Category: Bank Owned

I hear from buyers frequently that are interested in buying a foreclosed home / bank owned property. Sadly, in the under $750,000 market, the competition is brutal. Many times those with 20% down or more will trump those entry level buyers with FHA or VA financing. Even with a strong, high down payment offer, the process is very challenging, listing agents are inaccessible, and offers go into an email black hole.

If you are frustrated, you are not alone. Buyers and agents alike are very discouraged. This video animation done by SanDiegoCastles, is a tremendous illustration of the consumer frustration that abounds.  If you ever need help in San Diego, Kris Berg is your gal.  Love her!

No crystal ball needed here – we are about to see a sharp increase in foreclosures in the coming months.  The foreclosure report for the month of March was recently released by Foreclosure Radar.

During the final months of 2008, many lending institutions participated in a voluntary moratorium on foreclosures.  Notice of Defaults (NOD’s), the first step in the foreclosure process in California, plummeted.   The final days on the moratoriums have just passed.  Fannie Mae and Freddie Mac’s were lifted as of March 31.

And if you’ve been paying attention to my ‘Microscope on the Market’ series, you’ve noticed the drop in bank owned homes on the market – hence the second half of that headline, ‘Foreclosure Sales Drop’.  Without the new NOD’s, there’s been a dramatic reduction in bank owned homes.

Notice the following chart that tracks Notice of Defaults and Foreclosure sales.  The green line represents California’s NOD filings.  Notice the arrows – the dramatic dip in September and the sharp rise as of March ‘09.

March 2009 Foreclosure Report

With the rise in filings, we can expect the foreclosures to rise.  Will Obama’s plan help?  My guess is no for Orange County.  Why?  The loan modifications the banks are offering, by and large, don’t change the significant negative equity that many of these homeowners are facing.  Without a substantial equity reduction, many sellers (who’ve already seen their credit damaged) will opt to walk away from the property.

What does this mean for buyers and sellers?  If we see a large rise in distress inventory, this market may see some downward pressure on pricing – although in some of the lower price points, overall inventory is still low (especially if you remove the difficult short sales).  I would expect that demand for this inventory will remain high – as we have seen in recent months.

One interesting note in the Foreclosure Radar report:

The California Foreclosure Prevention Act, which goes into effect this summer, adds an additional 90 days to the foreclosure process if lenders fail to take certain actions.  It is quite possible that the dramatic rise in foreclosure notices occuring now is an attempt by lenders to process as many foreclosures as possible before this law takes affect.

If you are interested in viewing foreclosure data and bank owned homes don’t hesitate to contact me.

Microscope on the Market

So many of the media numbers focus on Orange County performance, but real estate performance can vary dramatically within our large county, and particularly at various price points.

Today’s Microscope on the Market focuses on the Laguna Niguel real estate market.

Homes Under $500,000

# of Sales Short Sales Bank Owned Equity Sellers
Active 119 63.9% 5% 31.1%
In Escrow 71 53.5% 29.6% 16.9%
Closed* 18 27.8% 38.9% 33.3%

In the under $500,000 market, Laguna Niguel does not vary from any of the cities I focused  on in South Orange County with a whopping 63.9% of the active properties in a short sale situation.  Couple of things to note – it would appear that there is significant movement with 71 properties in escrow.  Sadly, 38 of them are short sales and those can sit in escrow for 60 to 180 days and that can skew the perception of significant movement.  Notice only 18 have actually closed escrow in the last 30 days.

I want to also point out the very low number of bank owned inventory.  Pay close attention to this number in the coming months.  It will increase again based on the end of the moratorium on Notice of Defaults.  Filings are back up to levels prior to the moratorium so watch for this number to increase.

Also of note, despite the large supply of short sales, buyers still look to bank owned homes and equity sellers for their purchases by a significant degree in relation to the supply.

Homes $500,001 to $750,000

# of Sales Short Sales Bank Owned Equity Sellers
Active 83 32.5% 3.6% 63.9%
In Escrow 29 65.5% 3.4% 31%
Closed* 15 13.3% 26.7% 60%

Again, despite the large number of short sales, buyers love bank owned inventory and it doesn’t last on the market and their is still a significant demand for reasonable equity sellers.

