Take the red pill

The changes are coming at us so fast and furious that it’s easy to get frozen into inaction. How many times have we said lately, "That can’t really be happening in America, can it? They can’t really do that, can they?" We’re all a bit uneasy because we know something’s wrong, but we don't want to face what it is.

I’m reminded of the movie, “The Matrix” when Morpheus confronts Neo with a choice – take the red pill and deal with what’s really going on, or take the blue pill and forget about the real world, just go back to what you used to believe.

I don’t know about you, but it sure would be a lot easier to take the blue pill. I’d love to go back to pretending that the government is watching out for its middle class; if you work hard and invest wisely you will succeed; and the good guys will be rewarded while the bad guys get punished. It sure would be easier if I could go back to believing that.

But now, I’m trying to operate in the real world. It’s no picnic but I’m still convinced that those who take considered action will be better off than those who are frozen in disbelief.

While we’re talking movies, remember “Titanic”? I just watched the scene again where Jack and Rose overhear the captain and the engineer conversing about what hitting the iceberg really means to their voyage. Jack gave his assessment of the situation: “This is bad.” Everyone around them was concerned with petty things that wouldn’t matter an hour later, while Jack took decisive action which ended up saving Rose’s life.

In my real estate practice I counsel people who are in various forms of hardship, and so I see firsthand the effects of inaction. You have to act while you still have options. Like the Titanic, the more the situation deteriorates, the fewer options you have. Your ways of escape are cut off one by one by the rising water and you may be forced into tragic dead-end situation where you have no more choices.

I know that some decisions are tough to make. Feeding your family or destroying your credit. Doing the distasteful thing or wishing and hoping something better will happen. Facing what feels like failure or making the best of a bad situation. Ripping off the bandaid quickly or pulling the hairs out one at a time.

I understand. Crystal and I have had to come to grips with our own situation lately and have made some really tough decisions. These true life experiences plus my extensive training as a Certified Distressed Property Expert (CDPE) makes me uniquely qualified to counsel and advise you or anyone you know who is facing some hard choices. We’re all going through this together, so please don’t be embarrassed, just pick up the phone and call.

Why You're Frustrated Trying to Buy a Short Sale

I’ll explain the steps involved in buying a short sale property, but first let me define a few terms.

A “short sale” means that if the owner sells the property, there won’t be enough money to pay the bank what is owed. The owner is “short”.

The “borrower”, the “owner”, and the “seller” are all the same person.

The “bank”, also known as the “lender”, does not own the property. Even so, for the owner to be able to sell the property he needs the bank’s agreement to discount what is owed.

The “package” is the documentation that must be sent to the bank so they can decide whether or not to accept a short sale and at what price.

The “agent” is the real estate professional that the owner hires to market the property and represent him during the short sale process.

Now here’s how it works. The seller and his agent decide to attempt a short sale. There is no guarantee that a short sale will work, since the bank may or may not go along with it. While experience tells us which circumstances have the best chances of success, the rules are constantly changing so no one can predict the outcome with certainty.

The agent’s first job is to create the package. This involves, among other things, hardship documentation, a Broker’s Price Opinion, photos, and most importantly an OFFER. The bank will misplace (this is code for shred) any incomplete package, so there is no point in submitting a package without an offer.

How does the agent generate an offer quickly? By listing the property at an unreasonably low price. The owner will net zero from the sale, so the price doesn’t matter to him. The agent’s first priority at this point is only to generate an offer, any offer. In fact, the agent might know some investors who will throw a lowball offer at anything, and in this case you see the listing hit the MLS with an accepted offer on day one. “Accepted offer” means the seller has signed it, but remember the seller is powerless to sell the property unless the bank goes along.

So now the waiting begins. It takes the bank 3 to 4 months to decide if they will allow a short sale, and at what price they will do it. During this time the property is still listed on the MLS as “Active”, since the bank has not approved the short sale yet. This is why you see listings at very low prices that have been on the market for 100 days. You’re wondering “what’s wrong with this property?” Nothing is wrong, it’s a crazy low price on a short sale and the seller is waiting on an answer from the bank.

During this waiting time the seller is either allowing showings or not. If the seller allows showings, you can make an offer which will be considered a “backup offer”. As you might imagine, in several month’s time it’s common for many backup offers to come in.

Once the seller has enough backup offers, he may decide that it’s nutty to keep having people come through the house, since they have plenty of offers and they aren’t even sure that a short sale will work. So why bother? If the seller comes to this conclusion, the listing will still be active in the MLS and yet you can’t see it or make an offer on it.

Bear in mind that none of this information is stated in the listing description that you see on the Internet. You might not know that it’s a short sale, or where it is in the process, all you see is a house at what looks to be a great price.

When the bank completes their own appraisals and due diligence, they will answer the seller. There might be all kinds of negotiating at this point between bank and seller, as to what the bank will accept as a loan payoff and what responsibilities the seller has. The seller might have to come up with some money or give the bank a promissory note. If the bank and the seller can’t come to terms, there will not be a short sale.

