Short Sale

Stealing A Home

Originally Published February 1, 2009

I was reading The Bubble Blog as I do most days, and as normal there were various comments that readers made that I thought were interesting, insightful, and sometimes spot on. But there are also the comments that make me think for a while and say, “Why?” In general, readers of the Bubble Blog are in agreement with the authors and support the notion that Charlottesville prices are too high. Given the current stall in sales, I tend to agree that movement is necessary in prices. But I’m not sure why everyone on the Bubble Blog is so convinced that it is all the Sellers who need to move. No, I’m not arguing that we have hit the bottom and we are about to skyrocket to 2005 price appreciation rates.

A year or so ago I was approached by another local Realtor who asked if I would be interested in selling my home. I told her, “Absolutely.” And I then proceeded to quote her a price somewhere North of 40% above my assessment. She said, “You’re crazy, your house isn’t worth nearly that much.” Well, she was right and wrong. It wasn’t worth that much on an open market, and it wasn’t going to be worth that much to her client, but to me, it’s absolutely worth that much. I had no interest in moving, and I still don’t. If someone wanted me to move, they were going to have to make it so worth my while to move that I would never have thought twice about it. And for me, that was about a 40% premium. And frankly, I’m not even sure I would have sold it for that.

Right now, I have lots of buyers looking for a steal. They don’t want a fair market price, they want a steal. They want to know that in five years when they look back at this period, that they took advantage of some pathetic seller who had no choice than to sell, at an absurd price. Today’s buyers want to know that there was no blood left. Well, guess what… today’s sellers aren’t all that desperate. Some are, but not all.

I have sellers who want to sell for various reasons. Some to move up, some to downsize, some who have been offered jobs in other areas, some who are having more children and want a bigger house. But on the news, you hear all about the millions who are losing their houses to foreclosure, and the banks are willing to sell for less than the debt. Not all sellers are bankrupt, and not all are willing to bleed for you to get your steal.

Market value is not just the price that a buyer is wiling to pay. It is also the price at which a seller is willing to sell. When the seller wants too much, or the buyer is willing to pay too little, no transaction occurs. It doesn’t always mean that the seller is over pricing. It can mean that Buyers are not wiling to pay market value.

And that brings us to the last few months of real estate. Buyers are convinced that Sellers are going to drop prices, but they haven’t. And when you look at my research into the city neighborhoods, most have not fallen in price more than 5%. And that does not represent the “steal” that buyers are looking for. Sellers on the other hand, may or may not have to sell. No one wants to be taken advantage of. Sellers are willing to drop prices when offers are being made that are fair and represent a market value transaction. But few are asking to be robbed.

I am not saying that values have not fallen in the Charlottesville area. They absolutely have. On Thursday night on 29 News I said as much. Transactions are occurring below assessments, and in 2009 we should expect to see that spread widen. But there is no indication that we are in a free fall, or that we should expect 20% price reductions anytime soon.

For Sellers, my recommendation is to seriously look at your reason for moving, and set your price accordingly. It could be that you won’t sell your house. But if you don’t need to sell, you certainly don’t need to be robbed in the process. For Buyers, assess why you are purchasing a home. For many, this is purely an investment decision. To you, I say watch for the short sales and foreclosures. You may not get the perfect home with the perfect view in the perfect school district, but you will find a good deal. There are many to be had. But don’t search for the perfect home, and then expect to steal it. It rarely happens that way.

The Davis Plan

Originally Posted October 9, 2008

Seeing as we as taxpayers now have access to $700 Billion of federal money to play with in the mortgage market, I thought it would be irresponsible of me if I did not put forth a legitimate plan for what to do with this money. Yes it involves restructuring debt loads, but I think it does more to solidify the real estate market more than anything I have seen thus far from our friend Sec. Paulson.

This post began, as did the preceding post, as a reaction I had when listening to the debate on Tuesday. Sen McCain offered that as part of our helping the middle class, we should use the $700 billion to buy back the mortgages of sub-prime and Alt-A debt that are having difficulty paying back the debt. Once purchased, we would re-set the principal to the new value of the home, so that people are not underwater in equity.

