Common Sense Real Estate

Effective April 30th, there will be no more real estate agents in the state of Illinois.

No, they haven't all given up and quit the business, although some have and others are considering it.  Illinois is requiring all licensed agents who want to stay in the business to transition to a broker's license, which requires additional education, passing a test and paying additional fees. Those who now hold a broker's license can remain a broker or, can transition to a managing broker's license, which would be required to manage an office. Everyone is basically moving up a notch. While this should be a good thing overall as it will require a bigger commitment from anyone getting into the business and should net more knowledgeable people working in the business, there is a downside for some. The downside is that those who currently hold a broker's license will be required to transition to the new managing broker's license to have the ability to do what their current license has always allowed them to do. I fall into this category. Having held a broker's license for many years already, I've been able to own and run my own office. If I decide to maintain this ability, I would need to transition to the new license to do what I've already been doing for the past 20 plus years.

Since these changes should increase the number of knowledgeable people in the business, and weed out some for whom the business was a part -time job, it's not a bad thing and should provide a higher level of service to those we represent.  Something tells me that this transition wasn't only about getting better professionals in the business. I suspect money was also a factor. Those who make the transition will be required to shell out some more money for additional education requirements and the new license.  In the long run, this will probably cost the state revenue instead of increasing it, as many will simply get out of the business altogether. This would seem to make sense as many have seen a decline in their number of transactions closed and, those that do close, usually require much more time and effort.

In recent years, our association's number of active licensees has been declining, especially at the time of year that we're billed for association dues and MLS fees. For some, these new licensing requirements mean more fees in a time when money is very tight. Many people don't realize how costly it is to maintain an active license, whether the Realtor sells anything or not.  As I write this, over 65% of our association's licensees have not yet completed their transition and/or continuing education.  Many wait until the last minute.  Some, especially those who haven't closed a transaction in over a year (a surprisingly high percentage) will not be able to justify the additional time and expense of the transition and will exit the business.  It's difficult to predict how many will stay licensed.  Time will tell.

With the current real estate market so strongly favoring the buyer, some homeowners are choosing to rent out their current home instead of selling when it comes time to move up to another home. With this strategy, one is able to take advantage of the current low prices as a buyer without having to sell their current home at a discount. Sounds like a great idea and for some it is, but rental properties aren't for everyone. Like most things, there are risks involved.

What's the worst that can happen? 

Over the years, I've owned rental properties and for the most part, have done well with them. Being in the business, I've seen some who weren't so lucky. I've heard the horror stories of tenants who move in, damage the property, stop paying and are tough to evict. A movie that comes to mind on this subject is "Pacific Heights", which came out around 1990. I suspect most people who've seen this movie would be petrified of ever being a landlord! It really is an extreme example of all things bad regarding rental property. While there are no guarantees, with the right approach, it can be a smart investment that pays big dividends over time.

The current rental market:

Recently I got a call from a client who was interested in selling their town-home. After meeting with them and and going over the numbers, they decided that they didn't want to sell in the current market and decided to have me find them a tenant instead. We put the unit on the market for rent and, within a few days, had applications from four prospective tenants. Results like this are actually pretty typical these days for a few reasons. While many people would prefer to own versus rent, some simply don't qualify for a loan. Some are dealing with a recent bankruptcy and or foreclosure. Some simply choose to not be tied to a property long term and renting makes more sense. The bottom line is that everyone needs a place to live. When people aren't buying, they're renting. In a market where sales are slow and the number of qualified buyers is lower than normal, the demand for rentals and, in many cases, the monthly rent amount goes up.

The perfect tenant

In most cases, there's no such thing. With rentals, as with most things, there are no guarantees! There is at least some risk involved. If this weren't the case, everyone would be a landlord. You may find a highly qualified tenant with great credit and a strong income but things can change. A sudden job loss can happen. There is no way to predict with absolute certainty what the future holds but there are steps that can be taken to increase your chances of being successful and avoiding a bad situation. Sometimes it may come down to little more than a feeling for how one person comes across compared to another. It's not always possible to be a perfect judge of character but in many cases, impressions do matter. If a prospective tenant shows up to view your home and you notice that their car is filled with months worth of fast food wrappers and other garbage, this could be a good indication of what your home may end up looking like should you decide to rent to them. References from previous landlords are always a good thing. If there's a way to see the prospective tenants current residence, this may also tell you a lot about what to expect. In the past, I've done this by personally dropping off paperwork to the prospective tenant at their current residence.

What to expect:

These days, you're more likely to see people with less than perfect credit. You'll probably receive applications from some with a bankruptcy and or a foreclosure on their credit. This is much more common now than in the past. The fact that someone has damaged credit shouldn't automatically rule them out as a tenant. Consider their circumstances and try to look at the big picture. If you had been through the same things they had, would your credit look any better? There are a lot of factors to consider. In my example above, the application we accepted was from someone who had a bankruptcy a while back and their income was less than half that of another applicant we didn't accept. When comparing the applications, the prospective tenant who made a lot more money also had worse credit and not as many reasons for the low credit score. While the applicant we accepted did have a bankruptcy, it was only after they had made every attempt to pay their bills including exhausting all of their savings and 401k. To the owner of the the town-home, and also to me, this said a lot about their character.

