Straight Digs

Photo by Steven Damron

Orange County home prices have gone up for six straight months as of the end of November 2009 according to the nationally recognized S&P/Case-Shiller Home Price Indices.  The Indices indicate that nationally price declines have been lessening and in particular highlight the Los Angeles/Orange County area:

” . . . there are still some markets that continue to improve month-over-month.  Los Angeles, Phoenix, San Diego and San Francisco have seen prices increase for at least six consecutive months.”

These Indices generally have a delay, which is why we are now getting November information.  These Indices have also tended to show lower price increases than sources that use median price as a measure, so they are a more conservative indicator of where the market is.  For example, Dataquick shows that as of the end of December, prices were up over 10% from the year before based on median prices.

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CNBC’s real estate blog, Realty Check, recently reported evidence of short sale fraud being perpetrated by banks.  If you are buying in this market you may be approached to commit fraud by a bank.  It pays to know what is and isn’t fraud in a short sale.

In a short sale, the homeowner is selling their home for less than the mortgage or mortgages on the home.  If the homeowner cannot pay the difference between what they owe and the purchase price, they are “short” and need the permission of their bank to complete the sale.

Often homeowners have a second mortgage or a home equity line of credit on their home.  In this case, they need the permission from both banks.  CNBC found evidence that in this scenario, the second mortgage lenders were sometimes asking for a payment on the side, not to be reported to the first mortgage lender.  This payment was sometimes asked of an agent, sometimes of the buyer.

Payments outside of the real estate contract or outside of “escrow” or not to be reported to the first lender in any way are probably violations of RESPA, the law governing lending fraud.  If you are asked to make hidden payments to anyone in a short sale transaction, you are probably doing something illegal.

You also may be throwing your money away.  As one of our clients put it, “If I’m being asked to put a lunch box full of money at the bus stop for someone to pick up, how can I be sure that they are going to hold up their part of the deal?”  Without a contract, there is no guarantee.

Finally, the banks aren’t the only ones asking for handouts on the side.  At a Bank of America talk given to Orange County Realtors, a number of Realtors reported that homeowners themselves are sometimes asking for payments on the side to choose a buyer’s offer to send to the bank.

As always, if you have any questions about the legality of a payment before, during or after escrow, seek legal advice.

Photo by urbanwoodchuck

How do you buy an Orange County home at auction?  We get the question at least once a week, and we have given the same answer for the last couple of years–you don’t.  It is too difficult, too much of a needle in the haystack, and the lenders don’t want you to so they will usually outbid you.

Well, rumor had it that lenders were no longer putting all homes on the auction block above market, but were going to value them in advance to put them on at reasonable market value allowing bidders to get the “steals” they are looking for at an auction.  So, we decided to check out an auction for ourselves.  Here is what we learned:

1.  Prepare for disappointment. At least 95% of the homes for auction on the day we picked were postponed.  Most likely the homeowners are working on loan modifications, short sales, or the like.  If you are staking out a particular property, be prepared to find out that the auction of that property has been postponed to a later date as the lender and homeowner work out an agreement.

2.  Bring cash.  Anyone who has seriously considered buying a home at auction knows already that you have to bring a cashiers check to make the purchase.  Some things you might not know.  It has to be for the full and exact amount.  So if you bid $325,100 and win, make sure you have a cashiers check (or more likely checks that add up) for the exact amount.  Because when the auctioneer says “going once, going twice, sold” you need to have the check(s) in his hands immediately.  Otherwise it is not a sale.  We were told the best method for handling bidding is to have a stack of $100’s another stack of $1000’s, etc. up to $100,000’s for your purchase.

3.  Be ready to bid against pros.  Most of the bidders at the auction (about 20 total) were professionals.  How do we know?  The auctioneer told us so.  Also, he knew almost all of them by name and said they came every day.  So, what’s the difference between a pro and anyone else?  Well, first of all, there is a team behind them.  Almost all of them had a phone bud in their ear subvocalizing everything that was going on at the auction to their partner(s) back at the office (or at other auctions?).  Secondly, they were carrying more money than you or I usually do.  If one of them wanted to win, they were going to win.  Finally, they did something that everyone should do before heading to the auction:

4.  Do your research. We’re not sure if it was intimidation, lack of organization or just an amazing amount of research, but one bidder had a few encyclopedias worth of paper with him.  Almost all of them had spreadsheets.  Many of them had tablet laptops with wi-fi.  If you do your research, you will know what you’re bidding on, what it’s worth and how high you are willing to go.  You don’t want to be the one mocked at the end of the auction as one pro did when he said, “that guy overpaid.”

