So Cal Real Estate News

There are some amazing opportunities for buyers right now. Two of them, “short sales,” and REOs, also involve some amazing incompetance by the same lenders that helped get us into this mess. (see “How we got into this mess“)

We saw both at work today at two homes about 100 yards apart in Downey.

Amazing opportunities for buyers:

This morning my colleague Blair and I were shooting a virtual tour for a new “short sale” listing we have (you can check out some of it at AdwenStreet.com). A “short sale,” which is anything but short, is a sale in which the lender takes a “short” or reduced payoff to facilitate a sale. The last one we closed, in Lakewood, saw the lender reducing their demand by well over $100,000.

Short sales present some unique opportunities for buyers who aren’t in a hurry if their agents are willing to do twice the work for a reduced commission. The downside is often a month or more of waiting to see if the seller’s lender will accept your terms. As part of the process, your agent generally has to agree to reduce his commission.

As a result, lots of agents and buyers just skip over short sales. But deals can be had for the patient. For example, at $347,777 our listing is currently the best priced home in the MLS in Downey, it’s in a good location, has a nice recently remodeled kitchen and big family room. The home across the street, also a short sale, just went into escrow at a record low price–but we’re now lower than they were.

As we were driving off, we noticed an open house being set up at a new “Bank Foreclosure” listing that isn’t even in the M.L.S. yet. Stopping in we discovered a home that was priced at $300,000–$50,000 below the two formerly lowest priced listings down the street.

When I got back to my home office, I checked the public records to see what similar homes were selling for when the market peaked. I found four comparable homes in the same neighborhood that sold in the summer of 2006 or early 2007 for about $650,000.

That represents a decline in prices of over 50%!

Now the foreclosed home needs a good cleaning and some yardwork. It’s back yard seemed small, and the floorplan a bit choppy. But it’s got three bedrooms and a bath and a half in a decent neighborhood that’s close to L.A., LAX, and the OC for $300,000!

I think the REO is priced below market, and will sell pretty fast, possibly above list. Still, it represents an excellent opportunity for someone who can act fast.

Because most agents don’t want to hassle with the double negotiations and pay cuts of a short sale, it may actually represent a better value for someone willing to come in with a low offer and wait a month or two. It’s in much better condition, has lots of upgrades, and has twice the garage & twice the back yard of the short sale.

What struck me, however, is that this is a market where the qualified buyer who can put together at least a 3% down payment rules. When the market does bottom, qualified buyers who wait on the sidelines for the market to drop further risk competing not just with the thousands on the sideline like them, but also with thousands more who currently don’t qualify but eventually will as lenders again relax their standards from the current overreaction to the market downturn.

Continuing lender incompetence:

The flip side of this good news for buyers is some bad news for homeowners and the economy in general, made worse by the continuing incompetence of too many lenders.

The owner of our new short sale listing called us a couple months ago to discuss her options. I referreed her to our post for upside down and troubled borrowers, “Trouble making your mortgage payment? 7 ways to get back on track.”

The family’s situation had changed since they refinanced, and she knew it would be impossible to continue making the payments once her mortgage reset. I suggested as a first step, and to avoid selling, that she try to negotiate with her lender for a reduction in both interest rate and principal.

Unfortunately, her loan was with well known subprime lender EMC, a subsidiary of Bear Stearns. They took 45 days to tell her they wouldn’t do anything until the actual reset hits in about a year. Kind of like a bank robber asking you to trust him. Pretty much left her no alternative to the short sale.

The REO was even worse. Foreclosed by GMAC mortgage, the home was listed about $20,000 too low, the agent didn’t even count the bathrooms right (missed a half bath!), & a $100 cleaning would raise the value even more. Besides missing a bathroom, the black and white flyer didn’t even have a price on it. And the agent was holding it open before even bothering to put it into the M.L.S., a typical tactic of unethical agents to shaft the seller in order to “double end” the listing by picking up the buyer. Typical of so many lenders that stick with a handful of often lazy out-of-area agents rather than take the time to find an honest, competent local agent–and there are plenty of them with time on their hands right now!

Two examples of how lenders are making things worse for themselves and homeowners everywhere because their loss mitigators and asset managers just aren’t doing their jobs. Sometimes it’s because they’re overworked, but there are plenty of underemployed Realtors and loan agents and processors out there they could easily hire & train.

Info for those thinking about buying:

If you’d like more info on either of these homes, or just want further information, you can call me (Dave Emerson) at 562.822.7653 or e-mail me at RealtorDaveE at msn dot com. (I wrote out the @ and the . to avoid spamming bots.)

Please understand: we think the absolute bottom’s still ahead, due to all the foreclosures just entering the pipeline (see “Oh-oh! We just passed a nationwide bottom!“)

But we also think nobody knows for sure what the future holds. (See “How low will prices go?“).

And we think that for many of us, there are more important things in life than market timing. (See “What to do when nobody knows what’s next.”)

