A Distressed Property Update: Las Vegas
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report from NARREIA. "Since the implosion of the sub-prime mortgage market at the beginning of 2007, the distressed property market has really gained momentum. This is especially true of markets like Las Vegas, where the extreme appreciation of 2003-2005 has been met with a year long cool down and the start of a slide in property value."
"When looking to invest in a market like Las Vegas, you need to consider which investment vehicles or strategies might actually be profitable. Rent is definitely too low for properties to cash flow positively with a down payment of 20% or less. This leads most local investors to the distressed property vehicles, but not all of these vehicles work well in down and depreciating market."
"Therefore, before you invest too much time in learning about a specific vehicle you need to determine if it will actually result in a profit. The most well known distressed property investment vehicles are the Notice of Default List, Short Sales, Foreclosures ('on the court house steps'), and Bank Owned REOs (Real Estate Owned)."
"There are a total of 25,659 available properties on the Las Vegas MLS with only 2,995 additional properties under contract. Of the available properties, 2,048 (7.9%) are flagged as short sales."
"Working short sales is very different than working the other pre-foreclosure investment strategy, the Notice of Default (NOD) list. When working with the NOD list, you are dealing with the owner and you are looking for properties that have a high equity, low Loan-to-Value (LTV) ratio. You need the low LTV because your profit is the difference between what the value of the home is and the amount the banks need to pay off the loan."
"While negotiating with the owners over the equity in their house might sound challenging, it is usually cut and dried. They either understand the situation they are in and are willing to negotiate or they don’t fully comprehend that they are about to lose their house and will shut you out entirely, and this can be determined quite quickly. If they stonewall you, you move on to the next property. If they are willing to negotiate, the process is relatively simple."
"In a short sale, however, you will be dealing directly with the bank and you’ll be looking at properties where the LTV will likely exceed 100%. The problem for the investor is two fold. First, where is the profit in this deal with the bank? Logically, the bank will want to get the most they can for the property, minimizing their losses. Seldom are banks willing to let a property go for anything considerably below today’s current market value, so this makes it very hard for the investor to work in their profit."
"The other hurdle that you will face is that the banks are notoriously slow in dealing with short sales. Banks regularly take 4-8 weeks just to respond to an offer, and if a property is already in the foreclosure process, that time could easily extend past the Notice of Foreclosure Sale date. Additionally, the owner will have to be very cooperative in coming up with the required financial statements and writing the hardship letter, and owners who are in these situations are not typically quick to respond."
"True foreclosures, what people sometimes refer to as 'buying on the court house steps,' is a cash-intensive process that is very competitive in the Las Vegas market. This makes this vehicle very challenging for most individual investors. Clark County requires you to pay the full amount of the offer immediately before the next property is auctioned, which means you need to have cash for the entire purchase price with you right there."
"While there are a few bargains to be had, it is not the fire sale that you might think as the banks would still rather hold on to the property than give them away."
"The banks’ current stance on valuing the properties on the high side leads to a growing REO market. REO stands for Real Estate Owned, and it is the term for a property the bank has foreclosed upon and did not sell at the county auction. What is amazing is that the banks will deny a short sale on a property only to drag it several months through the entire foreclosure process and then list it for less than the denied short sale price. While it is not yet a 'fish in a barrel market,' some banks are starting to deal on a few of their properties."
"Where is this all going? Either the banks will start dealing with the current owners utilizing workouts and short sales, or the REO market will explode."
"At the beginning of June, 2007, the banks were still playing hard ball, unwilling to negotiate in most short sale situations even in very reasonable scenarios. The only positive sign that we’ve seen recently is their willingness to arrange for workout programs for the current owners. These programs allow the owners to miss a few payments to try to get back on their feet, but this is truly a band-aid approach."
"Owners that are not able to make their payments today will more than likely not be able to make their payments at the end of summer, and we will still see the need for either a short sale or foreclosure."
"Until the banks face the situation squarely and start accepting more short sales, the properties will flow to the REO market and that is a good place to be looking for some bargains."
"As the supply in that market swells, look for even further discounts to come. The local market tends to slow down in the fall and stagnate in the winter, so the distressed property market should be in its prime at that time."
