Mar042011

New families find the houses lost in foreclosure

People get caught up in their empathy with those losing their family homes to foreclosure. Its easy to get sucked in to the emotional stories of victimhood and believe that perhaps we should stop foreclosures.chidlren_lose_home

We all forget that the distressed debtor who rented money from the bank to occupy the house and appear on title will turn over the property to a new buyer who is not as indebted. This new buyer will be able to sustain ownership under stable, government-backed financing terms.

Pain for Some Families Presents Possibilities for Others

By Doug McKelway — Published February 24, 2011

As much as the bursting of the real estate bubble devastated the economy, destroyed hopes, and caused untold pain, there is a silver lining for would-be home buyers in today’s market. All that pain presents the potential for great bargains for the right buyer.

In most American cities, the cost of real estate is lower than it’s been in decades. On average, home prices in the U.S. have fallen more than 27 percent below their peak prices. But even that figure is deceiving, because it doesn’t take into account the desperation of some hard-pressed sellers to ditch their homes.

Often faced with the hard realities of pay-cuts, lay-offs, and neighborhoods devalued by short-sells and foreclosures, sellers have less negotiating power.

“If I have a foreclosure on a house six houses away, I’m going to lose value in my house. If I have another foreclosure ten blocks away down the street I’m going to lose additional value. And then it compounds itself,” said John Taylor of the National Community Reinvestment Coalition.

But this loss in value is the buyers gain. Amy Bohutinsky of real estate Web site Zillow.com, which tracks prices closely across the nation, sees a pattern in some depressed markets.

“If a home is listed at one price, ultimately it sells for 10 or 15 thousand dollars less,” Bohutinsky said. “That means buyers have negotiation power.”

Buyers have enormous power when there is excessive supply, particularly in a declining market. In a declining market smart sellers are extra motivated because another buyer willing to pay that price really isn’t going to come along. In an appreciating market, sellers can always trade money for time. If sellers want more money, they simply have to wait for the market to come to them. In a declining market, sellers do not have that luxury.

And where are those markets with the best real estate deals? Lawrence Yun, chief economist for the National Association of Realtors, said the best buys often tend to be in those areas where the race to build was greatest in the boom years, and where foreclosures are common.

“In places like Miami, one can pick up a nice condo for about $60,000. Same situation in Las Vegas because of so much abundant foreclosed inventory, the banks are just releasing property at deep discounted prices,” Yun said. “We are seeing the transaction increase once the prices are drastically reduced.”

Bohutinsky says three metropolitan areas in Florida, in particular, offer extraordinary bargains: Orlando, Tampa, and Sarasota. But Yun adds many other metropolitan areas offer prime buys.

“In middle America between the mountains — the Appalachian Mountains and Rocky Mountains — the median prices are about $120,000,” Yun said. “Anyone with a stable decent job would be able to buy a home.” Zillow.com’s figures also suggest that Minneapolis, Chicago and San Luis Obispo, Calif. have seen precipitous declines in housing prices at some income levels and leaving bargains for would-be-buyers.

But if those people with stable jobs are not yet clamoring to pick up distressed properties, there’s a good reason. Experts believe that the market may not yet have hit bottom.

The market hasn’t hit bottom. It doesn’t take a genius to read a chart and see that we are making new lows.

Buyers should be skittish, but there is a price point where the savings versus rentiing is great enough to lure buyers to the market. Very few people are renting by choice in Las Vegas despite the dropping prices. Moving from renting to home ownership with either get you 40% more home or cost you 40% less money. That incentive pushes most off the fence, and Las Vegas’s sales volumes have been above peak levels for quite some time.

“We know that home values are still falling across much of the U.S., and that they probably will continue to fall throughout this year,” Bohutinsky said. “At Zillow.com, our economists are saying that the bottom is likely be somewhere between the mid and latter half of the year, and from there, home values will probably stay at the bottom for the next year or two.”

And the prospect of flipping homes? Buying and selling for a quick profit? Those days may be gone for all but the most seasoned investors.

“Mortgages are harder to come by,” Bohutinsky said.”Your average Joe is not going to go be able to go and obtain multiple mortgages on all of these homes and be able to hold out for a decade for home prices to recoup and actually make some money on this.”

