Straight Digs

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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 ToastyKen

The Federal Trade Commission released a “foreclosure rescue scams” publication this time last year that is as relevant today as it was then.  Many homeowners who are deciding between loan modification, short sale, or foreclosure are susceptible to the practices of scam artists looking to make money on others’ fears.  One of the best parts of the FTC publication is its “Red Flags” section, which we have reproduced below.  If you need help navigating this process we can help guide you to the right resources free of charge.

“RED FLAGS

If you’re looking for foreclosure prevention help, avoid any business that:
• guarantees to stop the foreclosure process – no matter what your circumstances
• instructs you not to contact your lender, lawyer, or credit or housing counselor
• collects a fee before providing you with any services
• accepts payment only by cashier’s check or wire transfer
• encourages you to lease your home so you can buy it back over time
• tells you to make your mortgage payments directly to it, rather than your lender
• tells you to transfer your property deed or title to it
• offers to buy your house for cash at a fixed price that is not set by the housing market at the time of sale
• offers to fill out paperwork for you
• pressures you to sign paperwork you haven’t had a chance to read thoroughly or that you don’t understand.”

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Kelli Hart at the Orange County Register reports that at least half the active inventory in Aliso Viejo as of February 19 was distressed properties.  A poll taken on that site shows that as of this writing about 60% of the readers felt that this was a bad sign and about 40% took it as a good sign.

There’s a third possibility: that statistic alone does not tell the story.  It has been the case for a while now that a significant portion of the Aliso Viejo home sales have been distressed properties.  As we posted in October of last year, the majority of homes selling in Aliso Viejo in October were distressed sales.  That continued in Q4 with 58% of the Aliso Viejo home sales being distressed sales.  So the statistic by itself says nothing new.

What is new is that Aliso Viejo homes sold in the fourth quarter of 2008 (176) were up by 59% compared to 2007 (111 sales).  That general trend has continued as sales in Aliso Viejo in the first two months of 2009 (87) are up 36% from the first two months of 2008 (64).

None of these statistics is the only one to consider.  Each one has to be considered the context of the others to be meaningful, but the sales trends are unexpected good signs in today’s market.

  Photo by respres

Half of Aliso Viejo’s housing inventory consists of short sales and bank-owned homes.  As of July 9, 2008, the MLS showed Aliso Viejo active inventory at 286 homes.  Aliso Viejo REO homes or bank-owned homes totaled 25 homes.  Finally, 118 Aliso Viejo homes were short sales or “subject to lender approval” sales.  Combined, 143 homes were either bank-owned or short sales, which is exactly half of the Aliso Viejo inventory.

As we pointed out in a previous blog post, short sales are not selling quickly.  In the last 3 months, 24 short sale homes closed escrow (sold) in Aliso Viejo.  At that pace, it would take about 15 months to sell all of the current short sales in Aliso Viejo. 

It would appear that short sales are an extreme buyer’s market and a great opportunity for buyers today.  However, it is still generally difficult to negotiate a short sale.  Banks are overloaded with them and don’t have the resources to handle them adequately.  Our recommendation is to only work with them if you have an abundance of time and patience and are keeping an eye out for deals in the other markets.

35 Aliso Viejo bank-owned homes sold in the last 3 months, which means it would take about 2 months to sell the active bank-owned inventory in Aliso Viejo.  Bank-owned homes continue to be an extreme seller’s market.  With our clients, we have seen multiple offers on many bank-owned homes.  Banks are pricing their homes aggressively attracting many buyers.  We don’t recommend you focus all of your attention on bank-owned homes, but often these are the best deals in town.

133 Aliso Viejo homes that were neither bank-owned nor short sales sold in the last 3 months.  We call these sales “equity” sales, because the homeowner has equity left after the sale.  At that pace, it would take just a little more than 3 months to sell all of the Aliso Viejo equity sales. 

Believe it or not, the equity market in Aliso Viejo is a balanced market.  If it only takes 3-4 months to sell your home in today’s market, you are a happy seller.  As a buyer, you can still find great prices relative to last year.  This is a balanced market, because sellers in this category have been much more aggressive with their pricing in the last few months as they have had to compete with the increasing numbers of short sales and bank-owned homes.

  Photo by Odalaigh

We had an offer rejected today by a bank.  It never feels good to have your offer rejected, but at least in this case we were expecting it.  We thought we would explain our expectations, because we think it says a lot about the current market.

First of all, lets get clear what “rejected” means.  An offer can be rejected, technically, by initialing a box at the bottom of page 8 of the standard California contract.  Much more common is what happened in this case, when we received no response until we called the agent and she said the seller had rejected our offer.  Either way, a rejection signifies that the seller has reviewed the offer and a counter offer will not be coming.