Sean Brown
Las Vegas, NV
NARREIA Advisor
A Lot Worse Before It Gets Better
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press release from Bruce Norris. "California's real estate downturn will be deep and long lasting, with home prices falling 15 to 30% during the next 36 to 42 months, according to a real estate expert. Bruce Norris, who correctly forecast both the real estate boom that began in 1997 and the subsequent doubling of home prices, said the downturn will reflect a perfect storm that includes record numbers of foreclosures, a sharp decline in migration to California, substantial increases in unsold inventory, and, of course, falling prices."
"'We are in for a very rough ride in California's real estate market, which is likely to be far more severe than analysts, state officials and real estate industry associations have acknowledged,' Norris said, adding, 'Foreclosures alone are likely to be more numerous than anything we've ever experienced, with bank repossessions ultimately accounting for as high or as many as 25-30 percent of all homes sold during the next three years.'"
"Norris said prudent investors need to arm themselves with the facts and come to terms with the fact that analysts, state officials and the California Association of Realtors are either not being frank about the severity of the coming crisis or they simply aren't looking at the right categories of statistics."
"But while Norris' outlook is gloomier than most observers for the short term, he expects California real estate prices to again rebound in 2011 as foreclosures decrease, the number of homes for sale declines to a manageable level and as California again experiences a net increase in population migration from other states."
"'There is light at the end of the tunnel,' Norris said, 'but we have to be very careful in this market environment. Investors need to know that marginal deals are no longer acceptable. The market will no longer cover their investment mistakes. If they don't know what they're doing, they need to stay out of the market until conditions change.'"
"The trouble with the analysis given by most real estate observers is that it's based on flawed assumptions, including the widespread belief that interest rate adjustments can somehow hold back the looming real estate crisis."
"'Interest rates alone do not determine the direction of prices,' Norris said. 'Look what happened the last time we had a real estate downturn in California. Interest rates were actually lower in lower in 1997 than they were in 1990. Yet prices declined by as much as 35 percent in some areas.'"
"The most reliable indicator of a downturn in California is low affordability. Historic affordability lows signaled the previous two real estate recessions and prevented inventory from selling quickly."
"'We still have strong employment and historically low interest rates,' Norris said, 'yet we continue to see the inventory of homes soar, even as builders lower prices and give huge sales incentives. This change in the market caught economists off guard because they said that without an increase in unemployment, you can't have a real estate downturn. That wasn't true!'"
"Centex Corp., Hovnanian Enterprises, Pulte Homes, Lennar and D.R. Horton together have written off more than a half-billion dollars worth of land option agreements during the past year, Norris said, citing published reports. 'If prices were heading upward and if demand for housing was strong, they wouldn't be walking away from these land option agreements,' he said."
"'Many economists and real estate observers and even government officials continue to offer rosy assessments because they are under political pressure to say nothing or because they are simply looking at the wrong statistics. Trouble is, there are many investors, including builders, who have been misled by their commentary,' said Norris."
"Various organizations are deliberately misleading investors and the general public, Norris said, adding that the National Association of Realtors (NAR) launched a $40 million ad camping in January of this year in which they told buyers that now is the perfect time to buy a home."
"Even more recently, Jeff Davi, commissioner of the California Department of Real Estate, is quoted in this month's issue of California Real Estate Magazine saying that California continues to need another 250,000 single and multifamily housing units to be built each year."
"'If this was truly the case,' Norris asked, 'why are we seeing vacant properties, increasing housing inventory and builders walking away from millions of dollars in land options? The reality is that the real estate market in California is going to get a lot worse before it gets better.'"
"The good news is that the market should turn upward again in 2011. By then, Norris said, prices will be low enough to lure many people back into California again, lenders will have again adjusted their lending guidelines and investors will again re-enter the market, sensing bargains and opportunities for additional profits and equity growth in the years ahead."
Defaults "Nearly Triple" In Massachusetts
The
Boston Globe report from Massachusetts. "Foreclosure auction announcements in Massachusetts nearly tripled in May when compared with year-ago numbers, according to a new report from the Warren Group. May also marked the eighth straight month in which more than 2,000 petitions to foreclose were filed, said the Warren Group, the Boston publisher of Banker & Tradesman and a provider of real estate data."
"There were 1,589 announcements of foreclosure auctions in May, compared with 654 in May 2006, the group said."
