Cash

The real estate market is a strange world right now.  It’s plagued by distress sales, foreclosures, a challenging lending environment, and economic uncertainties, and yet there are certain price points where inventory is so low that sellers are receiving multiple offers within days of listing.  If the home is priced right and it’s under $500,000 – it will sell – fast.

Many investors and fence sitters feel like with the steep declines in values, it’s time to jump back into the Orange County real estate market.  And guess what?  They have cash.  This video done by Tyler Wood - my go-to-guy for all Big Bear real estate needs – illustrates a similar dynamic in their market and raises some important questions for cash buyers to consider.

So what is the value of an all cash offer?

Are YOU one of those cash buyers?

There is no question that coming into a multiple offer situation with cash will give you an advantage if the other offers have to secure financing.  But as Wood points out, you may be finding that you aren’t the only cash buyer.

But even if you are the only cash buyer in a multiple offer situation – what advantage does that give you in your negotiation?  Let’s look at the potential benefits that the seller has when they have an interested, all cash buyer:

  1. The question of the buyer’s ability to secure financing goes away.
  2. A possible quick escrow period.
  3. Less contingencies to contend with.  No loan contingency.  No need  to appraise.

So what is the value of those things to a seller?  What monetary value do you place on that?  Clearly, the answer will vary depending on a seller’s circumstances and how important a sure and quick close is for them.

I know in theory that ‘Cash is King’.  But, I think you’ll find that a seller, if given a choice via multiple offers, will go with a buyer that requires a loan at full price rather than a buyer that is offering 10% off asking just because they have cash.

It’s important to note that at the end of a transaction – whether it’s a cash buyer, or a bank that funds a buyer’s loan, – IT’S ALL CASH.  Either way, the money is the same in the final analysis.

house short sale

This post is LONG, but if you are thinking of buying a short sale (or if you’re an agent looking for an outlet for your short sale frustrations),  PLEASE read.  Understanding this information is a must.

I completely understand the allure of the short sales when you are a buyer.  The prices are attractive and there are SO many of them.  They have become a  necessary evil of the Orange County real estate market.  I get it.

If you really want to pursue a short sale, be forewarned.  Know what you are getting into, understand the risks, the pitfalls, and what is  required to make them happen from a buyer perspective.  They may, or may not, be worth it.

What is a Short Sale?

The seller’s obligations in a sale (loans, encumbrances, and closing costs), exceed the value of the property.  The seller must prove a hardship (job loss, wage reduction, divorce, health crisis, lack of assets) to qualify for a short sale.

A Few Realities

  • There is no Standard Operating Procedures for the banking industry to handle short sales.  Every bank has different guidelines and manages them differently; even negotiators within the same bank manage them differently.
  • This is important:  Nearly across the board, a banking institution will not consider a seller’s hardship application until they submit an offer with a short sale.  What does this mean to a buyer?  Your offer is used to see if they qualify in the first place.  You may sit in escrow for weeks while the bank considers not your offer, but the seller’s circumstances.
  • There is no Standard Operating Procedures for how agents handle their short sale listings.  Frankly, I think there is a lot of irresponsibility in this area.
  • Many agents leave their listings ACTIVE in the MLS even though they have an offer submitted to the bank.  Once an agent has a good offer with a solid buyer, it should go in Backup position.  The bank will only look at ONE offer – highest and best – anyway.  Why waste an agent’s time, a buyer’s time and emotion, showing a property that is not really available?
  • The SoCalMLS has a Special Condition field where agents are required to specify that the short sale has an offer submitted to the bank.  Unfortunately, most agents don’t use it.
  • A short sale process will take as little as 60 days (very rare) or as much as 4 to 6 months (common).
  • The list price is not a reflection of what the bank will, or will not, take. The listing price is positioned to generate offers.  Remember, the bank hasn’t even looked at these seller’s situation yet, let alone evaluate the the market value of the home.
  • There may be past due HOA fees, property taxes, or other expenses, that the bank will ask for a buyer to cover.
  • If the seller declares bankruptcy during the process, your deposit becomes a frozen asset that you likely wait a fair amount of time to recover – if you do.
  • Many short sales ultimately foreclose.  Why?  If you find out please tell me.  There is often NO LOGIC in the way banks (and investors) approve, or disapprove these.
  • More banks are trying to do loan modifications for sellers rather than approve short sales and in some instances, they are incentivized by the government to do so.

