So Cal Real Estate News

(The following information is pasted in from the California Association of Realtors’ website and is general in nature.  It is provided as a courtesy and resource for Californians affected by the wildfires, and also has some interesting items related to fire damaged real estate in general.  You should consult an attorney if you require specific legal advice.)

Introduction

The seasonal firestorms we experience in California raise several legal questions for REALTORS® and their clients. The following questions and answers may be helpful for property owners and residents who have suffered a loss, or for buyers who are in escrow to purchase property involved in the disaster.

Q 1. What are the general rules concerning who bears the risk of loss in a real estate transaction where an “Act of God” or other disaster, such as fire, affects the property?

A If the purchase contract between the parties does not specify who is to bear the risk of damage or loss to the premises during the time between the execution of the contract and the transfer of title, the liability of the parties is governed by the California Uniform Vendor and Purchaser Risk Act (Cal. Civ. Code § 1662). Under the provisions of this statute (assuming no fault on the part of the buyer), the risk of loss or damage to the premisesis carried by the seller until the buyer receives either title or possession. (Note: C.A.R.’s Residential Purchase Agreement and Joint Escrow Instructions, Standard Form RPA-CA, revised 10/02, does not dictate how risk of loss is allocated between a buyer and a seller.)

If all or a material part of the premises are damaged before title or possession is given to the buyer, the buyer can cancel the contract and recover any portion of the purchase price paid. It is not clear whetherthe buyer can alternatively elect to enforce the contract with a reduction in the purchase price equal to the loss of value or cost of repair.  (Cal. Civ. Code § 1662.)

After the buyer has taken possession or has received title,the buyer bears the risk of loss or damage to the premises (assuming no fault on the part of the seller). Therefore, if the premises are damaged, the buyer must still complete the contract and pay the balance of the purchase price.  (Cal. Civ. Code § 1662.)

If the purchase contract does contain a risk of loss provision, that provision will govern to the extent it is different from or more specific than the Uniform Vendor and Purchaser Risk Act (Uniform Act) (Cal. Civ. Code § 1662).

Q 2. May a buyer get out of a purchase contract under the Uniform Act if the damage or loss caused by fires to the property is minor?

A Probably not. The Uniform Act implies that the seller may still enforce the contract if the damage is not material.  However, a purchase agreement may require the seller to repair such damage.  For example, Paragraph 7A of C.A.R.’s Residential Purchase Agreement requires the property to be maintained in substantially the same condition it was in on the date of acceptance.  Under this language, a seller could be obligated to repair fire-related damage to his or her property.

Q 3. May a buyer get out of a purchase contract under the Uniform Act if the damage or loss caused by fires to the property is major?

A Yes. To repeat, if (1) neither legal title nor possession has transferred from the seller to the buyer, and all or a material part of the real property is destroyed by fire, and (2) no express contract provision to the contrary exists, then, under the Uniform Act the seller cannot enforce the purchase contract and the buyer may cancel and recover any portion of the purchase price already paid.  (Cal. Civ. Code § 1662.)

Q 4. If the damage is not severe, does the timing of the fires (whether they occur before or after an inspection) affect the right to cancel?

A Yes. If the damage occurs before the buyer has removed an inspection contingency in his or her purchase contract, the buyer can, of course, exercise any inspection, disapproval, and cancellation rights provided by the contract.

If the damage occurs after the buyer has removed his or her inspection contingency, the buyer generally does not have an automatic right to reinspect the property and approve or disapprove of its condition under most purchase contracts (including C.A.R.’s Residential Purchase Agreement).  However, the seller may be obligated to repair the property.  See Question 2.

A purchase agreement may, however, require a seller to disclose fire-related information, which in turn may give a buyer a right to cancel a transaction, even if he or she has already removed contingencies.  For example, Paragraphs 5A(3) and (4) of C.A.R.’s Residential Purchase Agreement provide that if,prior to the close of escrow, the seller becomes aware of adverse conditions materially affecting the property, the seller must provide a subsequent or amended disclosure or notice, which then gives the buyer a right to cancel the agreement.

Q 5. Must a seller disclose major fire damage that has not been repaired when attempting to sell the property?

A Yes. For sales of residential one-to-four unit properties, the Real Estate Transfer Disclosure Statement (TDS), Section II (Seller’s Information), paragraph C.9, asks:

“C. Are you (Seller) aware of any of the following: . . . 9. Major damage to the property or any of the structures from fire, earthquake, floods, or landslides.
______ Yes ______ No.”   (Cal. Civ. Code § 1102.6 (emphasis added).)

In addition, for both residential one-to-four unit and other properties, the seller is required to inform a buyer whether the property is located in a “very high fire hazard severity zone” (which has certain maintenance requirements) or a “state responsibility area” (which may contain substantial forest fire risks and for which the state has primary financial responsibility for fire prevention and suppression). (Cal. Civ. Code §§ 1103.2 et seq.)  The disclosure of these and other natural hazard zones is discussed more fully in C.A.R.’s legal article, Natural Hazard Disclosure Statement.

For all types of property, the general requirement of disclosing known material facts affecting the value or desirability of property applies.

Q 6. Must a seller disclose the fact of a fire when there was no major damage to the property?

A Yes, if it is a material fact affecting the value or desirability of the property to the buyer.    Even though the property may not have suffered major fire damage, the seller may be aware of other factsrelated to the fire that the buyer might not be aware of.  Of course, a buyer must also exercise reasonable care to protect himself or herself in a real estate transaction, and is not excused from discovering problems that are within his or her diligent attention and observation.

Q 7. Must a seller disclose the fact of a fire when there was major damage to the property but it has been repaired?

