Making successful decisions as a property owner is a complicated task.

It seems simple enough. In fact a ten second Google search will give you nearly 800 million results if you’d like to make money “fast” or “easy” using real estate as your tool. There is also no shortage of quips or cliches to help guide you down the right path. Buyers should, “buy low, sell high” and always seek the best “location, location, location…” You get the picture. Yet invariably, at the end of each market cycle overwhelming numbers of property owners are left in an unfortunate and losing position.

Information and guidance can also be confusing or disheartening. This past month senior economist Paul Dales, expressed his belief that “There’s no denying that home sales are still very low and will remain low for a few years. But after having risen in each of the last three months…it is clear that a housing recovery is now well under way.” A week later David Blitzer, chairman of the index committee at Standard & Poor’s explained, “Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall… “The trend is down, and there are few, if any, signs in the numbers that a turning point is close at hand.”

It’s no surprise that many potential home buyers and sellers are left dumbfounded when it comes to making a sound financial decision. Unfortunately, the mixed signals also leave some professionals in the industry equally discombobulated. Yet, throughout the years, regardless of market conditions or level of experience there remains one most important question that all existing and potential property owners should answer before making a move:

How do I make a good buy today?

Over the course of a 19 year career, the answer to this question has changed fluidly depending on where opportunity lies and to whom I’m giving the advice. Yet, beyond the specifics relating to each property, the true answer remains the same:

Think and buy like an Investor.


Distinguishing Between the Investor and Speculator

To understand this principle it’s first important to distinguish between the investor and the speculator. Although both seek to buy for the sake of financial gain, their method of achieving success varies as wildly as their chances of good fortune.

A real estate investor is an individual or entity that invests equity into a real estate asset for the purpose of generating income from or adding value to the existing improvements. Investors can have long term or short-term strategies. They may use their own capital or they may borrow (leverage) equity to varying degrees. Some create value by curing defects either physical (dilapidation) or financial (cash buyers with quick closings), while others employ long-term hold strategies that gather value from timing and appreciation. Yet all prudent investors share the distinction of returning to the marketplace Use Value for the profits or Cash Value they earn.

Speculators can share timing and leverage strategies with investors, yet that is where the similarities end. The intent of a speculator is not to add value to the economic engine; rather they look to take advantage of the marketplace by simply getting in line first. The speculator is driven by greed. Profit margins and financial gain are not based on business strategies that help balance supply and demand, thus making the business plan viable in the long term. Instead the speculator looks to horde or corner markets to their advantage intending to reap exceptional short term profits before quickly exiting the marketplace without regard to what is left behind.

In a previous blog post I wrote in 2009 I asked if it was wrong to make a profit as a real estate investor? The conclusion I drew was that true real estate investors seek a market balance by trading “use value” for “cash value,” thereby delivering equal value to the market in return for their profits. To that point, thinking like an investor allows home buyers to couch the value of their investment against their needs and and desires.

The Intelligent Investor

Warren Buffett is widely considered to be one of the most astute and successful investors of all time. In one of his more popular quotes he attributes his philosophies as being 85% Benjamin Graham. Graham was a mentor to Buffett early in his career, considered one of the most astute investors, and wrote the highly regarded investment books The Intelligent Investor (1949) and Security Analysis (1934). In those books Graham lays out three timeless investment principles which continue to guide the most successful minds in the investment business.

Principle #1: Know what kind of Investor you are

In Graham’s words, “Work = Return.” Knowing which type of investor you are means understanding if you are willing to take an active/enterprising roll or passive/defensive roll in your investment strategy. An active investor puts in the work to discover the untapped value of a particular investment by researching, discovering potential for growth, or the possibilities of expanding an investment’s market appeal. A passive investor finds market tested, blue chip opportunities thoroughly evaluated by the market and other investment minds. Neither is wrong, however each is specifically suited for the tastes and stomach of the individual carrying out the plan.

In real estate an active investor seeks higher returns by seeking out undervalued property. Bank REO’s and short sales may fit this strategy. Further, “fixer-uppers” and homes in “emerging markets” require more legwork from the buyer. This work, if done right, can lead to large profits. However the time and energy needed to be successful and happy with an active investment may not be available or suitable to everyone. Some home buyers prefer to find neighborhoods which have long standing appeal, houses in immaculate or move in condition, and homes lovingly tended to by owners who can meticulously walk through each detail of your potential purchase.

While the latter strategy may not have the same potential for large swings of profit, it also carries with it less volatility and potential for loss. Understanding who you are, how much time and effort you are willing to put into your housing investment and what tolerance to risk you possess will allow the home buyer to best understand what type of property they should be searching for.

Principle #2: Always invest with a margin of safety

The simple idea behind this principle is to minimize risk buying assets at a discount to their intrinsic value. The goal would be to buy $1.00 assets for $.50. In business this means buying a company when valued below the value of the income in produces or the cash it has on hand. In real estate this means valuing investment properties based on existing or actual income rather than fabricated or scheduled income. For home buyers it can also mean finding a home priced below its replacement value.

Although not part of Grahams work, I feel this principle addresses another important aspect of real estate investing – buying within your means. As history reminds us real estate markets are cyclical. The burden of a monthly mortgage payment becomes much heavier in trying times. Stretching every last dollar to meet the rent or mortgage bill can and will be directly affected by your available savings, the consistency and certainty of your income, and by the amount of debt you carry. Appropriately sizing your price range and sticking to your budget will greatly increase your chances of success.

Principle #3: Expect volatility and profit from it

the market will fluctuate, and sometimes wildly. Rather than fearing volatility, use it to your advantage to get bargains in the market or to sell out when your holdings become way overvalued.

