Record Low Interest Rates Yet Data Shows Lack of Activity. Why?

I recently read an article written by Time Magazine’s Alison Rogers discussing the recent trends within the national real estate market.  Her argument is that data has shown that while interest rates are at an all-time low (since Freddie Mac began keeping track of them in 1971) buyers still haven’t jumped in.  Her short article cites the restrictions of lenders as the main cause (albeit, not the only one).

Lending has definitely become more restrictive.  Gone are the days of people making $10/hour qualifying for $500,000 houses on “stated” income (you tell the lender how much you make, rather than any kind of documentation required).  I will also agree that the pendulum has swung to the uber-conservative where people with good income, good credit, and little debt still find getting a loan exhausting.  (Tangent story: recently had a client buy a house for his son and, as a lesson of responsibility for his son, got a loan and put his son on the title.  The father could’ve bought the house cash and nearly did when the lending got so tedious and involved.)  However, I cite many other reasons for the lack of activity in the market.  I see them as follows:

  1. Uncertainty in Where the  Market is Going:  yes, if you are a first time home buyer the tax advantages of buying a house far outweigh waiting out the market, even if it declines (see one of the Blog’s from last week: “Renting vs. Buying: The Whole Story”).  Still, it’s very hard to buy something today when it may decline in 6 months.  Psychologically, everyone wants to buy in an appreciating market where you can know for sure that the value is going up.  Those who are affected most by a declining market are investors.  Flipping a house has become very difficult unless you’ve got a lot of cash on hand and the ability to renovate at cost.  Even then, you gamble a little in a relatively shaky market.
  2. Uncertainty in the Job Market: in August of 2011 the unemployment rate was at 9.1% nationally.  Remember, that’s 9.1% of the total labor force that is unemployed but actively seeking employment and willing to work.  What that number doesn’t take into account are people who have jobs but see the guy in the next cubicle get canned.  Leah has a great job but sees Joe in the next office get laid off.  I can assure you the last thing crossing Leah’s mind is running out and buying a house.  People need jobs to buy houses and get loans and without the peace of mind of a stable job we aren’t going to see an increase in activity.
  3. Better ROI Elsewhere: return on investment (ROI) is the name of the game these days.  Got cash and need somewhere to put it?  Before the downgrade, the stock market might have been a better, albeit riskier, decision than the real estate market.  Take an above average example, Apple Inc.  At the beginning of 2009 it was selling for around $100 per share.  As of today (October 6, 2011) Apple Inc closed at $369.80 per.  Quadruple your investment since 2009?  Probably wouldn’t have happened in real estate unless you had cash.  The difference is that real estate has been a safer, longer term investment.  People that own houses and already have the tax shelter find that for bigger ROI the stock market is the way to go.

Overall, real estate is always a good investment if you’re in it for the long haul.  If you want to buy something and flip it in the next 6 months, I’d say you better have experience doing it and trust that you can get something well below market.  Buying today and holding for 5 years or more?  I can honestly say that within that time frame the market will be in a better place.  If you have questions or are interested in discusses the market, please always feel free to call or email me.

Residential Real Estate Appraisals: What Are They and What Do They Do?

If you purchase a house with a loan, the lender requires an appraiser to assess the property and make sure that the market value is there.  In other words, if you’re buying a house for $500,000 the bank wants to make sure the house isn’t worth only $200,000 and that they’re lending you $300,000 of extra money.  Sounds legitimate.

The problem arises when the discussion of market value comes into play.  Buyer writes an offer.  Seller counters.  Buyer agrees.  Buyer and Seller have to come to an agreement about what the house is worth.  To many people, that is the definition of value: “what someone is willing to pay”.  The trouble is that that isn’t necessarily market value.  If the same floor plan just sold 3 weeks ago as the property-in-question for $300,000, and today Buyer and Seller agree to purchase the same floor plan for $310,000 in a declining market, the market value may come in less than $300,000, depending on a variety of factors (interior upgrades, lot size, etc).  Market value isn’t an exact science and appraisers are licensed in using a bunch of determining factors to calculate value (i.e. a larger house that’s a little bit older than the property-in-question and has a pool sold 0.25 miles away 3 weeks ago.  How does that affect the market value of the property-in-question?).  Appraisers use a variety of tools in order to determine how each item affects the value as well as take into account trends within the local and national market.  The main thing to remember is that the appraiser works for the bank.  The appraiser’s job is to protect the bank’s interest and make sure there isn’t any loan fraud or other potentially illegal activity going on.

