Common Sense Real Estate

To some, the answer to this question is very simple but to an increasing number of people, it's a question that requires a bit more thought. It seems there are more people these days who feel it's acceptable to stop paying their bills, letting it become the problem of someone else. Some have no choice as they simply don't have the money to pay due to a job loss or other factors. While the number of people in this category is definitely on the rise, more troubling is the fact that the number of people who do have the ability to meet their obligations but choose not to is on the rise as well.

Rewarding irresponsibility

Recently, I closed a short sale with a buyer I was working with. He got a very good buy and, the seller, who had fallen behind and was facing foreclosure, was able to get out of a bad situation and move on with his life. Overall it was a win-win situation. One thing that was different from any of the short sales I had been involved with previously was that the seller's lender actually cut a check to the seller for $10,000.  I was happy for the seller as I knew this would be a tremendous help to him and his family in a time when not much of anything had been going their way. Unfortunately, those who need help the most don't always receive it and sometimes those who need no help, who haven't lost a job or dealt with a financial hardship are reaping the benefits. There are people who are earning as much or more than they have in the past but, since their home value has dropped to a point which is below what they owe, they simply stop paying their mortgage. In most cases, depending on the state, those who do this end up staying in the home for a year or more (payment free) after they stop paying. It's referred to as strategic default. I've even heard stories of some people going out and buying a bigger, nicer home and then defaulting on the first home.  Some liken this to nothing more than a business decision... Why continue to make payments on something that is worth less than what they payed a few years ago? This situation can only get worse with some banks now offering large sums of money (upwards of $30,000) to homeowners who agree to sell their home as a short sale instead of forcing the bank to go through the lengthy foreclosure process. While this may increase the bank's bottom line, it does come at a cost. Part of that cost lands on all of the homeowners around the subject property via lower sale prices.

The most current statistics I've seen show roughly 11 million people are now underwater with their homes - they owe more than their home is worth. Of these 11 million, roughly 8 million continue to pay their mortgage each month - some struggling to do so. Imagine if all 8 million of these homeowners suddenly stopped paying their mortgage in hopes of being rewarded for selling their home through a short sale. Of course this is an extreme example. However, there are plenty of people who, with a bit of financial incentive, would gladly walk away from a house which has thousands more owed on it than it's worth.   With a short sale, the seller does not care how little the home sells for as long as the bank agrees to take the proceeds as full settlement of the debt owed. Not a good thing for anyone nearby who's trying to sell their home and does care what it sells for!

Let someone else pay!

Essentially, this is what the banks are saying. To speed up the process of getting a non-performing loan off their books, they are causing the housing market to realize the loss ultimately. The homeowners who have chosen to do a strategic default are clearly saying 'let someone else pay', too. Unfortunately, at some point, all of us become the 'someone else' who ends up paying.

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.

...Almost anything can be made to sound believable!

Recently while on Facebook, I saw something a friend had posted that caught my attention. The post was a chart that showed a breakdown of the budget and debt of the government. All of the figures in the chart were adjusted by removing several zeros from the end of each figure, transforming the chart to something that resembled a  household budget. The resemblance was limited to the fact that the numbers were in the thousands and not billions or trillions of dollars. That's where the similarities ended. The numbers, if they represented a real household budget,  it would be a household long overdue for a visit to the local bankruptcy attorney!

This chart is nothing new. I had seen it a few times in the past. It really does put things into perspective regarding the federal budget and deficit spending. The numbers in the chart were as follows:

Annual Income: $21,700.00

Annual Expenses: $38,200.00

New Credit Card Debt $16,500.00

Total Credit Card Debt: $142,710.00

Total Budget Cuts: $385.00

Pretty alarming when put into this perspective!

What was different this time was that someone had posted an interesting comment about the chart. He posted that this chart was something created to sensationalize the current state of the economy, that you can't compare the economy of the government with that of a household. Following his comment was a link to an article that I was sure would attempt to back up his opinion and may have even been the basis for that opinion. Being curious how anyone could put a positive spin on these numbers, I had to read it.

