Short Sale Statistics for Northern Virginia

I got to wondering today whether more short sales are closing and thought I would share some interesting data I found. All data is per MRIS as of today.

Number of active listings designated "potential" short sales in NoVA* = 607 (# in Arlington = 57)

Number of short sales that have closed in NoVA in past 30 days = 199 (# in Arlington = 7)

Close Price to Last List Price Ratio for Short Sales that Closed = $302,258/$306,505 = 98.6%

Average Days on Market (Property) of Short Sales that Closed = 83 (Highest was 631 days). Note this represents the number of days until they got an offer, NOT the number of days that it took for the bank to approve the transaction. A quick look at the listings that closed in the past 30 days showed "contract dates" of as far back as November 2008, but most seemed to have been put under contract in the March-April-May 2009 timeframe, meaning about 3 month waiting period for bank approval and settlement. As a point of comparison, "regular" contracts tend to settle about 30-45 days after the contract date.

* NoVA = Arlington, Alexandria, Fairfax, Fairfax City, Falls Church City

I have to say that I was surprised that so many short sales closed in the past 30 days. I went back for a few months to spot check and the average seems to be roughly 200-250 closing each month going back to this Spring. This data leads me to believe that not only are banks approving more and more short sales, but they've gotten more efficient at that approval process.

Buyers, short sales are certainly not without their own risks, delays, and headaches, but maybe it's time to put them back on your shopping list.

State of the DC Area Real Estate Market: June 2009

The Spring market is hopping, but some recent changes are making it difficult to predict what's around the corner. Here's what's going on in the local real estate world:

Interest Rates Jump: Mortgage rates took a significant jump in the past few weeks. The short story is that optimism about the economy combined with fears about inflation are pushing rates up. But if you want the long story, you can read more about the relationship between the bond markets and MBS markets here.

Foreclosures and short sales continue to be a very active segment. Banks have finally figured out that the trick to selling foreclosures quickly is to price them ridiculously low and get a bidding war going. It's not uncommon to have dozens of offers in during the first few days for entry-level price points ($200-300k). Short sales continue to be a source of frustration for buyers, as noted in this good NPR story.

The area's inventory remains flat (Arlington and DC) to declining (NoVA)

--check out the significant decline in Northern Virginia inventory here.

Case-Shiller is still reporting significant price declines year-over-year, but here's a good article explaining why, if you read the data more carefully, the news is much less ominous.

New Appraisal Code Scuttles Deals: The new Home Valuation Code of Conduct was implemented in May, and is wreaking havoc with deals. This Code created intermediaries to manage the appraisal process, and some argue that quality has dropped. Many appraisals are coming in low, opening the door to a secondary round of price negotiations in many transactions.

Monetization of Tax Credit: Of significant note to first time buyers is the emergence of programs that will allow a buyer to "monetize" the $8000 tax credit. VHDA has developed a program to structure a second trust of $8000 with no principal or interest payments due during the first 12 months. Details are still evolving, but it is expected that a buyer could use this $8000 second trust as part of their downpayment.

If you are a first time buyer hoping to take advantage of the $8000 tax credit - start your search NOW! The lack of "good" inventory may make it difficult to find something that fits your needs and your price range. Settlements must occur by November 30 to file for the credit, and with the current volume of lending and refinancing banks are backed up. No doubt this backlog will increase for both lenders and settlement companies as we approach November 30 - plan ahead! Contact me to start your search - I'd love to help you!

And finally, just for fun: For all you Arlingtonians and those who want to be an Arlingtonian -- check out this rap.

As always, please let me know if I can do anything to help you or your friends with your real estate needs.

Foreclosure Risks

Now that Spring is right around the corner, buyer activity is picking up. There are still plenty of foreclosures on the market, and though there are lots of incentives to buy right now (low interest rates, first time home buyer credits through July 1, and low prices), the risks with buying a foreclosure -- as well as the process itself -- are significantly different.

(Update: The credit above applies to purchases in 2008--when this post was written. If you are purchasing in 2009, see updated info on the new credit here.)

I've provided here links to all my previous Foreclosure (and Short Sale) Related Risk posts here for convenience.

Short Sales vs Foreclosures - What's the Difference?

Short Sales - Are They Worth a Buyer's Time?

Risks of Buying a Foreclosure:

Bank Addendum - Always written in the bank's favor

Timing - Impossible to control turnaround time

Property Condition & Inspections - Unlikely (impossible?) to get repairs made, and careful to retain your 'right to void'

Title Defects - Be sure to have your own title inspection done!

Financing Complications - Timing and property condition issues combine to create complications with financing, too.

If you're considering buying a foreclosure in Northern Virginia, DC, or Maryland, or need help starting your home search, contact me.

Related: Search MLS

First Time Home Buyer? Sign up for my free first time home buyer class in Arlington or DC.

Buyers May Not WANT Condo Docs for Short Sales & Foreclosures

I was quoted in the Washington Post yesterday for my recommended strategy of NOT asking for condo docs on a foreclosure or short sale.

In the original article here, the author discusses the fact that:

Virginia law requires sellers or their real estate agents to get a presale financial disclosure packet from the association and give it to buyers. Buyers have three days to review the financial disclosures and rules governing life in the association and can back out of the deal if they don't like what they see. In Maryland, buyers have seven days in which to review the documents and cancel the purchase. In the District, buyers are allowed three business days.

The challenge with short sales and foreclosures is that the sellers either can't or won't provide these documents (which come with a charge of several hundred dollars.) This leaves buyers in a tough spot -- they don't know whether there are any problems with the Association's finances, for example, because they never received the packet. Sometimes buyers can pay for the pack themselves, but often Associations won't give them to anyone but a current owner.

BUT, there's an upside to this frustrating situation: Buyers who never receive the packet retain their right to back out at any time up until, and for 3 to 7 days after receiving them (depending on jurisdiction). See my quote here:

Katie Wethman, a real estate agent in McLean, pointed out a way to game the system. "It can be a strategic choice not to ask for the documents," she wrote. "Buyers retain a right of rescission up until, and for three to seven days after, the receipt of the documents. If the buyer is concerned about timing, financing, finding a better deal, or just getting cold feet, they may wish to delay receipt of those documents as long as possible. They may forgo them altogether in an attempt to keep their right to walk away right up until settlement."