But let’s assume the bank and the sellers agree on what has to happen for a short sale to take place. The bank at this point will state at what price they will do a short sale. We then call this an “approved short sale” meaning that the bank has approved it. The price is probably NOT what the agent has in the listing, it’s usually more and it might even be significantly more.

At this point the person who made the original offer usually walks away. The price is not what he was hoping for. The bank might then ask the agent to see the backup offers and decide to accept or send a counter offer to one of them. They might ask everyone to submit their “highest and best” offer within 24 or 48 hours. At this point the agent might put the new price into the MLS and say the short sale has been approved and generate some new offers. There are no rules to this game; it goes however the bank wants to play it. They call the shots, because without their approval, no sale will take place.

So if you’re still interested 3 to 4 months after you made your offer, and if you’re willing to up your offer so that it’s the highest and best, then congratulations! You succeeded in purchasing a short sale property!

Downsizing

The current economic climate has caused many people to re-think their priorities in life. Or stated more correctly, many people re-thinking their priorities has caused the current economic climate. This dramatic shift in motivation lies at the root of all that we see happening, and the reason stimulus won’t work is because people don’t want to be stimulated.

In real estate this dramatic sea change in thinking from expansion to contraction is showing up as the desire to have your housing work for you rather than you work for your housing. Some of my clients are re-examining the drive to constantly strive for more and better homes, especially as it gets harder to work longer hours as we age, and we are no longer certain that we’ll make more money next year than we did this year. And even if we did manage to make more, we won’t get to keep any more as taxes are certain to increase in the future.

So how do we get housing to work for us rather than vice-versa? It starts with an honest assessment of what we need and want in our lives. What if by downsizing to a less expensive but equally comfortable home gets you out of debt so you don’t have to work so hard just to maintain? What if you could free up equity and buy some investments that produce “mailbox money”, meaning checks that show up in the mail without you having to work for them?

It looks like this – you have a large house that you don’t really need anymore because the kids have moved out. You have empty bedrooms that you never use. You’re in one of the upper tier price points that have declined in value a bit, but not as much as the entry level market that has been hard hit by foreclosures. You’re getting closer to retirement, but you’ve watched your retirement funds in the stock market drop. You could stay where you are and continue to make the big mortgage payments, but you’d rather not. Why not trade that house for a more affordable one and free up capital for investing in cash flowing assets?

What if you downsized and reduced your monthly expenses? If we’re in the eye of the economic storm and there’s more to come, you will be better able to stand. And if happy days are returning soon, then you will be making good money while your expenses are lower, and so you’ll be able to replenish that retirement account. You win either way.

It seems I’m running into more people who are thinking along these lines, which makes sense in light of the social mood shift. It is exactly this shift which tells me the economy is not ready to return to the go-go days of expansion. We have much more de-leveraging ahead.

So how about you? Are you getting closer to the edge where if things don’t turn around soon you’ll be in trouble? Or maybe you’re doing alright but you’re just tired of working so hard? Why not be proactive and make some wise choices while you still have options? That’s called living life by design and not by default. You call the shots.

Depending on your situation, you could reduce your debt, eliminate your debt, purchase cash-flowing rental property or some combination. For example, if your home is worth $950K and you owe $300K on it, you could sell it, buy a house for $500K cash, and buy two rental homes in Hemet for $75K each that rent for $850 per month each. So you’ve eliminated a $2500 a month mortgage payment, reduced your real estate taxes by $500 a month, and increased your income by around $1200 a month. That’s $50K a year you don’t have to make. That could be the difference between working and retiring, or living well on only one income.

So what’s really important to you and what are your priorities? Spending more time with the kids or grandkids? Is there a ministry or worthy cause you’d love to devote more time or money to if only you could? Perhaps you have the means already. Maybe you could free up time and money by restructuring what assets you already have. We can all learn to be better stewards of what God has blessed us with.

Your whole life can change with some strategic moves. If you’re stuck in a rut of working to pay the bank and not getting anywhere, I can help you get unstuck. Feel free to call me any time.

San Diego County Sales Strong in February

Sales of single-family, re-sale homes were up 38.4% year-over-year. This is the tenth month in a row home sales have been higher than the year before. Year-to-date, home sales are higher than any year since 2005.

Sales continue to be concentrated in the lower-priced cities where the bulk of the bank-owned property is: Chula Vista up 73.2%, Escondido up 89.1%, Oceanside up 42.5%, and Encanto up 189.5%, just to name the cities with the largest number of sales.

Inventory was down 9.9% in February, while the number of properties pending rose 19.1% from January and was up 186% year-over-year.

The median price was flat at $325,000, but was off 24.4% compared to last February. The average price fell 8.3% month-over-month, and was off 33% year-over-year.

Condo sales were down 3% month-over-month, but gained 37.8% compared to last February.

The median price for condos fell 1.6% from January, and was off 36.8% year-over-year.The sales price to list price ratio increased 2.4 points to 98%. The sales price to list price ratio for condos rose 0.9 of a point to 96.9%.