Most experts agree that values will increase at a much more modest pace, once the market bottoms out. That may be a welcome change after the rollercoaster that home owners have ridden the last few years.

It won’t be welcome at all by the legions of appreciation buyers in Orange County.

Merry Christmas and happy new foreclosure

 

I bought this house on December 7, 2010. The above was the actual picture of the property I used to evaluate it as a potential flip taken the morning of the auction.

Do you see the carefully groomed landscape and the Christmas reindeer in the front?

These people liked this house, and they didn’t want to lose it. I was buying it eight days before December 15th when the local constables who handle evictions stop all activities for the holidays.

Was I going to be Grinch this year?

Cash-for-keys

I always prefer a negotiated settlement to eviction. It takes too much time to evict, and the occupants aren’t too careful on their way out with their belongings.

These former owners have few tenant holdover rights. If i want them out, I can have them forcibly removed in short order. In Nevada, they get a 5-day notice to get out followed by a 3-day notice before the constable arrives to remove them by force if necessary. This is dangerous work, and they do carry weapons.

Technically, the former owners owe me rent from the day of the foreclosure sale. The typical negotiation is to offer free rent for three weeks with cash incentives if they move out quicker. The cost of money dictates that i can offer up to $500 per week if they are out early, and it improves overall revenues and profits.

I wasn’t about to expedite an eviction to see if I could kick this family out two weeks before Christmas. We negotiated a deal where they could stay until January 10th if they agreed to leave certain appliances, be careful when moving furniture, leave the fixtures and fans, basically leave the place undamaged so we can do preparations for sale quickly and with limited expense.

Sue for unlawful foreclosure

We needed to exchange written documents, and they avoided meetings until it became apparent to us that these occupants did not intend to follow through on their agreement. Just before Christmas, we received a lawsuit notification, and with the justice system basically shut down the last two weeks of the year, we had no options, and the holdover owner got one last peaceful Christmas in their former dream home. I truly hope they enjoyed it. Denial has its rewards.

On the 3rd of January, we filed suit to get them removed, and after some legal finagling, we got a 30-day notice filed with a calendar set to expire in early March. These owners genuinely believed they were somehow going to keep this house. After more than two years with no payments, their house was called to auction, and now they are no longer on title. Only their bodies and their possessions remain.

As the eviction clock is winding down, we get a communication from the owners asking us if our original cash-for-keys offer was still on the table. They would get out that weekend if I gave them $1,500. Of course, my first thought is, screw you, your willing to take my money after lying to me, suing me, and generally pissing me off. Go to hell! After a few moments to think rationally, I sent Jacki over with a big smile on her face to agree to their demands.

They got out in a weekend, I got the house in immaculate condition — I knew any loan owner in foreclosure who bothers to put out decorations and maintains their yard that well probably maintained the inside well. They did. We got the house on the market the next weekend (last weekend) with minimal fix up expense.

A bitter pill to swallow

These former owners loved this home. Jacki told me they were very bitter about the entire situation, the failed appreciation, the failed dodgy loan, the failed loan modification, the failed attorney savior. Despite the anger and bitterness, after telling their story, they were polite to Jacki when she inspected the property and paid them off.

When I think about borrowers like these, I do wish it had turned out differently for them. This particular family were peak buyers. They paid $399,991 for a property I bought 5 years later at auction for $170,000. The comps have weakened since I bought this property, and I will likely have to discount it to move it. These owners owed double what this property is worth today. What were they supposed to do?

The new family that buys here will enjoy a substantially lower cost of ownership. instead of the $2,500+ monthly cost the former owners had, the new buyer will spend less than $1,200 a month to live in this place. These people won’t have HELOC riches any time soon, but they will have a cost-of-living that leaves them enough spending money that the HELOCs aren’t necessary.

What is the best resolution for properties like this one? Do we give every existing loan owner principal reduction to keep them in place? Forgive the Ponzis their debts at my expense? I wouldn’t feel very good about that one. Would you?

Do we allow them to squat forever and deny the new family their home? Perhaps foreclosure is a good solution after all.