So talk to your agent about your situation and whether it makes sense to try to obtain the documents or not...you may come to regret having asked for them.

Scared about taking on a short sale or foreclosure home because of the rehab work involved? Consider purchasing one using an FHA 203(k) loan, described in my blog post here.

Finding an Investment Property in Northern Virginia

As prices plummet, some solid investment opportunities are starting to emerge…but how do you identify good investment properties?

Step 1: Identify some target neighborhoods.

- The first thing to do is to consider long term (e.g., 10 years) appreciation potential. Think about area employment (and more importantly where those employers are—commuting time is a big factor). Also think about long term demographic shifts like BRAC, as well as infrastructure projects like new metro stations or light rail lines.
- Consider the neighborhood. Ideally you want to find the lone problem house in a great neighborhood, but that’s easier said than done. Also consider neighborhoods that previously had been more desirable in terms of age, location, and home condition, but perhaps were hit hard by this recent wave of foreclosures.
- Consider the price range – While you hope to ultimately find a property that will be cash flow positive, you nonetheless have to front the money to buy it, and getting a loan these days isn’t easy, especially for investors. Financing remains a problem, and lenders require investors to put 30% down, plus closing costs of about 3%. Interest rates run about a percentage point higher than owner occupied properties. Figure out how much cash you’re willing to put into the property, what you can qualify for in a mortgage, and back into a price range from there.
- Look at rents the neighborhood can command. Once you identify a few target neighborhoods, begin collecting rent data. The best place to collect rent data is on Craigs List in addition to the MLS. This is because many landlords conduct the process themselves and so the listings are never in the MLS. You also can’t be sure how aggressive a listing agent was in procuring a renter, which may skew the price. If they put it into the MLS but then never on Craigs List (by far the more popular site for finding renters), then it’s likely the rents there are lower than what the market actually commands. Unfortunately there’s no easy way to gather historical Craigs List data – you just need to keep watching and see which rentals seem to go quickly. Consider calling some of the landlords to ask whether they’ve had a lot of responses.

Step 2: Identify some target properties

- Short Sales & Foreclosures are a great opportunity because you can be patient. (See my post on the challenges of timing a foreclosure transaction here and the frustrations of shorts sales that never close here.) While an owner occupant doesn’t have the luxury of time and can get frustrated with all the problems of these transactions, investors can go with the flow since their timing is more flexible. And that flexibility pays off by getting properties for less money.
- Consider the home’s condition and your level of expertise in doing or managing renovations. Many of the short sales and foreclosures on the market today come at bargain prices, but require everything from heavy cosmetic work to kitchen and bath remodels to mold remediation. Very few properties in the attractive price ranges are move-in ready, but there's a lot of upside for people not afraid of elbow grease and with the right handyman connections.
- Be patient. You may need to wait for the right house at the right price. Set up an alert so that you can be ready to jump on a property that meets your investment needs as soon as it comes on the market—you can be sure other investors are circling and waiting for the right opportunity as well!

I’ve seen some inside the beltway single family homes below $400K and townhouses in under $300 in areas that I feel have great long term potential given our area's strong job market and expected government growth (see this post on the best place to live in a recession here, and article on the bailout being a boon to our local economy here.)

In another post I’ll cover how to look at cash flows for an investment property.

I’m working with several investors and have already previewed many homes that fit the criteria above. Call or email me to set up an appointment to discuss investing opportunities!

Guest Post: Rehabbing Properties Using the FHA 203K Program

Thanks, Cindy Fox of SunTrust, for information on this program which can really help buyers who have found their diamond in the rough! You can find Cindy's contact information at the bottom of this post.

Looking for a bargain in the real estate market?

Have you seen the perfect place for you and maybe your family – but then the inside of the place has been trashed? Or is simply is older, outdated, and in need of updating and/or repair?

Sometimes you just need to see beyond to cosmetic abuse to the eye, and maybe structural deficiencies, and envision a place after tender loving care – and a lot of tear down, build up and sweat has been applied!

So – you have the vision. Great! Now – how to pay for putting that vision into action to bring to a reality that vision?

There is an option for you! The FHA, which is a part of Housing and Urban Development (HUD), has a program that will help finance the purchase of such a dwelling, as well as the financing of rehabilitation of the house.

203(k) - How It Is Different from Conventional Construction Financing

The 203(k) program is a section of HUD’s home financing guidelines and its primary program for the rehabilitation and repair of single family properties. The program was designed to promote and facilitate the restoration and preservation of the Nation’s existing (and aging) housing stock. Most of the time lenders will only lend money to purchase homes that are complete. The condition of the property must meet certain standards. Under normal purchase transactions (or refinance transactions) properties that are complete and meet a certain property condition provide the necessary collateral for the lender to lend with confidence. Additionally, most loan programs require that if there are repairs, or renovations to be completed, this must occur before the lender will release funds to complete the purchase and close the loan.

Under conventional guidelines, when a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods.

The 203(k) program through HUD was designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work.

Eligible Improvements: Luxury items and improvements that do not become a permanent part of the real property are not eligible as a cost of rehabilitation. However, the homeowner can use the 203(k) program to finance such items as painting, room additions, decks and other items even if the home does not need any other improvements. All health, safety and energy conservation items must be addressed prior to completing general home improvements.

How the Program Works: The improvements, repairs, and rehabilitation proposals must be part of the loan package and can be prepared by a builder, or a consultant and show the scope of the work to be done. Cost estimates must include labor and materials sufficient to complete the work.

The scope of the work as presented in the proposal determines the amount of the loan. Usually, an appraiser will evaluate the proposal in conjunction with the current value of the property and determine an “after-improved” value which will determine the amount of money available for the repairs and rehabilitation.

For More Information: For more information on eligible properties, how the program can be used, required improvements, how the program works, and the application process, contact Cindy Fox at SunTrust Mortgage at (703) 464-4345, or email Katie (info in right hand sidebar) for more information.