The payoff:

Of course making money is the goal but how is this accomplished? the best rentals don't always have a positive monthly cash-flow. There are other factors to consider. While some may not immediately see the advantages of owning a rental property that simply breaks even every month, the advantages, in some cases, are there. Appreciation in the property can greatly outweigh a monthly income.   Years ago, I had a rental property that cost me about $900 per month to own. I rented the home out for $900 per month so I made nothing from the monthly rent. It was a wash. To most this wouldn't seem like a very wise investment, until one looked at the whole picture. This particular home was one I bought for $78,000. After purchasing, I spent roughly $30,000 to completely renovate the home. Once the home was back in shape, it appraised for about $130,000, which enabled me to refinance into a mortgage of $110,000 and recoup my out of pocket costs. At that point, I really had none of my own money into the deal and had a completely renovated home. In my area, appreciation was running at between 3-4 % per year and had been consistently performing like this for years. When you add up 3-4% appreciation per year on $130,000 over several years, (for a home I no longer had any of my own money tied up in) it's pretty easy to see the upside.

Know the local market:

While the above approach has worked well for me and a lot of others, there are many who haven't done as well and some who've lost a lot of money trying to do this. In some areas, until around 2007, homes were appreciating very rapidly, some at a ridiculous rate that just couldn't be sustained for any length of time. Some, attempting to cash in on the skyrocketing values, bought homes and assumed they would continue to rise in value at a record pace. At the peak of the market, appreciation in Phoeniz was at around 50% per year! Many people who thought this would go on forever really took a beating! In my opinion, a more conservative, predictable market is typically much safer. Check with a Realtor and learn about the market you're considering investing in. Not only the current state of the market but also how it has performed over time. Finally, before you commit to renting out your current home or buying a home for investment purposes, check with an accountant regarding potential tax ramifications.

Foreclosure auctions or sheriff's sales as they're referred to in my area ( Lake County IL.) are the sales that are held at the end of the foreclosure process, where the homes are either sold at the auction or taken back by the bank. The sale information is published as a legal notice specific to each property in the local newspaper. Lists of homes being auctioned can also be obtained. The homes are offered in a public auction and sell to the highest bidder above the bank's opening bid. The bank decides the amount of the opening bid. If nobody bids on the home, it goes back to the bank.

It had been years since I had been to a sheriff's sale. I ended up going to one yesterday. There were some things I noticed right away that hadn't changed. You could tell as the room started filling up that many of these people knew each other or at least were used to seeing each other every week. I'm sure for some, it's a full time job. One thing that was different was the volume of homes being run through the auction. The sales I had been to previously had only a handful of homes being auctioned. Yesterday there must have been close to a hundred!

 It was interesting to see what some homes sell for at auction versus sales on the open market - some pretty deep discounts are evident. There was one house being auctioned that I was very familiar with and knew it's value. It was a tri-level which normally would sell for about 130k, conservatively. The bank's opening bid on this home was $87,000 and nobody bid on it. This shows not only the discounts available with these homes but also how much of a discount these buyers expect or require before they'll bid.  A couple of the homes, I could tell by the addresses, were great buys for the opening bid amount.

This was a much more active sale than ones I had been to. There were a few properties that had multiple bidders which drove the price up several thousand dollars above the bank's opening bid. Clearly some of these homes were much better buys than others. Of all the homes available, only about ten of them sold. The rest were taken back by the bank and will most likely find their way onto the market in the coming months.

There are definitely opportunities at these sales but it's not something to just show up at and buy something. These purchases should include plenty of research prior to the sale, including the advice of your attorney.

Most people's motivation for buying a short sale comes down to one thing. Price!

One important thing to consider with short sales is that in many cases the list price means nothing!

What I mean by this is that most sellers of short sales don't care what price their home sells for as long as their lender agrees to accept the net amount of the sale as full payment for the amount  the seller owes. The seller's motivation is simply to get out from under a bad situation. The seller receives none of the proceeds from the sale so, whether the home sells for market price or substantially less, it makes no difference to the seller. For this reason, a very aggressive, sometimes unrealistically low list price makes sense. In many cases, these sellers are facing foreclosure and it's a race to beat the deadline of the sheriff's sale that's looming. Receiving an offer is the first step to getting the sheriff's sale put on hold and it's common to see the list price reduced over and over until an offer is finally received. In many cases, by the time an offer is received, the list price has been reduced to a number that's far below what comparable homes are selling for.

An analogy:

Imagine going to the store. As you walk down the aisles, you spot many items on the shelf that are clearly priced lower than the comparable items around them. You find an item that you want to purchase, being motivated by the low price. You put the item in your cart and head for the checkout. After waiting in line for what seems like forever, the cashier looks at the item, looks at the price tag and then proceeds to say " sorry, we can't sell you that item for that price". At this point, you could pay a higher amount for the item ( a counter-offer ) or you could go back down the aisles to find another low priced item and start the whole process over again hoping that, eventually, you'd be able to actually buy what you wanted for the amount on the price tag. It really comes down to how much time you're willing to spend in hopes of buying at a discount. Another option would be to leave that store and go somewhere that the items could be purchased for the amount on the price tag.

If you're looking for the discount and that's your primary motivation, a bank owned home is usually a better way to go. These homes have already been taken back by the bank and have been priced at an amount the bank will accept. These can be really good buys but some will have additional hoops to jump through compared to non-distressed sales. An "approved short sale"( the bank has already approved the sale at list price ) is also typically a better option.

The one thing which must be considered when pursuing a short sale is time. While many of the banks have gotten better regarding how long it takes them to respond to offers, it's very possible that you could be waiting several months for a response and, that response may end up being a rejection of the offer or a counter-offer. The longest short sale transaction I've worked on took almost nine months to close! While this is a very long time, I know other agents who have had deals take even longer.

If you're a buyer who has plenty of time and doesn't mind waiting for something that may not pan out, it may be worth the effort and you may end up buying at a deep discount. On the other hand, you may be heading down a long road which ultimately leads to nowhere.

There are many variables when it comes to short sales and their success or failure. Working with an agent who knows their way around this process can eliminate some of the uncertainty, but not all. The bottom line is that you're trying to purchase something that requires the approval of a third party ( the bank ) to accept less money than they're owed.