How To Make Money With Short Sales And REO Property

Written by:

Wally Charnoff

 

The current real estate market causes most investors to think twice before buying a piece of property, regardless of how great a deal it might be. While it’s prudent to use caution, don’t be penny wise and pound foolish. There are two areas in real estate that are begging to be noticed: short sales and REO properties.

A short sale is when a property is in default or foreclosure and the lender agrees to consider offers below the amount owed on the property.

An REO property is a home or other piece of real estate where foreclosure has been legally completed and is now owned by the mortgage lender, typically a bank or other financial institution. REO stands for “Real Estate Owned.”

Whether a real estate investment rookie or seasoned veteran, be sure to include short sales and REO properties in your list of possibilities when looking at potential acquisitions. Here are five things to remember in your search:

Specialization - Real estate investment is best done with the assistance of a Broker/Agent. Do your homework and choose someone with the appropriate qualifications to help you navigate the twists and turns of short sales and REO properties. Having good help and sound advice can make or break your chance of long term income potential from a property.

Inventory - The increase in foreclosures means an increase in REO properties. Banks are inundated with empty homes and vacant businesses, giving the buyer the advantage in negotiating an offer below market value. The lower the price when you buy, the higher your potential rate of return.

P/E Ratios (Price/Earnings) - As property prices go down, mortgage payments shrink, increasing profit potential for rental properties. You can attract tenants with reasonable rates and come out ahead with lower loan payments. Research the rental rates for the area and compare with the price of the considered property to maximize your return on the investment.

Good Questions = Better Answers - Short sales may give you the deal of a lifetime if you know what questions to ask. There are a lot of nuances when dealing with short sales, and getting the right information can help you decide if you want to make an offer. Two crucial things to ask are, “Has the short sale package been submitted to the lender?” and “Has the bank done a BPO (bank price opinion)?”

Patience - When making an offer on a short sale, expect to wait on a reply from the lender. Sometimes that wait will extend for months. In the meantime, circumstances may change and bring the market value even lower. This increases your bargaining power with the bank to negotiate a cheaper price. There’s no guarantee that any lender will accept a short sale offer, so be prepared to walk away if the lender rejects it or counters with a price outside your budget.

 

 

 

 

 

Real Estate Consultant: Flippers Give Way to Real Investors

Written by:

Allison Landa

 

Jack McCabe sees change in the air.

The CEO of Deerfield Beach, Florida-based McCabe Research and Consulting watched as the good times in the real estate world went sour – and now that that pain is being felt worldwide, says that there has been a return to a more traditional bulk of investors.

“Flipping as we knew it a few years ago is like the dinosaurs – dead and gone,” he says. “These investors coming back into the market tend to be more savvy, more experienced. A lot of them have made their living in real estate. They sat out while all the artificial craziness was going on, knowing it would result in a tremendous downturn.”

Of course, it did.

“In the first half of this decade, flipping was done by all types of individuals, from taxi drivers to housewives, waitresses, to top-level earners,” McCabe says. “We had investment clubs, we had pools of money where people would put their money together to buy condos and flip them.”

This along with what McCabe calls “toxic loans and easy credit” artificially inflated real estate values across the country, particularly in markets in Florida, Nevada, Arizona, and California that saw historic increases – as well as overseas markets in England, France, and Spain, where people were priced out by speculative flippers.

“These markets have all come crashing down once the market understood it had doubled in size, not due to population increases, or job development, but due to speculative flipping by people who had no intentions of ever occupying these units,” he says. “When these things got out of hand, it was musical chairs, and who was going to get caught without a chair.”

Today prices in many areas have dropped by 45 to 50 percent – or more. In Fort Meyers, Florida, for example, prices are down 71 percent. That’s a far cry from the time period between 2001 and 2005, when masses of investors would show up at the grand openings of condominiums, putting down deposits on multiple units.

“Now the prices have dropped so much that the real long-term investors that have been sitting on the sidelines watching this debacle unfold are re-entering the marketplace, many of them with cash,” McCabe says. “(They’ve) been building war chests.”

Those war chests filled with cash provide an advantage. These days, acquiring financing is not an easy task, and often sellers want only to deal with cash buyers, refusing to consider any offers that require financing because of the risk involved.

“Cash is king,” McCabe says, “and cash is driving the marketplace as well as foreclosures, short sales, and distressed sales.”