Buying an Investment Property in Northern Virginia

The Washington Posts' Express paper had a special Home Buyer's Guide this past Wednesday, and I was honored to be asked for my thoughts on buying investment properties.

During my conversation with the author, I noted that prices inside the Beltway--areas that are optimal for finding renters--have not dropped to the extent people may think, and thus finding an investment property that is cash flow positive is difficult. Having said that, it's not impossible to find a good property with long term potential, and if you're looking out side the Beltway, there are deals to be had in terms of price (though finding renters may be more difficult than with close-in areas). The challenge right now is in obtaining financing, as I and Will Gaines, of Access National Mortgage, noted here.

» DOUBLE DOWN: Expect to break the piggy bank open — wide open. "You usually need a minimum of 15 percent down for an investment property, and, ideally, for good pricing, it should be 20 percent," says Will Gaines, senior loan officer with Access National Mortgage in Reston, Va. "To get your very most competitive pricing, you really need to have 30 percent to put down."

» DOUBLE TROUBLE: Don't blame the banks for tighter restrictions. "The private mortgage insurers got burned so, so bad in the past few years, and they're reluctant to provide insurance," warns Katie Wethman of Long & Foster. She says they're especially wary of insuring rental properties because "if a borrower falls on hard times, they're more likely to skip a payment on an investment property than one they live in." That said, she advises borrowers to come up with a big chunk of cold, hard cash to sweeten the deal; the less credit you need, the more likely you are to get the loan you want.

» DOUBLE UP: Count on your friends. "I see more younger people going in together to buy investment properties," Gaines says. "That way, they can share the down payment and spread out the risk if they're without a renter for a period of time." Be sure to have a game plan for buying each other out in case one of you is ready to cry "Uncle!" before the other.

If you have the cash for a larger down payment, and the patience to ride out the downturn, there are investment opportunities out there. In particular, being flexible on timing and having a bit of cash for repairs makes short sales and foreclosures more of an opportunity for investors (versus someone who has to move before their lease is up: read more on my foreclosure risk post on timing a transaction.)

What else do you need to consider when searching for an investment property? Long term demographic trends, price to rent ratios, competing inventory (i.e., apartments), cash flow, and a host of other factors. If you're considering an investment property and need an advisor for your transaction, contact me to set up a meeting.

Foreclosures & Short Sales: Agents Not Updating Listings When Offers Are In!

Looking at short sales and foreclosures? Better have your agent call the listing agent before you take your time to go see them – chances are that they may already have an offer in and you’re wasting your time and energy. And if the listing agent doesn’t answer their phone or call back (which happens more than half of the time, in my experience), then I’d cross that one off your list. Let me explain.

I only have a handful of ‘rants’ on this blog, but it’s time for a new one: Banks and listing agents who don’t update listing information on foreclosures and short sales when they already have offers on those properties. Here’s the dilemma. Listing agents represent the seller (the bank, in the case of a foreclosure), so ultimately their fiduciary duty is to that seller. When an offer comes in, the agent submits it to the bank, who might sit on it for months. (See my post: Foreclosure Risks: Unpredictable Timing).

During that period, the property is continuing to be marketed as “active” so buyers call their agents and agonize over whether to buy, how much to offer, etc. Agents likely even call the listing agent to try to get more information, though in my experience, again, those agents rarely answer their phones or call back. I guess they're too busy not marketing all of their foreclosure listings. Finally when I reach someone at their office live, I’m informed “Oh we have multiple offers on that one already in process.” ARGH!

So why didn’t they update the status to ‘pending’? Because technically a contract is not yet ratified (accepted and signed by the bank.)

Why didn’t they at least update the comments to say “offers already received”? Well, that depends on the agent. My opinion is that they should disclose that fact, but the argument against it is that updating the comments to restrict further showings would not be in the seller’s best interest. Sometimes they claim the bank has instructed them not to update the listing (though I find it hard to believe that today's overwhelmed loss mitigation and REO departments find the time to micro-manage a listing like that.)

After all, contracts for foreclosures fall out all the time following inspections, review of condo documents (IF you get them, which is unlikely) or other reasons. To best represent the seller, an agent should encourage further showings. Are agents doing this to best represent their client? OR are they are just too lazy to update the listing? Besides, it’s not an inconvenience to the listing agent anyway – it only wastes the time of the buyers and their agents.

IndyMac Closing - Impact on Their Bank-Owned Properties?

Indymac Bank today announced they are closing down their loan operations and laying off 3800 people. While this is certainly bad news for the lending industry as a whole, it's also bad news for buyers on two fronts. First, and most obviously, fewer lenders means less liquidity.

The ripple effect though will impact foreclosures already on the market--many of which are owned by Indymac. Two effects here that I can see right off the bat: first, Indymac requires offers to be submitted by an Indymac pre-approval letter (I hate this practice whenever a lender does it...but that's another post.) I assume this requirement will be lifted now that Indymac is no longer underwriting? Or will buyers be in an endless loop because they can't get an Indymac letter but somebody in the REO department has a checklist somewhere and that box isn't checked?

Second, if you thought it took Cubicle Joe in Idaho a long time to get you an answer on your foreclosure/short sale before, how much longer do you think it will be now that he's worried his employer might go out of business? My guess is he'll spend a lot more time at the water cooler gossiping, saying goodbye to his friends in underwriting who got let go, and polishing his own resume. Your timing risk just increased exponentially.

Buyers, lower your expectations when making offers on Indymac properties, and make sure you have a back up plan.

Sellers, if your buyer's lender is Indymac, ask for a new lender letter asap; or be prepared to re-list your home.

Readers: Are you learning about these developments from me via this blog instead of from your own agent? Shame on your agent for not being plugged into the market. You might want to explore the possibility of finding a new agent.

Short Sales: Are They Worth a Buyer's Time?

Yes. No. Maybe. If you’re looking for an absolute, don’t bother reading this post. I’ll go out on a limb and say usually it’s a waste of a buyer’s time—the odds are certainly against it.

