Short sale vs just walking away

Much has been written about short sales, foreclosures, strategic defaults, deed-in-lieu and other forms of getting out from under an underwater property. I'm often asked why a distressed property owner should attempt a difficult short sale when they could just stay in the property rent free until the bank finally forecloses, years in some cases. Short answer; the deficiency (the amount of loss the bank incurs) does not go away in the case of foreclosure. The bank can come after the borrowers for up to 25 years in Florida after the foreclosure. The deficiency accrues interest in the interim. The bank has five years to file the deficiency action and then has 20 years to pursue the debt even if the borrower moves to another state. They may be able to garnish wages, attach bank accounts and even seize property. Good article on the subject here.

In a short sale, there is the chance of either being released from the deficiency outright or replacing the original promissory note secured by the property with an unsecured and likely smaller note. Here's a link to a very detailed explanation  of the differences in foreclosures, short sales and deeds-in-lieu from Florida real estate attorney, Richard Zaretsky. Many thanks to him for taking the time to share his knowledge and experience.

If you're in a situation where you can't or don't want to continue making your payments, don't just sit there waiting for the bank to knock on the door. The consequences of inaction could haunt you for a very long time.
 
Andy- Aunt Bee wants to see new models; she's thinking of trading in her old car.
Goober- That's a good thing - that car is on its last leg.
Andy- You said it was in tip-top shape.
Goober- That's before I knew she was going to trade it in.

Feedback Backlash

I commented briefly in January about buyers' feedback. Feedback is an ingrained part of the real estate listing process, intended to assist sellers market their properties by providing comments and suggestions from buyers who have viewed the property. I have never heard another agent question the usefulness of the practice. Most sellers seem to embrace the idea of getting comments from potential buyers and their agents. I have always questioned the benefit of feedback and just had my contrary opinion reinforced when an agent told me about an encounter she had at an open house this past weekend. A visitor to the open house told her that they would not do business with the agent or her brokerage because she had left negative feedback when she showed this person's property months earlier. The feedback was from a buyer who looked at the property and didn't like the floors. The seller's agent asked for honest feedback and the buyer's agent relayed her client's comments. For that she and her brokerage are blacklisted and mistrusted. Hearing this I think buyer's agents would be well-advised to never leave critical feedback lest their honesty damage them with unreasonable sellers. That brings up another danger of feedback. What does an over-priced seller do with feedback that says her price is just right? Never mind that it may have come from a well-meaning but unaware buyer's agent. She will likely resist lowering her price to a fair level and may not sell her property.

Here's my take on buyer feedback. The way it works these days is usually that the buyers' agents receive an email or fax asking for comments on any listing they show including opinion of price, condition, how well it showed and any comments. Any informed seller already knows whether she is priced right and is aware of the condition of the property, so, feedback is usually worthless except to report new damage to vacant properties. Feedback does, however, provide an opportunity to buyers and buyer's agents. Is any good buyer's agent going to leave feedback suggesting that the price is too low or even just right? Never. Why not take an opportunity to plant a seed of doubt in the seller's head about the price. It may pay dividends when an offer is presented. Considering the open house encounter I think my new feedback routine will be to shower praise about the condition of the property regardless of my client's opinion of it but continue to suggest that the price is too high. That way I don't insult any sellers who are merely fishing for compliments but at the same time chip away at their resolve about their price. Sellers, you're better off listening to your agent and/or doing your own research and dismissing feedback as unreliable and sometimes intended to influence your perception of the value of your property. If you don't trust your agent's opinion get a new one.

"If the human brain were so simple that we could understand it, we'd be so simple we couldn't." ___unknown

Comps and offer substantiation

I remember talking to an appraiser in the mid-2000s about his method for time adjustments for sold comps. For instance, in a rising market, successive sales are generally higher than the previous sales so, to establish present value, some adjustment must be made for appreciation. His comment to me then was that his underwriters would only allow a maximum adjustment of 1.5% appreciation per month even though we were seeing much higher rates of appreciation in some market segments. Seems crazy now but that was the state of the market in 2002 through 2007. To establish present value in a declining market it stands to reason that the reverse would be true. If any appraisers are reading this I would be interested to know if you have been making time adjustments for depreciation in the recent declining years and, if so, how much.

