Foreclosures / Short Sales

We all know the market is down, and we know there are great deals available to those willing to put in the effort (and capital).  Not every bank-owned home is a great bargain, and not every home seller is desperate.  But once in awhile we’ll come across a strong investment opportunity - a great home in perfect condition, on the best lot in a desirable neighborhood, which a bank is selling for significantly less than any other home in the area!

The trouble is, I’m starting to see, hear, and read advertisements telling me how to take advantage of this market to get rich in real estate.  The process isn’t as easy as these advertisements make it seem.  But if 2,000 people buy their $500 expertise, they’ve made $1 million.  To be honest, I think they have a better chance of making a million dollars selling their course than you do by following their teachings.

I’m not against investing in real estate - quite the opposite, actually.  But please be careful who you listing to.

Foreclosures.com has compiled an extensive list of Foreclosure Gurus who have had complaints filed against them.  Give this a read before you call one of these guys.   http://www.foreclosures.com/pages/gurus_to_avoid.asp 

Your believing that when people have to sell too hard, it’s not worth buying Realtor,

Chris Butterworth

True story.

I have a client who wants to buy a home at the lowest possible price. They (Mr. and Mrs. Client) know how to do quite a bit of handyman-type stuff, and they have friends & family members who are professional contractors. Their goal is to find a bank-owned home which isn’t in very good shape; they can buy the home at a low price and then fix it up without having to pay labor charges. Sounds like a decent enough plan – there are plenty of lender-owned homes currently for sale.

We make a phone call to a lender to make sure they’ll be able to qualify for a mortgage, and learn that we shouldn’t have any trouble at all considering the price range we’re looking at.

This weekend we found a great property – they like the neighborhood, floorplan, and structure of the home, but it needs A LOT of work. The A/C Unit has been removed, along with the ducts. Most of the rooms are showing concrete floors. Door-frames are missing, there are holes in the drywall, the kitchen is in disarray – you get the idea.

We call the lender one more time to dot our I’s and cross our T’s before submitting an offer. That’s when we learn about our next hurdle…

Most banks won’t want to make a loan on this home as they’ll consider it uninhabitable. The banks which will make a loan will require a large down payment and a higher interest rate.

The buyers are hoping to use a small down payment in an attempt to conserve the money they’ve saved for fixing the home.

It seems like a perfect scenario: The bank can sell the home. The buyers can buy the home. The bank can make a loan to a borrower with perfect credit AND money in the bank. The buyer can fix the home up and increase their equity. The bank would have a loan against a property with plenty of equity. The neighborhood would have a home in top condition.

Instead, the bank SAYS they want to sell, but what they really mean is they want to sell to somebody who can pay cash AND pay to repair the home. In essence, they’re shrinking their pool of buyers down to investors only. My guess is the bank is not going to get a “win” out of this transaction if they’re only catering to investors.

On top of that, the bank doesn’t want to make a loan to a borrower with perfect credit, money in the bank, and buying a home which is well within their debt-to-income ratios.

How far will this go?

Your still doesn’t think the banks know what they’re doing Realtor,

Chris Butterworth

My wife & I recently had a chance to catch up with an old friend. He had a pretty sad story to tell, with a combination of bad luck and unforeseen events. But he’s a positive attitude type of guy, and he’s able to see some silver linings around all the clouds. Here’s the gist of it…

He bought his home in 2005. Like tens of thousands of others, this turned out to not have been a great time to buy. But prices were going up so fast, he and his family were excited to move up to a larger home before it got completely out of reach.

He financed his new home with an Adjustable Rate Mortgage. I’ve written before that 9 out of 10 people (or more) should use a 30 year, fixed-rate mortgage, but that for certain people in certain situations an ARM is an ok choice. Our friend is self-employed, and had been able to consistently grow his business. It wasn’t unrealistic to think he could continue to expand over the next 3 years. Although hindsight is 20-20, it wasn’t a terrible plan to think he would be better equipped to pay the mortgage when the interest rate adjusted upward in 2-3 years.

His business is service-based, and driven primarily by two factors: Residential homes selling, and/or Families having discretionary income. Unfortunately, the housing market and the ensuing recession did a 1-2 punch on his business.