Homes Over $750,001

# of Sales Short Sales Bank Owned Equity Sellers
Active 147 8.2% 2% 89.8%
In Escrow 30 30% 0 70%
Closed* 12 8.3% 0 91.7%

As I noted in Coto last week, there is just very little in the upper price points that is moving.  At this rate of consumption (12 homes a month), we have a 12.25 month supply of homes.  If nothing else were to list in this price range, it would take us over a year to consume the existing inventory with current buyer demand.

The good news in Laguna Niguel – there is very little bank owned inventory and very few short sale listings.  That can be good news for values in the coming year.  I’m not suggesting any appreciation guys – but even with slow sales, these folks may have the financial strength to hang on.

*Closed Sales are properties that have closed within the last 30 days from the time of this writing.
**All information and statistics are from SoCalMLS and are deemed reliable but not guaranteed.
If you have any questions about market conditions for Laguna Niguel, feel free to get in touch with me. I’m happy to help try to make sense of it all.

Steven Thomas, President of Altera Real Estate recently released his latest Orange County Housing Report and it is definitely worth taking the time to review if you are curious about how the 2008 housing market finished and the possible outlook for 2009. It’s a very comprehensive summary.

I would encourage you to review the charts for Active Listings and Pending Sales. I love the way that it visually lays out the ‘05, ‘06, ‘07, and ‘08 numbers for comparison.

One thing worth noting is that current inventory is way down – 11,842 homes off the March peak of 15,617. Homeowners have definitely taken to heart that selling will not be easy and pricing is critical. If they don’t have to sell, they generally are opting not to.

The biggest facet of our current market is the distressed inventory. As I’ve continued to repeat here, one of the indicators that a recovery is on the horizon is declining numbers in the distressed sector of the market. Right now, Thomas states that 46% of all the current inventory are distressed sales; 76% of those are short sales and 24% are foreclosures.

So where is the demand? Believe it or not, it is a strong seller’s market when it comes to foreclosures and they are selling at 101% of asking price.

Short sales continue to be a frustrating facet of the market because they continue to stay active on the market while a bank approves the offers they have pending. This creates negative and misleading numbers when one analyzes the active inventory. These offers can take weeks, even months, for the bank to approve. The sale to list price on short sales is running at 97%.

If you have questions about how these numbers impact your buying or selling plans, I’m happy to discuss it with you.

Even in a tough market for sellers, there are still those that must sell due to personal circumstances.  Whether it’s a divorce, job relocation, or financial strain – there are still homeowners with equity, that find themselves in the position of having to sell and in this market, that can pose some challenges.

I come across articles all day on the Internet and share with you those that I find most interesting or those that in which I feel compelled to share my 2 cents.  This article on foreclosures and pricing from early December on CNN Money, was sent to me by a past client that is selling a home out of the area.  She is also a buyer in Orange County and sees the significant impact that foreclosure pricing has on her view of traditional, or equity, sellers.

It creates an interesting dynamic for her – she is both a buyer and a seller in this market.  That dual role allows her a tremendous clarity in the ability to position her listing.  She knows that she must price it to compete with the distress inventory in her marketplace.

As a buyer, she is also seeing that the although distressed inventory in our marketplace is not always in great condition, the best deals are often in that sector of the market.

As stated by CNN Money, “In California, the median price for an REO listing was $259,000 during the week of November 10, 23% lower than the non-REOs on the market according to Trulia.com.”

With REO’s in the state priced 23% lower than the traditional seller, it definitely puts the price pressure on equity sellers.  You must price to compete.

That being said, I have noticed (and discussed here) that traditional sellers do seem to get a higher price per square foot ultimately.  The possible reasons?  Full disclosure from the seller about past problems, often superior condition, less competition with other buyers because many investors target foreclosures, and the ability to have a timely response to an offer as opposed to the lengthy one in short sale circumstances.