As prices plunged after 2007, prudent buyers capped their offers somewhere below present value to allow for more depreciation. They or their agents then had to explain the rationale for expecting to purchase below what the comps suggested as present value to the seller and her agent. Sometimes the sellers got it and were willing to sell below present value to relieve themselves of the risk of further price erosion. Sometimes they didn't. Until recently, most of those who went ahead and sold for less than they wanted made the right decision. Recent sales in many complexes seem to indicate that the trend is reversing. That will call for a shift in strategy for buyers. Research is still vital to the offer process but expecting to purchase below the last sales may be unrealistic in many cases in the current market. Determine present value, quantify wiggle room and prepare for some mission creep.

Speaking of comps and offer justification, the world's most thoughtful and eloquently articulated argument for an offer means nothing if the seller is unwilling to accept that research and/or reality. Research is only part of the battle. There are some properties that can't be purchased anywhere near current value. Just because a buyer's research proves that $300,000 is a fair offer doesn't mean that the seller won't continue to cling to her dream of $400,000. Some deals can't be done. Just move along. Reality is subjective.

"Possession isn't nine-tenths of the law. It's nine-tenths of the problem." _________John Lennon

Revisiting "compliance" fees

I just wanted a little sun and you throw me in the water and then take my picture with my hair a mess. Geez. Humans.

I thought the nasty practice of brokers ripping off their clients with impressive sounding junk fees was primarily a thing of the past. I was wrong. Readers who've been reading this blog for a few years may remember a post from 2007 titled "Unarmed Robbery - Broker Style" In that post I talked about the unsavory practice of real estate brokers and agents charging their clients bogus fees disguised in official sounding names like "regulatory compliance fee", "transaction fee", "broker compliance fee" and so on. I was introduced to the practice when a brokerage I was working for was bought by a large franchisee of a national real estate company. As part of our indoctrination into the world of high-profit real estate practice, agents were "encouraged" to tack onto each of their transactions a fee of $395 to $495 to be paid by our clients. Initially we were told it was to cover the cost of the department handling transactions post-contract to closing and it was called a "transaction fee". After resistance from a few clients and agents (yours truly included) the name was changed to "regulatory compliance fee". Agents were still "encouraged" but not forced to add it to their clients' closing costs. I left that brokerage and haven't given junk fees much thought since.

Last week one of our agents received an offer on one of her listings that asked for the seller to pay the buyer's closing costs. Not that unusual. What was unusual was that in the list of closing costs was a "compliance" fee of $175 being charged by the buyer's broker. I have no idea if the buyer knew that he was going to be paying his broker $175 or not. It's not unusual for a buyer to pay their broker when he is not being paid by the seller's broker, which is the usual situation. It is, however, unusual to be charged by your buyer's broker when he is already being paid by the seller's broker as he was in this instance.

Before you close a real estate transaction, read the settlement statement closely and question any fees you don't understand. Any not-previously-discussed fee going to either real estate broker on the settlement statement other than the commission is suspect.

"...as you get older you sort of settle into a perpetual state of buyer's remorse." ___P. Lutus

Cocoa Beach - state of the market

Current market conditions - March 12, 2012 - Cocoa Beach and Cape Canaveral
(all data is from the Cocoa Beach MLS)

FOR SALE INVENTORY

Condos and townhomes____369 ( 29 asking more than $500,000 )
Foreclosures______________20 ( 9 of those at the Pier Resort )
Short sales________________31
Total distressed____________14%
Sold since Jan. 1___________52

Single family homes________73 ( 46 are waterfront )
Foreclosures______________0
Short sales_______________5
Total distressed___________7%
Sold since Jan. 1__________11

Inventory of all property types is very picked over with a lot of the current inventory having been on the market for well over a year. Readers of this blog know that the "days on market" number is easily manipulated by listing agents wanting to give a languishing listing a fresh look with a zero DOM number. That means without looking at each listing's history individually, it's impossible to get the exact number but trust me when I say a large percentage of the current inventory is very old. Number one reason that so much of our inventory is old: it is overpriced. The priced-right new listings that are coming on the market are getting contracts quickly. Those that are optimistically priced continue to collect dust.