With the U.S. unemployment rate hitting a 26-year high of 9.8 percent in September, experts are questioning how long it will take for the credit markets to thaw and for sales activity to fully recover. That combined with anemic job growth makes flipping as it was once done a non-issue, according to McCabe.

“These are not positive indicators for any type of short-term profit-making on real estate,” he says. “Even though people know they can buy at low prices, they still have unrealistic ideas of how much values are going to increase in the next few years. If they’re looking at three to five years, forget it. ... But if you have a longer-term investment mentality and if real estate’s in your blood and you love it (then that’s positive), but you also have to be really savvy, experienced, and knowledgeable.”

So who will succeed in this new market? According to McCabe, it’s the investors who want to buy low, sell high, and not do a quick flip on properties, but rather hold them for seven to 10 years – or longer.

“These are long-term investors that realize if they build up a portfolio at today’s bottoming prices and they hold and manage for periods of five, seven, 10 years or more, they’ll realize substantial gains and increases in wealth over that time period,” he says. “These are not yesterday’s cocktail-party experts that talked about ‘Oh, I put money down on this condo two years ago and I just flipped it, and I put down 20 percent but was able to flip it for $200,000 profit, and I’m so smart, I’m such a bright guy.’”

He also emphasizes that today’s investors have to do due diligence before buying properties to ensure they’re getting the most for their money. “You can’t sit at home and pick something out on the internet,” he says. “There are so many different (factors) to know before buying.”

 

 

 

Foreclosure crisis far from over for South Florida

By CAMMY CLARK

Miami Herald

Sunday, October 18, 2009

If you think the torrent of foreclosures affecting every city and nearly every neighborhood and street in South Florida is as bad as it can get, here is a harsh new reality:

There's a new wave of foreclosures making its way through the courts that has nothing to do with exotic subprime loans, real-estate flippers out to make a quick buck or people who bought way more house than they could afford.

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Now, double-digit unemployment, sagging home prices and a lingering recession are to blame.

``The second tsunami of foreclosures is coming,'' said Miami Beach-based John Tur, who teaches people how to invest in real estate.

The numbers already are staggering.

During the second quarter of the year, nearly one in four Florida home loans were past due or in foreclosure, making Florida the most delinquent state in the nation, according to the Mortgage Bankers Association.

This could delay a serious recovery in Florida, because a market with many foreclosures tends to drive down housing prices.

Within Florida, First American CoreLogic reports that Miami-Dade County had the second highest foreclosure rate in August, after California's Osceola County. Broward was sixth.

And foreclosure tracking firm RealtyTrac found that Homestead — the epicenter of the boom just two years ago — had the highest rate of new foreclosure filings in the county.

And it could get worse.

New foreclosure filings in Miami-Dade, Broward and Monroe counties are on pace to top 120,000 this year. Court clerks say filings could even go as high as 135,000. That's 17,000 to 32,000 more filings than last year.

THE REALITY

Those statistics are played out daily in neighborhoods such as Malibu Bay, a gated community in Homestead where property values have plummeted. A two-bedroom, two-bath home that sold for $242,000 in August 2006, for example, is now listed for $70,000, said Karen Klores, a Realtor at The Keyes Company.

Malibu Bay is a quiet, well-manicured community of sand-colored homes with no foreclosure signs in sight. But as in many South Florida neighborhoods, that serene picture masks secrets: In a 200-yard stretch of Northeast 11th Drive in the Ventura section of Malibu Bay, 14 out of 48 townhomes are in some stage of foreclosure.

Although the grass is kept trimmed by the homeowners association, many of the homes are shuttered and empty, with padlocks on the doors.

Leslee Ramos doesn't often visit her three-bedroom townhome in Malibu Bay, which was built by Lennar Corp. during the housing boom, but she checked in last week.

Ramos moved to Northeast 11th Drive in October 2006, paying $255,490. The home is now worth $121,800, according to property records.

After losing her job about two years ago, she started eating into her savings to make payments but still couldn't afford the mortgage. Her home went into foreclosure earlier this year, and in May she moved back to Kendall to live with her mother.

Now Ramos' house is empty, and she expects the bank to sell it in February.

``It feels horrible to go through foreclosure,'' said Ramos, who now does marketing for a nursing home. ``I can't apply for anything. I have no credit.''