Mr. Graham illustrates this principle with a well know parable about an investment partner named “Mr. Market.” As the story goes, Mr. Market is the imaginary partner of every investor. Each day Mr. Market is willing buy or sell your shares of an investment at a price determined by his wild mood swings. Most days Mr. Market’s price is fair and makes good sense. However, when he’s optimistic his offer price can be ridiculously high. When he sees gloom and doom his offer price becomes absurdly low. In each case you, as a rational investor, have the opportunity to make your transaction decision based on your own analysis. The opportunity is to reap the rewards of buying when Mr. Market’s fear cause him to sell in a panic. Equally to realize profits when Mr. Market’s unbound optimism cause him to grossly overvalue your shares.

The same is true in real estate. Opportunity in the real estate market comes from applying rational analysis against the irrational emotions of the marketplace. This doesn’t mean one should throw caution to the wind as an unadulterated contrarian. Instead, use facts and logic to your advantage. Look for signs that Mr. Market is being led by emotions when determining his price.

The Bottom Line

While the concept of buying real estate for profit is not that complex, making the decisions that lead to that success can prove a bit more involved. For the investor and home buyer alike it requires the application of sound principles and the ability to filter out emotions in volatile markets. In order to make smart decisions, home buyers today must understand their tolerance for risk, plan for unexpected surprises by building in a margin of safety, and prepare themselves to act when opportunities present themselves.

Market conditions will continue to fluctuate but the principles of successful investing remain steady.

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Have you wondered why residential real estate professionals have seemed a bit less happy over the past few months?  Fannie Mae may have uncovered the answer in their third quarter national housing survey.   According to the report, when considering the state of the economy, those who know a defaulter are more likely to have a negative outlook.

In today’s marketplace you’d be hard pressed to find a single Realtor who does not know someone facing foreclosure.

The silver lining when looking at this months data – nationally defaults are on the decline and delays in processing defaults may slowly be replaced with more efficiency.

Foreclosure Radar released their data report for October (showing September statistical data).  Like last month new filings continue their surge in California although down when compared to September 2010.

Below is a summary of the monthly foreclosure statistics:

  • NOD’s – a 28.5 percent increase from August to September. 25,777 total filings, which is a 25.24 percent decrease over September 2010.
  • Notice of Trustee Sales – a 28.22 percent decrease from August to September. 17,490 total filings, which represents a 35.0 percent decrease over September 2010
  • REO’s – a 24.83 percent decrease from August to September. 8,385 total sales ended up in the banks REO portfolios representing a 44.64 percent decrease from September 2010.
  • Third Party Auction Sales – 3rd party sales were down 18.86 percent in September compared to August. 3,128 homes were sold to investors at the court steps, representing a slight 6.65 percent increase from September 2010.
  • Cancellations – Cancellations were also down in September by 7.20 percent as 12,219 households left the foreclosure process without proceeding to trustee sale. This figure represents a 20.02 percent decrease from September 2010. Homeowners leave the process when they become current, complete a short sale or permanent loan modification.
  • Number of Homes Scheduled for Foreclosure – The estimated total number of homes in the foreclosure process remains high in California although decreasing in the month of September. Pre-foreclosure properties in the NOD stage decreased 21.97 percent and those scheduled for sale decreased by 6.65 percent. A total of 192,000 total properties statewide (104,000 in pre-foreclosure and 88,000 scheduled for trustee sale) are currently in the foreclosure process.
  • Foreclosure Discounts – The average value of properties sold to third party investors at the court steps was discounted 44.2 percent below the outstanding loan balance and 24.3 percent below fair market value .

Nationwide Lender Processing Services (LPS) indicates that the total number of mortgages delinquent continue their contraction.  Down for the third straight month to a total of  6,373,000 mortgages 30 days or more past due (down from 6,538,000 in July and 6,397,000 in August). This number is taken from their database of loans totaling nearly 40 million. Of these loans 2,172,000 have started working their way through the foreclosure process leaving 4,202,000 yet to be addressed delinquent borrowers.

Backlogs of inventory at the banks continue grow as they face longer timelines to complete the foreclosure process.  According to LPS it takes a bank on average 761 days (25.36 months) to complete a foreclosure cycle in judicial foreclosure states.  Not far behind, non-judicial states, like California, are averaging  581 days (19.36 months).

Foreclosure service Realtytrac.com posted a slight decrease in foreclosure filings across the country. Their October release, indicates that servicers filed 214,855 foreclosure related actions for the month, down 6 percent from September’s report.  California tops the list as the state with the most foreclosure actions (153,051 statewide) and accounted for 1 in every 4 foreclosure actions filed nationwide.  The state also accounted for 15 of the top 25 metro areas included on Realtytrac’s most distressed metro area list.

As we noted in last month’s foreclosure report, residential shadow inventories seem to be shrinking according to Corelogic. July supply of shadow inventory (foreclosed properties not currently listed for sale) stands at 1.6 million units nationwide (5 month supply). The inventory numbers show some promise as inventory continues to shrink from 1.9 million units one year prior (six month supply) and 1.7 million units in April 2011.   With new defaults entering the system we would not be surprised to see shadow inventories grow over the third and fourth quarter of 2011.

Then again, we may also see banks proactively pushing short sales on their delinquent borrowers.  Many banks have begun offering incentives to borrowers who initiate short sales.  We may also see banks bend to the pressure of several states as they move to settle with attorney generals who want principle reductions to be a part of loan modifications.  If that’s not enough to move them, perhaps the strong suggestions by the Fed will prompt them to action.

Our conclusion this month – It seems likely we’ve seen the worst of the worst in this housing cycle.  Banks are now in a position to financially withstand their losses and political headwinds point towards helping main street, at least those remaining in their underwater homes.  We expect to see more bumps in the road of recovery and expect it to be slow in coming.  However, while it was ridiculous to think that housing prices would always go up, as some did in the early 2000′s, it’s equally misguided to assume housing is a bad investment and will never again return as a safe investment.