What is a short sale? It’s a sale where the debt owed combined with the costs associated with the sale exceed the property’s market value. Creditor(s) MAY be willing to agree to allow the property to be sold for less than the loan amount.

You can recognize these listings by key phrases in the comments section such as “short sale” or “third party approval required” or “lender approval required.”

As a seller, how do I go about a short sale?
Every bank is different. At a minimum, you will need to establish that you are financially incapable of paying the loan(s). You must submit W-2s, bank statements, tax returns, a “hardship letter” stating the reason the credit should consider granting a short sale, and other financial statements outlining your assets and liabilities. The hardship letter is particularly important. Stating that your house isn’t worth what you paid for it is NOT a hardship. You must establish why you are no longer able to afford the payments.

As a buyer, I keep hearing that Short Sales don’t close. Why not? Can I do anything about it?
Some close, but it’s true that most do not. A quick search of the local listings showed 282 active short sales. In the past 90 days, only 35 closed. That’s a very poor hit rate. Short sales are typically priced at or just below current market value, and that’s reflected in the close price of those 35 homes—average closed price was $367K versus an average list price of $373K—98% of asking!

The overwhelming majority of short sales don’t sell and/or close because of one of these reasons:
(1) They aren’t priced competitively so don’t get any offers. On the flip side, sometimes they are priced at a low price that the bank will never accept!
(2) The sellers have not met the lender’s requirements to approve a short sale (e.g., have not submitted a hardship letter or otherwise proven that they can no longer afford the payments
(3) A secondary or tertiary lien holder has not approved the sale (if the first lienholder isn’t getting paid in full, the guys behind him are making nothing, and so have zero incentive to sign off on a deal). Often in this situation they will ask for a personal Promissory Note from the seller. If the seller refuses, it will scuttle the entire deal.
(4) The lender has received all of the paperwork but is “stringing along” the seller to collect a few more payments
(5) The lender has received all of the paperwork but is planning on foreclosing and collecting the mortgage insurance.


Buyers have no control over any of these reasons. Sellers have limited control over some. But it only takes one of these to prevent a short sale, so the odds are against it. In particular, if the bank is bound and determined not to approve a short sale (reasons 4 and 5), then no one can make them. If a seller is determined that they do not want to attempt to repay any of their debts (reason 3) then it’s not going to happen. Reasons 1 and 2 have a much better chance of closing. But why would a homeowner and agent list a home when it’s either overpriced or when the paperwork isn’t in? Lots of reasons: naiveté, ignorance of or inexperience with the process, denial. Why would an agent waste their time with a listing that won't sell? In most cases, there’s no real ‘cost’ to them. Agents decide individually how they want to market properties and how much they'll spend doing so. So they choose to spend nothing, and infact, they still get some free advertising via the yard sign and mere existence of the listing.

How can buyers identify a short sale that is more likely to close? Agents can put basically anything they want in the comments, but a few key phrases give you slightly better odds:

• Bank already approved price of $x/Short sale already approved
• Only one lien
• No waiting/bank ready to close/can be closed immediately
  
• Paperwork already submitted
• Quick Response/Turnaround in x hours/days/weeks
  

And of couse, you should have your buyer agent contact the listing agent to see what the status of the paperwork is. If the agent doesn't know or doesn't return the call, it's likely to be a waste of your time as a buyer.

Buyers, remember that, just like with foreclosures, timing is a big issue and so taking your chances with a short sale isn’t for everyone. With every passing week, banks are getting more efficient at processing these, so we might see more short sales and foreclosures closing. There’s also speculation that banks have too much real estate owned (REO) on their balance sheets, which impacts their regulatory capital requirements; so they may very soon be more amenable to short sales in the months to come.

Read More: Foreclosure Risk Series

Read More: Understanding the Difference Between Short Sales, Foreclosure Auctions, and Bank Owned Properties (aka REO)

Foreclosure Risks: Title Defects

One risk of buying an REO (bank-owned) property that you rarely hear about is the potential for title issues. Buyers incorrectly assume that since liens are typically extinguished in a foreclosure, that the title is free-and-clear. Not always so!

Let’s discuss the process. Lenders require buyers to obtain title insurance on the property. These policies protect the lender, and if you opt for extended coverage, the buyer. (See my post on how to save money on a title policy on a non-REO purchase here.) The policy protects against defects in the title, competing claims, etc. To issue this insurance policy, the settlement attorney’s office will perform a title search, issue a commitment to insure (sometimes called a binder).

The REO addendum (see post on risks of that addendum here) is usually written such that the bank is protected even if the title they convey isn’t perfect, so you can’t come after them if you determine later that there is a title issue. More importantly, the addendum requires only that they convey insurable title, not marketable title, as is required in the standard Regional Contract. Remember that the addendum trumps the contract, so don’t go relying on that paragraph in the offer that requires marketable title.

What’s the difference between insurable and marketable titles? Marketable means it’s free from threat of litigation. Insurable does not guarantee clean title, but rather simply requires that there is a title insurance company willing to “insure over” the defect. (Ever wonder why bank addenda require that you use their title insurer and settlement agent?)

Why should you care about insurable versus marketable title? Because when YOU go to sell down the road, you won’t have the benefit of that trump card, the REO addenda, nor will you have a settlement attorney in your pocket that will “insure over” defects. It’s possible that the price on an REO deal will be such that you don’t care about the insurable versus marketable difference—but make sure you review, and ask lots of questions about, what is being “insured over,” or you may find yourself paying to cure title defects years later when you sell.

What can a buyer do to protect himself? First, choose your own settlement attorney. Have them perform a title search as quickly as possible to identify any problems early. If the bank insists on using their title company, consider shelling out the few hundred for your own concurrent title search. Many foreclosures have significant title issues, and many bank addendums provide a very tight timeframe for identifying and objecting to them. An example of an issue that might be identified would be if the listing included a parking space, but upon searching the deeds, the bank didn’t actually own the parking spot—how can they convey what isn’t theirs? Second, review that title search and make sure you understand all the possible defects. Finally, buy the best title insurance you can--it's a one time cost at closing that may save you many times more than the cost of the policy.