"'As we can see from May's numbers, foreclosures are still affecting homeowners across Massachusetts,' Timothy Warren, CEO of the Warren Group, said in a statement. 'And the Bay State has not yet seen this problem peak.'"
"Warren noted in his statement, 'As we see a higher number of homes make it farther through the foreclosure process, it becomes evident that homeowners are finding it difficult to refinance their mortgage or sell their homes before they reach auction.'"
"One factor driving the increase in foreclosure auction announcements, regulators believe, was the rising popularity of so-called subprime loans in recent years; in general, subprime loans are marketed to home buyers with poor credit ratings."
The
Business Journal. "May also marked the eighth consecutive month in which more than 2,000 petitions to foreclose were filed, the Warren Group reported. There were 1,589 announcements of foreclosure auctions in Massachusetts last month compared with 654 in May 2006, an increase of 143 percent. Petitions to foreclose rose 39.3 percent compared to May 2006, with 2,164 filed this year and 1,553 filed last year."
"Petitions rose slightly from April, when 2,005 were filed in Massachusetts Land Court compared with 1,589 in May. Auction announcements, however, fell from April to May. There were 1,712 announcements in newspapers in April."
Buying A HUD Home
The
Denver Post reports from Colorado. "Buying a home continues to be an iffy proposition for many Coloradans. The state is on track to log more than 37,000 foreclosures this year, a 30 percent increase over last year, according to the Colorado Division of Housing. While so many people have been forced to surrender their piece of the American Dream, others have unearthed diamonds in the rough."
"HUD houses, once thought of as dilapidated properties reserved for low-income families, have been redefined as one of this decade's most accessible solutions to homeownership."
"A HUD home is a Department of Housing and Urban Development residential foreclosure property. The caveat with these homes that has changed the landscape for so many of today's first-time buyers is the caliber of HUD homes now available. 'The market is being flooded with houses that...people can now afford,' says Rachel Basye, spokeswoman for the Colorado Housing and Finance Authority."
"HUD homes, whether single family, townhouses or condominiums, are usually cheaper than comparable homes in the same neighborhood. The buying process is often less cumbersome, and many HUD homebuyers are able to cash in immediately on thousands of dollars of built-in equity."
"Many of the properties listed on the CHFA's website, Coloradohousingsearch.com, are such federally insured homes. But there is a catch: HUD homes are sold 'as-is.' That means the new owner must incur the expense of any necessary repairs, and those can be numerous and expensive."
"Some argue it's a fair trade, as HUD home prices are adjusted down
When Shannon DeLoach bought a HUD house two years ago its interior was comparable condition to this current HUD sale home nearby to account for expected improvements. HUD also goes through the trouble of pinpointing potential remodeling needs."
"Last week, for instance, HUD was offering a three-bedroom, 2 1/2-bathroom property in east Denver for $154,500. In ads for the property, HUD estimated that about $400 would be needed to replace a missing vent cover, a kitchen sink and address other plumbing issues. An initial inspection report also was included with the listing."
"Buyers should be realistic about how much repairs might cost, says Capital Brokers real estate agent Anthony Davis, who specializes in selling HUD properties. The $400 fix-up estimate for that east Denver property may have been low."
"Davis says any visual inspection of the home might reveal only inexpensive wear-and-tear issues. A subsequent investigation by a certified housing inspector could reveal a financial burden waiting to happen."
"Housing experts such as this advise that it is paramount to have these properties inspected before the closing so that buyers know exactly what they are getting into. A foreclosed house left vacant for months can develop unforeseen plumbing problems, for instance. It's also common to uncover damage to the roof, foundation, electrical wiring, water heater or furnace, expenses that could easily cost $20,000 to $30,000."
"Plus, previous owners often take out their anger and disappointment over the foreclosure on their property. One HUD home Davis sold had holes in the basement drywall where someone had repeatedly thrown a billiard ball against the wall."
"Jerry Chesser owns the Broomfield-based Win Home Inspection franchise and has investigated numerous HUD homes. 'There are some real gems out there,' Chesser says. 'Other times, conditions are such that buyers have to honestly ask themselves if they have enough cash...to bring the home up to livable standards.'"
"He has seen the previous owners of foreclosed homes drill holes in plumbing, kick in doors, throw bleach on carpeting and destroy garbage disposals. Another frequent problem: missing fixtures and appliances."