When you can get a 50% discount, it may be time to think about buying.

Coming soon:

Thanks for stopping by. Please check back from time to time–we try to post our “news and perspectives from the SoCal real estate front lines” at least 3 to 5 times each week. On Monday we’re planning “A Tale of Three Closings” chronicling a “flip” gone bad, a seller gone mad, and today’s escrow problems on three homes that just closed escrow on the same Lakewood block.

A week ago I told L.A. Times real estate reporter Peter Hong that much of a Realtor’s job in this market involves delivering bad news to homeowners. Pretty much the opposite of three years ago.

“You go from being like a doctor who delivers babies,” in a booming real estate market, I said, “to being an oncologist, just giving people bad news all day long.” (”Foreclosure glut further depresses housing prices“) Shoot the messenger time. Or keep dialing until the seller finds an agent who tells her what she wants to hear. (See #1 in “5 ways NOT to pick an agent.”)

Well, today brought more bad news for homeowners.

But that’s just one side of the coin. Unlike our 1980-82 housing bust, where mortgage rates topping at 16% were bad news for BOTH sellers and buyers, today’s bad news for sellers is good news for buyers.

Which can turn it into good news for some sellers who might also be buyers, and several other types of buyers:

First, this could be an excellent time to buy for “move out” sellers who are headed to more overbuilt areas like the Inland Empire, Vegas, Texas, or the Central Valley. That’s because prices there have generally dropped more than prices in Southern California’s coastal plain.

Such a “move out” seller can get her current home in escrow, then take her time looking in that outlying area, as prices continue to decline. There are plenty of homes to choose from, and lots of motivated sellers out there.

Folks who are willing to sacrifice a little temporary inconvenience for a lot of greenbacks & that elusive “perfect” home should consider renting in their new community while they continue to look. A buyer with cash in hand is in the best negotiating position, too. This move also lets you take advantage of the annual real estate market cycle (See “Market Predictions 101: Our 2 real estate market cycles“.

Second, the time may also be right for “Move Down” sellers, especially those looking to buy a condo. Since we’ve had a glut of condo building through much of our area, even coastal plain condos are experiencing rapidly declining values and lots of foreclosures.

The same goes for the more modest “starter” single family homes, which turn over more often and have more subprime loans and foreclosures. These aren’t just “blue collar” communities like Stanton or North Long Beach, but also communities like Lakewood, Cypress or even parts of Mission Viejo, which include large tracts originally build for first time buyers.

Third, this might be the right time to buy for people who are ready to settle into their dream home now. Specifically:

1. Buyers who will be living in this home for many years, and
2. Who have good credit, a down payment, and
3. Are tired of renting and are ready for the joys and trials of home ownership, and
4. Would like to start the 15 - 30 year process of paying off a mortgage so they can retire, and
5. Could use two of the three last great tax write-offs (mortgage interest, property tax, and donations), and
6. Are able to locate and negotiate an acceptable price on their “dream home.”

These buyers also might want to nail down the kids new school for next year. Maybe they’ve figured out that they want to enjoy their “dream home” while their kids are still at home. Maybe they’re concerned about interest rates going up. Maybe they know they’ve got busier times ahead & now’s the best time to look for a home & fix it up the way they want.

Maybe they know what we’ve been saying since last November: Nobody knows for sure what’s ahead. (See “How low will prices go?“)

Forth, this may well be an excellent time to buy for those whose personal situation suggests it. Someone who’s relocating into California, whether for work, family, or retirement. Someone who desperately needs a tax break. There are lots of different scenarios where personal situation trumps market speculation.

Some people would prefer to gamble with their stocks or in Vegas but not with home ownership. We believe there are plenty of things far more important than money (See “What to do when nobody knows what’s next,” “A little perspective,” and “A little more perspective.”)

Fifth, this might be a great time for buyers who appreciate the security of buying before or near the bottom.

Prices are already down 20% or more in many Southern California neighborhoods, interest rates are low, especially with inflation looming, and some special jumbo loan programs will be expiring soon. Why not take advantage of it?

Truth is, the best time to negotiate is just before the bottom. While prices don’t shoot up dramatically, the ultra motivated sellers and the super buys do disappear fairly quickly. And you never know it’s a bottom for sure until a year or two passes.

To take a very recent example, in January of 2007 we experienced a temporary “false bottom” caused by dropping rates and seasonal demand. In December I could find 10 - 12 low priced “super bargains” in Rossmoor, a popular west Orange County neighborhood. Within a month, they were all gone! We saw the same thing late in 2001 after the Fed dropped rates in the wake of 9/11.

Both 9/11/01 and 1/07 illustrate two things:

1. Super bargains disappear quickly when the market heads up.
2. You can only be sure of a bottom when you’re looking back months or even years later.