The percentages of distressed sales are at their lowest level since 2008, the year we saw our first short sale. If there truly is a backlog of pending foreclosures that the "experts" have been predicting for well over a year, there is a ready group of buyers in our market standing by. I don't doubt that this may be the case in some other markets but, based strictly on my daily involvement, observations and street-educated gut, I doubt seriously that we'll see any significant supply of new foreclosures in our two city market. Short sales are a little easier to predict and it seems obvious we'll see less and less of these. My take is that most property owners who were going to short sell or default as their property value slid underwater knew it was happening several years ago and have already disposed of the property. As always, I could be wrong. Wouldn't be the first time. The sold numbers appear to support me;

YEAR - distressed sales
2007 ----- 0
2008 -----15%
2009 -----36%
2010 -----56%
2011 -----32%
2012 ----- ? - for sale condo inventory is at 14%, single family at 7%

"The wind and waves are always on the side of the ablest navigators."
_____Edward Gibbons

Continuing Ed - Home Buying

Home buying scenario 1; Fiscally prudent Basil decides he wants to purchase a home in Cocoa Beach. He is mistrustful of realtors and decides to do his own research, select the properties that interest him and contact the listing offices directly to see them. He decides not to use a buyer's agent which he mistakenly thinks will cost him more money. After viewing multiple properties with multiple listing agents he decides to offer on one that seems perfect. He asks the listing agent what she thinks he should offer. She suggests that a low offer will not get a response as the seller is "very close" to her bottom line at the current asking price of $350,000. Basil offers $340,000 and the list agent calls the next day with the good news that the seller has reluctantly agreed to sell if Basil will come up to $342. Basil is thrilled and agrees. He didn't have to pay a buyer's broker and he got a good deal, he thinks, on a home that is almost exactly what he wants.

Scenario 2; [months earlier] Savvy Sammy decides, with retirement approaching in a couple of years, to go ahead and begin a search for a Cocoa Beach home. He does some research, makes a few calls and selects a buyer's agent to assist in his search. With Sammy's list of criteria, his agent begins distilling the active listings to get to a prime list of possible matches. Sammy and Sara fly to Cocoa Beach three times over the next year to look at properties and decide what features matter and finally find a house that they like and want to make an offer on. Sammy asks, El Dubya, his buyer's broker, what he should offer. El Dubyah says, well, considering that this home has been on the market off and on for the last three years at steadily decreasing prices I think we can afford to be aggressive. Two very similar houses in the same neighborhood closed last month and the closed prices suggest that a fair price for this one is around $325,000 but I think we should start lower and hope to end up around $325. Sammy offers $315 and the seller counters at $340. Sammy bumps up to $320 and the seller counters at $332. While Sammy and Sara contemplate the seller's counter, El Dubya sees that a new listing has popped up on the next block at an attractive price. It is slightly larger and has a new seawall and dock. Sammy decides to offer on it rather than increase his offer on home number one. A deal is struck on the 2nd house for $320 and house number one remains on the market asking $350 until Basil comes along two months later and pays $342 with the listing agent's hints that that is a good price.

Neither Basil nor Sammy paid a realtors commission. Both sellers paid 6% to their listing broker. The listing broker for house number 2 paid El Dubyah's broker 3% of the seller's total 6%. The less-than-helpful listing agent for house number 1 kept the entire 6%.

Take-aways: Rarely does a buyer get a break on price by going directly to the listing agent. That agent is prevented from advocating for the buyer in the deal and cannot divulge what the seller might accept even if the seller has previously agreed to a lower number with another buyer. While the agent technically can't advocate for the seller either, the dynamics are unlikely to ever be in the buyer's favor. Even if the agent agrees to reduce the total commission, both buyer and seller are expecting that savings to land on their side of the settlement statement. The result most often is that the buyer pays more than he would have had he had an advocate on his side of the deal.

A good buyer's agent who is active in the market will almost always have information about a property, a neighborhood or the market in general that can be used to hammer out a better deal for the buyer. Just as important, a good buyer's agent will not allow his client to have excessive exposure in the contract language without that buyer's knowledge. Buyers who decide to eschew their own representation better be familiar with customary division and amount of closing costs, escrow amounts and where it's safer being held, inspection periods, assignability, contract time periods and a few other potentially costly areas. Penny wise, pound foolish.

"Sometimes if you want to know for sure whether the stove is hot, the only way to find out is to touch it."  __ Jack Reacher

So far this year

An Atlas V rocket lifting off yesterday from Cape Canaveral Air Force Station with a monster 15,000 pound military satellite.

As I was expecting, the rate of property sales so far this year lagged the same period in recent years. Since January 1 there have been 15 sales of single family homes in Cocoa beach and Cape Canaveral as reported by the Cocoa Beach MLS. In the same period there have been 50 condo and townhome sales. The two biggest dynamics in play in our market are the depleted inventory (372 condos and 73 homes) and the rapid decline of the number of distressed properties. In the period of January 1 through February 25 last year, distressed sales (short or foreclosed) represented 37% of the single-family home sales and a whopping 47% of the condo sales. In that same period this year the numbers of distressed sales declined to 27% for single-family homes and 26% for condos. This trend of reduced distressed sales will continue as this morning's MLS inventory shows only 17% distressed condo listings out of 372 total and a mere 5% distressed homes. There is a total of only 20 foreclosed properties in our two cities, none of them single family homes. Over half of the foreclosures are at two complexes, nine at Pier Resort and two at Mystic Vistas. There are 42 short sale condo offerings and four single family.