In all fairness to both parties, Obama has said he wishes to do the same, although I did not hear him say it on Tuesday.
This is a horrible idea. A miserable idea of massive proportions.

Let’s dissect the value of this proposition and why it is being bantered about. The goal is that if we don’t have foreclosures, we won’t have diminishing property values. If we halt the fall in prices, it will restore confidence, and thus the world will be all good. Well, the other obvious thing is that people love getting something for nothing, and that’s just what this does. It rewards people who borrowed too much and are now unable to pay for it. Further, if we remove the burden of being underwater, what is to stop people from dropping the sales price of their house dramatically to get out from under the loan.

So, what is The Davis Plan?
Rather than adjusting the principal, adjust the interest. This has multiple purposes. If a borrower qualified for the teaser rate in the beginning, he (theoretically) should still be able to do so in most cases. So, the borrower should be able to make the monthly payments. Because he can make the payments, he won’t get foreclosed. However, because his mortgage is still underwater, he can’t sell. This is a GOOD thing. Because he can’t sell, he stays. This reduces inventory on the market. This produces a stable market. This provides for liquidity to those persons who can sell and wish to sell.

How does this really play out? Well, if a person bought a $400,000 home with 100% financing at 5.5% teaser, his original payment (assuming no negative amortization) would have been $2,271 + Taxes and Insurance. With interest rates resetting, that rate could be 8.5 or 9.5%. If we assume 8.5%, then the borrower is now paying $3,075 +T&I. Under the current plan touted on Tuesday night, the principal would be reduced to the market value. Let’s say it’s dropped 25% in Ohio, that borrower now owes $300,000 at 8.5% interest and the payment is all the way down to $2,306 + T&I. And the cost to the taxpayer is an instant $100,000. With no chance of ever seeing that money again.

Now, under The Davis Plan, the borrower returns to paying $2,271 (less than the proposed plan). The borrower stays in his home. He doesn’t sell because he can’t afford to; remember, he still owes $400,000 on a home that has dropped in value. But he still has his home which is really what he wanted anyway.

Now, I know what you are thinking: what if the borrower needs to move because of work or family. Well, I have that covered.
Remember how I said people like getting something for nothing. That doesn’t exist in The Davis Plan. People will have the option of putting their house into The Plan or not. If they choose not to, they can be foreclosed upon, face bankruptcy, and see what the court allows them. That’s fine. I don’t think most people will take that route. I think they’ll opt for The Plan.

Upon agreeing to this workdown of debt, the borrower agrees to one simple change in their mortgage. Just like government insured student debt, you won’t be able to bankrupt your way out of this one. It is with you to your death.

So, if in five years you need to sell your home and you only get $350,000 for it, you still have a $50,000 – 30 year note with the Government. You can take it to your next home. You can prepay it if you would like. It will be tax deductible to the same degree that any other mortgage is – provided that loophole remains.

We now have a method for helping out the middle class, keeping them in their homes, removing excess inventory from the market, stabilizing the housing market, restoring confidence to the markets, and all of this without giving away something for nothing.

How much would all this cost? I have no idea. But I don’t think anyone really knows if $700 billion is enough to do what little they want to do anyway.

Update on Short Sales

Originally Published July 7, 2008

As I reported last week, there were a total of 14 short sales listed for sale out of 3,687 listings as of last week. I found it interesting to see that today, the National Association of Realtors projected that out of the projected 4.99 million existing home sales that will take place between May 2008 and May 2009, approximately 400,000 are expected to be short sales. That’s nearly 10% of the market, compared to Charlottesville’s less than 1/2 of 1 percent. It looks like local lenders did a better job of lending, and the prices just haven’t dropped the same as in many other areas.

Selling Short

Originally Published July 2, 2008

To the rest of the financial world, selling short refers to the act of selling shares of stock that one doesn’t own, in hopes that the price will drop, and being able to purchase those shares later for less. But, as with most things real estate related, a short sale has a whole different meaning, and its not a good one. However, despite national trends, Charlottesville seems to be have stayed away from Short Sales at least for the time being.

The term short sale in real estate refers to a negotiated settlement with a bank in which a seller agrees to sell his or her property for less money than he or she owes their mortgage company. The bank in turn, agrees to accept this lower amount rather than foreclosing. Sometimes this works, sometimes it doesn’t.

