Real Estate Information

CNNMoney has been running a series on American s facing financial ruin because of the ongoing problems in the economy. Honestly, some of the stories make it hard to feel sorry for people involved. Comments from readers reflect that.

Consider the story of Patricia Guerrero who had to go to the food bank on Good Friday to get food for her family. Her husband left her and she lost her job as a mortgage loan processor. Now we don t know the full story, but one fact immediately leaped out at me - she was on the brink of financial disaster after only two months. One of those months was covered by their tax refund, the other s obligations were met from savings. Guerrero has a $2500 a month mortgage payment and admitted she had to take off her Tiffany bracelet and leave her Coach purse in the car when she entered the food bank. This doesn t help her pity case one bit and commenters lambasted her.

However, it is clear by this story that she, like many other Americans, lives way beyond her means. She had no business getting a $2,500 a month mortgage on a $70,000 salary. Also, why didn t she have more money in savings? Sounds to me like she set herself up for failure. Maybe her story is the wake-up call more Americans need.

I am a single Mom with 2 kids and am scraping by making half of what she does. I don t feel sorry for her that she lives above her means and she better deal with the reality that s smacking her upside her head by moving and living realistically.

This woman should take her kids and move to another part of the US where houses are affordable. I feel nothing from this story; only bitterness at people that make bad decisions.

Longtime readers know I don t trust the media and there are a lot of omissions to this story we don t know. However, one thing you can see all over the Internet is people criticizing, condemning and complaining about failed flippers, overextended homeowners and other financial casualties.

Two themes that are very clear about this downturn is the sense of schadenfreude and the belief there should be no bailouts. As it s an election year, political candidates are being grilled over solutions to the housing problem. At HousingPanic the opinion on who has the best plan flip flops depending on the day. First it was John McCain who was right, then it was Barack Obama. The underlying theme of “correctness” is based on the assumption of personal responsibility and no bailouts. Hillary Clinton is vilified because her plan costs the most - $30 billion. In a presidential race that has been reduced to labels; black, female, war hero, I think we should vote in the smartest candidate and forget about the tags associated with each contestant.

At the root of the issue of bailouts and schadenfreude is our human sense of fairness. I ve suggested in the past the housing crisis is like a fire negligently set in an apartment building. Regardless of who set the fire, or how they did it, everyone will suffer if it doesn t get put out.

But this sense of fairness, of justice runs much deeper. I ve been thinking about it for some time and realized where I ve heard this story before. Forgive me as I m about to get Biblical.

11And He said, “A man had two sons.

12″The younger of them said to his father, Father, give me (A)the share of the estate that falls to me So he divided his (B)wealth between them.

13″And not many days later, the younger son gathered everything together and went on a journey into a distant country, and there he squandered his estate with loose living.21st Century version of loose living - Hummers, granite counter tops, interest only loans and Coach purses.

14″Now when he had spent everything, a severe famine occurred in that country, and he began to be impoverished.

15″So he went and hired himself out to one of the citizens of that country, and he sent him into his fields to feed swine.

16″And he would have gladly filled his stomach with the pods that the swine were eating, and no one was giving anything to him. Given the Jewish culture and the commandments about unclean animals, this was quite the step down.

17″But when he came to his senses, he said, How many of my father s hired men have more than enough bread, but I am dying here with hunger!

18′I will get up and go to my father, and will say to him, “Father, I have sinned against heaven, and in your sight;

19I am no longer worthy to be called your son; make me as one of your hired men.” It s better to be the servant of a rich man than continue on the brink of starvation.

Rather than hold his son to judgment, the father celebrated his return and utterly forgave him for his mistakes -

21″And the son said to him, Father, I have sinned against heaven and in your sight; I am no longer worthy to be called your son.

22″But the father said to his slaves, Quickly bring out (D)the best robe and put it on him, and (E)put a ring on his hand and sandals on his feet;

23and bring the fattened calf, kill it, and let us eat and celebrate;

24for this son of mine was (F)dead and has come to life again; he was lost and has been found. And they began to celebrate.In a turn of resentment, the older, responsible brother was robbed of his schadenfreude and complained -

25″Now his older son was in the field, and when he came and approached the house, he heard music and dancing.

26″And he summoned one of the servants and began inquiring what these things could be.

27″And he said to him, Your brother has come, and your father has killed the fattened calf because he has received him back safe and sound.

28″But he became angry and was not willing to go in; and his father came out and began pleading with him.

29″But he answered and said to his father, Look! For so many years I have been serving you and I have never neglected a command of yours; and yet you have never given me a young goat, so that I might celebrate with my friends;

30but when this son of yours came, who has devoured your (G)wealth with prostitutes, you killed the fattened calf for him. The father concluded the tale by saying -

31″And he said to him, Son, you have always been with me, and all that is mine is yours.