Good luck to everyone.

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Bank of America announced a limited time program paying homeowners in Florida up to $20,000 to short sell their home.  To many the deal sounds too good to be true, however their offer to allow upside down homeowners to walk away from their debt and get paid to do so is not only real it’s one that several other banks have already offered.

Wells Fargo has offered similar incentives to upside down homeowners who have loans originated with Wachovia, World Savings, or Goldenstate Financial, all now folded into the Wells Fargo brand.  Their program, called the “Fast Track Program,” is offered on a limited basis to homeowners in several states (including California) who opt to list their home for sale as a short sale and make their best attempts to find a buyer willing to pay market value.  The fast track program is expected to take 14 days for approvals, hence the name, and offers the seller relocation assistance up to $5,000 at the close of escrow.

Not to be outdone, JP Morgan Chase also invites selected homeowners across the country to participate in short sales, allowing many to avoid foreclosure and leave their home with sizable chunks of cash;  up to $20,000.  Chase’s program seems to be offered by solicitation, although relocation assistance can be requested by a short sale negotiator during the settlement negotiation process with the bank.

Each of the lenders mentioned have their own caveats to participate in the programs and each has limited massive participation to most likely avoid underwater homeowners who are still paying from deciding to jump ship and just walk away.  Although the idea of banks paying borrowers to leave their home may sound preposterous to many, when we consider the depth of the housing crisis, the growing backlash of sentiment from the 99%, and the hard court legal press from state and federal officials a clear picture begins to emerge.

Why Would Banks Pay You to Short Sell?

The answer to this question has developed slowly over the course of the past four or so years.  To begin, banks have now stabilized themselves to the point where they can clearly address the depth of the housing crisis.  According to foreclosure tracking service Realtytrac, 1 in every 605 homes are in foreclosure nationwide as of September 2011.  Lender Processing Services (LPS) puts the number of home owners in default at 6,397,000 and counting in that same period.  Understanding that banks simply want to recoup their losses as quickly as possible it’s easy to understand why they would encourage a process that resolves defaulted loans asap.

Enter the robo-signing‘s debacle.  Sloppy paperwork, mistakes, lack of compassion and in some instances fraudulent and potentially unlawful practices took place at banks and surprisingly, pseudo government back agencies like Fannie Mae!  As a result of these poorly executed practices, the federal Office of the Comptroller of Currency will begin reviewing the foreclosures of approximately 4.5 million previous homeowners who lost their home between 2009 and 2010.  The results could potentially bring civil damage claims to the banks.  These are damages which could have been avoided if banks agreed to either modify loans or settle debts via a short sale.

Finally, the public relations backlash against the banking industry has reached fever pitch.  The march on Wall Street has spread worldwide with protesters suggesting, “we shouldn’t bail out the banks. We should bail out the people.”  Attorney Generals from across the country have dug in their heels taking a hard stance in negotiating a settlement with banks that could overly limit bank liability to homeowners for faulty foreclosures.  In short, much of America feels that banks have a responsibility to do everything necessary to help homeowners avoid foreclosure.

Yet it gets worse for lenders.  As sympathy for banks and Wall Street investors wane, more and more borrowers find it acceptable to just simply walk away from underwater properties, even if they can still afford to pay.  Strategic Defaults are becoming far more common, especially among prime borrowers with larger loan balances.  A recent Bloomberg article indicated that nearly 27% of all defaults are strategic defaults.  It’s even worse for prime loans.  According to Bloomberg, “the share of strategic delinquencies among prime non-agency mortgages, which were typically jumbo loans larger than government-supported Fannie Mae and Freddie Mac could finance, is now almost 40 percent, up from about 30 percent a year, according to a September 30 report from JPMorgan written by analyst John Sim.

Where Do We Go From Here?

As someone who’s worked over 200 short sale files in the past couple of years alone, I can’t help but notice a fundamental shift in the attitude banks are taking towards defaulted borrowers.  One constant among approval letters, regardless of the lender, has been the clear understanding that borrowers may not financially benefit in anyway as a result of a short sale transaction.  By actively soliciting borrowers to participate in these programs and offering them money to do so, it seems hard to understand how banks can continue to justify this position going forward. Even more clear to me is the fact that banks realize they are in a losing position and must offer something to defaulting borrowers, to motivate them to leave a free home, persuade them not to fight the foreclosure in court, prevent the government from punishing them, and begin to repair their tarnished image.  How much longer before $20,000 cash offers to leave your home in short sale become $100,000 principal reductions in the form of a loan modification.  It seems to me the best win/win scenario is to keep borrowers in their homes. would you agree??

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Freedom

CNBC – Mortgage Default Filings Surge

Big news on the foreclosure front for August 2011. Led by a 200 percent nationwide increase in new foreclosure filings by Bank of America, California foreclosure starts surged upward in August to levels last seen in September 2010. The BofA increase represented a 116 percent increase in the Golden State over July 2010. They were not alone as both Wells Fargo and US Bank also posted increased filings for the month.

Perhaps this month will mark a change in direction for lenders who spent the better part of this year bogged down with long processing delays and declines in new filings while servicers sorted through the fall out of the robo-signing scandal and other shoddy processing practices. These delays have pushed the average days delinquent for US homeowners facing foreclosure action to a new record 611 days (over 20 months), according to Florida based Lender Processing Services (LPS).

While many delinquent homeowners will be disappointed by the end of free housing, the move towards resolutions will ultimately prove healing for the ailing housing market.