Then, In 2007 he suffered a freak injury, which required surgery, and he was effectively put “on the shelf” for a few months. His income all but evaporated at that point.

Shortly after all this, his mortgage rate adjusted upward (as expected), and he could not make his mortgage payments. A few months later the bank foreclosed on him (and his family.)

The silver lining? He was able to find a home to rent which is similar to, and even a little bit larger than, the home he lost, and his rental payment is about $1,200 per month LESS than his mortgage payment was. He’s healing, and his business is getting back on track. His credit is in bad shape for the time being, but he isn’t planning on moving anytime soon. In a few years, his credit, his body, and his business will have all recovered, and he’ll have the flexibility to decide what he wants to do at that time.

Best of luck, ______. You know we’re pullin’ for ya.

Your appreciates people who turn lemons into lemonade Realtor,

Chris Butterworth

Technorati Tags: foreclosure story

I pulled together a chart to summarize how many Active Listings out there are owned by, or need approval by, a bank. The numbers may be a surprise, but the distribution isn’t; the outlying suburbs (which were investor-driven in 2005) have a significantly higher percentage.

Lender Owned SFR listings

Lender Involved SFR listings (short sales included here)

Wow – what a difference! In Scottsdale, you’ll find a foreclosure in 1 out of 27 Active Listings. In Maricopa (city), you’ll find a bank’s involvement in 45% of the Active Listings!

Your wishing he had done this post a few months ago so he could compare trends Realtor,

Chris Butterworth

Technorati Tags: bank owned, short sale, market statistics

Two of the most talked about subjects over the last year have been “Who’s to blame for the real estate downturn we’re in?” and “Short Sales / Bank-Owned Properties”. I’ll discuss whose fault it is tomorrow. Today I’ll write about another short sale contract we attempted.

I’ve written about short sales and bank-owned listings before: Short Sales are hard. Very hard., If I were a bank, If I were a bank – Part 2

Last week I finally received an official “no” from another bank on a short sale contract where I represented the buyer. We presented a market-value offer to the bank, then waited 2 ½ months for the bank to obtain a BPO (Broker’s Price Opinion) and an appraisal, both of which came in within $2,000 of our contract price. The bank needed to postpone the trustee sale date for 30 days, because they were out of time and hadn’t yet accepted our offer. Then they waited 27 more days to say no. That’s 3 ½ months it took to say no to an offer which was within $2,000 of the value given by 2 different sources hired by the bank! But that’s only part of the insanity.

It makes even less sense when you look at what has happened in that particular neighborhood during this time. Many short sale listings have gone through the foreclosure process, and are now back on the market but at a lower price. This means that once the bank completes the foreclosure process (and incurs extra expenses), they’ll have to re-list the property at a reduced price as well. My guess is that we’ll see the home back on the market on about July 15^th, for a price of about $229,000 (compared with our contract price of $243,000.)

It makes no sense at all when you consider the bank’s stated reason for not approving this short sale: They didn’t like the way the homeowner allocated his money. They are upset that he was able to pay off his HELOC but did not pay down his 1^st mortgage balance. Excuse me, but when did banks decide that being punitive to their borrowers was more important than making sound financial decisions?

Your believing the banks’ poor decisions are slowing down the recovery Realtor,

Chris Butterworth

Technorati Tags: short sale

This used to be a very cute desert landscaped yard, with manicured plants showing all different colors of flowers. Now it’s a weed forest.

Many people are asking questions about who is responsible for cleaning up the ugly yards in empty houses. The banks who own many of them? The owners who have moved out, don’t have any money, and know the bank is going to own them soon? The HOAs? The neighbors who feel pressure to keep their neighborhood looking nice? The government (city, county, or state)?

It makes me sad to see so many homes in this condition. I do realize it’s a temporary situation, though; over the next year or two most of these homes will have new owners, and most of these new owners will set to work on making their new homes beautiful.

In the meantime, it’s another sign of the times..