5.  Know the auction. On the same day we saw traditional auctions that went to the highest bidder, we saw an auction with a low bid/high bid format (somewhat like a “reserve” price format).  If you know the format of the auction, you will know the rules of that auction and bid accordingly.

6.  Know your auctioneer. We got this one from the auctioneer himself.  Some auctioneers say “going once, going twice, sold” and some give you three tries.  We saw one bidding war where a guy kept bidding between going twice and going three times, because he knew the auctioneer had a “going three times” in him.

One suggestion we have is to attend a few auctions in advance.  In addition to all of the above reasons to do so, it can be pretty intimidating seeing 20+ guys (and they were almost all guys) who look like they know exactly what they are doing bidding against you.  That intimidation increases when you consider that each may have hundreds of thousands if not millions of dollars worth of cashiers checks on them and some of them (based on a few telltale signs we observed) may have weapons protecting that money.

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Lansner on Real Estate, the Orange County Register’s housing blog, just wrapped up its recent Eyeball 2010 series.  In Eyeball 2010, guests forecast the 2010 housing market.  Here were the results:

1.  The usually bearish readers of the blog did not surprise, the plurality voting that prices would be down 10% or more in 2010.

2.  Cal State Fullerton chimed in with a prediction of a 3% rise in prices.

3.  Beacon Economics predicted prices will be flat.

4.  Homebuilder adviser John Burns didn’t make a prediction, but had some interesting thoughts on how we are measuring prices.

5.  The Building Industry Association guessed a 3-5% rise in median price.

6.  Housing development advisers, The Concord Group, got specific with its flat prediction of 0% gain.

7.  The Orange County Association of Realtors’ President was the first to go decimal with a 4.5% increase.

8.  Homebuilder consultant Mark Boud provided a forecast for three years, 2.1% in 2010, 4% in 2011, and 8% by 2014.

9.  Altera’s broker suggests next year’s 5% increase in median price will be due to more homes selling in the high-end (which he suggests is over $1 million), because high-end home pricing will come down.  This was the best analysis we found of where the market has been and where it could go.

10.  The “self-described evangelist of real estate optimism” and real estate broker, Gary Watts, hedged at a no more than 3% gain.

10.  Brookfield Homes predicted a 4.9% gain.

11.  “Ask a Realtor” columnist and agent, Lesslie Giacobbi put her guess at 3%.

12.  Research firm, Real Data Strategies set the gain at 4.5%.

13.  Pacific West Association of Realtors president doesn’t think there is any question that prices will increase and guessed the increase would be 7.5%.

14. First Team (Yay!) executive says overall 6% gain, but could be 10% in the low-end.

15.  Broker Glenn Hellyer comes in at a 5% increase.

16.  Condosetc.com said condos would increase 8% this year.

Our Magic-8-ball says it will continue to be impossible to predict exactly where the Orange County housing market is going in 2010, but whatever direction it goes, homes will continue to be bought or sold because of buyers and sellers “needs” more so than the direction prices are going.

Photo by MSVG

Aliso Viejo announced the winners of the 2009 Aliso Viejo holiday decorating contest recently.  The best Aliso Viejo holiday lights included 33 Cape Coral in the Key West tract, 1 Starling Lane in Laguna Audubon I, and 16 Prairie Falcon in Laguna Audubon II.  We really liked the home on Starling.

Laguna Niguel also announced the winners of the 2009 Laguna Niguel Holiday Lights Decorating Contest.  There were too many winners to list, but one of our perennial favorites is 5 Tunis, Laguna Niguel.  The homeowner on Tunis times his lights to music you can play in your car by tuning to the right radio station.  Definitely worth seeing.

Finally, we wandered over to Ladera Ranch this year where two streets, Merriweather and Walden, decorate their entire street to the hilt.  Sunglasses are recommended for both of these streets.

Merry Christmas, Happy Holidays, and Happy New Year!

Photo by emdot

Is the media calling the Orange County housing bottom?  Here is a summary of recent news articles from the Orange County Register on the housing bottom over the last month:

October 7, 2009–The California Association of Realtors said home prices hit bottom early 2009 and forecasts that the median home price will rise 3.3% next year.

October 14, 2009–Prices and sales rose together, year-over-year, for the first time since September 2005.  15th consecutive month with year-over-year sales gains.

October 20, 2009–Aliso Viejo is the hottest housing market in Orange County with a market time of 1.2 months to sell all current inventory.  For all of Orange County, market time is down to 2.4 months from 4.76 months a year ago.