Foreclosure Radar released their data report for September (showing August statistical data) reflecting the surge in new California foreclosure filings accompanied by a slight increase in homes moving from the initial phase towards foreclosure sale. Below is a summary of the monthly foreclosure statistics:

  • NOD’s – a 69.49 percent increase from July to August. 31,965 total filings, which is a .75 percent decrease over August 2010.
  • Notice of Trustee Sales – a 6.06 percent increase from July to August. 24,020 total filings, which represents a 23.60 percent decrease over August 2010
  • REO’s - a 12.29 percent increase from July to August. 11,104 total sales ended up in the banks REO portfolios representing a 22.87 percent decrease from August 2010.
  • Third Party Auction Sales – mirroring the increase of new REO’s, 3rd party sales were also up 9.90 percent in August compared to July. 3,853 homes were sold to investors at the court steps, representing a 10.78 percent increase from August 2010.
  • Cancellations – Cancellations increased slightly in August by 1.86 percent as 13,165 households left the foreclosure process without proceeding to trustee sale. This figure represents a 21.85 percent decrease from August 2010. Homeowners leave the process when they become current, complete a short sale or permanent loan modification.
  • Number of Homes Scheduled for Foreclosure – The estimated total number of homes in the foreclosure process remains high in California increased in the month of August. Pre-foreclosure properties in the NOD stage increased 20.46 percent contrasting with those scheduled for sale which decreased by 3.31 percent. A total of 228,000 total properties statewide (134,000 in pre-foreclosure and 94,000 scheduled for trustee sale) are currently in the foreclosure process.
  • Foreclosure Discounts – The average value of properties sold to third party investors at the court steps was discounted 45.5 percent below the outstanding loan balance and 25.2 percent below fair market value. Those ending up as REO inventory averaged a 35.4 percent discount to loan face value and only a 6.7 percent discount to fair market value.

    Further supporting the timelines indicated in the LPS report above, Foreclosure Radar reports that the average home in California takes approximately 333 days to complete the foreclosure process. Additionally it takes banks on average 237 days to resale a property once it becomes REO reflecting an average of 570 days in total to complete the cycle from initial missed payment to ultimately being sold as a bank REO property.

    These timelines have slowly continued to grow throughout 2011 and despite Bank America’s NOD dump this month, most real estate professionals don’t see the trend reversing anytime soon.

    Nationwide Lender Processing Services (LPS) indicates that the total number of mortgages delinquent has contracted slightly to 6,397,000 total mortgages 30 days or more past due (down from 6,538,000 in July). This number is taken from their database of loans totaling nearly 40 million. Of these loans 2,148,000 have started working their way through the foreclosure process leaving 4,249,000 yet to be addressed delinquent borrowers.

    Foreclosure service Realtytrac.com also posted sharp increases in foreclosure filings across the country. Their September release, indicates that servicers filed 228,000 foreclosure related actions for the month, up 12,000 from July’s report. According to Realtytrac 1 in every 570 houses nationwide are in foreclosure; Nevada still remains the most distressed state (56th straight month) where 1 in every 118 homes are in foreclosure, while California remains second with 1 in every 226 homes facing foreclosure actions.

    Residential shadow inventories seem to be shrinking according to Corelogic September Shadow Inventory Report in their September report, noting that July supply of shadow inventory (foreclosed properties not currently listed for sale) stands at 1.6 million units nationwide (5 month supply). The inventory numbers show some promise as inventory continues to shrink from 1.9 million units one year prior (six month supply) and 1.7 million units in April 2011. Although 22 percent lower than the peak level of 2 million units registered in January 2010, I expect these inventory levels to tick back upward over the third and fourth quarters as seasonal slowing hits the housing markets during cold winter months and the holiday season.

    The quarterly mortgage performance report from the Office of the Comptroller of the Currency (OCC) was also released in September. The report covers approximately 63 percent of all first lien mortgages across the country worth $5.7 trillion in outstanding balances. Citing a sluggish economy and elevated unemployment, the report shows slight increases in delinquent mortgages. The report indicates 1,319,902 mortgages in the portfolio, representing 4 percent, are actively in the foreclosure process. Overall, 18 percent of the entire portfolio is in some state of delinquency, .07 percent better than the last quarter.

    The OCC report also tracks foreclosure alternative statistics. Short sales continue to gain steam as 12 percent more short sales were initiated during the second quarter (56,403 in the portfolio nationwide) and deed in lieu actions nearly doubled to 2,546. Although HAMP Loan modifications were up 31.6 percent for the quarter saving borrowers on average $393 per month in mortgage costs, the effectiveness of the program is still in doubt. The report indicates that nearly half of all modifications completed since the beginning of 2008 (48.7 percent) have once again become delinquent.

    The conclusions we can draw from this month’s data is three fold. First, we likely have a year or more to go before we work through the majority of mortgage problems facing homeowners. Second, as the major servicers and lenders get closer to a settlement with government agencies for faulty foreclosure practices, they will likely ramp up foreclosure or alternative foreclosure procedures to clear out excess distressed inventories. Finally, loan modifications, without principal reductions, continue to be no more than a temporary fix.

    Good luck to everyone.

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    Steve Jobs Apple Computer

    In Memory Steve Jobs 1955-2011

    The World lost a visionary, an inspiration and a leader.

    Always attentive to design and quality. His imagination and drive changed the world.

    “…And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”–Steve Jobs

    Think Different!

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    photo courtesy Gothamist

    10 years and two weeks ago I started on a journey to follow two dreams.   The first was to live in a city, The City, that fascinated me since I was a kid;   New York.   The reason I moved across the continent to live there was to fulfill a second dream, to graduate from Columbia University.