The process goes something like this: Helen Homeowner is struggling to make mortgage payments. She contacts her bank and tells them that she has to get out from underneath the mortgage. The bank looks at their records and notes that Helen has made all of her payments, albeit a tad late. Thus, they tell her that if she keeps making her payments, they will avoid foreclosure and agree to accept a lower than owed amount if she can sell her house.

The bank meanwhile looks at the PMI insurance policy that Helen has been paying on for the past three years and recognizes that if they accept this short sale, that they lose money. However, if they foreclose, they get the insurance payment to cover loss. Thus, they convince Helen to keep trying hard to make the mortgage payments, and have no intention of accepting anything less than the amount owed.

A buyer comes along, and the contract is submitted to the bank for their approval, which, surprisingly, never comes, because it requires that the bank lose money. If, however, there is no PMI, there is a good chance that Helen can indeed get a settlement agreed to. Unfortunately, the bank would rather foreclose on a PMI loan than accept a settlement. But as long as Helen is making her payments, no one is losing any money at all.

From the Buyer’s representative side, a home that is a Short Sale is a disaster waiting to happen. The bank rarely approves the buy out, the commissions have been reduced, the time to close is increased, the frustrations of the buyer are multiplied, and the deal falls apart on a fairly high percentage of the contracts anyway. I saw a number from a Northern Virginia agent who studies this in his market and found that in Arlington County, less than 5% of Short Sales actually closed. No one would ever enter into a contract if they believed there was only a 5% chance that the deal would close. (http://blog.franklyrealty.com)

Well, here in Charlottesville, I am happy to say that the odds are a tad better. We have had 6 close in our MLS out of a listed 30. (20%)

So, how prevalent are Short Sales in our MLS? If you read the news, you will be under the impression that it is roughly 50% of the market. but in reality, it is a very small number. Across the whole CAAR MLS, there are currently 3,687 active listings. 10 of these are listed as short sales. 0.27% of all listings.

One would also think that the people most affected by these sales are going to be sellers who probably didn’t qualify for that first home, but bought anyway and are now having problems. Well, of the 8 listings outside of Albemarle County, that may be true. The average price for a home currently listed as a Short Sale is $211,387 and the median is $193,800. But the 2 current Albemarle Short Sales are listed at $799,900 and $899,900.

Now remember, a short sale doesn’t just mean that the owner is losing money, but rather that the borrower owes more than the asking price. So in at least one of these two listings, the total debt obligation exceeds $900,000. That is one enormous obligation. Even if the borrower managed to secure all of the debt at 6.500%, that is still a payment in the neighborhood of $5,700 before the taxes and insurance that would run roughly $610 more a month, or a total mortgage payment of $6,300. Remember, that is the bare minimum for the payment. It is likely much higher.

Just goes to show that the fiscal mismanagement is most certainly not a habit of only the middle class.

How Low Should I Lowball?

Originally Published June 19, 2008

I can’t tell you how many buyers ask “so what percentage of asking price should we offer in this market?” Not just now when the market is slow, but always. This is one of those buyer questions that everyone hears all the time. It goes along with “What home is going to have the most appreciation?” Well, to the later, I respond that I don’t have a crystal ball, but for the former, “There is no set figure.” People like a real answer, not cryptic, so this usually frustrates them. But, here is the formula. The price offered should be directly related to the value of the property, not the asking price.

When determining asking prices, Realtors go to great lengths to determine an approximate fair market value. Sometimes, they do a good job, sometimes, they don’t. Sometimes sellers heed their agent’s advice, sometimes they don’t. Some agents price homes high, some agents try to price their homes fairly each time.

In this market, there are still homes that are getting multiple offers. So, there is no clear cut formula for making an offer. What is clear, is that a buyer’s agent must look at the market factors before making an offer. Lowball offers are not wrong in this market, but if a home is priced correctly, a lowball offer is not going to close a deal.

There are homes out there that are priced 110% of market, and those that are priced at market (and some below). Buyers need to look at a home’s value rather than the asking price as the starting point for determining a starting point for price.

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