The lending pendulum has swung from the liberal times of the mid 2000’s (when people making $10/hour could afford $500,000 houses) to the very conservative.  Appraisals have come along with that.  Used to be that lenders and appraisers had relationships and Dave the Lender could call up Tony the Appraiser and have him appraise the property.  Of course, Tony appreciated the business from Dave and therefore was more inclined to make things work and have the property appraise at value.  Now, appraisals go into a hat and a random appraiser is selected.  Seems better but the problem sometimes is that you get an appraiser who potentially isn’t familiar with the specific neighborhood.

The second biggest problem with appraisals is that the appraiser is given the contract.  From the sense of putting deals together it makes sense but for determining market value it doesn’t make sense.  I’ll tell you a quick story regarding a recent house I sold at 3120 Skyline Drive in Oceanside.  The buyer wrote an offer at $800,000 and the seller countered at $825,000.  The buyer agreed.  We went into escrow at $825,000.  However, the appraiser received the contracts from the lender (remember, the appraiser works for the lender) but only got the offer at $800,000 without the counter.  He appraised the property at $800,000 (surprise, surprise).  He thought he was making the property appraise at value.  Actually we were undervalued.  My client (the seller) brought up a valid argument.  If the appraiser is only going off the contract, what’s the point?!  It’s a valid argument.  The appraiser’s job is to determine the market value of the property.  At the same time, he doesn’t want to be the one to screw up everyone’s deal (FYI — appraisers get about $250-$300 take home per appraisal.  Lender fees are about 1% of the purchase price.  Realtor fees are about 3% of the purchase price per side.  Etc, etc).  You can see the dilemma.

Appraisers have one of the toughest jobs within real estate.  Often there are qualified buyers who are agreeing with motivated sellers to buy a house at a specific price and the property falls through because it doesn’t appraise.  At the same time, difficult properties to appraise (i.e. property different than surrounding properties) draw increased scrutiny from the appraiser’s boss (aka The Underwriter).

If you run into trouble with appraisals, there are ways to combat them.  Give me a call or drop me an email if you run into trouble and need some help.

Auctions: What Are They and How Do I Get One?

There is constant discussion about auctions in real estate.  Basically, there are two main types to be aware of:

1.  Notice of Trustee’s Sale Auction: this is the type of auction when a short sale becomes a foreclosure.  After receiving a Notice of Default (after 3 months on non-payment) the owner has 6 months to cure the default.  If the default isn’t cured within time specified, the property goes to auction where it is sold on the courthouse steps.  If no one buys the house at a price the bank deems reasonable, the bank will take the house back and put it on the market as a foreclosure.  Notice of Trustee (NOT) auctions are common these days because of the high volume of short sales.  I’ve been to several in San Diego and the houses are auctioned literally on the courthouse steps with auctioneer going quickly through each house.  A representative for the bank is in attendance and it’s his/her job to ensure that the house is being bought above the bank’s bottom dollar.  The challenge with these types of sales is that they are usually cash only purchases and are done in “As Is” fashion.

2.  Auction-Style Regular Sale: this is a relatively rare type of auction for normal housing.  It’s a creative way to try and sell a house quickly and create a lot of buzz about the property within a short time period.  They usually don’t limit based on financing or length of escrow, but will take those factors into consideration before moving forward with the buyer.  Also, usually everyone is aware of what the highest bid is.  I’ve seen them done via phone and they ask you if you want to proceed to the next level of bidding.  If not, they thank you for your time and you are disconnected from the call.

In my opinion, it’s a gimmick that doesn’t do the best thing for the seller.  Perhaps you’ve seen the recent raffle for houses.  People can buy a $50 ticket and the house is given to the lucky winner.  The hope is that if the house is worth $500,000 the agent sells more than 10,000 tickets and makes the seller a decent profit.  On the other side, the buyer’s hope is to get into a house for a significant discount (say, $250 for 5 tickets).  The problem is that it’s a game of chance.  The agent hopes that they sell enough tickets to justify the sale.  The buyer hopes they are lucky enough to beat the 1 in 3,000 odds.

To me, auctions are a great opportunity for a buyer but another gimmick that hurts the seller.  Here’s why:

– usually there is a weekend where the buyers must attend a viewing of the house before being eligible for the auction.  This is usually a specific time on a weekend (Saturday and Sunday).  The problem is that that doesn’t always make sense for every buyer.  A four hour time slot (let’s say 2 hours each day) is typical and to make that window limits getting all qualified buyers in the door to be eligible to bid.  This limits the potential auctioneers.  It also means that people who think their bid won’t be enough may or may not go.  My advice: if you’re within $100,000 of what the house is worth, go.  You’ve got nothing to lose.  Another bit of advice: take your Realtor.  Get good advice about the value of the house and let him/her read through the obligations of the auction contract (i.e. is it being purchased “As Is”?  Is there an escape clause for the seller if they don’t get enough?  Will there still be a contingency period to get inspections done? etc).