A California law does not clearly answer whether a seller must disclose past property defects and repairs.  At the present time, the law does not appear to require disclosure of past defects and repairs unless the problems may be persistent.  In other words, a defect which has been fully repaired and no longer threatens the value or desirability of the property probably need not be disclosed.  On the other hand, defects which are difficult to remedy and which may continue to plague the property may have to be disclosed.  Given some uncertainty in this area of the law, many sellers may prefer to resolve doubts infavor of disclosure to minimize the risk of liability.

Q 8. What are the tax effects of destruction of a property?

A Federal income tax law provides for the deduction of “casualty losses,” which include destruction of property by “Acts of God” including fire, theft, and certain other types of losses.  (See 26 U.S.C. §165.)

The following is a brief summary of the rules:

1. (1)  For business property, the casualty loss is fully deductible. (26 U.S.C. §165(a).)
2. (2)  For non-business property of individuals, losses from “casualties,” including floods, earthquake, fire, storm, or other natural occurrences, are generally deductible only to the extent that the total of such losses exceeds 10 percent of the taxpayer’s adjusted gross income for the year of loss. Any loss is deductibleonly by a taxpayer who itemizes deductions. Each loss is subject to a $100 floor. The amount of a casualty loss is the lesser of, (a) the difference between the value of the property immediately before and after the loss, or (b) the adjusted basis of the property immediately before the loss. (26 U.S.C. §165(c)(3) and (h).)
3. (3)  If the loss results from a disaster that the President determines to be eligible for federal assistance, the taxpayer has the choice of deducting the disaster losses on his or her return either, (a) for the year in which the loss occurred, or (b) for the preceding tax year. (26 U.S.C. §165(i).)

See the Internal Revenue Service’s website for more information.  For a copy of the IRC code, go to U.S. Code Online and enter 26 for the title and 165 for the section and click on search.

Please contact an accountant or tax attorney for further details about the tax effects of fire losses on a particular transaction.

Q 9. Can a landlord or tenant terminate a lease or a rental agreement if all or parts of the premises are destroyed by fire?

A Yes. Under California Civil Code Section 1933(4), the agreement is terminated automatically if the entire premises are destroyed, unless the parties have agreed to something different.   In the event the premises are only partially destroyed, the tenant can terminate the lease by notice to the landlord if the landlord had reason to believe at commencement of the lease or rental agreement that the portion destroyed was a “material inducement” to the tenant to enter into the lease (Cal. Civ. Code §1932(2)).

Again, any contrary agreement between the parties will govern.

Q 10. Can a landlord collect further rent after the lease or rental agreement is terminated due to destruction of the premises?

A No. The obligation to pay future rent is extinguished when the rental agreement is terminated. However, a tenant maystill owe back rent.

Q 11. Where can I obtain additional information?

A Additional information is available on the Real Estate Resources page on C.A.R. Online.  Look for the category, “Fire Disaster Assistance.”  This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.’s legal products and services, please visit C.A.R. Online at www.car.org.  For a list of important contact numbers, please see Appendix A below.

Readers who require specific advice should consult an attorney.

(Saturday afternoon, 11/15/08) Being a second-generation native Californian, I tend to take our local disasters in stride.  Local’s joke that we really do have seasons out here in So Cal, they’re just not the traditional winter, spring, summer, & fall outsiders are used to.  Our seasons are more like flood & mudslide season, riot season, fire season, and earthquake season.  (I left off “drought,” but that’s more like a year-round thing every few years).

Trouble is, in the last few years fire season keeps getting longer.

I just flew back from a wet,  chilly, but fall-foliage beautiful two days in Nashville on Thursday night.  During the last half of my non-stop Southwest flight home the “Tea Fire” in Montecito ignited, spread, and burned several dorms and other buildings in my wife’s Alma Mater, Westmont College.  I teased my son-in-law that he needed to keep I couldn’t leave the state for two days without Barb’s college burning down.  Fortunately, injuries and loss of life was minimal, but hundreds of gorgeous acres and scores of expensive mansions were lost, along with the Tea Garden well known among Westmont students.

Fortunately, the winds died down on Friday, but when I got up this morning and saw the Santa Ana winds gusting through our Los Alamitos neighborhood, I knew the fires would be back today.  Before we even turned the TV on for the non-stop coverage I told Barb to expect at least 4 new fires and 500 homes destroyed.   Sadly, it appears that I may have underestimated.

Most of our natural disasters aren’t really that widespread in their devastation.  This week’s fires, for example, will probably devastate less than a hundredth of 1% the homes in Southern California.  That’s still hundreds of homes and millions of dollars, but most of us aren’t severely impacted.

The smoke and pollution will be felt by millions, lots of patios and cars will need to be washed off sometime early next week, but life essentially goes on.

Fire season is brought on by the infamous “Santana” winds, often mistakenly called “Santa Anas.”  The word is probably a contraction of vientos de Satan, Spanish for “winds of Satan.”   These are hot, dry offshore winds that descend from the Great Basin through the Mojave desert down into Southern California, primarily in spring and summer.  While the threat of fire is generally greater in the fall, with recent dry winters fire season has extended to include spring and, now, late fall as well.

Los Angeles weather is the weather of catastrophe, of apocalypse, and, just as the reliably long and bitter winters of New England determine the way life is lived there, so the violence and the unpredictability of the Santa Ana affect the entire quality of life in Los Angeles, accentuate its impermanence, its unreliability. The wind shows us how close to the edge we are.

—Joan Didion, “Los Angeles Notebook”

Ultimately, additional restrictions will be imposed on construction and additional clearance and greenbelt requirements imposed in fire prone areas.  Our wildfire challenges are actually easier to manage and less widespread than California’s earthquake risks.

To most Californians, our natural disasters are less ominous than those in so many other regions of the nation or the world.  Most of us regard them as one trade off for 360 days of temperate sunshine a year and the many other benefits of living in a dynamic, diverse land of opportunity.

While our thoughts and prayers and help will be going out to our neighbors in these days of loss, while it’s annoying to curtain outdoor activity and deal with the smoke and ash, most Californians still consider this our Golden land of opportunity, and really wouldn’t want to live anywhere else.