Read more: Beginning of series on Foreclosure Risks

Resource: A great local settlement attorney - Ekko Title

Search for foreclosures

If you're interested in learning more about REO and foreclosures, or thinking of buying one, I'd love to advise you on the home buying process.

Foreclosure Risks: Financing Complications

Buying a bank owned property creates a multitude of financing risks—not because a buyer may have any particular problems with their credit or loan otherwise, but simply because the transaction is complicated and timing is difficult to control (read previous post on timing difficulties in buying a foreclosure here.)

It’s critical that buyers protect themselves with appropriate financing contingencies (and make sure that the protections you want are not negated by those pesky bank addenda – read post here.) Buyers take on enough risks in buying a foreclosure—don’t expose yourself to unnecessary interest rate risk as well. Let’s take an example. You make an offer on April 1 (no, there’s no hidden message there just because I’m using April Fool’s Day as my example) when rates are at 5.875%. The bank takes four weeks to get back to you, at which time rates have jumped to 6.25%, or even worse, the 10% down program you were planning to use is no longer available and now you need 15%, which you may not have. Sure, you can still back out of the contract (the upside of having to sign off on the bank addenda mentioned earlier), but obviously the situation is far from ideal. Let’s take a riskier situation: the contract is ratified and the buyer has signed off on the bank addenda. The buyer locks into a rate for 30 days, and settlement is scheduled for day 27. But the week before settlement the bank has a problem with the deed, and needs to delay settlement for a few days/weeks. So much for that rate lock—now your financing is floating with the market, and you take on all that interest rate risk.

Another pitfall to look out for is inconsistencies between your type of financing and the property condition. FHA is a great example; FHA loans require that repairs for issues that “rise above the level of cosmetic defects, minor defects, or normal wear and tear.” In a “normal” sale, the seller has to pay for those repairs. But, as we’ve discussed before in the property condition post, the bank is not about to take their time to hire plumbers and electricians to come in and fix those items—the sale is “as is.” The bank won’t pay. You don’t own the property so even if you wanted to repair it yourself, you’d have some hoops to jump through. So the property needs repairs, the bank won’t do them, and so FHA won’t fund your loan. (There may be some creative ways to still make this happen, but I can’t give all the secrets away here, can I?)

So to wrap up, don’t underestimate the financing risks you take on in buying a bank owned property. It’s not a bargain unless you’re adequately compensated for that risk, in the form of a lower-than-market price.

Read more: Foreclosure Risks: Unpredictable Transaction Timing

Read more: Foreclosure Risks: Bank Addenda

Read more: Foreclosure Risks: Property Condition and Inspections

Foreclosure Risks: Property Condition & Inspections

One of the most common scenarios in a bank owned (or REO) sale is that the property is “as is.” But most people don’t understand exactly what this means, or how to protect themselves from buying a home that may need tens of thousands in repairs.

Let’s back up a moment, and put “as is” in the context of a “regular” (i.e., non-REO) sale. “As Is” is a commonly misused term. We first must understand the home inspection process and one particular paragraph in the regional sales contract – the Property Condition paragraph, also known as paragraph 7 (because it’s literally paragraph #7 in the contract…sometimes we agents aren’t all that creative.) Paragraph 7 indicates that the systems of the house, including plumbing, electrical, and appliances, must be in “normal working order.” Unless the parties agree to strike through this paragraph, that means the seller must ensure all of those systems work at the time of settlement.

Beyond that, buyers may wish to also get a home inspection (highly recommended). If the home inspector notes items related to plumbing, electrical, or appliances that are not in “normal working order” then the homeowner must fix these—they’ve already agreed to based on paragraph 7. Any OTHER items the home inspector may find—e.g., foundation problems, roof problems, window/door problems, etc.—are negotiable.

Sometimes a listing will be marked “as is” but technically, unless they’ve crossed through paragraph 7, or unless an addendum supersedes paragraph 7 (see Bank Addenda post here.), then the seller is still obligated to fix those systems of the house indicated in that paragraph. They’re simply telegraphing to potential buyers that they will not repair or provide a credit for any additional items.

In a foreclosure, banks always say “as is”, and most Bank Addenda trump any inspections that you may think you’ve negotiated. The last thing a bank needs is the back and forth negotiating to give a buyer a small credit for some electrical problem—they’re way too busy and have tons more foreclosures to get off their books. Most banks though, do not have a problem with you having a home inspection; they just want a “go or no go” decision immediately following. You either take it as it is with the inspection findings, or void the contract. Tip: Even when a bank allows you to do an inspection, make SURE it includes a “right to void” based on the results!

You should always try to get an inspection so you know what you’re getting into with an REO property. It’s a sad fact that many frustrated borrowers take out that frustration on the property on their way out the door. (Read a WSJ posting discussing that approximately half of all bank-owned properties have "substantial" damage inflicted by angry homeowners prior to vacating. ) Often the repairs are simply cosmetic—a good scrubbing, some patched drywall, missing cabinets or appliances, or a fresh coat of paint—and those are good opportunities for a quick bargain. But structural and mechanical issues can easily run into the tens of thousands of dollars. And once settlement occurs, you have no claim against the seller, even if there was a problem that wasn’t disclosed to you (unlike other transactions). So remember that taking on that additional risk requires an additional reward, in the form of a very discounted price; otherwise that bank owned property isn’t such a good deal after all.

Read about some other risks of foreclosures here:
Foreclosure Risks: Title Defects
Foreclosure Risks: Bank Addenda
Foreclosure Risks: Unpredictable Transaction Timing
Foreclosure Risks: Financing Complications

Foreclosure Risks: Unpredictable Transaction Timing--Don't Pack Those Boxes Yet!

I’m often asked about the risks involved with buying a foreclosure. This is the second post in a series of as-yet-undetermined size. (Have a question on the risks? Contact me.) The first post on REO Bank Addendums covered the all encompassing risk—the risk that the bank can basically do whatever they want, including walking away at any time with no penalty, if you’re not very careful with what you sign. That addendum always includes one or more clauses protecting the bank if they are unable to meet certain deadlines—like actually proving they are the owner (oh, do I have to OWN the property before I sell it?) before settlement. These broad clauses lead to our second major category of risk: controlling the timing of the transaction.