It isn't just suburban subdivisions feeling the impact of foreclosures. Condominium foreclosures are also on the rise. In early 2008, single-family-home foreclosures outpaced condos by about three to one. But now condos make up 41 percent of the residential foreclosures in Miami-Dade, 67 percent in Broward and a whopping 83 percent in the Florida Keys, according to RealtyTrac.

`I don't think there's any question the first wave of foreclosures we saw up until this year was driven by bad loans — the subprime loans with squirrely features of big jumps in rates or payments,'' said Guy Cecala, publisher of Bethesda, Md.-based Inside Mortgage Finance. ``This year, we're feeling the full brunt of the deep recession in the country. It's economic-driven.''

Jose and Priscilla Andino also were decimated by a drop in household income, but they are still trying to save their four-bedroom home in Miami.

The Andinos and their two young kids and dog had just moved to the house in December 2007 when they got unexpected bad news: Priscilla had been laid off from her accounting job of 13 years.

``It was a shocker, but I said, `We're fine. We've got money saved,' '' said Jose Andino, an aviation security specialist for Miami-Dade County. ``But with the economy going bad, my wife couldn't get another job right away. Now we're doing everything we can to save our home.''

Priscilla eventually found a new job, but not before the couple fell way behind on their mortgage payments. They've been in foreclosure since March and are working with foreclosure defense attorney Dennis Donet to try to get a loan modification from their lender, Wells Fargo.

``Every day, it's a new monster,'' Donet said of the foreclosure crisis.

Donet finds he must navigate a logjam in both the courts and with lenders that must deal with ever-changing federal, state and local assistance programs.

Lenders have been overwhelmed by the growing number of homeowners who've already fallen behind on their mortgages, thousands of acquired mortgages from failed banks, and the thousands of new cases that are cropping up as homeowners lose their jobs due to the recession.

``We do hear scenarios of people who go six to 10 months without making a payment and they have not received an initial default notice,'' said Daren Blomquist, marketing communications manager of RealtyTrac. ``That leads us to believe there is a logjam of activity. We have not seen the full extent of what's happening.''

At courthouses in Miami-Dade, Broward and Monroe counties, judges and the staff have been overwhelmed by the deluge. More than 90,000 new foreclosure cases were filed through September of this year in the three counties.

``It's pretty bad,'' said Elizabeth le Sueur, a Miami-Dade County court operations officer whose staff used to handle an average of 9,000 foreclosure cases a year.

In August, the backlog got so severe that new cases and pleadings were stuffed in 70 cardboard boxes and mail bins scattered throughout the courthouse's ground level. With 4,972 new foreclosure filings in September, Miami-Dade's year-to-date tally climbed to 49,325.

``There is no end in sight right now,'' le Sueur said.

Circuit Judge Jennifer D. Bailey, who heads a state foreclosure task force, said she is bracing for the crisis to continue well into next year. ``Now what we are seeing is people in trouble because of changes in life, loss of their income, not changes in their loan,'' she said.

A year ago, prime fixed-rate loans accounted for only one in five foreclosure filings nationally. Now these loans — in which credit-worthy borrowers receive a bank's best rate at terms that don't change — account for one in three foreclosures, according to Jay Brinkmann, the Mortgage Bankers Association's chief economist.

In South Florida, only a fraction of a percent of prime loans were in foreclosure in January 2007. The figure jumped to more than 9 percent in August, according to California-based First American CoreLogic, a real-estate information company.

STANCHING LOSSES

The Florida Supreme Court is now considering recommendations that could help families like the Andinos.

Presented in August, the recommendations come from a 15-person emergency task force led by Bailey that spent 20 weeks putting together a comprehensive plan to alleviate the burden on the state courts — and to provide a potential win-win solution for borrowers and lenders.

The recommendations include a statewide-managed mediation program for all cases involving homesteaded property mortgaged by institutional lenders such as savings and loan associations, local and regional banks, mortgage companies, finance companies, and commercial lenders. Borrowers are required to attend foreclosure counseling before mediation.

The Legislature has also passed a new law, effective Jan. 1, that requires all unlicensed loan modifiers, loan originators and mortgage lenders to get a state broker's license.

That will bring state laws in line with a 2008 federal law that requires brokers to renew their licenses annually, have background checks and pass a written exam following training. A nationwide registry that includes employment history and disciplinary action will be introduced in 2011.