    Since being a kid I was captivated by the prospect of being part of a larger cause.   To me urban environments, diverse, dense and bustling are the ultimate manifestation of that concept.   Having grown up in a suburb of Southern California life for me felt very homogenous.   No complaining, I had everything I could hope for, great family, fun school, good friends.   Yet, everyone I knew looked the same, dressed the same, had the same hairstyle, listened to the same music, new the same people… you get the point.

    I had a taste of city life, beginning with my four years at USC, followed by a job in Downtown Los Angeles working for one of the country’s largest commercial real estate firms.   It had been a great time for me and a treasure trove of new and exciting experiences, most good and some bad.   I learned that you can’t leave your doors unlocked and expect your stuff to be there when you return.   I also learned that there are incredibly intelligent and caring people from all over the world who grow up in vastly different circumstances eager to find out how they too fit in.   I helped put together real estate projects that revitalized what were once a collection of shuddered dilapidated buildings, and witnessed rioting mobs burn down and loot shops where I did my weekly shopping.

    In 2001, I realized I wanted more.   Part of me felt I needed to know what it took to live in a real city if I was ever going to build urban buildings.   Part of me was driven by the desire to prove I could make it, and part of me was driven by Kurt Vonnegut who suggested that we should all live in California once, but leave before it makes us soft.   Live in New York, once, but leave before it makes us hard.   I had lived in Southern California all my life, was I too soft already?   Regardless, I could probably use a bit of an east coast hard edge.

    8:15 am, September 11, 2001 I woke up in my apartment on the upper West Side of Manhattan, turned on New York 1, poured a cup of coffee, and decided I would head downtown on the 1 train to the World Trade Center.   My class assignment was to hand sketch a building in city and bring it in for discussion later that afternoon.   I jumped into the shower before leaving figuring I’d either sketch the NY Stock Exchange building or the Woolworth Building, for 17 years the World’s tallest building.

    Before leaving I glanced at the TV one last time to see something odd.   Fire and smoke was flowing out of the World Trade Center.   I turned the sound back up to hear confused newsmen trying to figure out what had happened.   There was talk of an explosion, a small plane or helicopter that may have crashed, but no one seemed sure exactly what had occurred.   That was until the second plane crashed into the second tower.   I was stunned.

    A product of Southern California, my first thought was that somehow I had turned the channel and was watching a movie.   Surely this had to be make believe.   No way I just saw what I saw live on the news.   I called my parents in LA, told them to turn on the television and realized the world would never be the same.

    Exactly 8 miles north of Ground Zero, the campus at Columbia felt a million miles away.   It was almost a perfect day.   Not one cloud in the sky and temperatures were perfect.   Had I not watched the news, I would never had known anything was off except for military jets flying up and down the Hudson every 10-15 minutes.   I ran into several classmates at a nearby cafe and stopped to chat with them about our bizarre morning.   Most of them were native New Yorkers, still calmly taking in the idea of what had happened and remembering several years early when someone tried to blow up the towers using a bomb in the parking garage.

    Then, again, as if I were in a movie, their cell phones starting ringing, each of them realizing that family members or friends worked in the WTC buildings and getting word that the towers were falling.   One by one they peeled off from the group until I was left trying to figure out what would come next.   Another of my friends had suggested we go to a Hospital down in the Village to give blood.   When we arrived near midday,   there was a line around the block with volunteers waiting to give blood or help;   Out front doctors and nurses had rolled out equipment, setting up a triage unit awaiting victims – nearly a half-hour later most started to grasp the reality that no one was going to show up.

    The terrible events of 9/11 have left a scar across the chest of Americans. Still a visitor to the city, I felt like a unwelcome bystander in the middle of someone else’s disaster.   Ten years later now back in Los Angeles, I feel honored to have become a New Yorker, if for only a short time.

    I will never forget watching fireman race towards a burning building, watching policemen calm panicked and confused crowds, witnessing taxi drivers help ash covered workers into their cabs.   I will never forget the surreal images of collapsed buildings, abandoned cars and a completely deserted Time Square. I will never forget the resolve of a determined city eager to become bigger than itself.

    The greatest lesson I learned that day was the importance of calm in the midst of a storm.   Patience and strength pervaded the city, uniting everyone towards solving a problem.   That contagious decisiveness spread across the city, state and country as images spread across televisions and news across radios.

    Congratulations to the city for your continued drive to heal and thank you for setting an example for all of us to follow.

    Let’s hear it for New York!

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    The real estate market has never been as chaotic, challenging and full of opportunity as it is in 2011.   While many homeowners continue to struggle with mortgages that exceed the value of their home and difficulty meeting their monthly mortgage payments, homebuyers and investors alike are finding incredible opportunities to find the home of their dreams and investments leading to financial independence.

    These buying opportunities also come with the responsibility to be prepared and make sound buying decisions.   A faltering market does not hide mistakes like a market in hyper-drive.   Overpaying, lack of planning, or faulty assumptions on the markets future can lead to disaster.   Conversely, a well prepared buyer with a sound plan can find unlimited success.

    To help with your buying decisions in 2011, I’ve prepared a list of the 10 things every buyer should know before buying real estate in 2011:

    1) Distressed Properties Still Drive the Market

    Although it’s still possible to find a home owner attempting to sell in a buyer’s market, an overwhelming number of sales are still distressed in nature.   Foreclosures, trustee auctions, short sales, probates are available in large numbers and continue to have a significant impact on buyer decisions, lender outlooks, and overall market values.   The most distressed states such as Nevada, Washington, California, Texas and Florida are still experiencing declining values due to the sheer volume of distressed sales.

    2) Secure your Financing Before you Start Shopping

    Good things come to those who are prepared!   As I tell my clients most sellers are concerned with the “surety of a deal.”   In many cases sellers will forgo thousands of dollars from the sale price for the assurance of a cash buyer who can close quickly.   Although you may not be fortunate enough to have the cash reserves to buy a home without a loan, you can do the next best thing and secure your financing before you start looking for a home.   Those who do tend to be better armed for a quick decision and far more likely to find the diamond in the rough.