Your thinking about buying a machete Realtor,

Chris Butterworth

Technorati Tags: weeds, vacant homes

I wrote yesterday about the huge difference in quality we saw between homes listed as Short Sales and those listed as Bank Owned (If I were a bank). (In a short sale, the homeowner still owns the home but needs the bank to approve a sale. If they can’t get the home sold, the bank will proceed with a foreclosure, and oftentimes ends up owning the property – hence Bank Owned.)

Comparing the two, the Short Sale homes were in better condition and they were priced higher than the Bank Owned homes. In addition, the bank hadn’t spent any money yet to foreclose on the home, and then to own it.

If I were a bank…

When my borrower brought me a Short Sale contract (and the potential to get rid of this property NOW and probably for more money), I would say YES!! And I would say yes QUICKLY!!

Your still doesn’t understand why short sales are so hard to get closed Realtor,

Chris Butterworth

Technorati Tags: short sale, bank owned, foreclosure

I took a buyer to see some homes this morning in Litchfield Park. We looked at 10 homes: 4 Short Sales and 6 Bank Owned properties. It was interesting to see the huge differences between them.

All 4 of the Short Sale homes looked very nice. They needed some TLC, sure, but nothing extreme. A little cleaning here, a splash of paint there, and maybe a battle against the weeds outside! One of the homes was actually beautiful and looked to have been professionally decorated.

All of the Bank Owned homes did not look so nice. In fact, these were some of the ugliest, dirtiest, most beat up, smelliest homes I’ve been inside in quite some time. Most of them were missing appliances. One of them was missing toilets. My client commented in one bedroom, “It looks like somebody was murdered in here, but they had motor oil for blood…” In another home we were afraid to open the closet doors.

Here I was, out shopping with a BUYER – someone who is already APPROVED for her loan and ready to close escrow within 2 weeks. And yet these homes were such an eyesore (and nose-sore) that she couldn’t wait to get away as fast as she could.

If I were a bank…

I would spend a couple/few thousand dollars to make these properties un-repulsive. They’re already deeply discounted, so I’m not expecting to see Martha Stewart’s custom designs. But the goal should be to keep an interested buyer interested! Have debris moved off the property; have the carpets (and the rest of the house) CLEANED; do some touch-ups & small repairs; re-paint the interior… Heck, I’d rather see a decent home $45,000 below market than a dung-heap $50,000 below market!

And if I were a listing agent of a bank owned property… I’d at least spring a few bucks for some air freshener.

Your still feeling dirty Realtor,

Chris Butterworth

Technorati Tags: short sale, bank owned, foreclosure

Do you ever go the mall and look at the clearance racks – they’re usually in the very back of the stores? You’ll see signs like “75% Off”, or “nothing over $10″, which is enough to draw my attention – heck, I’d love to pick up a $60 pair of shorts for $15!

The trouble is, the deal only works if I can find a pair of short in the right size, style, and color – which doesn’t happen very often! I see lots of really small and really large shorts, and lots of off-beat colors and styles. But I rarely see a typical pair of khaki shorts in a size 32. That’s because these shorts are more popular, and sell at the retail prices, so they don’t need to be deeply discounted.

We’re finding the same to be true with the bank-owned houses for sale.

If homes in a particular neighborhood are selling for around $250k - $300k, you might find a bank-owned home (or even a couple/few) listed for $200k. It’s showing as a tremendous value, and the buyer is going to get a great deal on his/her home. But it doesn’t mean the “regular” sellers are going to match this price. Most, if not all, of the regular sellers are going to say, “at $200k we’d rather just stay put – it’s no longer worth it for us to move.”

If the bank-owned property fits you, and you like the style & color – now’s a great time to buy a home off the discount rack. There’s a larger selection for sale than ever before, too!

But don’t expect the rest of the homes out there to match the bank-owned prices. Much like the shorts on the clearance rack – when they’re gone, they’re gone. And once sellers don’t have to compete with the banks in every neighborhood, prices are likely to firm up quickly.

Your shopping for discounts Realtor,

Chris Butterworth

Technorati Tags: bank-owned property

I recently had a client email me about a listing he saw online. He wanted to see it in person, so we scheduled a time to meet at the house. The home mentioned short sale in the MLS description, so in the meantime I contacted the listing agent to see what I could learn about the seller and the bank.