Real Life Examples

The following are scenarios that have been experienced by me, my agents, colleagues, and my buyers.

  • My Listing last May:  I had 8 offers in 3 days.  The highest was $580,000 and it took 4 months to get an approval from Countrywide.  By the time it was approved, the market value had fallen precipitously and the buyer was no longer interested.  When I asked Countrywide if the process would go more quickly with a new buyer given the hardship had been approved, their response was that the each buyer was a new file and they couldn’t provide better than a 4 to 6 month time frame.  The home sold for $490,000 4 1/2 months later.
  • An agent within my company, had a short sale in escrow with a solid buyer for 90 days.  The bank asked the insolvent seller to come to the table with $3,500 on the $165,000 sale.  When the seller was unable to, the bank refused the short sale.  The home is currently vacant and worth about $145,000 6 months later.  Currently, it’s not in foreclosure and the seller hasn’t made a payment in about a year.
  • This week alone, I’ve shown 2 different short sales, marketed on the MLS as Active, that already had offers submitted to the bank without notation in the listing.  When I called expressing my buyer’s interest in one of the properties, the agent subsequently told me, ‘the deal is done’.  When asked, “Then why is it active?”, his response was, “Don’t tell me how to run my business, sweetheart.”  BTW – Don’t call me sweetheart unless you’re loving me or you’re my husband:)
  • One of my recent short sale listings was in escrow 60 days with a qualified, ready-to-go buyer.  In that time, the bank reviewed the seller’s hardship, denied it, and offered a very poor loan modification.  Buyers lost 60 days and their offer was never considered.
  • I currently have an investor buyer in escrow on an ‘approved short sale’. We’ve been in escrow 90 days on a property that had an Notice of Default filed in March 2007!  Not only has there been no news, the listing agent has told me essentially – don’t call us, we’ll call you if there is an update.  Not very reassuring to my buyer.

This is the tip of a massive iceberg.  So if you want to buy a short sale, you certainly have my blessings.  Just be armed with patience, don’t become emotionally attached to the property, and be prepared to potentially go through the process more than once.

If you have questions, if you think I’ve gotten any of this wrong, or if I’ve just scared the hell out of you – leave a comment or give me a call.  Happy to chat with you.  If you want to create a strategy to buy in Orange County – whether it’s a short sale, bank owned, or an equity seller, just let me know and I’m happy to help.

Happy House Hunting!

Microscope on the Market

Today the microscope is on Mission Viejo.

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.

I’m going to spend the next several posts breaking down each of the South Orange County cities to give you an idea of local performance.  Whether you are buying, selling, or just keeping an eye on your local market, these numbers tell the story.

BTW Dear Friends/Readers, if you find this number crunching downright boring – stay tuned.  I always come back to the conversations that are much more fun than this!  :)

Homes Under $500,000

# of Sales Short Sales Bank Owned Equity Sellers
Active 177 66.7% 6.2% 27.1%
In Escrow 126 44.4% 26.2% 29.4%
Closed* 43 27.9% 39.5% 32.6%

I think one of the revealing things about the under $500,000 market is the fact that while nearly 68% of the active inventory are short sales, they make up less than 28% of the homes that closed in the last 30 days. Demand also is high for bank owned product but very little currently exists – only 6.2% in this price range.

Homes $500,000 to $750,000

# of Sales Short Sales Bank Owned Equity Sellers
Active 124 25% 4% 71%
In Escrow 35 45.7% 2.9% 51.4%
Closed* 6 66.6% 33.3% 0

Again, very little inventory in the bank owned market, but significant demand.  There were very few sales in $500,000 to $750,000 market, as well as the $750,000 market as shown below.

It’s important to note where the demand is: of the closed sales in the last 30 days 81.1% have been in the under $500,000 market.

Homes Over $750,001

# of Sales Short Sales Bank Owned Equity Sellers
Active 49 14.3% 2% 83.7%
In Escrow 12 50% 0 50%
Closed* 4 25% 0 75%

Interestingly, there are significantly less short sales in this price point. The bad news – sales are slow and with current buying trends, it would take 12.25 months to exhaust the current inventory of homes if nothing else were to come on the market.