The “double dip” recession that started here in So Cal in 1989 during Gulf War I, then reversed to a new peak in 1990, then collapsed into the end-of-the-Cold-War bust of 1991 - 95 is a great example of # 2.

A personal story. During the ‘91 - ‘95 bust, Barb and I did not enjoy watching our rental homes decline in value, even as my income from real estate sales was also tumbling. But I wanted to avoid hefty taxes from selling those homes, many of which we’d owed for along time.

One day my colleague, John Spear, mentioned in passing that multi family properties in Long Beach had dropped to prices as low as four times Gross Rent. That means the price was down to 4 x the annual rent for some apartments.

Well, since apartments generally produce more income than single family homes, I decided it was time to use the wonderful tool of the 1031 Starker Delayed Exchange to convert our rental homes into rental apartment buildings. That way, even if the market continued to drop, at least we’d have some positive cash flow.

At that point, it looked like prices would continue to drop for years to come. A popular New York financial analyst wrote a syndicated column about how Southern California would never recover. Ever.

As they say, it’s always darkest just before the dawn. Turns out, I was buying at the bottom, but I didn’t know it. Possibly the best financial move (other than structured donations) that Barb & I ever made. And we didn’t even know it at the time. We were just lucky. Blessed, actually.

Bottom line?

If you can find a home you love and can afford with a 30-year or 15-year fixed mortgage, in a location you love, maybe it’s time to stop betting on further drops and become a homeowner. Even a professional gambler knows when to cash in his chips.

At least some of them. You could always pick up a rental or vacation home later on if prices continue to drop.

At least it might be time to start looking. Even if we all think the bottom’s still a ways off.

Only God knows for sure.

And He agrees with us that there are things far more important than money (see Matthew 6:19 - 34).

May 21 update: Ongoing increases in foreclosures and long term interest rates now make us more inclined to think that the bottom may be further off than we had hoped.

That doesn’t significantly alter our basic conclusions in this post, but it should at a little more caution. And a little more hope for those who are still saving for a down and seeking to improve their credit.

We recommend you check out today’s post on the subject: “Oh-oh! We just passed a nationwide bottom!.”

7/15/08 update: Lots has happened since we wrote this post back in February. It has certainly been an interesting ride, and plenty of opportunities are still out there. For our latest posts on what’s going on, simply click “front page” in the upper left corner, then scroll down, or check out the “recent posts” in the upper right below our “search” box. We’ll continue giving you straight talk from real estate’s front lines, with the perspective of 30 years experience.

The Federal Reserve’s latest rate cuts may well have just radically shortened the present housing slump. The “bottom” may be a lot closer than anyone suspected just two weeks ago.

That may mean the time to buy is actually now, for several reasons.

First to get the lowest interest rates. Right now, you can get 30 year fixed mortgages well around 5.7%. That’s outstanding. . . but rates were a little lower a few days earlier. Why? Well, the Fed really can’t control long term rates–they’re set by market forces.

So, when the bond market thinks we’re headed into a recession because the Fed hasn’t lowered short term rates enough, long term rates drop. And when the Federal Reserve reduces the risk of recession by aggressively dropping the rates they control, long term rates move up. That’s one reason all the Fed rate increases back in 2003 - 05 didn’t reduce long term rates. And it’s why that much-expected additional lowering by the Fed could mean today’s mortgage rates may be the lowest we’ll see in a long time.

Second, this may be the time to buy because the best time to buy isn’t at the bottom, but a little before the bottom. I know first hand there are tons of potential buyers waiting to jump in once they think the market bottoms. The trick is to jump in before they do. Because the below market properties are the first to go. Plus, once sellers think things are moving up, they become much harder to negotiate with.

The truth is, almost nobody buys at the very bottom, or sells at the very top. And they didn’t know they were doing it until they looked back. I know–I bought several properties near the bottom of the last cycle around 1995, but I didn’t realize how fortunate I was until several years later. Likewise, I also once locked a long term interest rate at a bottom, but had no way of knowing it at the time. I just knew it was an interest rate I could live with.

A third reason this may be the time to buy relates to what we call the “annual real estate cycle.” You see, the forces of supply and demand are influenced by annual events. Buyers are way too busy to look for a home with the holidays around the corner, so demand slackens in December. Once the New Year begins & they’ve resolved to get that first home, demand picks up. Especially after they see how much they’re paying in taxes. As we move into late spring, the push is on for many to move to a better school district. Parents want to get the home in escrow & lock in the address before the school administration is gone for the summer.

But as good weather & summer vacations kick in, buyers get other things on their mind & demand slows. That’s too bad, because that seller who resolved to get her home on the market in January is finally finishing their pre-listing painting & cleaning, & supply is finally increasing.

All of which means that, all things being equal, prices go up dramatically from Feb. - May, level in the summer, & decline in fall & early winter. Which means the annual cycle just bottomed. Then the Fed dropped rates. Twice. And Congress is working on a stimulus package. And maybe it’s time to start looking for bargains.