    3) Jumbo loans aren’t as Jumbo come October

    This is most important in the high cost areas of the country.   For example Los Angeles County, Orange County, Marin County all in California.     Financing a home purchase has been especially challenging since the market changed in 2007.   Many home purchases were only possible because the FHA continued buying loans making conforming loans the predominant form of financing across the country.   By contrast Jumbo loans, were difficult if not impossible to find.   For most markets this meant that homes priced above the FHA conforming loan limits were difficult to sell.   After October 1, 2011, the high cost conforming loan limits will be reduced from $729,750 to $625,500 for single family homes.   This will likely mean that buying a home beyond the $625,500 price tag after October 1 will be more challenging and costly.

    4) Appraisal Values are Not a Given

    It seemed that all you needed was a pulse and a signature to get a loan in the early 2000′s.   Of course the result of such lax standards was a disastrous fall in values after the spigot of easy financing was shut off.   Nearly every sub prime lender has left the business along with the eternal optimism that was often supported by appraisals that unfailingly showed rapid appreciation.   Today’s appraisers are rightfully conservative. Further, due to changes in lending laws lenders and real estate agents have limited to no control over the appraisal process.   The result of this in 2011 is that the pendulum has swung in the opposite direction.   Many buyers across the country are finding that getting an appraisal that supports their purchase price is not a given and in many cases results in broken deals where values can’t be supported.

    5) Know the Costs – it’s More than Just a Mortgage Payment

    Don’t forget that owning a home comes with the responsibility of caring for your investment.   At a minimum homeowners should have 1% of their purchase price socked away for unexpected expenses.   Better yet, 2%-3% of the purchase price will help insure that sudden disasters like roof replacements, plumbing or electrical malfunctions can be addressed quickly and properly.   Although many foreclosure victims find themselves in trouble after a life changing event or loss of job, it’s typically the big unexpected repair which pushes them over the financial edge.   Be prepared.

    6) It’s Still Possible to get a Loan with Stated Income

    Although not a place for the novice buyer, it is still possible to find a loan without having to document your income.   Welcome to the world of private lending.   Bad credit, self employment, or poor performing tax returns do not necessarily lock you out of the buying market.   These loans may carry rates far in excess of the average conforming loan (think 10%-14%) and may also require larger down payments (eg. 20%-40%) but can be a useful tool for investors, rehabbers, or homebuyers with a deal just too good to pass up.

    7) Investors can Generate Positive Monthly Cash Flow

    A novel concept indeed.   However the heady days of the early 2000′s often forced investors to buy investments based on the hope that values and rents would continue to rise.   Now that most sane investors realize that appreciation will be slow or stagnate over the next few years values have dropped to the point where property can generate positive monthly income after mortgage payments, taxes, insurance, and monthly operating expenses.   It’s time to seek these opportunities and build your real estate empire.

    8) Investors Should no Longer Buy rental property on “Scheduled” Income

    Like Unicorns and Fairies, projected income should be treated as pure fiction! In a seller’s market when competition is stiff and values are rising rapidly it’s almost plausible that an investor would pay a seller for the work he or she would do “after” the close of escrow, but in a buyer’s market it makes little sense, carries tremendous risk and will not be supported by your lender.   Capitalization rates and Gross Rent Multipliers should be based in “actual” income.

    9) It’s still about Location, Location, Location

    In hot markets when prices are rising rapidly buyers tend to settle for buying opportunities in secondary markets or awkward locations. The primary reason; buyers get priced out of the best locations.   When markets cool investors tend to follow whats known as a “flight to value.”   In other words, when prices are reasonable most buyers avoid troubled locations and secondary markets seeking to buy an affordable home in the most desirable or best location.   In 2011 home buyers will find the best opportunities by targeting the worst house in the best location.   Seek to add value with physical improvements, get to know your local hardware store, but target the best location you can afford.

    10) A Seller Under Duress Does not Guarantee a Good Deal

    REO does not equal bargain!   Short sales are not always sold at a discount.   The smartest and most successful home buyers understand that the distressed label does not guarantee a good deal.   Do your homework before committing to a deal. Review comparable market information and remember a good comparison of value is a closed sale.   Homes actively being marketed for sale can be and often are listed at prices that have no factual support from closed sales.   Be a smart buyer.

    Everyone looks like an all star real estate investor when markets are good and prices are appreciating rapidly.   A challenging market and bad economy hide   no skeletons.   2011, while challenging and distressed, provides an astute buyer with incredible opportunities to buy right.

    For those of you who waited out the middle part of the last decade wondering how anyone could justify buying at those crazy prices, your time has come.   Price levels are back on average to 2003 levels wiping out the craziness.   For seasoned investors ready to jump back in, the time has come to start adding   to your real estate empire.   May you all find success.

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    photo credit: Andrew Ciscel

    California jumped ahead of the nation in July with regards to protecting homeowners against deficiency judgments during a short sale or foreclosure.   With the passage of SB 458 (Corbett) signed into law by Governor Brown July 11, 2011, it’s now illegal for lenders to pursue most homeowners after agreeing to settle their debt in a short sale.

    Adding to the protection already afforded to many California homeowners after a non-judicial foreclosure auction, SB 458 and SB 931, which passed in January 2011 now extend deficiency judgment protection to most borrowers on single family homes, condominiums and 2-4 unit apartments in short sale transactions.

    This new law (CA Civil Procedure Code 580e) has been lauded by most real estate trade groups who recognize it as the last hurdle towards bringing short sale regulations in line with non-judicial foreclosure regulations in the state.

