advantage of the current real estate market, not that potential buyers should need further enticing given the current climate. With that said, here is the latest carrot to be dangled...

The federal tax credit of up to $8,000 for first-time home buyers is now eligible to be used toward closing costs and/or a down payment in Massachusetts. (Source: MAR)

In order to take advantage of this program, a borrower will need to apply through his or her lender for an $8,000 loan via MassHousing. This loan is now available for homes purchased by December 1, 2009. The borrower must then claim the tax credit on his or her 2010 federal tax return. So long as the loan is repaid by June 1, 2010, the loan is interest fee. In the event the loan is not repaid by June 1, 2010, the loan will be amortized over 10 years at the rate of the first mortgage. (Source: MAR)

Similar programs are currently being developed and implemented by other states. (Source: MAR)

A caveat to the above is that borrowers must first determine whether they qualify for the credit in whole or in part. For an overview of the credit paramaters, refer to my prior entries regarding the same. As always, I recommend consultation with a tax specialist (CPA or tax attorney) prior to making any real estate decisions predicated on tax strategies.

Refinancing Change

The Treasury Department just announced that, as part of its home rescue package, Fannie Mae and Freddie Mac are expanding their efforts to refinance people who are upside down (have negative equity) on their mortgages. Specifically, Fannie and Freddie will now allow refinancing on homes with up to 125% loan to value ratio. Until this announcement, the cap was a 105% loan to value ratio. (Source: CNBC)

Whether this is good or bad news is dependent largely on your priorities (moral hazard, compassion for upside down homeowners, investment opportunity, etc.). However, at least in the short term, this should slow the pace of foreclosures and short sales. This in turn should help to stabilize house prices. The elephant in the room is whether this is merely a stop gap. Will these additional refinances lead to higher losses on bad loans and future increases in foreclosures, or will it buy these borrowers the time to allow house values to return to such a level so as to make it cost-effective to eventually sell these homes? We shall see...

Cramer Calls Bottom

Yesterday, Jim Cramer of CNBC's Mad Money called a "bottom" to the housing market. He relied on certain economic indicators released that day including, but not limited to, increases in building permits and housing starts nationally. Cramer reasoned that the large home builders, as well as the banks financing their projects, are some of the most well-versed institutions regarding the real estate market. Their expertise, coupled with the risk aversion under which they have recently been operating, makes it extremely unlikely that they would risk incurring additional losses resulting from excess inventory. These institutions are simply not interested in compounding their exposure to a declining market. (Source: CNBC)

While Cramer's argument is cogent, I fear that many pockets of the real estate market (including the area in which my company operates) currently have excess inventory and cannot afford additional new home construction. At this point and time, many local markets have between 8 and 11 months of inventory available. My opinion (and that of many experts) is that 6 months of inventory would represent a healthy market. With that said, I am partial to Cramer's position, as a bottom is obviously necessary prior to any rebound in real estate.

A few odds and ends:

If you are preapproved for a mortgage and have not checked in with your lender/broker in the last two weeks, you should do so. Rates on 30-year fixed mortgages increased from roughly 5.0% to 5.8% last week. A swing of that magnitude is significant. You should keep yourself apprised of mortgage rates, as they directly affect your buying power.

If you are a first-time buyer who is depending on the $8,000 first-time buyer tax credit, keep in mind that it is due to expire at the end of November. Also, note that there is a phase-out depending on income level, which may affect your eligibility for the credit.

As always, feel free to contact me at any time with respect to the real estate market and your particular needs.

Economic Indicators

Just a few odds & ends I thought were worth reporting:

Both Lowes and Home Depot had better than expected quarters. This is a positive sign for the construction industry, as is the fact that builder sentiment was up for the second straight month according to the National Association of Home Builders, which attributed the gain in part to the $8,000 tax credit for many first-time buyers. (Source: WSJ, CNBC)

Although the above is favorable news and indicates a stabilization of the housing market in the near future (stabilization, not rebound), there are still a few shoes to drop, such as impending defaults on commercial real estate loans and the effect of those defaults on small to mid-sized banks. A Wall Street Journal study predicated on similar criteria as those used by the federal government for the large bank stress tests shows potential losses of $100 billion for 900 small to mid-size banks relating to commercial real estate loans. These losses would dwarf the losses from residential loans, anticipated to be approximately $49 billion for these same banks. (Source: WSJ)

In Jamie Dimon's conference call for JP Morgan today, he had harsh words for the TARP program relating to the lack of clarity as to the means by which the government will allow repayment. He also noted that it is possible we are seeing a bottom in the economic downturn. (Source: CNBC)

In short, a mixed bag...