-opening bids are usually about 50% of value in order to get everyone interested.  That means a $600,000 house might have an opening bid of $300,000.  That’s nice at the beginning but for most buyers not doing their homework on the auction and the true value of the house, they are set up with unrealistic expectations.  The thought is that someone who can afford more but only wants to pay $550,000 gets caught up in the “game” of the auction and outbids someone else for $585,000 and the house gets sold in a weekend.  My advice to buyers is to pick a number before seeing the house and stick to it.  Many times in traditional negotiations I’ll recommend to the buyer that we go take another look in between Counter Offer #1 and #2.  I do this because I want them to make sure they like the place and are excited about moving forward.  Looking at houses is fun; buying a house is a whole different animal.  With an auction you won’t have the luxury of going back to view the house again after the last bid.  It’s easy to say “just one more bid” over and over again until you end up $35,000 above where you wanted.  Consult a Realtor, find a number, stick with it.

Buying or Selling Out of State? I Can Help!

Many people are aware that I can help them buy and sell residential real estate within San Diego County, Riverside County, and Orange County (actually I am California licensed so I could help sell someone’s house personally anywhere in the state).  What people sometime don’t know is that because I’m part of a network of Realtors within my company and because of relationships that I have with some very large lending institutions, I can put people in contact with a local Realtor who has a proven track record of success anywhere in the world.

For instance, let’s say your grandmother wants to move from Chicago to the beaches of Florida.  I can help.  I can put her in contact with a quality agent in both areas (selling and buying agent) that is a veteran, quality agent.  Maybe she already has a relationship with someone she trusts (and I always recommend using those first) but if she doesn’t, it’s a way she can at least start with someone who is qualified.  Plus, as an added benefit, then I can keep tabs on that agent and keep him/her accountable and make sure that he/she is working hard in order to get that home sold or help her buy a beautiful place to live.  When I recommend someone I realize that the quality of work (or lack thereof) is a reflection of me, and so I take all of that business very seriously.

If you or someone you know needs to buy or sell outside of Southern California, please feel free to contact me and I can help.  It’s just another way that I look to provide service that truly is “a foot above the rest…”

What is a Short Sale?

In certain qualified cases, where a homeowner owes more on their home than what it is worth today, a lender may allow the homeowner to sell the property for less than the mortgage balance and accept a short sale.  A short sale allows the homeowner to sell their home to a buyer thereby avoiding a lengthy foreclosure process that can be damaging to credit and future ability to purchase real estate.  To qualify for a short sale as a homeowner you must meet three simple requirements: 1) you must have a financial hardship or a verifiable reason why you’re unable to pay your mortgage payment 2) you must insolvency, or in the eyes of the bank you must not have the cash or assets to pay off your mortgage balance and 3) you must have a monthly shortfall or verifiable financials that show that each month you can’t afford all of your monthly payment obligations including your mortgage.  If you meet these three requirements it is very possible that with the right Realtor you will be able to negotiate a short sale.

I often get questions about the timelines of short sales.  From start to finish how long does the process take?  That’s unfortunately hard to say.  It depends on many different factors.  Let’s take a hypothetical example to help illustrate this:

Let’s say John buys a house in 2005 for $500,000.  When he buys it in 2005, he does an interest only loan with a 1st trust deed (loan) with Wells Fargo for $400,000 and a 2nd trust deed with Chase for $100,000.  He does this because by staying under the $417,000 loan limits at the time he buys he allows himself to get the best interest rate at the time.

Then, the market tanks.

Today, John’s house is worth $200,000 and he just lost his job with the recession.  John needs to short sale his house.  In a normal transaction, if John were to sell his house at $200,000 today he would owe $200,000 to Wells Fargo (1st Trust Deed) and $100,000 to Chase (2nd Trust Deed).  NOTE: Obviously, John has been making payments since 2005 in this example so those numbers will be slightly less depending on the type of loans he got in 2005, how much he pays monthly and if he pays over his mortgage payment towards prinipal, etc etc, but for ease of numbers let’s leave those numbers as they are.  In a short sale, John needs to prove a hardship and prove that something bad happened (i.e. his job loss) which makes it impossible to continue making the payment.  A market change isn’t an acceptable answer.  Now, he calls up his favorite Realtor (read: and begins the process of short selling his house.