    Significant to Note

    • It covers all parties related to or represented by the lender in the transaction.   Therefore in agreeing to a short pay, the borrower will not be pursued by the lender, the investor on the loan or the Mortgage insurer after the close of escrow.
    • It specifically states that, the lender cannot require the borrower to “pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent to the sale.”   Therefore the lender cannot legally ask the seller to sign a promissory note, or contribute cash at close of escrow.

    Potential Snags

    It’s hard to find a reason why anyone would choose foreclosure over a short sale in California now that the new laws have passed.   However, there are a few potential snags which remain.

    For example, junior lenders are not compelled to agree to a short settlement.   Since they have nothing to lose and everything to gain, it may compel some lenders to hold out for a better contribution towards their debt.   Although promissory notes are out of the question and seller contributions are prohibited, the law does not forbid other parties from contibuting towards the debt settlement.   Family members, ahem… agents in the transaction, buyers, may all be “hit up” for additional money to settle the debt.

    Junior liens not associated with the senior loan are still able to pursue a deficiency judgment after a non-judicial foreclosue sale.   Considered “sold out junior liens” after the foreclosure sale and rendered legally worthless these loans allow the lender to pursue a borrower after a foreclosure.   In cases of a strategic default and short sale where a borrower has other significant assets to pursue, the junior lender may choose to take it’s chances, foreclose and pursue a judgment.

    To note, these sold out junior loans do not have the same rights to deficiency in cases where the foreclosing lender wiped out it’s own interest (Simon v. Superior Court (Bank of America),  4 Cal. App. 4th 63 (1992)) or in cases where the worthless security exception does not apply, like purchase money loans (Brown v. Jensen, 41 Cal. 2d 193 (1953)).

    Conclusion

    Primarily a non-judicial foreclosure state, California has protected homeowners against deficiency judgments better than most.   As a single action state, lenders have but one remedy to collect on debts when a borrower stops paying.   Security first rules further protect borrowers in California by requiring lenders to exhaust the collateral of the loan before personally pursuing the borrower for liability.

    Now that the state has passed laws that protect borrowers both in short sale and foreclosure scenarios it will be rare and difficult to find situations where a homeowner remains on the hook for a debt after resolving a sale.

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    photo credit: asgreinc

    May 2011 had the fewest new foreclosure filings or foreclosure starts since October 2008.   At first pass this seems to be good news, perhaps an indication that the worst is over and fewer households will face foreclosure going forward.   A deeper look at the housing market tells us that other mitigating factors led to the slowdown in May and that we still have a long way to go.

    One this is clear; proposed solutions are many and a lacking clear direction from banks is causing delays, delays, and more delays.

    Foreclosure Radar released their data report for June showing drops in new California foreclosure filings and an increase in homes moving from the initial phase towards foreclosure sale.   Below is a summary of the monthly foreclosure statistics:

    • NOD™s “ a 2.36 percent decrease from April to May.   20,533 total filings, which is a 24.3 percent decrease over May 2010.
    • Notice of Trustee Sales “ a 18.38 percent increase from April to May.   25,967 total filings, which represents a 16.6 percent increase over May 2010, an increase after fourth consecutive monthly drops in filings
    • REO™s “ a 3.54 percent increase from April to May. 11,750 total sales ended up in the banks REO portfolios representing a 3.4 percent increase from May 2010.
    • Third Party Auction Sales – mirroring the increase of new REO’s, 3rd party sales were also up 4.19 percent in May as compared to April.   3,704 homes were sold to investors at the court steps.   This figure also represents a 4.1 percent increase from May 2010.
    • Cancellations – Cancellations were dropped in May by 24.3 percent as 14,010 households left the foreclosure process without proceeding to trustee sale. A significant drop after three months of consecutive gains. This figure represents a 18.92 percent decrease from May 2010.   Homeowners leave the process when they become current, complete a short sale or permanent loan modification.
    • Number of Homes Scheduled for Foreclosure – The estimated total number of homes in the foreclosure process remains high in California and remained flat in the month of May.   Pre-foreclosure properties in the NOD stage decreased 4.07 percent following suit with those scheduled for sale which decreased by 1.83 percent.   A total of 225,000 total properties statewide (118,000 in pre-foreclosure and 107,000 scheduled for trustee sale) are currently in the foreclosure process.

    Loan mods, short sales, and lawsuits continue to delay banks as they deal with homeowners who stop paying.   The average time to foreclose in the state of California continues its steady climb, increasing 10.3 percent in May 2010 to a new record 344 days on average to foreclose.   On average, it takes a bank almost one full year to foreclose on a homeowner once they stop paying the mortgage.

    Investors buying at trustee sales, on the other hand, are faring much better now that the summer buying season has hit full swing and inventory levels of homes that aren’t in some stage of distress become rare commodities.   These buyers are now reselling their investments at a much faster clip 7.6 percent faster at 134 days on average.   This is the fastest pace since September 2010.

    Lender Processing Services (LPS) also noted some distressing news for those hoping the worst was behind us. The LPS Mortgage Monitor monthly in May shows us that loans 90+ days delinquent and in foreclosure outnumber foreclosure sales 50:1.

    The report (download LPS report here) covering nearly 40 million loans across the country indicates that 7.96 percent of total US home loans are delinquent adding to that 4,084,557 homeowners are 90+ days delinquent on their mortgage and in some stage of foreclosure.   This number part of a total 6,350,487 homes not current and in some stage of foreclosure nationwide.

    The conclusion to draw from this months reports – lack of direction from all ends of the distressed market.

    From servicers unclear how to follow proper procedure, to loan investors lacking a clear guidelines.   From homeowners unsure if they’d like to stay and modify or leave and sell short, to Government programs which seem to lack effectiveness.   One thing is clear, as Los Angeles Times reporter Michael Hiltzik suggests, Homeowners deserve more.