(photos from L.A. Times’ Gallery

(10/8/08)  I’ve been teaching brief buyers’ and sellers’ classes for the city of Lakewood for about 20 years now.  I like to do a buyers’ class early in the fall each year in anticipation of the market bottom that usually occurs during the winter months (see “Real Estate 101:  Our 2 market cycles.”)

Several months ago we scheduled this year’s class with Lakewood’s Community Services Department for this Saturday, October 11, from 9 - 11 a.m. at Lakewood’s Mayfair Park (details & registration link here). At the time, we were anticipating at least the annual market bottom and possibly a cyclical bottom as well, but we weren’t exactly anticipating the events of the last few weeks!

The current market presents that rare combination of low prices and low interest rates that usually mark a bottom.  That bottom could be occurring right now, or it could still be years away.  Regardless, smart buyers should prepare now for the bottom that eventually will come.

Our little class includes basics of buying, an overview of foreclosures, break-out sessions for first time buyers, move-up buyers, and investors, an overview of current lending options, and an up to the minute discussion of the current market and what may be anticipated.  It’s open to all, whether Lakewood residents or not.

Blair and I were both teachers when we first went into real estate, and we enjoy getting back into a classroom setting from time to time.  My decision to buy my first home way back in 1976 was largely based on information I received in a similar, but longer, Saturday class taught by Los Angeles realtor Scotty Herd for UCLA’s extension program.  It gave Barb and I the information, tools, and confidence we needed to make that first purchase.  The buyer and seller classes we do give us an opportunity to discuss real estate in a classroom, rather than selling, setting.

If you know of someone who may be thinking about buying in the next year or two, this course would be an excellent opportunity to get some useful information.

We’ll also be doing a similar class for sellers on January 24, same place, time & price (info & reg link here).  You can also call us directly at 562.822-SOLD if you have questions or want additional information.

“ECONOMY HAS HEADS SPINNING”  my morning paper screams at me before I’ve even picked it up off the driveway.  Stocks tanking, huge firms failing or being bailed out, DataQuick medians show yet another home price drop.

And we decide today’s the day to tell you it’s a sellers’ market?

Well, yes and no.

Actually I decided last night it was time to write a post that it’s become a sellers’ market at the low ends for detached single family homes in most neighborhoods in the Coastal Plane of Los Angeles and Orange Counties.

What’s going on now:

You see, what we try to do here, as our masthead says, is give you “real estate news and perspectives from the front lines.”  What we and our colleagues see going on right now at open houses and with buyers and sellers in Southern California.

So we’re 3 months ahead of DataQuick, whose monthly median closing price stats just reported August closings on sales that were negotiated mostly in June.  We’re 5 - 6 months ahead of Case-Schiller, who averages 3 months of closings using their unique “matched pairs” approach and then delays a month to release.

So let me tell you what’s actually happening right now:

• Showings are up significantly at all of our listings priced below $500,000, and up modestly on our “move-up” inventory.
• That offer I made a few weeks ago that I told you about (See “Who should buy between now and Christmas?“):  Outbid.  Swamped with competing offers.  My “all cash, close in 10 days, as is” offer didn’t even get a phone call back!
• Yesterday I surveyed several other agents I’ve known for years.  Every one of them said buyer activity was up dramatically over the last few weeks.
• Even my partner, Blair, & his wife are about to make an offer.

Why?

Pretty simple, actually.  Summer just ended, prices have been coming down, and–oh, yeah–mortgage rates just plummeted:

• August is almost always one of the slowest months of the year, but things generally pick up in September and October before slowing again as the holidays approach.
• Foreclosures and pre-foreclosure “short sales” have been forcing prices down all year.  Data Quick’s August median for OC was back to the level of November 2003!  Vacation over, kids back in school, & buyers are noticing that neighborhood they couldn’t afford last year is now within their reach.
• When the U.S. Government (that’s you & me, in case you didn’t notice) basically took over Fannie Mae and Freddie Mac, confidence returned to the mortgage markets and rates dropped around a full point, with 30 year fixed loans at 5.5%!  Rates have ticked up a bit since then, but are still near record lows.

What’s it mean?

Good question.  Is it a seasonal blip or did we just pass the bottom, at least for starter homes in built-out areas?  Well, part of it is seasonal, but that’s not the whole story.  What happens next will largely be determined by the answer to five key questions:

1. What will the economy do?
2. What will interest rates do?
3. What will mortgage rates do?
4. Are foreclosures peaking?
5. Have prices corrected enough?

The first two will tend to counter-balance each other.  If the economy continues it’s sharp declines, both the fed and investors will combine to drop interest rates, both short and long term.

As for mortgage rates, with the feds supporting the market, we know the margin, or mark-up, for mortgages will stay at the more normal levels we’ve seen over the past few weeks.  One of the biggest challenges for housing has just been met.  Federal intervention is having some positive results for home sellers and buyers, as we’ve been predicting all year.

Foreclosures may be the key here.   In California it takes about 4 months to foreclose on a home from filing the initial Notice of Default through the Trustee’s Sale.  Longer if the owner files bankruptcy.  It takes another 1 -3 months to get the occupant out and the home on the market.   We know that the banks have been taking back record numbers of homes, assuring a continued influx of foreclosed homes hitting the market through year’s end.

We can also check on homes entering the foreclosure process (we give you two links for that under “Useful Links” in the column to the right, but we prefer the data in the “Preforeclosure” link.)  A month ago, it looked like homes entering foreclosure were peaking, but recently released August stats are up for both Orange and Los Angeles Counties.  Government relief for foreclosures is about to kick in next month, and the shakiest borrowers have already lost their homes.  On the other hand, a sinking economy combined with coming payment “resets” (increases) on many adjustables may put more homeowners in jeopardy.  This one may be “too close to call,” but I think by mid spring of 2008 the worst of the foreclosure market will be behind us.