Bottom line – look at your competition.  Are there distressed properties in your sector of the market?  You may have a bit of an edge as an equity seller, but buyers are looking for a good deal.    If you want to sell, you must be perceived as a good deal with pricing that is competitive.

The new buyer profile today is understandably looking for a ‘good deal’.   With the major changes we’ve seen in Orange County in the last 2 years, the buyers that feel ready to jump into the market are consistently saying, ‘If I find a good deal…’

So what is a ‘good deal’?  Let’s examine the potential opportunities.  There are 3 types of listings that are predominately found in the active market today:

  1. Short Sales
  2. Bank Owned (or REO’s)
  3. Traditional Sellers

Short Sales: A short sale is a listing in which the seller currently owes more than the home is worth in today’s market.  I have discussed the process of a short sale in other locations on this blog.  Do your homework here if you are interested in this type of purchase.  It is a process that will take time and not every short sale will actual sell.  Some seller’s don’t have a legitimate hardship (required for a bank to approve their short sale).  Some will go into foreclosure after weeks of tying up a buyer(s) hoping to buy that home.

Is this a good deal?  Maybe.  Remember, they are usually priced very low to attract offers.  A bank won’t even consider a seller’s hardship until they have an offer.  This may mean that the home is priced far below what the bank may ultimately take.  And if the home is in disrepair, you’ll need to add the cost of repairs into your calculation.  A short sale will take time, patience, and a little luck.  I have seen some ‘good deals’ here but you’ll need to go into the process with ‘eyes wide open’.

Watch for rising interest rates in the meantime.  This can impact your affordability.  Also, watch the market.  What may seem like a ‘good deal’ now, may not seem so great in 4 months when the short sale has been approved if the neighborhood values continue to decline.

Bank Owned or REO’s: This is generally some of the most aggressively priced inventory on the market in Orange and Riverside Counties.  The banks don’t want to carry the inventory and they are priced to move.   The decline in prices have reached a level that has become affordable again for the first time buyer and appealing to the investors.

Steven Thomas, President of Re/Max Real Estate Services recently said in his Market Time Report, “For those looking to find a great “deal” by offering to purchase a property far below the asking price of a distressed home, good luck.  Your chances are much greater in winning the California lottery….The sales to list price ratio, how close a home is sold compared to the asking price, is between 99% and 100% depending upon the price range.“  He continues to make the point that the way that they are priced is already a deal.

After recently working with a buyer on the purchase of a single family home, we consistently found ourselves in multiple offers on bank owned homes – and not just 2 or 3 offers.  Often times there were 10 + offers in place within 48 hours of listing.  Who was awarded the purchase of those homes?  Cash is king here my friends.  Those with cash down, few contingencies, solid credit, and a strong offering price came away with the home.

Traditional Sellers: Some parts of the market are moving more slowly than others.  The bulk of the distress sales, 93% according to Steven Thomas, are under the $750,00 price point and subsequently there is a great deal of pressure on prices in those lower price points.

Are there good deals with traditional sellers?  The short answer – Yes!  Most people that are listing their homes today understand that it is clearly a buyers’ market in Orange County.  They generally know that it won’t be easy and those that are motivated to sell, are pricing their homes to compete with the inventory.  And often times that inventory consists of short sales and banked owned homes, especially in the price points under $750,000.

The bonus on many of these, there still is pride of ownership.  Is a bank owned home still a good buy if there is $50,000 in cosmetic or structural repairs?  Maybe, but maybe not.

The Bottom Line: Seriously consider the potential for a great value from a realistic, traditional seller.  You’ll have the benefit of full disclosure from the seller (which you don’t have in bank owned homes), you’ll have the opportunity to request repairs, you won’t be competing with the buyers that are focused on – “I want to buy a foreclosure’, and you won’t be dealing with the unknowns and long waits of the short sale process.

If you find the great deal you’ve dreamt about in a short sale or bank owned, by all means, go for it.   But be an educated buyer and understand the process and expenses when determining if you really have a good deal!

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