In a typical transaction, you make an offer, the seller takes a day or so to review it and either a) accept, b) counter, or c) reject. If you’re concerned that a seller might be “sitting on the offer” to wait for a better one, or even “shopping it around” by calling all the agents who have previously visited the property to see if they can scrounge up a competing offer, then you might consider including an expiration or exploding clause. These clauses state that the offer will expire by x time and date if not responded to in writing. It’s a great way to protect a buyer and maximize your chances of a quick turnaround.

However, with a bank owned property, the bank takes as long as they darn well please. Might be a day, might be a month, might be several months. They don’t really care about your expiration clause. Well, maybe not that they don’t care, it’s just that they’re a big corporate entity, and your offer is likely to be sitting in a pile of paperwork that needs to get done asap, but the individual sitting in a cube somewhere really doesn’t have the right incentives to make sure he gets to your offer today, or tomorrow, or the next day.

In the meantime, you’d be wise to keep looking at properties to see if there’s anything better that catches your eye. As a buyer you have the right to withdraw your offer anytime before the bank gets back to you. In reality, the bank’s response will NEVER be an “accept.” Rather, it will ALWAYS include that pesky Bank Addendum that you will have to read (please, I beg of you, read) and sign before your contract becomes official.

Once you’re ratified, is it time to give notice on your lease and call the movers? Hardly. Remember one of the common clauses is for the bank to give themselves the right to back out at any time. I’m not saying the bank does this out of malice…there are a million reasons (deed issues or delays are common) the bank might be very willing, but simply unable, to proceed to settlement. (You’d be out the cost of your appraisals, inspections, moving deposits, etc in this case.) As an aside, you can be sure that one of the clauses in that Addendum imposes a hefty daily financial penalty on the buyers if they aren’t ready for settlement on time, so apparently what’s good for the goose is NOT good for the gander.

Other than not being sure when to start packing, this open-ended timing creates issues with financing. Most loans are locked for just 30 days, and after that you need to pay a fee to maintain the lock. If you pay the fee, you may be out that money and never close. If you don’t pay it, and rates change, you may be in an even worse situation—in fact you may not even qualify for the loan anymore if rates change too much! Make sure you fight hard for a financing contingency that will protect you in the even that settlement gets delayed. (Side note—often banks will offer to give you financing in the event of problems…but they never specify the terms!)

So when can you start making plans? Not until the deed has been recorded, which is typically the day after settlement. Yes, you read that right. Don’t make any plans to move until a day AFTER SETTLEMENT OCCURS.

If your lease is up soon without the option to go month-to-month, make sure you have a back up plan for where to stay in the event of unforeseen delays. The timing risk can be partially mitigated by 1) continuing your search knowing you have the option to walk away and 2) keeping a financing contingency. But chances are strong that you’d incur extra expenses, along with sleepless nights, along the way.

Thinking of buying a foreclosure? Contact me to discuss the other risks and how you might be able to mitigate some of them. Remember, it's not a bargain if you're taking on too much risk for not enough reward.

Read the next post in the series on Foreclosure Risks: Property Condition & Inspections

Read more on the differences between short sales, foreclosures, and REO properties.

Read the first post in the series--risks related to Bank Addenda--here.

Foreclosure Risks: Read Those Bank Addenda!

I get a lot of questions on foreclosures. How could I not? Some neighborhoods are flooded with them (though some are not...see the graph in my post on Beyond Auctions.) Buyers want to know if they’re a good deal, what the risks are, and how they can get in on one.

I’ve decided to write a series of posts on the risks specific to buying foreclosures—trust me that there are too many risks to put into one post! Some risks can be mitigated, some can be eliminated, but most remain; that’s part of the trade off you make in deciding to buy a foreclosed property.

First, a quick overview on the process. (For a review of how a home moves from short sale to auction to REO, read the post “I want to buy a foreclosure.”) Once a home is foreclosed upon, also known as Real Estate Owned or bank-owned, it is usually listed in the MLS with a listing agent, similar to any other home for sale. It will usually be noted right in the comments that this is a “bank owned property” or “special addenda required.” What is this special addenda?

When you decide to make an offer on a foreclosure, you put together the offer using the standard regional forms, just like any other resale (though not the same as new construction—for those you use the builder’s contract.) You include any contingencies or other negotiables you want—home inspection, seller subsidies, etc. Then you send it off to the listing agent, who sends it to the bank. The bank’s representative may respond right away, they may throw it into a pile to see what else comes in, or they may not do anything. (So controlling the timing becomes a big risk of a foreclosure, but I digress.) Let’s say they get back to you and let’s assume they even agree to all of your terms. They’ll return it all with a copy of their own Bank Addendum. An addendum is simply the legal term for a condition that amends the main contract. Even “regular” resales have a half dozen addenda-- for home inspections, appraisals, and to meet jurisdictional requirements. Bank Addenda are written by the bank’s lawyers to protect themselves during foreclosure transactions. Any guesses on which side they favor?

Every bank’s addendum is different, and it’s critical that you read and understand every clause prior to signing it. Because it’s an addendum, which amends the main contract, it doesn’t really matter what you think you negotiated—anything in the addenda trumps the main contract. Think you negotiated an inspection but the addendum says no? Or what if the addendum says you can inspect but not void? The addendum wins the day. A lot of good that inspection does you if the home inspector says the place needs to be demolished by you aren't allowed to walk away.

Unless you sign the addendum, there’s no deal, so you can still get out if you don’t like what you read. Occasionally, on some clauses, you may be able to negotiate certain clauses, but that increases the likelihood of slowing down the process—after all, some guy in a cube in Idaho (no offense, readers in Idaho) has to get that change sent to the bank’s lawyers to review, and I guarantee that those lawyers have their hands full with all their other foreclosures right now. If you decide to live with the clauses, then once you sign the addendum, the contract proceeds as is more typical.