We arrived at the home and were not disappointed. It was a much higher quality home than most of what we had seen in this price range. It was also one of the least expensive homes available for its quality. Either way you look at it, this home represents a great value.

Unfortunately, as is often the case, this great value might be more mythical than real. Here’s what I learned from the listing agent:

The seller owes about $350,000 in 1^st and 2^nd mortgages. The market value is probably somewhere around $300,000, but the home is currently listed for $250,000. The buyers have not yet missed a mortgage payment, but are trying to be proactive because their situation is about to become dire. They expect the 2^nd mortgage to be wiped out, regardless of whether the home is foreclosed on or sold short. They have not yet talked with their banks about approving a short sale.

In reality, this home is probably a couple of months away from being a viable short sale, if it’s viable at all. The banks aren’t likely to approve a short sale while the owner is still current on the mortgage. Also, the only reason a bank would ever approve a short sale is if they believe they can minimize their loss (as compared with a foreclosure). If the second mortgage is getting wiped out either way, what is their incentive to help us facilitate a short sale?

My guess is that, even though this homeowner is very conscientious and wants to do the right thing, he is merely clogging up the MLS and confusing potential buyers. We’re going to keep our eyes on this one to see what happens…

Your prefers ‘bank-owned’ to ‘bank approval required’ Realtor,

Chris Butterworth

Technorati Tags: short sale, foreclsure

I’ve been asked this a lot recently, so I thought I’d post my answer here.

For those unfamiliar with the term, Short Sale refers to a home being sold where the payoff on the Seller’s mortgage is greater than the current sales price &/or market value of the home. The bank then agrees to take a short, or incomplete, payoff in exchange for moving the property off its books and avoiding the foreclosure process.

The bad news is: Short Sales and Foreclosures are both going to have a negative impact on your credit report. But, if you can negotiate a Short Sale successfully, you can minimize that negative impact significantly. Here’s what Elizabeth Weintraub has to say on About.com:

A Short Sale will reduce your credit score by 80-100 points, and it will take you about 18 months before you’re able to qualify for another mortgage at “reasonable” rates.

A Foreclosure will reduce your credit score by 250-280 points, and will require about 36 months before a mortgage at “reasonable” rates is accessible.

Your thinking a 100-point drop is better than a 280-point drop Realtor,

Chris Butterworth

Technorati Tags: short sale, foreclosure, credit report, fico score, Fletcher Heights

I’m beginning to hate Short Sales, and it sounds like I’m not the only one. I spoke with the tech support department at ARMLS (Arizona Regional Multiple Listing Service – our local MLS provider), and they tell me they are getting lots of calls from Realtors wanting to eliminate Short Sales from their MLS searches. Why would they want to do that, you ask? Well, let’s look at an example:

Let’s say a seller owes the bank $330,000, but the current market value is somewhere around $300,000. The seller will not get enough for the house to pay off the bank, so they ask the bank to write off the difference – a Short Sale. But the bank doesn’t want to talk specifics with the seller until 2 conditions are met:

1. The seller must be behind on their mortgage payments. Being proactive, and responding to cash flow problems early doesn’t do much good in the short sale world. Sellers need to be heading down the road towards foreclosure. This means that the clock is ticking, and they don’t have time to sit on the market for months without an offer.
2. The seller must bring an offer to the bank. The banks typically won’t give a blanket approval for a short sale; they want to see a serious offer, in writing.

So how does a seller get a serious offer, in writing, in a short amount of time? By advertising an artificially low price! In the example above, with a $330,000 payoff and a $300,000 market value, I would expect to see this house listed in MLS for $250,000.

Banks have been reluctant to approve sales at very low prices, and buyers have been reluctant to pay market price for short sales – sort of a Catch-22. At the very least, these transactions are a lot of work. And many of them end up falling through the cracks.

Based on what I’m hearing and seeing in the marketplace, I think there’s a backlash right now against Short Sales. The banks’ unwillingness to play nice is starting to catch up with them.

Your part of the backlash Realtor,

Chris Butterworth

Technorati Tags: short sales, Fletcher Heights