Which brings us to question # 5.  You’ll get plenty of debate on this, but the multiple bids on properly priced REOs make it pretty obvious to me that some prices have, indeed corrected enough, provided interest rates don’t rise dramatically & the economy doesn’t tank.

What prices have corrected enough? The prices that bring competitive bids:  The fire-sale prices the lenders are now offering on starter single family homes in built-out markets. Pretty much what we said three weeks ago, except it’s happening now, not early next year.

Is this the bottom?

For SFRs in the coastal plane of OC & L.A. Counties, maybe so, maybe this December, maybe later.  It largely depends on the economy, interest rates, and when foreclosures peak.  Stay tuned, & we’ll keep you posted on what we’re seeing here on the front lines of So Cal Real estate.

Our 2-hour, $5 October Buyer Seminar:

We actually scheduled a two hour buyers seminar with the city of Lakewood’s Community Services Department several months ago.  It’s open to everyone, not just Lakewood residents.  It’s from 9 - 11 a.m. on Saturday, October11 at Lakewood’s Mayfair Park (Clark and South St.).  We designed this to help buyers make the most of this fall and winter’s unusual buying opportunites. Class size is limited to allow interaction. Sponsored by Lakewood’s Community Services Department. Details here. No, we’re not selling tapes, cds, books, or DVDs! We’re both former teachers, & we enjoy a chance to discuss real estate in a “classroom” setting.

Note: Special 2 hour, $5 buyer seminar with Blair & Dave set for Saturday, October11 at Lakewood’s Mayfair Park (Clark and South St.). We designed this to help buyers make the most of this fall and winter’s unusual buying opportunites. Class size is limited to allow interaction. Sponsored by Lakewood’s Community Services Department. Details here. No, we’re not selling tapes, cds, books, or DVDs!

It wasn’t that long ago that Blair and I thought Southern California home prices were most likely to begin to rebound in spring of 2010.

Near the end of July we made an upbeat revision in our forecast, giving a 40% probability Southern California home prices would bottom this coming winter, a 40% chance of our price bottom coming the following winter, and a 20% of our bottom coming after that.  We also began specifying which areas and price segments can be expected to bottom first.  (For details and our rationale, check out “An optimistic update on our projections of a home price bottom.”)

Now we’re getting even a bit more optimistic, largely due to modest declines in homes going into foreclosure combined with the rapid decline in prices over the past year.

Nobody can say with certainty when Southern California home prices will hit bottom (See “How low will prices go?“).  DataQuick’s numbers won’t reflect that bottom until long after it’s passed (see “Two big problems with DataQuick’s monthly median price reports“).  However, there comes a time before the price bottom in every market cycle where the wise buyer starts looking very seriously.

I think that time is now.  In fact, last week I put in my first offer on a California property in over ten years.  (Last month I also decided to run for my local City Council for the first time ever, but that’s another story for another blog.)

Let’s take a close look at some questions this raises, including where, what, and why to buy now:

Where to buy now: While we believe recovery for the desert area and the Inland Empire may not come unti spring of 2010, we now believe the next four months are likely to present the best buying opportunities for most property classes in the coastal plane of Los Angeles and Orange Counties.

Why? As we’ve indicated in “Our Two R.E. Market Cycles,” in most years both sales volume and prices for homes going into escrow tend to bottom in November and December. People are too busy preparing for the holidays to buy homes but lenders and builders are trying to unload inventory before year’s end.  It’s almost like an annual “year end clearance” sale for real estate.

With the number of homes going into foreclosure beginning to decline and effects of the federal housing relief bill beginning to kick in (see “The good news about the ‘Housing and Economic Recovery Act’ “), we think the odds now are that this winter’s apt to be as good as it gets for buyers looking in the more built out areas of So Cal.

What’s more, interest rates are still near historical lows and are expected to gradually rise over the years ahead.  Very low prices and rates make for an excellent buying opportunity.

Finally, there are literally hundreds of thousands of buyers sitting on the fence right now waiting for the market to bottom.  Once they all sense the time is right, you’ll have far more competition from other buyers than you have right now.  If you’re not early, you’ll be late.   Once everybody recognizes a golden opportunity, it’s too late to take advantage of it.

Due to the annual cycle, we know activity’s apt to pick up starting 12/26, we think the prudent buyer should at least get her feet wet in the market now.

Who should buy now? Buyers who have fairly decent credit, access to a down payment of at least 3.5% (the new FHA minimum), stable income, and who aren’t planning on selling in the next five years.  (3-5 years used to be the rule of thumb for accumulating enough equity to cover selling costs.  1-2 year “flipping” for anything besides severely distressed property is probably a thing of the past.)  It’s also not a time for negative amortization loans, or adjustable mortgages with low teaser rates and payments that will rise dramatically.  We recommend 7 - 30 year fixed, fully amortizing loans.

What to buy now? We think lower end Single Family Homes (SFRs) will rebound first, as they’ve been driven down the most by foreclosures.  Starter condos, which were overbuilt more than SFRs in LA & OC, will probably lag behind.  Quite likely move-up homes will also lag, since most buyers need to build up equity in their current home in order to move up.

We also like the discounts available on “short sales.”

What’s a “short sale?” In a  “short sale” the current mortgage holder accepts a reduced, or “short” payoff at close in order to avoid foreclosure.  It actually takes longer than a normal sale or a bank foreclosure, and you can expect the current mortgage holder to attempt to renegotiate or even cancel the sale.  I got plenty of experience with short sales back during the 1991 - 1996 SoCal real estate crash, and so far Blair and I have closed every short sale we’ve opened.

Why the discount on short sales? For agents, short sales are twice the hassle for 1/6 less commission, since the mortgage holder always insists on reducing the commission as a condition of accepting the short sale, if they’re willing to accept it at all.  Buyers would also rather avoid the renegotiation hassles not to mention the chance of the current lender disallowing the losing the home 30 - 60 days into the escrow.  As a result short sales often go for 5% - 15% below market.  And market is already 25% - 40% below what it was at the peak.