There are many examples of egregious clauses, but here are a few of my favorites:

- The bank may not own the property and may not be able to go to settlement. You may be required to go to settlement even if the bank cannot deliver the deed at that time.

- The bank may guarantee only insurable title, not marketable title (more on that in another post)

- The bank may give themselves the right to change their mind and walk away at any time up to settlement for no penalty

- There may be easements or restrictions on the property that aren’t recorded; if you find one, the addenda may prevent you from backing out of the contract as a result

There are many more, as these addendum often run about ten pages. Because they are written to apply nationwide, there are occasionally even clauses that are illegal in Virginia!

So read those addenda carefully, and caveat emptor on this foreclosure pitfall. It’s a doozie.

I’ll continue the series with future posts on these other critical risks:

- Lack of control over turnaround and the dependent risks it creates for buyers (and not just your move date)

- Inspections, repairs, and warranties

- Financing complications (Don’t rely on using an FHA loan!)

- Title and deed issues

- Condo/HOA docs

Have another risk you want addressed? Add it in the comments and I’ll write about it.

Are you thinking about buying a foreclosure and want to know the risks you’ll face? Contact me to discuss the risks and some mitigation strategies.

Read the second post in the series, about the challenges in controlling the timing of a foreclosure transaction, here.

WSJ: "Beyond Auctions" Article on Buying Foreclosures

There's a fantastic article today online in the WSJ: "Beyond Auctions: Ways to Buy Foreclosed Homes."

It explains why there are actually very few bargains to be had in foreclosure auctions, and why buyers (especially first time buyers) need to instead focus on bank owned property (REO). There's a good list of do's and don'ts too. It goes on to say--and I find this to be true--that "Some of the banks will sit [on a property] until they hit their target number -- they may get 20, 30, 40 offers before they're ready to take one....Potential buyers should...put in a realistic bid. You can't expect to bid 50% of the asking price and hope to get it."

Of course there are tons of foreclosures in the Northern Virginia area as a whole, but painting the entire area with one brush stroke can be dangerous. Take a closer look at the foreclosure stats below.


















On the bottom, you can see where Washington, DC, falls compared to other major metropolitan areas. But even that average (about 88 per 10,000 homes) is misleading...Looking at the top part of the chart, I've broken it out by county. You can easily see that DC, Arlington, and Alexandria are a very different market than PG, Stafford, Loudoun, and PW. Are there parts of Arlington that have more foreclosures? Of course. But the moral of the story is to make your decisions based on your specific situation--where you want to live, what type of property you want, etc....and not by a perceived "bargains" of price or availability. You may be surprised at the details behind those "opportunities."

Read more: Blog Post - "I want to buy a foreclosure."

Data Source: GMU Center for Regional Analysis

Read more: Alexandria Real Estate News

Read more: Falls Church Real Estate News

Q3 Trend Report - What are you waiting for?

The Metropolitan Regional Information System (MRIS, the group that runs the Multiple Listing Service) has released its Q3 Trends in Housing Report. It’s an interesting read. You can view the full 22 page report here.

Some highlights:

- Job Growth: Over the 12 months ending in August 2007, over 47,000 new positions were added-—5.8% above the 15 year average. Interestingly, all of the government job growth came from local governments, not Federal. The local unemployment rate dropped even further, to 3%, the lowest in the nation for any major metro area. Even more jobs are expected to be created in 2008.
- Residential housing market – “remains in an adjustment phase at 3rd quarter 2007, though there are signs of creeping back towards equilibrium….Average metro-wide prices in July and August were more than 4% above prices the same time last year…The average days on market has consistently declined since the beginning of the year.” This next part is critical: “But the gains are uneven, with desirable areas inside the Beltway showing strong price gains and shorter listings, while the reverse is generally happening as distance from Washington increases.”
- Outook: “By spring 2008 we expect that consistent demand (generated by steady job growth, net migration, and a rising immigrant population) and a decline in construction will stabilize pricing, leading to an uptick in sales activity, with improvement in market conditions appearing by summer.”

So what does this mean? A few points:

Not surprisingly, and consistent with other posts I’ve made, the job market is a huge driver of where the real estate market will ultimately head. More jobs = either a) more people moving to the area or b) higher salaries (more employers competing for the same employees), or some combination of both. People with higher salaries are more likely to buy, and people moving to the area need a place to live, whether it’s renting or buying. (More demand for rentals will translate into higher market rents, which will in turn make buying a more attractive option.) Either way, it's going to result in an uptick in housing. So if job growth is good, eventually the real estate market will follow.

Next, the point about uneven gains is clear to anyone who has been tracking specific neighborhoods in the past year. All those foreclosures and short sales you read about? The overwhelming majority of them are in the outlying suburbs – Herndon, Leesburg, Woodbridge, and similar areas.

But what about 1BR condos in 22201 (that includes Ballston & Clarendon)? So far in 2007, the average 1BR condo stayed on the market for 40 days. In January, the average 1BR condo in 22201 sold for $305,644. By August? $363,252. Granted it’s come down a bit since August, to $320,183 in October, but if you’re waiting for 1 BR condos to bottom out in the orange line corridor, you just may have missed it. (Side note - January was the lowest price of any month in that zip code in 2007, and not surprisingly, since fewer buyers means more negotiating leverage. Implication: This is a great time of year to get started with your search!)

My point isn’t that you should try to time the market down to the month, but rather to take a more macro view that the coming months are in fact a good time to buy. If you don't buy in a buyer's market, when should you buy? Never? I doubt you believe that or you wouldn't be reading this post.

This too, like any other buyer’s market, will eventually turn to a seller’s market. The tricky thing about changing markets is that you don't know when it changed until long after the fact. It's not like the Post will suddenly have a headline that reads "Real Estate Market Bottoms Out This Month." Think longer term, and if the circumstances of your life have you thinking you want to buy, pick the one or two neighborhoods that you're interested in and really dig into that data to see whether the micro trend reflects what you've been reading in the papers. Then make the "buy or wait" decision. You may find that what you "save" by waiting isn't a savings at all. (see rent vs buy calculator post here - this one has great options that aren't normally included that allow you to account for condo fees, tax brackets, and rate of return for the alternate use of your funds .) If you're thinking of buying in Woodbridge though, I'll save you the trouble: wait.