A few important things to know:

1) The short sale process doesn’t begin until there is a qualified, ready-willing-and-able buyer who has submitted an offer.  Only then will the bank begin the process.  From there, they will start by going getting a “short sale package” from the listing agent complete with John’s financials, job history, etc in order to prove that there is a hardship and that he isn’t able to afford the payment.

2) Because the process doesn’t start until there is an offer, many listing agents will under price the house in order to get it going.  For example, John’s Realtor may list the house for $170,000 in order to get offers submitted.  Once these offers are submitted the property is held in “Contingent” status.  Short sales from start to finish can take anywhere from 3-12 months and therefore most Realtors don’t count on the original buyer to stick around.  (Usually after several months, that buyer finds another house and buys it)  But, the Realtor doesn’t let the bank know the buyer is gone.  The bank looks at the offer and counters the buyer (3-12 months later) with an offer of $205,000.  Now, the buyer is gone but the listing agent puts the house back on the market (from “Contingent” back to “Active”) and increases the price to $205,000 in the MLS with “APPROVED Short Sale” in the remarks.

3) Short sales are similar to bank owned foreclosures (or REOs) in that usually the bank will not pay for repairs (including any and all termite damage repairs) and sell it “As Is”.  The advantage is that you can get property at a discount (sometimes), the disadvantage is that you can go in blind sometimes.

Short sales are complex and there are many moving parts.  I recommend you contact me with any questions and I can help you through the buying and selling side.

Jeffrey Thoma

“It is my privilege to be writing this letter today on behalf of Stephen Ploetz, my realtor and friend, who for the past four and a half months has been assisting me in my search for the perfect home in San Diego. I began the search in mid March amidst a very busy schedule, as I was just finishing up graduating from UCSD and finding a job in the area. It was my first time looking into real state, and prior to meeting, Steve made sure to ask all the right questions for efficient selection of properties to view on our first outing. His professionalism and open attitude made it very easy to describe to him my hopes and fears of purchasing real estate, to which his replies were always honest and sincere. This sincerity is perhaps what has made the difference, having Steve both as a realtor with a business eye and as a friend with a vested interest in his client’s satisfaction. I noticed that at every home we visited, he was intently listening to the comments about what I liked and disliked, constantly revising the requisites for the perfect home for me. Steve’s job was not easy.

However, his job did not end at the mere discovery of the perfect home. After an arduous search, the time had come to write an offer. This is where Steve demonstrated his expertise as a realtor. As a first time home buyer, I had a lot of questions, and Steve answered every one of these questions more than adequately through his organizational
and personal skills. If there was ever a question for which he did not know the answer, or a question that he could not answer with one-hundred percent certainty, his response was, “I will look into it and get back to you.” For this response, Steve always kept his promise, even answering questions that I had forgotten I had asked. Steve was always available by phone for questions and comments and was prompt about getting back to me if he was unavailable. And when the property closed escrow more than a week early, Steve was there to welcome me into my first home and to help me move some of my furniture that same evening. To this day, Steve still follows up with me to ensure that I am confident with my purchase and to offer his services for home improvement.

I would like to commend Steve for his professionalism, affability, sincerity, honesty, and attentiveness to detail; all characteristics that I believe make him a great realtor and a great friend. With one-hundred percent certainty, I can now say that I fully recommend Stephen Ploetz as a hard-working realtor who will help anyone find the perfect home. His critical eye and good knowledge of the market allowed me to find what I feel was a great purchase for me. I feel that he will be able to do the same for anybody. Thank you for taking the time to read this letter, as I hope that you have taken equal pleasure in reading as I have had in writing.

Best Regards,
Jeffrey Thoma”

Philip Shiffman

“As you are well aware my wife and I just closed on a condominium in San Diego and Steve represented us.

This is to let you know that Steve did a wonderful job in representing us. Specifically, he handled the offer/counter offer phase to our satisfaction, he guided us through the labyrinth of California forms and answered our questions and concerns in a timely fashion.

If all of your sales reps perform as Steve, your firm should do very well.

Yours truly,
Philip J. Shiffman”

Petersson Walter Paley

“Hey Steve

I just wanted to let you know how much I appreciate all the work you’ve done, trying to get this thing done.

You’ve kept your head on straight and maintained professionalism… And with this latest wrinkle, you’ve taken care of everything, even though it was my oversight to begin with.

Through it all, you’ve been a great friend… and a great agent.

I’m looking forward to celebrating the close of escrow with you.