What about foreclosures? Once the bank takes the home back, the hassles of a short sale and the reduced commission are both eliminated, so the demand increases.  Some REOs (”Real Estate Owned,” or lender-owned, foreclosed properties) are initially overpriced.  When an REO is underpriced, the lender may wait 7 - 10 days before accepting an offer, essentialy holding an auction so that the price will get bid up, sometimes actually selling above market.

When should I start looking? Preferably September or early October.  That way you’ll have time to look and to familiarize yourself with your options.  Some experts say you should look at 20 similar homes before making an offer.  With the internet, it’s not that hard.  You can search for yourself using the links to Southern California Multiple Listing services in the column to your right.  Better yet, we can set you up on the MLS’s “Listing Book,” which allows you to sort out the listings you prefer.  (Just shoot us an e-mail at BlairNewman at verizon.net.  (You know what the “at” represents, but most web-crawling e-mail harvesters don’t.)

It’s also good to start looking now so that if you find a short sale you like you’ll have time to give it a shot, & still have time to look and write other offers if the current lender plays hardball 45 days down the line.

What if prices continue to drop next year? We think the odds are against that, but nobody can say for certain.  What we do know is that prices have already fallen by about a third from the peak.  By staying in developped areas, you minimize the risk of dramatic additional falls.  Of course, if the economy takes a major turn for the worst while you’re looking, you can always wait.  Check back with us, or sign up for our RSS feed, to see our take on future developments.

How do we get started? First, talk to an honest, reliable lender (if you don’t know any, we do.  562.822.SOLD).  Find out what you qualify for on a fixed loan, if you need to work on your credit, how much down you’ll need, etc.

Then find an honest, experienced, diligent full-time agent.  Not someone you know at work (they’re not full-time, no matter what they say), probably not a relative, and not a friendly person you meet at an open house.  At least five years in the business, at least 50 closed sales, at least 5 of them in the neighborhood you’re interested in.   Again, with 30+ years in the business, we can probably find someone good for you if you can’t.  If you’re thinking southeast L.A. County (Long Beach, Lakewood, Norwalk, Cerritos, etc.) or west or North Orange County (Cypress, Rossmoor, Seal Beach through La Mirada and La Habra), we’ve got many years experience there ourselves, with over 500 homes sold.

You may decide you want to wait a little longer, but you may also find your dream home & be able to negotiate a great deal.  Whatever you finally decide, now’s a great time to get started.  There’s a very good chance it may be the smartest financial decision of your life!

Los Alamitos, the second smallest city in Orange County, sits just east of Long Beach on the Orange County/Los Angeles County line.  Because most of the city is in the 562 area code, many people think its in Los Angeles County.  It shares it’s zip code and post office with Rossmoor,  a large, upscale unincorporated trac.  Los Al shares its highly-regarded school district with Rossmoor and Seal Beach.

Los Alamitos has been my home town for twenty years.  It’s a great place to live.  In many ways ranging from location to schools to climate it may be one of the best places in Southern California for someone with a middle class income to buy a home.  (In fact, I just happen to have a beautiful 5 bedroom pool home on a cul de sac that we recently listed–details and virtual tour at LosAlDreamHome.com.)

Like any town, Los Alamitos isn’t perfect.  Two things about it bother me the most.   Although Los Alamitos has fewer than 7,000 registered voters, it’s in the big leagues when it comes to traffic congestion and hostility on it’s City Council. It’s a case of periodic gridlock on the streets and at city hall.

As a Realtor, my job for the last 28 years has involved getting buyers and sellers to work together for their mutual benefit.  I’m a big believer in “win-win” negotiating.  So I decided to toss my hat in the ring for this year’s Los Alamitos City Council election, to see if I could get our divided City Council to work as one team instead of two.  In a town this small, we have more things that unite us than that divide us.

I recently started a blog, LetsFixLosAl.com, for several reasons:

• To promote a greater spirit of teamwork on Los Alamitos’ City Council.
• To suggest and promote strategies to reduce the occasional gridlock on Los Alamitos’ streets.
• As a 21st century town hall meeting in cyberspace where citizens can discuss these issues 24/7/365.

Oh yeah.  The blog seemed like an inexpensive way for a political neophyte to compete for two council seats against three former mayors and another neophyte.

LetsFixLosAl.com is less than a week old, and only has a few posts up, but I plan to add to it several times a week, chronicling first-hand the adventures of a newbie small town politician.   At this point, I’d also appreciate input from both local residents and anyone else with a good idea to share.

Check it out, and let me know what you think.  It should at least provide some interesting insights on politics from a front-line perspective.  Pretty much what we try to do with Southern California real estate on this site.

On July 8, 2008, California Governor Schwarzenegger signed S.B. 1137, an emergency bill designed to assist homeowners in foreclosure and tenants in foreclosed property.

At first we thought it would just make lenders more reluctant to lend in California, but on a closer look we now think that, overall, it’s another positive step in the right direction.

Because it was an emergency bill, many of the changes took place immediately. The bill applies only to loans made between 1/1/03 and 12/31/07– which are the loans most likely to go into foreclosure.

60 Days Notice for Tenants in Foreclosed Homes

According to the state legislative counsel,

Until January 1, 2013, this bill would give a tenant or subtenant in possession of a rental housing unit at the time the property is sold in foreclosure, 60 days to remove himself or herself from the property. . . .

From the bill itself:

A tenant or subtenant in possession of a rental housing unit at the time the property is sold in foreclosure shall be given 60 days’ written notice to quit pursuant to Section 1162 before the tenant or subtenant may be removed from the property as prescribed in this chapter.

(b) This section shall not apply if any party to the note remains in the property as a tenant, subtenant, or occupant.