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    photo courtesy: thetruthabout

    What does it mean when the foreclosure experts are baffled by the statistics of the foreclosure housing market?   Most often the anomalies are explained by uncovering some hidden manipulation taking place behind the scenes, artificially creating temporary outcomes that are later explained when more information comes to light.

    Not one to follow conspiracy theories, I’ve been reluctant to buy into the theory of foreclosure roulette, Foreclosure Radar CEO Sean O’Toole put forth last August.   However as loan modifications continue to wallow, short sales become more predominant in the market, confusion and lack of clear guidelines reign supreme, and REO’s continue a slow trickle into the market it all seems to make more sense.

    As the banks emerged from self imposed foreclosure moratoriums and slowed foreclosure filings due to the robo-signing scandals and resulting lawsuits, most expected new filings in April to increase as banks pushed through the backlog of files on their desks.   Defying logic, the opposite happened this month.

    Foreclosure Radar released their data report for May showing unexpected drops in California foreclosure filings this past April.   Below is a summary of the unexpected monthly foreclosure statistics:

    • NOD™s “ a 25.84 percent decrease from March to April.   20,788 total filings, which is a 28.04 percent decrease over April 2010
    • Notice of Trustee Sales “ a 10.92 percent decrease from March to April.   21,732 total filings, which represents a 31.21 percent decrease over April 2010, the fourth consecutive monthly drop in filings
    • REO™s “ a 17.24 percent decrease from March to April. 11,342 total sales ended up in the banks REO portfolios representing a 21.09 percent decrease from April 2010.
    • Third Party Auction Sales – mirroring the drop in REO sales, 3rd party sales were also down 15.75 percent in April as compared to March.   3,553 homes were sold to investors at the court steps.   This figure also represents a 16.24 percent decrease from April 2010.
    • Cancellations – Cancellations were up in March by 26.95 percent as 18,488 households left the foreclosure process without proceeding to trustee sale. While representing a significant gain over the past two months this represents a paultry 1.15 percent increase from April 2010.   Homeowners leave the process when they become current, complete a short sale or permanent loan modification.
    • Number of Homes Scheduled for Foreclosure – The estimated total number of homes in the foreclosure process remains high in California and remained flat in the month of April.   Pre-foreclosure properties in the NOD stage increased 10.93 percent offsetting those scheduled for sale which decreased by 9.80 percent.   A total of 231,000 total properties statewide (123,000 in pre-foreclosure and 108,000 scheduled for trustee sale) are currently in the foreclosure process.
    • Lender Discounts at Auction – Winning bid amounts averaged 44.2 percent less than outstanding loan amounts and a 26.2 percent discount to fair market value.

    Continuing a trend that should prompt more short sale approvals in the coming months the report also indicates that foreclosure time lines have grown again throughout the state.   The average time to foreclosure is now 312 days (roughly 10 months) a 3.31 percent increase over last month and a 15.56 percent increase from April 2010.

    The banks aren’t doing much better after foreclosure, taking on average 222 days (7.4 months) to resell their REO’s once they take ownership.   Whether due to inefficiencies, lack of motivation to move property quickly, or internal procedures, it takes on average 34 percent longer to resell an REO compared to properties resold by third parties (investors) after buying at the court steps.

    To add a bit more confusion into the market, Florida based Lender Processing Services (LPS) also released their monthly foreclosure report covering nearly 40 million loans across the country.   After reporting a 12 percent drop in foreclosure filings last month, LPS notes a slight 2.4 percent increase in filings from March to April.   Their overall mortgage delinquency rate rose to 7.97 percent at the end of April.   This number accounts for mortgages that are at least 30 days past due but have not formally entered the foreclosure process by receiving a notice of default (NOD).

    LPS reports the nation™s foreclosure rate stands at 4.14 percent at the end of April 2011, slightly lower than March 2011(4.21 percent).   These figures amount to 6,388,000 homes in the US either delinquent or in foreclosure, representing 2,184,000 are part of the foreclosure inventory and 4,204,000 are delinquent but have not been formally served.

    The Mortgage Banker’s Association also released the quarterly National Delinquency Survey (NDS) for Q1 2011 today (Thursday) showing that on a seasonally adjusted basis 12.84 percent of mortgages were either one payment delinquent or somewhere further along in the foreclosure process.   This is essentially flat compared to Q4 2010.

    In a conference call earlier today MBA chief economist Jay Brinkmann noted “(the) Bulk of problem loans were originated in 2005, 2006, and 2007.” Also, suggesting that “Outlook is good. Market is on the mend.”   However later in the call Brinkmann suggested employment figures will continue to drive and direct and pace of the market recovery reminding listeners “Unless people have a paycheck, they can’t make a mortgage payment.”

    According to MBA Florida and California lead the nation in foreclosures, representing 24 percent and 11 percent of all troubled loans respectively.   Drawing from the statistics that the NDS covers about 43.7 million first lien mortgages on SFR one-to-four unit properties, covering about 88 percent of the outstanding first lien mortgages in the market, the writer’s at calculated risk indicate this reflects a total of 6.4 million delinquent borrowers, right in line with the LPS report earlier this month.

    As a result of the sheer volume of distressed properties, it seems we still have a long way to go before the stress is worked out of the markets; perhaps years.   Massive foreclosures and quick/efficient short sales are certainly not our current norm; further it seems unlikely that will change anytime soon.   What can be expected is the unexpected.   If Mr. O’Toole is correct with his theory, we can expect more of the same illogical and confusing responses and results along the way.

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    © 2011 Allan S. Glass – ASG Real Estate Inc. ®

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