October 24, 2009–September national home sales had largest increase in 26 years and jumped 13% in the West.  Deutsche Bank chief economist calls the bottom.

October 28, 2009–Three Orange County cities, San Juan Capistrano, Lake Forest, and Tustin, are in state’s Top 10 price gainers in September.

October 29, 2009–UCLA economists project Orange County median price to rise next year by 15.9% to 16.6%.  Projected price increases to be smaller 2011-2015.

November 4, 2009–Expected market time for Orange County short sales is 56 days compared with 7 months a year ago.  Bank owned homes current inventory is just 21 days.

As with the housing peak, no one is going to perfectly call the housing bottom and no one can predict the future.  However, today the Orange County housing market is moving in the right direction, as reflect in the media reports.  If it continues, we will see price and sales increases in the future.

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Both buyers and sellers agree that all things being equal it doesn’t matter what loan a buyer applies for as long as the buyer has approval.  However, because of the hoops that FHA buyers have to jump through to get full loan approval, all things are not equal.  With multiple offers on many of the homes in today’s Orange County housing market, it is difficult to have a competitive advantage as an FHA buyer.  Here are some ways you can overcome seller prejudice to FHA buyers:

1.  FHA loans require more repairs than conventional loans.  Solution?  Money. FHA lenders require their appraisers to note health and safety issues with a home.  These items need to be repaired by close of escrow.  For a home in good condition, this is probably not a big concern, but homes that have been neglected may need repairs with an FHA appraisal.  Unfortunately, the only way to overcome this objection will be money, whether you promise at the outset that you will pay these costs if they come up or just offer a much higher price than the next buyer (usually $5,000+).

2.  FHA loans take longer to approve.  Solution?  Get the right lender. The time to approve FHA loans went from a standard 30 days to 45-60 days last year as lenders and FHA itself tried to deal with the onslaught of buyers interested in the program.  Today, some lenders have systems in place to close escrow in 30 days or less with an FHA loan.  Align yourself with a lender who can close FHA loans quickly.  Have them provide their FHA track record in their approval letter.  Finally, get lender pre-approval (not just pre-qualification) in advance and make sure that approval includes signing the recent HERA/HOEPA disclosures.

3.  FHA buyers are more likely not to qualify.  Solution?  Get pre-approved.  If during escrow it turns out the buyer doesn’t qualify for an FHA loan, it’s likely the buyer will not qualify for another loan, because there are no other 3.5% down payment programs.  A seller will often choose a 20% buyer over an FHA buyer, because if the 20% buyer doesn’t qualify for one program, there are other programs for 20% down that will work.  If you are fully pre-approved, not just pre-qualified, that can go a long way toward easing the seller’s fears.

4.  FHA requires more termite work to be done.  Solution?  Money. Termite work is usually split into Section 1 and Section 2 items with those items in Section 2 usually not required to be done by close of escrow.  However, with an FHA loan, the Section 2 items need to be corrected by close of escrow.  Section 2 items don’t come up very often, so this is not often an issue.  However, you can answer this objection, by offering to pay Section 2 items and showing proof that you have funds to repair those.

5.  FHA loans are more likely to have a low appraisal.  Solution? Money. If the appraiser determines that the local market is declining and the loan is for more than $417,000 and the down payment is 5% or less, then a second appraisal is required.  The second appraisal gives two chances for a low appraisal to come in on the home, which can happen in our current market environment with fewer sales, but rising prices.  Appraisers can have a tough time, despite multiple offers, justifying the result of a bidding war by just looking at the most recent sales.  If you have the funds, and think the home is worth it, you can offer to make up for any difference between the appraisal price and sales price at the outset.

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For those who have been active in the buying market, you may have heard of the concept of today’s “shadow inventory”.  According to the theory, banks have foreclosed homes that they are holding on to and not releasing to the marketplace, because they don’t want to flood the market with homes and drive prices down.  So, the theory goes, even though inventory levels are low today, there is a “shadow inventory” of homes that just aren’t on the market yet, but will be coming.

Those who hold this theory are divided on what this means for the marketplace.  Some think that banks will continue to foreclose on homes and slowly put them on the market until the market turns around.  Under this version of the theory, prices will continue to stabilize and/or increase, in part because of bank manipulation.  Some think that at some point, banks will be forced to sell their shadow inventory whether because of profit concerns or because government regulations will require them to.  Under this version of the theory, banks being forced to “dump” inventory will hurt prices.