In another effort to prevent further foreclosures, most Florida lenders began in August to require credit scores of 740 to obtain Federal Housing Authority loans, said Valerie Saunders, president of the Florida Association of Mortgage Brokers.

``Anything over 700 used to be a great score,'' she said.

As the foreclosure crisis deepens, many people have flooded not-for-profit organizations such as Neighborhood Housing Services of South Florida, which averages between 50 and 70 new cases a week.

``We tend to deal with more folks at the lower end of the income spectrum, but we also see people clearly in the middle income, and we just helped one guy in Coral Gables with a million-dollar house,'' said Arden Shank, the executive director. ``The median income of the people we are working with is going up.''

While most of the delinquent subprime loans have already worked through the system, there are some other mortgages that could ultimately lead to foreclosures when new rates take effect. Among them: adjustable rate mortgages that began as interest-only payments but will revert to full payments in the next couple of years, or those that give borrowers options on how they want to pay, including interest-only or partial interest.

``There are some ARM products still lurking in the shadows, readying to rear their heads,'' said Keith Gumbinger, a vice president at mortgage industry publisher HSH Associates in New Jersey. ``It will matter where the interest rates are and where the economy is at when those reset.''

THE WAITING GAME

For some, the first reset may not come until 2010 or 2011, Gumbinger said. ``That's why there could be some lingering effects down the road.''

Of 1.1 million loans with adjustable rates in South Florida, 53 percent have already reset. But at the beginning of August, another 22 percent were scheduled to reset in the next two years, according to First American CoreLogic.

Industry experts say the foreclosure crisis won't end until housing prices recover, not just flatten — and until the employment situation improves.

``I've read guesstimates that some properties might not be back to the price borrowers paid for them for 10 to 12 years,'' Gumbinger said. ``It could be ugly for a while yet.''

The Andinos hope it's not too late for them to save their home. They have sold a vehicle and other property, cut back on cable, cellphone service and their annual Orlando trip with the kids, and now are at the mercy of their lender.

``I'm crossing my fingers every day and praying every night,'' Jose Andino said. ``We just need a second chance.''

For Marise Bazelais and her large extended family, which includes 11 children, it's already too late. After getting a four-day extension from the sheriff's office, they have until Monday morning to leave their Lauderhill house, which was foreclosed on in May. Bazelais said they have no money, no place to go.

``For now, to tell you the truth, my option is to take the kids in my car and live in my car with them. We don't have any idea,'' Bazelais said.

 

 

Next Mortgage Crisis

Friday, October 9, 2009

Leaked Document Shows Fed Preparing For Next Mortgage Crisis


The rising defaults on commercial loans could lead to another banking crisis, although the Fed doesn't seem to be ready to admit the problem. The significant risk is held by financial companies with large commercial loan portfolios and insufficient reserves. In the following post, Glenn Hall from The Street writes that the Fed should be dealing more openly with the threat.

Here we go again with all the regulatory silence and wishful thinking by banks that preceded the first mortgage meltdown. Meltdown part II could be in the making as defaults rise in the commercial real estate sector.Behind closed doors, U.S. banking regulators appear to be "girding for a rerun" of the mortgage losses that nearly crippled the financial markets last year, according to a report in the Wall Street Journal citing an unpublished Federal Reserve report.The Fed report concludes that U.S. banks are slow to take losses on their commercial real estate loans , the Journal reports, adding that the documents it obtained do not represent the Fed's formal position.

The point is ratified by a review of regulatory filings by the Journal, which found that banks with heavy exposure to commercial property loans set aside only 38 cents in reserves for every $1 in bad loans in the second quarter.I don't know what's worse, the banks skimping on reserves and holding off on reporting losses in hope of a revival or the Fed for knowing about the problem and trying to keep it a secret. Someone at the Fed must feel the same way because the report somehow found its way to the media.

To illustrate the risk, Capmark Financial is singled out by the Journal as having only 11 cents in reserves for every $1 in bad loans in the second quarter. Capmark, you may recall, was previously part of General Motors' GMAC lending arm before being taken over by an investor group that includes Kohlberg Kravis Roberts and Goldman Sachs (GS Quote).Last month, Capmark acknowledged that it is teetering on bankruptcy and accepted a rescue deal from a group led by Warren Buffett. Capmark is a pretty good a barometer of the commercial property mortgage industry since it is among the top servicers of U.S. commercial real estate loans and the biggest for property in the rest of the world, according to the Mortgage Bankers Association.