However in the under $500,000 market, it would only take 4.12 months to exhaust all the inventory at the current rate of consumption. As I have mentioned many times here, the short sale listings takes months to close and skew the numbers dramatically. With current inventory, it would only take 1.9 months to consume the equity seller and bank owned listings under $500,000.  This sector of the market is no longer a buyers market.

*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 Mission Viejo, feel free to get in touch with me. I’m happy to help try to make sense of it all.

After years in this business, my husband has learned a few realities about my business:

  1. “I just have to return this one phone call.”  Translation: 30 minutes and several phone calls.
  2. “I just have to run down to my office and shoot out a quick email.”  Translation: 20 + minutes in the office.
  3. “I’ll be in my office catching up for just a bit.”  Sadly the translation: I’ll be in bed about an hour after you.

Consequently, he has affectionately referred to my home office as, ‘The Black Hole.’  I have three children so he certainly appreciates the fact that I get things done when I have time and unfortunately, that isn’t always 9 to 5.

This week, something fun came out of ‘The Black Hole’ that I’m excited to launch:  My Las Flores hyperlocal community blog.

my-las-flores-e28094_12357039494331After working in the Orange County community of Las Flores for several years, I began to rethink the methods for marketing.  Since the launch of OC Real EstateVoice, I knew my business was headed in a profoundly new direction.  I knew that consumers were looking for information about a community (listings, trends, values) not just another, ‘Look what I sold!’ marketing piece from an agent.  Hence, the birth of the My Las Flores site.

I’ve got a couple tweeks to make as of yet – the video has to be redone.  It’s excruciatingly long and I made the video on garbage day with garbage cans out on every street.   Bad news, so this will be my project for the coming weekend.  But overall, I like the direction it’s heading in.

Every now and then I emerge from ‘The Black Hole’ and something satisfyingly ‘tangible’ is born.  This is one of those weeks.  :)

The Homeowner Affordability and Stability Plan was recently released.  It attempts to address some of the issues that the current housing market is struggling with and I have been through some of the details and as it currently is written, I’m disappointed.

Near the end of December last year I posted the article about about the top 10 worst housing markets in the country, according to CNN.  Unfortunately, 8 out of 10 were in the state of California.  Now keep in mind, California is a massive factor in our national economy.  Our Gross Domestic Product is larger than all but 8 countries in the world.   You will not fix this housing crisis if you don’t address the state of California.

The plan that came out has one elemental problem (there are others but this one is a deal breaker) – it only applies to Fannie Mae/Freddie Mac backed loans.  Translation:  if the loan is over $417,000, no deal.

Let’s examine this just a bit.  In most parts of Orange County, in 2004,  2005, 2006, and 2007, you couldn’t get much more than a very small condo for $417,000.  You couldn’t buy a single family home in most parts of Orange County for under $600,000.   The people that are most at risk are the people that purchased during that period of time- and the big Affordability Plan – doesn’t apply to them.

Look at the numbers for the big California markets – Los Angeles, San Diego, the Bay Area – it doesn’t change.

So call me crazy, but I don’t get it.  Hell, I’m happy for the folks in the midwest that this has an impact on.  I’m happy for the people that will benefit from it.  But I’m not sure this solves the problem at hand.

You can solve this for the folks in Kansas, but if you leave out 8 out of 10 of the worst housing markets in the country, are you really addressing core of the problem?  Just sayin’.

Remember those long car rides that seemed to last forever?  I used to pester my poor parents with the tired question, “Are we there yet?”  As a mother to 3 kids, 10 and under, I’m now on the receiving end of that tired question.

This Orange County real estate market is one of those long car rides where we are all asking the same question about the bottom of this market – “Are we there yet?”  I even have moments where I want to say in my whiniest voice, “How much longer, Mom?”

Did you ever notice that your parents were intentionally vague?  There were no specifics.  Now, as a parent, I understand why.  The answer can vary depending on traffic, bathroom breaks, if we stop to eat, and of course the potential need to pull over to break up a fight.

So if you are wondering how much longer – I’m right there with you.  But it depends.  It depends on how the foreclosure market is impacted by government intervention.  Will it help or just delay the the healing of this market?  How available is money?  Will the strict lending guidelines continue?

But if you keep your eyes peeled, you may see a few roadsigns that will give you some clues.  Watch the percentages of distressed inventory versus traditional sellers.  Watch the lending trends.  Watch the average days on market.  Track absorption rates.  Notice the listing price and the final sale price.  All of these are indicators of where we are on this road trip.