What do these stats mean for participants in our market? With over three quarters of this year's condo sales so far closing with cash, mortgage availability is not a factor. Almost certainly, without high numbers of low-priced distressed listings, we should expect to see stabilization or increases in closed prices. I'm already seeing some indications of this. Obviously it's not the same in all complexes. Until the foreclosures get flushed out at the Pier Resort complex, we won't see any improvement there. With Mystic down to the two last foreclosures I expect that the days of sub-$200,000 sales will shortly be a thing of the past there. For sellers, the light at the end of the tunnel is starting to show. Those with the flexibility to wait it out may at last be rewarded. For buyers, the low-hanging fruit is almost entirely picked and expecting to pay the same or less than the recent comps is likely to be less successful than in the last few years. There are still deals to be had but one needs to be realistic and understand the dynamics.

On another subject, when researching property and agents on the Internet, be skeptical of all you see. False claims on agent websites like "expert this, that or the other" or "specializing in ..." and search engine manipulation are at an all-time high as are domains designed to trick the public into thinking they are actually on our public MLS. We have a broker in our area who maintains a site/s with almost-the-same domain name as our association site even though our association has repeatedly warned members that this is unacceptable (not to mention unethical). The obvious intention is to trick consumers. The puff adder I profiled in the post from earlier this week claims to be a beautiful peacock on the Internet. If you won't believe that a stranger is holding $15,000,000 from your deceased relative that he needs to transfer to your bank account you shouldn't believe that an agent you never met is an expert at anything but claiming to be an expert. This includes me. I could be a clever monkey with a broadband connection harvesting leads to sell to other less-resourceful agents. Trust your gut and ask questions of your agent.

I am frequently asked why lists of property listings from sites like Zillow, Realtor.com, Trulia, etc. almost always contain listings that are no longer active and often already sold. I suspect these sites intentionally leave sold listings up to increase page views. That is their business model after all. If you want real-time accurate MLS data for Cocoa Beach and Cape Canaveral use the public MLS site maintained by our association at http://www.brevardmls.com/  No need to wade through lists that are arranged according to how much a listing agent paid or full of already sold properties.

"He who would search for pearls must dive below." __John Dryden

The snake will always bite

I phoned a client (who we'll call Woody) one afternoon recently when a new condo listing appeared that matched his criteria. I previewed the unit for him the next morning as he couldn't make it down to see it immediately. Woody indicated that we would be making an offer that day as soon as I had forwarded photos and description of condition. He told me that another agent with whom he had worked in the past (who we'll call Dick) called him about the same listing. When he told Dick that he was already preparing an offer with me on this unit Dick told him that he would be bringing an offer from a different client on the same unit. He offered to withhold the other offer if Woody would work with him on a different unit in the future. Woody agreed.

After thinking about his promise Dick changed his mind. The delayed gratification of some future deal wasn't working. He decided to use the threat of a bidding war to pressure Woody into letting him write his offer rather than me. Woody relayed all this to me and asked me to step aside and let Dick write the offer for him. I complied. Based on Dick's promise Woody thought he stood a chance (without a competing offer) of getting the unit for less money. After presenting Woody's offer, Dick told Woody that he had submitted the other offer anyway and a bidding war ensued with the price running  to almost full asking. Long story short, Woody wound up paying more than he wanted to and Dick was rewarded for his deceit with two commission checks instead of one as he got to sell his other freshly-defeated but anxious-to-purchase client a different unit. I doubt the other buyer ever knew what was going on. I'm happy to have been on the sidelines for this one, unpaid, unsurprised but with integrity intact.

Some of the details of this story may be inaccurate considering that one of the main participants is likely to have told more lies than the ones that surfaced. For instance; Dick may have not submitted the other offer but told Woody that he had in order to get him to up his offer. Or, there may never have even been another offer and Dick used that threat to coerce Woody into letting him write the offer. In any case, tread carefully out there. Trust your gut if it's telling you your agent may be less than honorable. There be dragons and snakes about.

"You can't talk of the dangers of snake poisoning and not mention snakes." ________C. Everett Koop