The above provisions of the law expire 1/1/2013 unless extended by the legislature.

This is a new law, but it appears to give a tenant 60 days from when notice is given after the foreclosure, as long as neither the tenant nor anyone else living in the property was a signer on the loan that foreclosed.  But those 60 cays could become as many as 180 before the tenant is actually out of the property.

Here’s the details, courtesy of the best property manager in Greater Long Beach, Dave Haas:  It would probably take the lender at least a week to prepare and post the notice, often much more.  After the 60 days had elapsed the owner would then have to obtain a court order if the tenant had not vacated.  If the tenant did not vacate after the expiration of the 60 day notice, it would take and additional 30 days minimum if the tenant did not contest the Unlawful Detainer (eviction) proceeding; 60 if he contested it; and 90 if he filed bankruptcy.

About a week after the court order rules the marshall or sheriff  posts the notice to vacate within 7 additional days.   If the tenant hasn’t left by then, the owner and her locksmith meet the sheriff at the property and enforce the order with a “lockout.”

At that point, the tenant would be gone, but would have an additional 15 days to come back and claim any personal property that was left behind.  (Lockouts usually happen early in the morning and generally consist of a brief but professional “Hello, time to go,” from the sheriff followed by a lock change by the owner’s locksmith.)  60 days notice, up to 90 days to get the order to evict, another 14 to the lockout, another 15 to store the tenant’s possessions for a maximum of about 180 days, worst case.  Maybe longer over the holidays.

However, if the tenant stops paying rent during that initial 60 day notice, a 3 day notice would be posted and an eviction would start at the expiration of the 3 days, taking a maximum of another 120 days. This law does not allow for the tenant to stay rent free, nor does it apply to former owners, just renters.

Most tenants do not want a “U.D.” (Unlawful Detainer, or eviction) on their record, and will arrange continue paying rent and move within the 60 day time frame.

The 60 day notice is posted not at the beginning of the foreclosure process, but once the home is either taken back by the lender or sold to a new owner at the Trustee’s Sale on those legendary courthouse steps.   That’s a minimum of 111 days from filing the “Notice of Default” which actually begins the foreclosure process.  In most cases, the borrower has missed several monthly payments before the “N.o.D.” is filed.

The bill also has requirements concerning the lender filing that Notice of Default:

Required Notifications prior to filing a Notice of Default:

At least 30 days prior to filing a N.o.D. the lender or their representative must meet with the borrower either in person or by phone “in order to assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure.”   This notification can only be waived if the lender demonstrates “due diligence” by following a number of prescribed steps and still is unable to contact the borrower.

This provision becomes operative 9/6/08, to allow lenders time to set up procedures.  N.o.D.s filed before then apparently are exempt.

Maintenance of Property

This one we think we really like.  As usual, the devil’s in the details, but it’s indended to prevent foreclosures from ruining a neighborhood by requiring the lender or new owner to maintain vacant residential property acquired at a trustee’s sale.  Included are excessive foliage, failure to prevent trespassers and squatters, and other conditions of public nuisance, including standing water and mosquito issues.  Fines of up to $1,000 per day should ensure compliance.  This provision takes effect immediately.

Provisions to Encourage Loan Modifications

This makes it easier for the loan servicer to work out a loan modification if such a modification is expected to ultimately save the lender money.  (Remember, many loans are held in huge consolidated blocks by large investors from pension funds to insurance companies, who pay a servicing company to collect the payments and foreclose if necessary.  You may make payments to Chase, but the Cal State Employees Pension Fund might actually own the loan.  In that  example, this provision give Chase more authority to act to achieve a mutually acceptable resolution on a loan secured by California property.

Three specific requirements must be met:

1. The loan is in payment default, or payment default is reasonably foreseeable:  In other words, the borrower is in trouble.  Quite likely will require a “hardship letter” with supporting evidence.
2. It looks like the lender will lose less money with a workout than with a foreclosure.
3. The loan modification is consistent with the servicer’s contractual or other authority.

These provisions may facilitate workouts under the newly approved federal mortgage relief bill in the state of California.

On the whole, this bill appears better designed up close than we thought when we first read about it.  As with the federal bill, there was give and take and consultation with the various interests involved.

As always, we value your input in the form of comments.

Click here for the text of the bill and the Legislative Counsel’s Digest.

(8/1/08) Frequent readers know Blair & I have been candid about what we don’t know during this amazing real estate market cycle here in Southern California. (See “How low will prices go?“)

But today, as I was looking through the Orange County Register’s Friday new homes advertising section, it suddenly hit me:

Prices on most So Cal new construction have either already hit bottom, or will be hitting bottom between now and December 26.

So, if you’ve always wanted to live in a new home, I suggest you start doing your research now.

Why now?

Simple:  Supply and demand.  New home permits have been way down for over a year now.  Most developers may be as addicted to building as a drug addict is to dope, but they aren’t crazy.  And even if they are, their bankers aren’t.  There just isn’t that much additional inventory coming onto the market.

In most segments, we’re in the final phases of a clearance sale, and the stores haven’t been ordering new inventory for some time.  Essentially, they’re going of business–some permanently, others temporarily.  And the “going out of business sale” is winding down.

Exactly which new construction?

In the developed areas of Orange, San Diego and Los Angeles Counties, the lower end of new construction will probably hit bottom first, as may also be the case in resales.  That would include almost all starter homes, especially condo/townhomes/lofts and “C” neighborhood detached homes.  As Lyon Homes reported today, the lower end homes are now the bulk of their sales, allowing them to sell out these tracts earlier.

In the outlying areas, it’s a bit trickier due to the impact of high commuting costs and economic problems from the building slowdown itself.  The areas with shorter commutes will most likely bottom first.  High end, move-up tracts may have further down to go as well.  Do your homework and look for desperate builders or whole tracts that are now bank-owned.

What about resales?