It was a well written article that brought up some valid points but, overall seemed to minimize the need for concern over the economy. It showed how, for the past couple hundred years, we have experienced many highs and lows in the economy and have usually had deficits. The thinking seemed to be that we've always gotten things back on track in the past and there's no reason to think that things would be any different this time around.  What a relief!

 Unfortunately, it's not quite that simple.  I then thought about some of the things that weren't part of the article- All of the jobs that are no longer in this country but have been shipped overseas. (Thanks NAFTA!) That we're a  shadow of what we used to be with regard to manufacturing. That after the great depression we were able to produce our way back to prosperity due to our strong industrial base. That the US dollar may not always continue to be as in demand as it was in the past. Somehow these important pieces of information were left out.

The problem with trying to put a positive spin on numbers is that numbers are not subjective. They're not a matter of popular opinion- Adding two plus two will always yield the same result. Always! While it may be possible to cite reasons to be optimistic, the numbers don't lie.  It would be nice to think that we'd get spending under control before things get worse. It seems doubtful that will happen until people are at least willing to acknowledge that there's a problem.  Just my two cents. ( $1.00 adjusted for inflation )

With the decline in home values in the past few years, some homeowners who need to sell in the current market find themselves trapped, as they owe more than their home is worth. In this situation, the short sale can become a viable option.

What is a short sale:

A short sale is simply a sale in which the proceeds are not enough to cover all of the outstanding obligations associated with the sale of the home including the mortgage or mortgages, unpaid property taxes, attorney's fees, title expenses, commissions, etc. This shortage would require the seller to bring money to the closing or to negotiate a "shorted" payoff with their lender. The lender has no obligation to agree to this, but many will. In most cases, a short sale is attempted by sellers who are facing foreclosure or have fallen behind and no longer have the ability to continue making their payments.  

The process:

There are a lot of misconceptions about the short sale process and the lender's role in it, even among some Realtors. The seller's lender's role is nothing more than that of a contingency.  This can vary by state depending on whether it's a title theory state or lien theory state. This information applies to Illinois, which is a lien theory state (the owner holds title and the lender holds a lien on the property)

The seller owns the home and ultimately is the one who, with the help of their agent, accepts, rejects or proposes a counter offer once an offer is received.   When the offer is accepted by the seller, it is done so contingent on their lender agreeing to accept the net proceeds of the sale as full settlement of the amounts owed.   I've had more than one occasion where an agent working for a buyer asks when their offer will be submitted to the bank, even before the seller has agreed to accept it. It can add to the confusion if multiple offers are received. Some think that all offers must be presented to the lender. This is not accurate. All offers must be presented to the seller, not to the lender. The goal of the listing agent should be to obtain the best offer possible, thereby giving the transaction the best possible chance of actually closing.

What are the odds of a successful closing?

They're actually better than they used to be. Nowadays it makes sense for banks to seriously consider accepting a short sale as, in many cases, they net more money overall versus going through the whole foreclosure process, taking the home back and marketing it as an REO (Real Estate Owned).  Illinois is a judicial foreclosure state. Some states are non-judicial. Judicial foreclosures take much more time to complete. In Illinois, the process can take a year or more. There are some states which take upwards of 3 years. When you consider that, in most cases, the bank is receiving nothing while the process drags along, you start to see their motivation to consider other options. Add to this the deterioration to the property during that time and the additional carrying costs, and the benefits to the bank become even more clear. The bank in this situation, much like the homeowner, is  looking for the best way to limit their losses.

The benefits of a short sale:

 Lenders generally don't allow the seller to receive any of the proceeds of the sale. This is fair when you consider that the whole basis of the short sale is negotiating with the lender to get them to take less than what they're owed. The only exception I've  seen to this was years ago when, due to an error, we were out of balance by $.06 The title company actually cut a check to the seller for six cents! As a seller in this situation, one needs to keep in mind that, if the lender agrees to the short sale, they are allowing the seller to avoid having a foreclosure on their record which follows them around for many years. Additionally, most short sales also let the seller out from under the debt without being chased for a deficiency. These two things should be all the motivation you need. there are no guarantees of being successful but it's certainly worth the effort.