So are we almost there?  The answer just might be, yes.

This week Jonathon Lansner did his recap of the Dataquick report on the Orange County real estate market. Where are we today?  And what does it really mean?

The Median Sale Price as reported by Dataquick for a home in the OC was $400,000 – which brings us back to May of 2003 if you’re tracking the bust backwards.  Lansner states, “That means that 53% of the 1996 to 2007 profit has evaporated.”

I found some other interesting tidbits on the DQNews site to report:

  • 44.2% of sales in Orange County in the month of November were foreclosures.
  • Sales volume is up 38.9% in November ‘08 as compared to November ‘07 numbers.
  • Median sales price is down 31.4% from the median sales price in November ‘07.

I want to draw your attention to one common misconception.  Take yourself back to your statistics class (come on now – don’t kick and scream like that – it will be a brief visit, I promise).  Remember the definition of median.  Dictionary.com defines ‘Median’ as “the middle number in a given sequence of numbers”.

Look at the above statistic and look at it with that definition now applied.  Median is not the average.  It just means that if there are 5 sales – the price of the number 3 sale is the median home price.

You cannot draw the conclusion that prices have all fallen 31.4% when comparing November ‘07 and ‘08 median home price figures.  Remember that 44.2% of the sales in November were foreclosures.  Much of the movement in our market is in the lower price points and in the most distressed price points – hence a lower median price.

Median home price is still a valuable indicator in the market but you must be careful of the conclusion you draw from the information.  There is no denying prices have fallen precipitously.  But, I do think it’s important to evaluate the numbers in the right context.

Okay – statistics class dismissed.

My husband, Michael cringes when I post things like this – but I never promised to bring you just the Pollyanna good news in the market.  The ‘60 Minutes’ piece speculates that we are about halfway through this housing crisis.  According to the show, the first wave of this crisis was made up of sub-prime loans.  The second wave is predicted to be  Alt-A loans and Option ARMs that have adjustments coming.


Watch CBS Videos Online

Sean Egan, considered to be one of 6 Wall Street experts that ‘predicted the fall of the financial giants’ says that the housing market is incapable of a recovery until we ‘clear out the garbage’.  I couldn’t agree more – and this point always takes me back to the same frustration.  If there were real solutions in how banks were processing the glut of short sale inventory, we could expedite the cleanup and expedite the recovery.  Unfortunately, that is not happening.

One portion of the ‘60 Minutes’ piece that had me roll my eyes just a bit was the acupuncturist – turned real estate investor that was supposedly clueless about those Option ARM loans she used on her multiple investments.  She was putting 20% down, but didn’t ask questions about the loans she was using.  Why?  She was busy. “Busy looking at properties.  All day.  All the time.” Give me a break.

The arguments were a bit one sided and accomplished what the media loves to do – speak to people’s fears.  Consumer confidence is a facet of recovery and  pieces like this don’t help.

That being said, there is no denying another wave is coming.  If the Alt-A and Option ARMs are with folks like our acupuncturist friend, then clearly there is reason for concern, but I believe that there are a good deal of folks who understood their loans and investments.  Maybe I’m wrong.  Time will tell. I also think there are a good deal of these folks who will likely refinance these notes given the current low interest rates.

Mr. Egan cites the NAR stats of record supply.  That’s a statistic that you must evaluate locally.  Steven Thomas, President of Altera Properties, noted recently on his blog that demand in ‘07 was ‘51% less than it is today’.  Mr. Thomas goes on to state, “Last year the inventory was at 16,128 homes, 3,740 additional homes compared to today, 30% higher.  Two years ago the inventory was at 12,661, 273 additional homes compared to today.”

As we have mentioned here, in the lower price points we are seeing significant movement and dramatically less inventory.  The upper price points are not enjoying those bits of good news.

Every now and then you see a headline touting the increase in sales in Orange County.  Less than a week ago, Orange County Register’s Jon Lanser posted ‘1-in-3 O.C. ZIPs See Homebuying Doubling or Better’.   I love good news but it’s important to drill deep into what these statistics are telling us.

Price point is really one of the big players in this discussion.  The movement that is taking place is great if you are a seller in the below $500,000 market.  With the limitations in lending and lower pool of qualified buyers, sellers in the upper price points have to be prepared for a longer selling cycle.