The glut of bargain basement new homes needs to be cleared out to stabilize resales, so this would be a step in the right direction.  There are two additional problems facing resale housing:

1. The glut of foreclosures and “short sales,” especially on the low end.
2. The lack of the normal buyers for move-up homes, because most owners of starter homes either already moved up during the boom or else have had their equity disappear during the plunge.  For example, last weekend we held open a beautiful Los Alamitos five bedroom, three bath pool home. Over 50 people came through, and most of them fell in love with the home.  Unfortunately,  almost all of the potential buyers had another home they needed to sell first.  In most cases, that home had been taken off the market because they couldn’t sell it at a price that they felt they needed to make the move, including one family that was making a lateral move back to California from Florida.  (The first Florida summer will do that for you!)  Same problem that Lyons is having with move-up homes.  On the flip side, prices have been “stickier” on most move-up resales, due to both a lack of competition from foreclosures and the ability of their sellers to wait out the downturn.

For resales, we’re sticking for now with our latest projections (see”An optimistic update on our projections of a home price bottom“).  In short, we think the odds are for a bottom either this coming winter or next, but it’s too close call as to which.

What to do?

• If you’ve got your heart set on a new home, start looking now and be ready to close before year’s end.
• If a resale will do, get your “ducks in a row” by figuring out what you’ll qualify for and what your home might sell for if you’re moving up, or if you’d be better off refinancing out your down payment now and renting it out.  (You’d need to close escrow on it within 3 years of moving out or you lose your tax free $250,000/$500,000 exclusion of capital gains.)  This winter should be good–prices have already dropped more than I’ve ever seen in my 28 years as a Realtor and broker.   But prices might be better in winter of ‘09-’10.

We think the deciding factor should be your personal situation.  For more, check out our classic post on “What to do when nobody knows what’s next.”  Of course, we’ll try to answer any question you leave in the form of a comment below.  You can also feel free to go to “About Us” and scroll to the last few lines to get our phone numbers, or simply put “contact me please” in the comment section below (click the word “comments” below if there’s no box to complete).

Times of great opportunity are ahead.  For many new home buyers, they’ve already arrived, and quite possibly for resale buyers as well.  Praying for wisdom might be a good place to start!

(7/30/08) Back on April first of this year, while debate was raging on the bill, we wrote a post titled “Major housing breakthrough near?“  It included the following:

It looks like our leaders may finally be setting aside their egos and personal agendas to work together for the common good.

Behind-the-scenes discussions between Congressional leaders and the Bush administration may be about to bear fruit. And that fruit would be a pragmatic Housing Relief Act of 2008 which combines the best ideas from partisans of all stripes to provide both immediate relief and long term reform.

The comments off the record are almost unbelievable: “The collapse of the American housing and lending markets is an impending crisis that compels us to lay aside partisan differences and work together,” one Senate leader has discovered. “Ultimately, we’re all in the same boat, and if it sinks, we all drown!” she continued.

“We need to recognize that we are all on the same team,” according to a key administration figure. “We need to stop acting like the Shaq and Kobe Lakers and start acting like this year’s UCLA Bruins. You don’t see Collison and Love fighting for the ball!”

The details are still being finalized, but they involve major concessions and some unique innovations from both sides of the aisle.

We meant it as an April Fool’s post!

Turned out, the joke was on us, & we’re glad!

While the bill’s far from perfect, it includes a lot of positives, from increased oversight of the mortgage giants Fannie, Freddie, to tax credits for first time buyers for a limited time.

What’s especially significant is the numerous compromises it took to get the bill through Congress.  For example, that first time buyer tax credit ended up being an interest free loan that has to be paid back over fifteen years.  Stimulus for housing now, partial payback for the taxpayers later.

Many housing bears are eager for values to fall more, even if it does ruin the nation’s economy and banking system.  Their hatred for this bill might be evidence they fear it just might work.

We think it’s a step in the right direction.  Maybe several steps.  The bottom of this crash is at least a little closer today than it was yesterday.  On our latest projections post, we increased the probability of a bottom within the next seven months by 5% directly as a result of this bill.  Hopefully, we’re being conservative.  (That post also lists some of the additional beneficial features of the bill.)

Thanks to those leaders in D.C. that finally realized that ultimately, as Americans, we’re all on the same team!

(July 30, 2008)  At 9 A.M. Eastern Standard Time, on the last Tuesday of every month, McGraw-Hill’s Standard & Poor’s Unit releases the  Case-Schiller Home Price Index for the previous month, just like clockwork.

The news media love it:  “Breaking news” on housing they can schedule into their calendar months in advance, just like DataQuick’s monthly median home sales price reports.

Conversely, Case Schiller must love the media. If it’s the last Tuesday of the month, Case-Schiller will on the radio,  be all over the internet, in the networks’ evening news, and in the next day’s paper.

There’s one thing to love about the Case Schiller Home Price Index, and at least two problems.

About Case-Schiller, In S & P’s Own Words:

Let’s start by getting an overview “straight from the horse’s mouth:”

The S&P/Case-Shiller Home Price Indices measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States.

These indices use the repeat sales pricing technique to measure housing markets. First developed by Karl Case and Robert Shiller, this methodology collects data on single-family home re-sales, capturing re-sold sale prices to form sale pairs. This index family consists of 20 regional indices and two composite indices as aggregates of the regions.

The S&P/Case-Shiller Home Price Indices are calculated monthly and published with a two month lag.

Looks like we may have just given away one of those problems, but before we get into that, let’s see exactly how these folks come up with their numbers, again taken from their own website (links at the end of this post).  The key to their method is a tool Karl Case and Robert Schiller came up with back in the 1980’s.  According to S & P:

They developed the repeat sales pricing technique, still considered the most accurate way to measure this asset class. [even if they do say so themselves!] The methodology measures the movement in price of single-family homes in certain regions.