Data Source: MRIS. All data deemed reliable but not guaranteed.

"I want to buy a foreclosure."

I'm interested in foreclosures is something I often hear from clients, but few people really understand the process, and specifically what it means to buy a foreclosed property. It's not for the faint of heart. Though you can occasionally find a bargain, there are unique risks involved with buying a foreclosed or bank-owned property. First, let's clarify some definitions.

It's possible that someone can be "upside down" on their mortgage (that is, they owe more on the mortgage than the property is worth) and antsy for a quick sale before it gets worse. In this situation, the seller is said to be "bringing money to the table" because they literally need to write a check to the settlement company even AFTER receiving the proceeds from the buyer. The seller hires an agent (in most cases) and the property is listed in the MLS--the buyer may or may not even be aware that the seller is in this situation. But what if the seller doesn't HAVE funds to bring to the table? Then it becomes a...

Pre-foreclosure or "short sale": The bank is a third party to this transaction because they have negotiated with the seller to take a loss on their loan. The property will likely be listed in the MLS, but there are special addendums and disclosures because the bank has to approve any contracts. In some cases, this delays the process, which can make timing for a settlement and move date tricky. Read more about short sales in my previous blog entry here. If no buyer is found, then the property becomes a...

"Foreclosure" or trustee sale: This is the proverbial auction on the courthouse steps. Properties are advertised in the newspaper, but typically no real estate agents are involved (because there are no commissions paid--can't blame us for staying away from those!) Note that the property may or may not be vacant at this point...a buyer may be forced to evict the previous owner. This isn't typically the auctions you'd think with bidders standing around with placards. The bank is unlikely to take a bid less than what is due on the loan, and if there's no equity in the property, why would someone buy it? So you need a property that's worth more than the loan, and if that was the case then it wouldn't be a foreclosure to begin with! So most auctions quietly pass with no bidders. If you do wish to bid, it's typical for the bank to demand a 10% deposit at the auction, and you have 15 days to close. These properties are typically sold "as is." If it's a condo, the seller (the bank) is not required to provide you with condo or HOA docs, as in other sales. If the "auction" ends with out a winning bidder, the property moves to...

"Bank Owned" or "REO" (Real Estate Owned): The bank usually works with a Realtor to list the home in the MLS and it's advertised just like any other property. They are usually sold "as is" (no home inspections) and special addendums are required. The addendum is sure to include a penalty for any change or delay in closing--anywhere from $65 to $200/day. While the banks are quick to penalize buyers for any delays, they don't usually hold themselves to the same standards--Some banks have very quick turnaround time on offers (days) and some have very bad turnaround time (months). This uncertainty makes settlement and move-in dates are very tricky, if not impossible, to manage. I've seen buyers put in an offer and wait 3 months only to be told that theirs was not the winning offer. This is typically also not an option for anyone with a brokered loan or stated income loan, again, because the timing is so difficult to manage.

I've found that the only REO properties that are priced significantly cheaper than the market are those that are in very poor condition, and maybe not such a bargain at all. There are always exceptions, and yes, a handful of really great deals out there. But to limit yourself to "foreclosures" is cutting off some of the best deals out there! I've actually found that the best "deals" are where sellers have some equity and can actually afford to sell below market, and have the incentive due to a life change (new job, new baby, etc.) to motivate them!

So to recap: Most people who are looking for "foreclosures" are actually looking for "short sales" or "REO/Bank-Owned" properties. Both categories of sales come with unique risks--specifically:

1) timing--if you have a specific timeframe for moving, make sure you have a backup option for living space
2) financing - related to timing
3) property condition--you won't get to ask for repairs, and may not even be allowed to have a home inspection prior to buying

My advice? Look at all the listings, not just "foreclosures"--which we now know really means short-sales and REO, in your price range. You never know where you're actually going to have the most negotiating power!

Sub-Prime Mortgages: Crisis Averted?

I've posted here before that there were signs that the sub-prime mortgage mess, while unfortunate for many, was not the crisis that the press makes it out to be. The housing market is just too important to this economy, and while no one is screaming "bailout", there have been consistent signs that the country is not going to sit idly by and let millions of people lose their homes.

Today President Bush announced that new programs were being established to help 80,000 people who have fallen behind on their payments. I'd be willing to bet that if conditions worsen, even more programs will be announced. Sure, they'll blame it on the predatory lenders rather than home buyers that made bad decisions, but at the end of the day, no one wants people out on the street. It's in everyone's best interests--from the owners', to the lenders', to the government's, to keep people in their homes.

Sub Prime Meltdown: The Middle of the End?

Several weeks ago I posted about Fannie Mae and Freddie Mac programs to help borrowers who are in risk of defaulting, or have already defaulted, on their sub-prime loans. By now, everyone has read of the "melt down" fueled by 2/28 and 3/27 adjustable rate loans that offered very low teaser rates back i n 2004-2005, and are due to begin resetting this year. The issue is that lenders approved borrowers based on those low initial payments and now that the payment will be going up--often very dramatically--borrowers who either didn't understand the resets, or just aren't good at budgeting, are in serious trouble.

Now Congress may be stepping in as well, in the form of a "stealth bailout" via the FHA. The Federal Housing Authority has many loan programs aimed at helping first time buyers, but the loans came with some serious drawbacks: heightened inspection requirements, mortgage insurance, and most importantly in this area, a relatively low maximum borrowing cap. With prices so high in this area, FHA loans just weren't a good deal for most borrowers. Congress is currently considering an FHA overhaul package that would, among other things, raise the cap, and lower the down payment requirement, all while providing 30 year fixed rates that are about 3% below the going sub-prime rate. Obviously FHA is expecting to see a surge in applications. Of course there will be snags as this bill makes it through the convoluted process, but if it comes through relatively intact, this could be the "middle" of the end of the "meltdown."