'Chesser says the best case scenario with a HUD house is severe cosmetic damage. The house may need new landscaping, caulking and waterproofing in the bathrooms, a few leaks plugged or a furnace replaced. The worst case scenario is a roof collapsing from water damage, mold creeping 4 feet up the walls, or that the property once housed a meth lab."
"HUD house investor Stephanie Williams suggests having enough money on hand to make mortgage payments should a refurbished foreclosure fail to sell quickly. Williams purchased a HUD home last November in Aurora for $151,000 and sold it for $172,000. But she had to carry the mortgage for three months before it sold."
"Loire Warren has fixed and flipped three HUD condos in Aurora since May 2006. Warren warns buyers to pull any criminal records associated with the house or the previous homeowner. One of her previous owners saddled Warren with more than $600 in unpaid homeowner's association fees."
"'It's very common that HUD will have liens against a property,' says Warren, who worked with HUD and the title company to pay off the liens."
Below The "Upset Price"
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report from MSNBC. "Brett Golden, 31, was one of the few bidders at a recent foreclosure auction to walk out with a purchase: a 2.5-story, 1,352-square-foot house in Queens, N.Y., that he got for $365,000. The previous owner had bought it in June 2005 for $415,000. Once Golden and his father, who together run a 50-year-old family business of buying and flipping foreclosed properties, are done fixing this place, they hope to sell it for about $480,000, netting up to $80,000 after expenses."
"Buying the house wouldn't have made sense but for a small detail: The mortgage lender, HSBC, put it up for auction for $90,000 less than it was owed. In other words, it went below the 'upset price' of the property. The upset price, also called the judgment amount, is what the bank is owed on the property, usually the sum of the outstanding mortgage and any interest and fees accumulated since the start of the foreclosure process. Normally, lenders put up houses for auction with bids starting at the upset price in order to recoup their costs."
"But as foreclosures increase, some banks are beginning to reconsider their required bids. 'In the past few months, I'm starting to see banks come down on upset prices,' Golden says."
"For many real estate investors or simply folks looking for a cheaper home to live in, finding a deal in foreclosures has become increasingly difficult. A lot of the homeowners now in foreclosure have drained the equities in their homes with multiple refinancings, have mortgages for more than 100% of the property value or simply bought at the height of the market."
"The banks, after all, know how much these houses are worth. Before a house is put up for foreclosure auction, it's usually appraised. And though banks weren't as diligent with appraisals when the market was booming, that's starting to change, says Brian Tracz, a New York real estate attorney specializing in foreclosures."
"'For the last five years, the banks blindly bid their judgment amount to recoup their loss,' Tracz says. 'Now I think you're going to start seeing banks bidding less if the appraised values don't justify the judgment amount.'"
"To be sure, this trend is in an early stage and has yet to be seen in many parts of the country. In Florida's Miami-Dade County, for example, where almost 25,000 properties went into foreclosure in 2006, banks haven't gone below their upset prices, according to Richard Housey, a real estate investor who specializes in pre-foreclosures and attends the county's twice-weekly auctions. 'That's been a real problem for investors,' he says."
"In the Chicago area, lenders are not only starting to go below the upset prices on properties, but they're also becoming more flexible with so-called short sales, says Jane Garvey, the president of the Chicago Creative Investors Association, a local network of real estate investors."
"In all, whether a lender will sell below a property's upset price largely depends on where the property is located, says Jay Brinkmann, the vice president of research and economics at the Mortgage Bankers Association, an industry group. If lenders expect real estate prices to go down in a particular area, they might decide to put properties on the market now to cut their potential losses. If they expect prices to remain steady, they may hold on to the properties for better prices later on."
"Take the Los Angeles area. Lenders are beginning to sell below the upset prices on properties in Los Angeles County. But that's not happening in nearby Orange and Ventura counties, where prices are steadier, says Larry Loik, the founder of the Real Estate Investor Network in California."
"Needless to say, the concept of selling below upset prices isn't new. It was particularly common in the housing crash of the early 1990s, when lenders faced a glut of hard-to-move properties, says Jonathan Miller, the president of Miller Samuel Real Estate Appraisers in New York. But now, Miller doesn't expect such discounts to become nearly as widespread."