When we talk about Absorption Rate, we are talking about how many months it would take for the existing buying demand to consume the total inventory if no other homes were to come on the market.  I recently calculated the Absorption Rates for some of South Orange County’s cities, but to get the truest picture of each marketplace, I thought it was critical to break it down by price point.

This is how it looks:

Absorbtion Rates

Absorbtion Rates

Notice, for example, Laguna Niguel.  It will take 14.42 months to exhaust the supply of inventory with current demand in the over $750 price range, yet homes in Laguna Niguel under $500,000 will only take 5.7 months to absorb. It’s important to note that Laguna Niguel has one of the lower rates of distressed property rates in the county and have a much higher median sales price overall.

Steven Thomas of Altera Real Estate, reported in his Orange County Housing Report that 69.4% of all the Lake Forest inventory are distressed sales.  Buyers and investors alike are targeting the distressed part of the market as opportunities.  Part of the reason that Lake Forest is enjoying one of the lowest overall absorption rates in our market is the high percentage of distress inventory and the related demand.

If you are considering buying, or selling your home, and want to know more about what these numbers might mean to you, don’t hesitate to let me know.  No arm twisting here – just happy to answer questions.
*These numbers are from SoCal MLS figures in the first week of November and
the closed sales in the proceeding 30 days.

There has been some sun peaking through the storm clouds of the Orange County real estate market which is bringing rise to the question, ‘When will we see the real estate market recover?’

There is still tremendous volatility in the banking industry and financial markets but there are some bright spots.  We have already begun to see a slowing of the pricing free fall.  Distressed properties, bank owned inventory, and entry level price points are frequently seeing multiple offers all over Orange County.

Steven Thomas of Alterra Real Estate has released his housing report noting that inventory has dropped to its lowest point in 18 months.  Last year at this time, inventory was 27% higher and two years ago it was 16% higher.   Clearly, the message has been heard by would-be sellers and those that don’t have to sell are opting to stay put.

Thomas says, “This is simple Economics 101, as prices fall demand rises and the number of sales increases as a result.  As the United States government fixes the financial system and money starts to flow again, we can expect rates to drop considerably, including in the Jumbo loan arena, homes about $700,000.  Falling rates lowers monthly payments, which is similar to falling prices.  We can expect demand to increase and the number of sales to increase as well.  This may be six months from today, so right now is probably the most opportunistic time to be a buyer.”

Jonathon Lansner quoted the consultants at Real Estate Economics of Irvine as predicting housing rebounding within 18 months.  REE writes, “Though the index has been trending in positive market territory (an over-correction), the severity of the short term impact of price-slashed distressed properties, tightened credit and extremely low market psychology will continue to hinder market conditions for the balance of 2008.  The over correction will eventually serve to restore buyer confidence.”

William Shopoff, CEO of the land-investment firm the Shopoff Group was recent interviewed by Jeff Collins at the Orange County Register.  Shopoff’s prediction, “I would expect a market bottom to occur in the later half of 2009, possibly extending into 2010 for the Inland Empire.  I think the recovery will take some time once we reach bottom.  I would expect the $700 Billion Government package…will provide the needed liquidity to the markets to provide support but the bigger problem is supply/demand imbalance at present.”

What’s the my prediction?  The Planeta Prediction for the last couple years has been Spring ‘09.  I knew that ‘08 would be a tough year because generally speaking, election years tend to slower.  That in addition to the already poor housing conditions heading into ‘08, I was prepared to buckle my seat belt for a long ride.  I didn’t foresee the financial crisis and that may very well push out my prediction.  We will continue to be plagued with distress sales until we absorb foreclosures that continue to hit the market.  But, I do think that we’ll see a much stronger Spring than we have seen the last couple of years.

I find Shopoff’s comment interesting about inventory imbalances in light of the low inventory reported by Steven Thomas.  That is a big factor and I see it playing out in some of the areas that I most frequently work.  Las Flores and Wagon Wheel markets, in Rancho Santa Margarita and Trabuco Canyon respectively, have the lowest inventory that I can recall seeing in years.

So, if you are watching for recovery, or even stabilization, we may be seeing the first glimpses on the horizon.  Don’t get me wrong, clearly we aren’t there yet, but if you are targeting the bottom, keep your eyes peeled.

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