Who should you call?

These transactions are not for beginners. There is no substitute for experience when it comes to navigating through this process. An experienced agent and attorney are crucial.  In this situation it makes sense to ask a lot of questions. There are specialized short sale/foreclosure courses available for agents. Some are very worthwhile but these courses alone don't necessarily make the agent an expert.  An agent  referred by a seller who's been through this process is definitely someone worth talking to.  

What will it cost?

In most cases, it will cost you nothing unless there's an upfront fee charged by the agent to list the home. All agents negotiate their own fees. It should cost you nothing to talk to an agent and get information.  All commissions and other closing costs a seller would normally pay will be factored in and, if the lender agrees to the short sale, they are agreeing to the net amount of the sale so essentially, it is the lender that is paying your closing costs. For someone facing foreclosure, a short sale can be an excellent solution.

This information is not to be considered legal advice.    An attorney should be consulted for all legal advice.

Recently, there seems to be more and more people saying "it's a great time to buy". To someone who makes their living helping people buy and sell homes, this is certainly more encouraging than the seemingly endless reports of gloom and doom we've been hearing for so long. If the last few years have taught me anything, it would be just how important perception is and how it can and does drive markets. While there are advantages to buying in the current market, the advantages may be things you haven't considered.

The most common thing I hear lately about the benefits of buying now is price and, more specifically,  the current prices in relation to prices a few years ago. On the surface this would seem like a very convincing argument. In my local market (northern Illinois) we've seen prices adjust  downward approximately 30%. Homes are much more affordable now than they were in 2007.

Where are prices headed? 

In late 2008 I ended up selling an investment property I had owned for several years. I did so not because it was a good time to sell but rather, to get out from under all the bills that had piled up that year as a result of the declining market and my declining sales. I had planned to hold this property long term and was very reluctant to part with it, as I felt a stronger market was just around the corner. How wrong I was! This turned out to be a blessing in disguise. I can see now that, had I not sold this property when I did, it would have cost me between $30,000- $40,000! Timing is everything. My point is that it can be very difficult to predict what will happen with home prices, even for someone who does it for a living. Will prices drop further? That's a question with no simple answer. Based strictly on what has occured in the market in the past few years, it would seem that prices have nowhere to go but up. If only things were that simple. A bit more research into the economy overall would suggest that it's  possible that prices could decline a bit further. Time will tell.

Why would anyone want to buy now if prices may see a further adjustment downward?

The answer to this question, financially speaking, is fairly simple. Interest rates.  Looking at home buying from an affordability standpoint, it's easy to see how one can benefit from buying now versus waiting to see where prices go. For example, a home purchased now for $100,000 with the current interest rates ( less than 4%)  will have a lower monthly payment than a home purchased for $90,000 or even $80,000 when rates return to what most would consider "normal".  One thing that no one will argue with is that rates will rise. Using this example, even if homes dropped another 20% in value, you'd still be ahead long term.

A long term plan: 

 Now more than ever, the decision to finally buy that home should be looked at as a long term investment. Years ago, it was pretty simple to buy a home and expect that it would rise in value quickly, allowing the owner to sell after just a couple of years without digging into their pocket to break even. In many cases, you could even make  money doing this. At some point, a strong market may again make this possible but, we're not there yet. For someone who doesn't have strong job security or who faces a possible transfer in the next couple years, not being financially tied to a home would be an advantage.

As a Realtor, I tend to focus on the numbers and whether things make sense financially. The fact is, that for most people, the decision to own their own home tends to also involve emotion. Having a place that is theirs, a place they can take pride in and make changes to that will bring them and their family years of enjoyment and memories  are the intangibles you can't simply affix a number to.

The bottom line is, if you've always wanted to own your own home and plan to be in one place for more than a couple of years, there are definitely  advantages to the current market. Long term, real estate has always performed well and I don't think that's likely to change.