This is done by collecting data on sale prices of specific single-family homes in the region. Each sale price is considered a data point. When a specific home is resold, months or years later, the new sale price is matched to the home’s first sale price.   These two data points are called a “sale pair.” The difference in the sale pair is measured and recorded. All the sales pairs in a region are then aggregated into one index.

Sales pairs are carefully screened for any data points that would distort the index. These factors include foreclosures, non-arms length transactions (sales between family members) and suspected data errors where the order of magnitude of the change is substantially different from other sales pairs in the region.

Once the “sales pairs” have been screened, they are weighted:

The indices are designed to measure the change in the price of homes that have not undergone significant positive or negative changes in quality. Sales pairs are assigned weights to account for fluctuations in price that can be attributed to factors like extensive home remodeling, adding a home addition, or extreme neglect.

For example, the indices assign smaller weights to sales pairs with large change in sales price relative to the community around them. The assumption is that this change is due to remodeling or neglect. Sales pairs are also weighted based on time intervals between sales.  Sales pairs with longer time intervals are given less weight than sales pairs with shorter intervals to account for the probability of physical changes.

In other words, Case-Schiller compares sales of the same property, trying to eliminate sales where changes in value could be influenced by neglect, upgrades or sales between family members

What’s not to like about that?

All indices have strengths and weaknesses.

Problem # 1:  A bigger lag than you think!

One of Case-Schiller’s weaknesses seems pretty obvious:  a two month lag.  However, as the infomercial salesperson says, “but wait, there’s more!” Again, from Case-Schiller themselves:

The monthly indices use a three-month moving average algorithm. Home sales
pairs are accumulated in rolling three-month periods, on which the repeat sales
methodology is applied. The index point for each reporting month is based on
sales pairs found for that month and the preceding two months. For example, the
March 2008 index point is based on repeat sales data for January, February and
March of 2008.

OK, time for a pop quiz.  Exactly when was that “March 2008 index” released?  The last Tuesday in April!

We’re not just looking at a two month lag here–we’re looking at a two-month lag on stats averaged over three months.  Using the middle of that three month range, we’ve got a three and a half month lag, with a five month lag on the oldest stats!

Let’s use a more current example.  I’m writing this on Wednesday morning, July 30, 2008.  Yesterday, July 29, Case-Schiller released their report for May, which was actually a composite of March, April, and May closings.

“But wait, there’s more!”

When did those March, April, and May closings go into escrow?  Here in Southern California, the “average” escrow is about 45 days, although lending problems often stretch that out, especially in the current chaotic mortgage market.  In the current market, it often takes about a week of negotiation before escrow is actually opened.  Some agents wait even longer, until the buyer has a physical inspection completed and repairs negotiated.  So those deals that closed in March, April, and May were actually negotiated during January, February, and March!

Yup, that’s right.  The price drop the media breathlessly hailed yesterday took place on sales that were negotiated five to seven months ago.  Now that’s what I call a lagging index!

Bet you didn’t hear those little details on the news last night!

Other problems:

Case-Schiller tells us they try to “carefully screen” the matched pairs they base their report upon, but a computer can only do so much.  They can spot changes in square footage between sales, but tax records in California rarely reveal anything about most kitchen remodels, let alone “neglect.”   Sales between family members are easy to spot if everyone has the last name, but that’s only the case some of the time.  And what if the last name is as common as Smith, Rodriquez, or Nguyen?

Random note: I just misspelled “Nguyen,” and Firefox’s spell check caught it!  I’m impressed.  If you’re still using Internet Explorer, maybe it’s time for a free download!

Besides an amazingly long lag and probelms in screening the “matched pairs” of sales, other problems  include the use of broad regions. Real estate trends can vary dramatically between adjoining zip codes, school districts, and even condo projects; painting with a broad brush obscures significant details.

Since Case-Schiller reports an index, not actual prices, it gets even harder to interpret.  Does a 23%  drop in the index really indicate a 23% drop in prices?  Does anyone really know what it actually indicates?  If you’re a CPA or statistician, you might want to follow the links at the end of this post deeper into C-S’s explanations and let us know your conclusions with a comment.  In any case, with an “index” we’re an additional step away from actual prices.

Finally, for now at least, Case-Schiller doesn’t tell us anything about sales volume–it just gives us a cryptic but supposedly well though-out index of price.

So What’s to Like About Case-Schiller?

For all its flaws, Case-Shiller is an index that seeks to get beyond averaging medians (see “Two big problems with DataQuick’s monthly median price reports“).  It gives us useful data from a different perspective that can be helpful looking back.  But the time lag makes it problematic for forecasting or even for evaluating forecasts.  It’s hard to figure out what’s going to happen next, when you don’t yet know what’s been happening over the past three months.

So What Do We Make of Case-Schiller’s Latest Numbers?

As one would expect from a lagging index, they tend to confirm what we already know:  Prices were down dramatically earlier this year.  In fact, for the Los Angeles and Orange County regions, home prices last winter were down about 25% from a year earlier.  That’s the crux of yesterday’s C-S report.

The big mistake we see right now is the impression that this is a new, record-breaking drop.  It’s just old news about the record-breaking drop that was occuring in the market last winter, and that DataQuick when they released their their closing data for the spring months. Old news.

C-S’s latest report certainly doesn’t change the opinion of where the market’s headed that we posted last Friday.  Nor does it change our basic recommendations of what potential sellers and buyers should do in uncertain times like these.

Today’s unusual real estate market presents unusual opportunities along with some risks.  For buyers, the risks have been dramatically reduced from a year and a half ago, as Case-Schiller’s most recent numbers document.

For more information:

Link to Case-Schiller’s monthly Home Price Indices

Standard & Poor’s own description of their Case-Schiller index

Making Sausage: S & P’s own description of how the Case-Schiller indices are compiled

Wikipedia entry on the Case-Schiller Index (Not Wikipedia’s best article–disappointing and confusing)