The real estate market is very hard to generalize. It is a market made up of many micro markets. For complete information on a particular neighborhood or for an evaluation of your home's worth, call me.

Is This A Good Time To Buy?

There are two different answers to that question. But behind that question is usually hidden another question – “Is this the bottom?” I can answer that one easily – no, we are not at the bottom. The only way we’ll know for sure it was the bottom is when the bottom has passed. However, we do have indicators such as absorption rates, days on the market, list to sales price ratios and others that give us an indication of what’s ahead. And none of those indicators tell me that we are at the bottom yet.

So is it a good time to buy? If you’re an investor buying with cash and trying to catch the bottom then I would wait because we are not there yet.

However, if you’re buying a home to live in and you’re going to get a loan, than that’s another story! Interest rates are fantastic right now and the federal government will give you an $8000 tax credit if you haven’t owned a home in the last 3 years. You can buy a house with 3% down using an FHA loan. The financial markets are changing so fast that it’s impossible to say what loan products will be available 6 months from now or next year. With all the deficit spending the government is doing, rates are expected to go up, perhaps way up.

So what will it be like next year? Maybe home prices will be lower. But the $8000 credit will disappear at the end of this year unless it is extended. It may be much more difficult to get a loan at all, and if you can you might be paying a hefty monthly payment. That higher payment could cancel out any benefit you received by waiting for the lowest price.

The real estate market goes up and down, and it’s been said that a smart investment is one that you buy low and sell high. Are real estate prices high right now? Or are they low? If you buy when prices are historically high relative to wages and rents, it’s risky. If you buy when prices are historically low AND interest rates are historically low, then your risk is low.

You have to do your own homework and assure yourself that while this may not be the absolute bottom, it’s low enough that buying at these levels is not a high risk decision, but is indeed a low risk decision. And then relax, enjoy your new home, and know that you’ve locked in a really low payment for the next 30 years. Smart!

Short Sale Training

I have a new website that explains how to avoid foreclosure by doing a short sale.

The benefits to you of a short sale are:
1. You won't have a foreclosure on your record. Recent reports state that a foreclosure lowers your credit score 140 to 200 points.
2. You can continue living in the house and not make payments during the 4 to 6 months it will take to do a short sale. You could save up a nice down payment to buy a house a couple of years from now when prices are at rock bottom.

To learn all about short sales, visit my new site at www.fleeforeclosure.com. Here's a sample of the kind of to-the-point information that you'll find on the site:

Lenders don't want to own another house and are becoming more agreeable to doing short sales. They avoid the expense of a foreclosure, plus the risk that the property will be vandalized while it sits empty. And now California Senate Bill 1137 signed by Governor Schwarzenegger in 2008 said that banks must avoid foreclosure if at all possible.

Even so, not all short sale attempts work out. A short sale is highly likely to succeed when:
1. You have experienced a legitimate hardship which can be proven,
2. The property is in a marketable area and is in marketable condition, and
3. The remaining value will give the most junior lender a minimum of 20% of the original loan amount.

This means that if you have a first and a second, there must be enough left over from a sale to pay the second something.

A short sale is highly unlikely when:
1. You have not experienced hardship,
2. You have not missed any payments,
3. You are in a Chapter 7 or Chapter 13 bankruptcy plan,
4. There isn't enough time to do a short sale before the bank forecloses,
5. You just did a recent re-fi with cash out and now you want the bank to eat it, or
6. There isn't enough money to pay something to the 2nd trust deed holder after paying off the 1st and all closing costs.

OK, so I said that a short sale is unlikely in those cases, but we have workarounds. The best bet is to contact us and see what is possible in your case.

Many agents don't even know what works and what doesn't. It's just a shot in the dark and this accounts for the high rate of short sale attempts that fail. If a short sale has a very slim chance of working in your case, we'll tell you the truth so you don't waste time and can move on with other plans.

Bank Owned Properties Continue To Dominate Market

Sales of bank-owned property continued to make up the majority of home sales in San Diego County in January.

These sales are pushing statistical prices down. The median price for single-family, re-sale homes dropped 4.4% from December, and was down 29.7% year-over-year.

Sales of single-family, re-sale homes were down 20% from December, but were up 47.7% year-over-year. Sales continue to be concentrated in the lower-priced cities where the bulk of the bank-owned property is: Chula Vista up 128.2%, Escondido up 214.6%, Oceanside up 118.2%, El Cajon up, and Encanto up 214.3%, just to name the cities with the largest number of sales.

Condo sales were down 22.6% month-over-month, but gained 51.4% compared to last January.
The median price for condos fell 6% from December, and was off 37.3% year-over-year.

The sales price to list price ratio decreased 2.7 points to 95.6%. The sales price to list price ratio for condos dropped 1.9 points to 96%.

Days on market for homes dropped ten to 63 days. Days on market for condos was down five to 64 days.

The real estate market is very hard to generalize. It is a market made up of many micro markets. For complete information on a particular neighborhood or for an evaluation of your home's worth, call me.