Misconception

Regarding the most recent stimulus package which is now in effect, the $8,000 tax credit for first-time home buyers is in fact a true credit. As a practical matter, it replaces the $7,500 "tax credit" which preceded it and which was actually a loan. The only caveat is that a homeowner must retain ownership of the property for three years, or the $8,000 will be recaptured. (I believe the entire $8,000 out of the proceeds of the sale will be recaptured. However, I am not certain if the amount recaptured is predicated on the amount of the capital gain on the home. In other words, is the amount recaptured capped by the gain if the gain is less than $8,000?) In addition, this credit is gradually reduced for individuals whose income is over $200,000 per year and couples whose income is over $250,000 per year. (Sources: MAR, WSJ)

As an aside, President Obama's budget calls for a reduction in the Mortgage Interest Deduction on a graduated basis for individuals whose income is over $200,000 per year and couples whose income is over $250,000 per year. (Sources: MAR, WSJ, CNBC)

Without getting too political, people should look long and hard at the economic philosophy underlying the graduated phasing out of benefits as referenced above based on income ratios. Does this comport with your economic school of thought, along with your goals and aspirations?

$15,000 Credit Update

According to Fox Business, part of the compromise regarding the stimulus package was the watering down of the $15,000 tax credit for the purchase of a primary residence. Originally, the credit was to cover the purchase of any primary residence, regardless of the number of homes one had owned in the past. However, it now appears that the credit will be applicable only to first-time buyers.

This is obviously a blow to real estate professionals including, but not necessarily limited to, real estate agents & brokers, mortgage lenders & brokers, and home builders. Weren't these stimulus packages, TARP, etc. designed to stabilize the housing market? After all, it is the general consensus that the crux of the economic distress rests with the real estate meltdown. Hmmm...

$15,000 Tax Credit

As of yesterday, February 4, Republicans were making great strides toward inserting a powerful real estate stimulus into President Obama's proposed stimulus package. According to the Associated Press, Republicans appear to have been successful in negotiating a $15,000 tax credit into the package. Specifically, the tax credit is for 10% of the value of the home, with a cap of $15,000. (The current credit is for $7,500.) Purportedly, the breadth of the credit will also be expanded to include all home buyers, as opposed to only first-time buyers. (Source: Associated Press)

In the event that this credit comes to fruition, the positive ramifications for the market should not be discounted or underestimated. I envision this credit being a tipping point for the countless people who want to sell their current homes and then purchase new homes. Many people are not selling because they fear they will not be able to afford to buy another home. For many, this tax credit could be the answer. This credit will offset a large portion of the costs associated with buying and selling. Similarly, first-time buyers who are on the fence as to whether to pull the trigger will have another reason to dive into this buyer's market.

As an aside, here are some statistics for the local housing market (15 towns from Boxford through Littleton, MA) covering trends for December as compared year over year (December '08 as compared to December '07): Single-family home sales increased 7%, but the most dramatic shift was an increase of 158.1% in sales of multi-families. In contrast, condominium sales slid by 39.4%. The drastic increase in multi-family sales is explained in large part by the steep decline in the median price, which fell by 36.2%. Prices for single-family homes and condominiums fell by 10.5% and 15%, respectively. All three types of properties described herein are still sitting on the market for an average of 4 to 5 months. (Source: Northeast Association of REALTORS).

Mortgage Developments

The Senate reached an agreement in principle with Citigroup wherein Citigroup is giving its blessing to legislation allowing for bankruptcy judges to cram-down mortgages. The cram-downs will allow judges to reduce the principal and/or interest on troubled mortgages so long as the homeowner shows that they attempted to negotiate with the lender prior to filing bankruptcy. Further, the mortgage at issue would need to predate the legislation. The proposed legislation, in its current form, would only apply to Chapter 13 bankruptcies. (Source: WSJ)

Whether the above will be a positive or a negative is anyone's guess. Will this stabilize the real estate market, or just increase Chapter 13 bankruptcies, prolonging inevitable sales with another layer of red tape? Moreover, will this move chill the already frigid environment for mortgages, further restricting the flow of credit?

On a more decidedly positive note, Fannie Mae, in conjunction with Bank of America (through its subsidiary, Countywide Financial Corp.) has implemented a pilot program regarding short sales, the bane of many Realtors' existence. This program is not yet available locally, but calls for the lender to preapprove the price on a short sale, thus enabling Realtors, sellers and buyers to have a much clearer view of the playing field and increasing the likelihood of a completed transaction. (Source: WSJ)

If anyone sees a downside to preapproved short sales, please enlighten me at your earliest convenience. It appears to me that this approach is long overdue.