The “shadow inventory” theories generally started at the end of last year when defaults were on the rise, but foreclosures had not caught up.  By early this year, the theory was more developed and seemed like a “given.” Those who believed that the banks were going to be forced to dump properties were told to expect summer to bring a flood.

When the flood didn’t come this summer, many believed that it was because of California laws and the Obama stimulus plan, which were hampering foreclosures.  Mid-summer, commenters who held the “flood” theory were sure that the flood would start in the fall.  Many said, “wait for September.”

Since we are in September, we thought we would run the numbers to date in the month to see how the flood is coming along.  In Orange County, according to the MLS, the number of bank owned homes listed in the last few months were 536 (June), 454 (July), 436 (August) and to date 345 (September).  September is on pace to have 450 this month.  By the way, almost all of those properties have sold.  47% have closed escrow already.  Another 34% are in escrow.

The flat REO listing numbers suggest that if there is a flood of REO properties coming, it hasn’t started.  The high REO sales numbers suggest that if there were a flood, for some buyers, it would be welcome.

Our suggestion to our buyers is to look at what you know.  If you happen to know the CEO of Bank of America and know their REO strategy, operate accordingly (by the way, we’d like to talk with you!).  Otherwise, in a market with low prices, low interest rates, and motivated sellers, if you find a home you like, grab it.  Don’t hesitate because you are guessing at what the banks may or may not do over the next year.  You may not find another home like it.

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A client recently asked about a home that is in the short sale process.  He asked, “How do short sales work?”  That’s not an easy question to answer:  Amazon has thousands of books on the topic.  While short sales can get complex and vary quite a bit, there are some common paths that they take.  As an Orange County buyer, it is essential to understand the basics, because about 1 in 5 homes sold in Orange County today are short sales.  The following are some general guidelines (there are exceptions):

1.  A quick definition of a short sale is the sale of a property for less than the amount the homeowner owes to the homeowner’s lender or lenders.

2.  The owner of the home has a “hardship” like their income is down or they were laid off of work, so they have trouble making their payments.

3.  The owner puts their home on the market, because their lender will not approve a short sale without an offer in hand.

4.  The owner gets an offer and applies for a short sale, asking the lender to accept the buyer’s offer to pay less than the owner owes on their loan.

5.  The lender is overwhelmed and says, “I’ll get back to you in a month or two.”

6.  One-two months later, lender says, OK, now I’m going to do my diligence, which includes looking at the offer, reviewing the owner’s financials, and getting appraisals done on the home.

7.  One-two months later, lender says yes or no on approval and what terms they agree to.

We have seen short sales take less than one month to get approval from the lender and we have seen them take over a year.  Because of that uncertainty and delay, they can be the best deals on the market.

If you are buying a home in Orange County, make sure the agent you are working with is experienced in helping buyers with short sales.  Many agents shy away from them, most notably all Redfin agents whose policy comes up on their site with any short sale listing:

“This home is flagged as a short sale. We’re sorry, we don’t tour or write offers on short sales because of the slim chance that you’ll get the home.”

We advise our clients to not eliminate any part of the market, especially if they have time.

Photo by Robert S. Donovan

As many home buyers know, the deadline to purchase a home that qualifies for the $8,000 federal first-time home buyer tax credit is November 30, 2009.  To close on a home by then, you will have to start your search now.  Here’s why:

You need to plan for escrow and writing offers.  Escrows usually take a minimum of 30 days.  That means you’ll have to have a winning offer in by October 31.  With escrows falling out and multiple offers on most homes in first-time home buyer ranges, that means you’ll have to start writing offers by September 30.

You need to plan to search for neighborhoods.  To start writing offers, you’ll have to explore what neighborhoods you want, which can take a month or so.  Your neighborhood search should begin then no later than August 31.

Leave time to explore cities as well.  To narrow a search down to individual neighborhoods, you’ll have to know the cities you’re interested in pretty well.  That process could take a month or so, which brings our search back to today.

What comes before narrowing a search down to cities?  Getting your loan in place is probably the most important item and is often the most overlooked.  In today’s market, with the tightening of the financial markets, it is critical to start the loan process early.

Also, your online search needs to begin before exploring cities in person, otherwise, you’ll be doing a lot of driving.  As you can see, if you are unfamiliar with the areas you are considering purchasing in, you will need to “catch up.”

Also, this time line does not account for short sale negotiations, which take an average of three to six months to negotiate, depending on the bank involved.  If you’re planning on writing offers on short sales the window is closing on ones that will qualify for the tax credit.

If you haven’t begun your search and you’re planning on buying by the end of the year, begin your search now.