This property was priced in the $430,000 range and we submitted an offer for $350,000.  In South Orange County, in 2008, for properties priced under $500,000, the average discount is about 5% off of the list price.  So, for a $430,000 property, you could expect to pay about $410,000 on average.  In Ladera Ranch (know your markets), the average discount is about 3%.  So, on average, looking at Ladera Ranch, you could expect $10,000 off of list price.  On this information alone, I would suspect at best a counter offer was coming.

In this case, the bank had multiple offers.  There was at least one full price offer in the mix.  You would think in an extreme buyers market that full price offers would be rare, but of the 45 Ladera homes sold this year up to $500,000, 14 sold for full price or more.

The lesson is that bank-related properties (short sales, REOs, etc.) are what everyone is looking for, so be prepared for possible multiple offers close to, at, or above full price.  And if you are going to submit well below asking, be prepared for rejection.

  Photo by meyshanworld

We have noticed that some homeowners who are not able to afford their home for one reason or another are keeping hush about their problem until the last possible minute.  In our experience, that is not the best approach.  Lenders across the board suggest discussing your options with them as early as possible, preferably before you miss a payment.

If you find yourself in this situation, and want confidential answers, find a real estate agent you trust.  As agents, we have been able to help clients get basic answers to many of their questions on loan modifications, short sales, foreclosures, deeds in lieu of foreclosure and other options.  The key is getting the information early so you have the most amount of flexibilty.  For more information on the largest lenders and their policies, visit bankrate.com’s article on the subject.

 Photo by purpleslog

Often we’ll have clients tell us they are planning on buying “in the spring” or “in the summer” as if that is far out into the future.  With short sales taking up to 3 months to negotiate and volatile market conditions, if you’re planning on buying by the end of the summer, the time to start looking is now.  Here is our general time line for buying an Orange County home.

First, establish a target date when you would like to move in to your home.  This is important both to plan your home search and align your search with your personal goals.  Lets say you want to move by September 1.

Next, 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 August 1.  With escrows falling out and multiple offers on low priced homes, that means you’ll have to start writing offers by July 1.

Then, 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 June 1.

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 start back to May 1.

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.  Rather than take everyone’s word for it on what different cities in Orange County are like and rather than drive to every single city in Orange County, explore online first.  This pushes our search back to today.

This does not necessarily account for short sale negotiations, which have taken our clients from one week to three months to negotiate, depending on the bank involved.  If you’re planning on writing offers on short sales, push all dates back at least one month.

If you haven’t begun your search and you’re planning on buying any time before the end of the summer, begin your search now.

A great, and I mean great, post today from an Arlington Virginia Realtor on how short sales do not sell for the most part.  In that area of the country, the closing rate is 5%.  That is only 1 out of 20 homes that are in short sale position will close escrow.

Got us thinking about what the numbers are like around here.  According to the MLS, in Aliso Viejo, 303 homes are currently active and 82 sold in the last 3 months.  It would take about 11-12 months to sell all of the Aliso Viejo homes active on the market at this pace (assuming no new property comes on the market).

In Aliso Viejo short sales, 72 are active and 5 have sold.  It would take about 42 months to sell all of the Aliso Viejo short sale homes active on the market at this pace.

A quick look at a couple of other cities shows Irvine would need about 12-13 months to sell its active inventory, while its short sale inventory would take about 44 months.  Laguna Niguel is at 14-15 months and 48 months.

For an Orange County home seller, the lesson is if you need to short sell your home be realistic about the possibility of negotiating the short sale.  It may not work.  For the Orange County home buyer, short sales require a tremendous amount of patience and time.  If you are short on time, you’re better off focusing on other property, including bank-owned property.

  Photo by frankh

At the end of 2007, President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007.  Prior to the Act, when homeowners had debt forgiven through refinancing or a short sale, they were taxed for that amount as ordinary income.  Under the Act, any forgiven debt will not be taxed as long as the debt forgiveness occurs in the next 3 years.

This obviously helps the homeowner who needs to renegotiate a loan he can’t pay.  It may also provide an incentive to homeowners to negotiate with their lenders for refinancing or short sales rather than let their homes go to foreclosure.

Photo by dbking 

It can be difficult for an investor to get representation when a property for sale has a notice of default filed against it, the first step in the foreclosure process.  That is because of an obscure California law that often requires agents who represent investors buying these properties to obtain a bond.  The problem is that no agencies offer the bond, so it is impossible to comply with the law.

Recently, a California appellate court struck down this law as unconstitutional in a case where an agent did not obtain the bond.  If this ruling holds up (appeal deadline is in January), it would mean agents will be better able to help buyers find foreclosure properties and pre-foreclosure properties would be more saleable in Orange County.