The top servicer of commercial mortgages in the U.S. is Wells Fargo (WFC Quote), which was already in the top 5 before buying Wachovia, which is the biggest master and primary servicer of commercial bank and savings institution loans, according to the MBA. Wachovia also ranks at the top for warehouse facility mortgages.GEMSA is the top credit company, pension funds, REITs, and investment funds servicer, PNC (PNC Quote) is the leading FHA and Ginnie Mae servicer and Capmark is first for other investor type loans, according to the MBA..If you're concerned about international exposure to commercial property loans, the leaders are Hatfield Philips, Deutsche Bank (DB Quote) and GEMSA, according to the MBA.And those are just the servicers.

Banks and thrifts hold roughly half of outstanding commercial property loans, representing $1.6 trillion of debt, according to Commercial Property Executive, which concluded that the highest default risk is for loans originated in 2006-2007 boom , when "commercial properties were valued far too highly in those days, and are now underwater."In case you're wondering whether the commercial real estate sector is really at risk, consider that defaults on loans to the sector rose to 2.88% in the third quarter from 2.25% in the second quarter, which was already the highest level since 1994, according to an analysis of FDIC data by Real Estate Econometrics.

Real Estate Econometrics projects that the default rate will swell to 4.2% by the end of this year and peak in 2011 and the group warns that the largest losses will occur at regional and community banks.All things considered, it seems like something the Fed should be talking about more openly and that banks should be addressing more quickly.Nobody wants a rerun of the mortgage meltdown.

This post has been republished from The Street.

Most Popular States Americans Would Choose to Live

The Harris Poll®

California, Florida, Hawaii, Texas and Colorado Are the Most Popular States Where Americans Would Choose to Live

New York, Denver, San Francisco, San Diego and Seattle the most popular cities that people would choose to live in or near

New York, N.Y. — October 5, 2009 — For the sixth year in a row, California tops the list of states that Americans would choose to live in if they did not live in the states where they are now. Florida, which was the most popular state in 2001, retains second place on the list and Hawaii is number three, as it was in 2007.

New York City tops the list of cities that people would most like to live in or near, followed by Denver and San Francisco.

These are some of the results of The Harris Poll of 2,498 U.S. adults surveyed online between August 10 and 18, 2009 by Harris Interactive.

The Harris Poll has asked these questions almost every year since 1997. Florida topped the list of the most popular states every year from 1997 to 2001. California jumped to the number one position in 2002 and has remained there ever since.

After California and Florida, the states where the largest number of Americans would like to live are Hawaii (#3), Texas (#4), and Colorado (#5). Next came three states tied for 6th place: Arizona, North Carolina and Washington state.

Filling out the rest of the top 15 states are Tennessee (#9), Oregon (#10), New York (#11), South Carolina and Massachusetts (both equal #12), Georgia (#14), and Montana (#15).

New York City has topped the list of cities where the most people would like to live in or near, every year, since 1997, except in 1998 when it slipped behind San Francisco. However, Denver and San Francisco, now tied for second place, have moved up from # 9 and # 4 last year. This is the first time in the thirteen year series that Denver has placed higher than #4.

The other most popular cities on the top ten are San Diego (#4), Seattle (#5), Chicago (#6), Boston (#7), Las Vegas (#8), Washington, DC (#9), and Dallas (#10).

Also in the top 15 are Austin (#11), Nashville (#12), Atlanta (#13), Orlando (#14), and Los Angeles (#15).

So what?
This is much more than a beauty contest. The most popular states and cities where large numbers of people would like to live tend to attract tourists and business. They are places where people like to take vacations and where companies like to have their offices and factories. 2
The climate appears to be important. The majority of the states and cities listed have hot or warm climates, and the top four states are all in the Sun Belt. However, both the two most popular cities, New York City and Denver, get snow and low temperatures in winter.
It is worth nothing that California is still top of the list of states in spite of the widely publicized economic problems and the political battles to control its budget deficits.


http://www.harrisinteractive.com/harris_poll/pubs/Harris_Poll_2009_10_05.pdf