"'Lenders have become much more sophisticated in terms of avoiding foreclosures,' he says. 'One thing they learned in the last housing downturn is it's extremely expensive in terms of managing properties.' Instead, banks will now focus on helping homeowners prevent foreclosure, he says."
But that may be more difficult if the lender that originated the mortgage sold it to investors in the form of mortgage securities, a particularly likely scenario in the subprime market, where foreclosures are now most common."
"When a bank sells a loan to investors, it has less flexibility to negotiate a settlement with the borrower, such as refinancing at better terms or repackaging the loan so that any delinquent payments are tacked on to the remaining loan balance, says the Mortgage Bankers Association's Brinkmann. Once the property is in foreclosure, on the other hand, the lender might have fewer such limitations, he says."
Back To The Basics In FLorida
The
Orlando Sentinel reports from Florida. " Joseph Peri is hunting for homely houses in Orange County. As a new franchise owner in Winter Garden for HomeVestors of America, Peri is ready to buy properties that need some work. HomeVestors is the company known for its 'We Buy Ugly Houses' signs, though the homes are not always ugly and other companies sometimes rip off the slogan."
"Florida has been one of Home- Vestors' best markets, with 42 franchises, second only to the company's home state of Texas. And there's no shortage of houses for sale, a virtual smorgasbord."
"'I'm looking at some from $50,000 to $550,000. It's pretty spread out,' said Peri, one of two HomeVestors franchisees in the Orlando area. But these days, many of the homes for sale in markets such as Central Florida can't be bought, rehabilitated and sold for a profit."
"'We've enjoyed tremendous growth in Florida historically, and we still have pockets of franchises doing well,' said John Hayes, CEO of Dallas-based HomeVestors. But the sharp run-up in home prices in recent years, the lack of equity that owners have in many of the properties now for sale, slack demand among home buyers and other factors have made the business more challenging."
"'I don't know how some [owners] are able to pay the taxes and insurance,' Hayes said. 'But this is temporary. We're just riding through this transition with Florida.'"
"Hayes said he expects Florida lawmakers will find ways to bring down both property taxes and hurricane-related property insurance, and help boost existing-home sales. 'They are not going to allow an exodus from the state,' he said."
"Ron Smith, an independent housing-rehab specialist in Apopka, said he gave up his sideline business a few months ago after 20 years of working the Orlando area."
"'It just got a lot tougher. I went to work full time with a roofing company,' said Smith, who used to buy and fix up homes to sell, or to rent until he could find a buyer, as many as four or five times a year."
"Smith said his best years were the late 1990s through 2004, when 'it just went crazy.' So many buyers were bidding up prices, it got harder to compete, he said. Then, earlier this year, sales went flat as thousands of homes flooded the market at inflated prices."
"'I didn't believe the market here would go 180 degrees, but it did,' Smith said."
"The median resale price of an Orlando-area home was appreciating as much as 36 percent on an annualized basis by mid-2005, before settling back to single digits by mid-2006 and turning negative in April for the first time in five years."
"Ed Rogner, who has been a HomeVestors operator in Orlando for the past six years and in real-estate sales locally since 1978, said the once-thriving market's sharp turn has surprised many veterans. 'I've never seen it like this,' said Rogner. 'There are just so many sub-prime loans out there. People will call us and want us to buy their home, but there's almost no equity. We can't do that.'"
"And when the company does close on a sale and puts the property back on the market, 'you're competing against all these other houses.'"
"The Orlando area's median sales price as reported by Realtors leveled off at about $250,000 beginning in April 2006 and recently dipped to about $240,000 as the inventory of listed homes jumped 50 percent in that period to a record 24,435 in April."
"Andrea Tolbert of Sanford, who has been buying, rehabilitating and selling homes in the Orlando area since 1999, said the market is more challenging but still workable for savvy investors. 'It's tougher to sell but easier to buy,'" Tolbert said, because of the record inventory of existing homes for sale by Realtors. 'Of course, you've got to be careful,' she said. 'We're going back to the core basics,' with much slower price appreciation."
"Tolbert, president of a real-estate networking and education association in Winter Park, said she still is able to make a profit buying and selling homes by focusing on those worth $100,000 to $200,000. 'There are always buyers in that range,' she said."