32′But we had to celebrate and rejoice, for this brother of yours was (H)dead and has begun to live, and was lost and has been found. ”I know this parable was not originally about homeowners, but it so eloquently explains human nature and presents the concept and need for forgiveness.

We have to do something to prevent all these foreclosures. Cities like Cleveland and Detroit have been blighted because of them. Crime has risen and governments have cut back on services because of lower revenues. California is in a similar situation. By not helping now, we will all be hurting later. Who cares if an irresponsible person started the fire? The responsible people have to put it out. If we don t, nobody will and the original irresponsibility will eventually consume us all.

This burning question comes from reader Susan -

I was wondering if you could explain the best way to buy a foreclosed property. How to I find them? Is it usually best to purchase it from a bank? Or a pre-foreclosure? Do the homes go to auction? Maybe you could do a post on this topic. Do you suggest buying foreclosed properties?

Thanks for the question Susan. Given the state of the real estate and mortgage markets in the U.S. and the increased rate of foreclosures, this is quite the timely question.

Let s recap real briefly what the stages of foreclosure are and then examine where the opportunities for investment lie in each stage. While every state has different laws and time periods associated with foreclosures, there are in general three main steps:

1. Notice of Default - When a homeowner fails to make a mortgage payment. Typically this takes place after 90 days of non-payment.

2. Notice of Sale - Whether it s a foreclosure sale or a trustee s sale does have some nuances. Essentially it s the lender telling the homeowner their house is going to be sold. This takes place between 90 to 180 days after the Notice of Default, except in Texas.

3. Real Estate Owned - The home will either be sold at auction, or the lender will take it back and try to sell it themselves.

I m going to add a fourth stage and that is the time period before the first payment is missed, when the homeowner first realizes they re in trouble.

To answer the original question about the best way to buy, I think there are opportunities to buy in each stage, but you have to understand the process well and have a competitive advantage to be successful. To try and deal with foreclosures as an attempt to buy a cheaper primary residence, probably isn t the best way to proceed because of the learning curve, but if you want to learn as an investment tool, that s a different ball game.

In my opinion, one of the best ways to pick up a house on the cheap is to get it early. Signs of distress can present themselves well before the Notice of Default unleashes a slew of offers from would be investors. The competitive advantage here is to know someone like a bankruptcy of divorce attorney who can refer you to people in those situations. One can also be referred by friends or family of the homeowners. Obviously that s the disadvantage as well. This is the most lucrative, but also the hardest way to buy a pre-foreclosure home.

A notice of default is a public record and as such can be searched by other investors who will write, call and even show up on the homeowner s doorstep trying to “help” them. Deals can be made at this stage, particularly if the homeowner has equity. Another tactic is to get a short sale from the bank with the seller being able to walk away and the lender providing the profit of the deal. This is also a potentially lucrative step to invest in, but has tons of competition from other investors. The way to get the NOD lists is to go to the courthouse or contact a title company that can provide daily lists. In Utah, one can subscribe to NewReach and also get updated lists. The disadvantage to buying homes in this stage is the competition from other investors and the potential the lender could delay or nix a short sale.

Once a home is ready to be sold at auction it s had dozens, if not hundreds of investors, agents and potential buyers look at it and pass on it. The homeowners could have damaged it, or had other parties put liens on it that could otherwise cloud the title. In addition, if the homeowners haven t yet moved out and you win the auction, evicting them becomes your responsibility. You may have not had the chance or ability to inspect the inside of the property and you ll need to close within 48 hours. Finally, you ll be bidding against a group of professional investors that know the system inside out. Still want to buy a home at auction? A new foreclosure auction company, Vestus, estimates 25% of all homes scheduled for auction actually get sold there. Further, they calculate only 50% of those homes have profit potential. Essentially only 12% of homes sold at auction have profit potential. This is the riskiest time to buy a home in the foreclosure process.

If a home doesn t sell at auction, for whatever reasons, the lender will add it to their portfolio of real estate owned or REO homes. They may make minimal repairs if needed and market the home for sale. Since lenders are in the business of lending, they tend to do poorly at selling. Additionally if a real estate agent is hired, their commissions are lowered and these homes spend a lot of time on the market. I used to bid on a lot of HUD homes back in the day. When the Utah market started booming, HUD homes virtually disappeared. The HUD process is a bit different than a regular REO because they do an auction. I never won a bid on a HUD home.

Sometimes a lender that quashed a short sale offer and a low bid at auction will end up selling for the same price, after incurring additional expenses, once the property becomes REO. This is where I think a lot of investment opportunities will lie in the next few years. A buyer has the opportunity to inspect an REO just like they would a regular home for sale. However, an REO could have major problems like a home I looked at that suffered water damage to the wood floors throughout the house, or the one that didn t get past the wiring phase of construction or the failed flip that was still in mid-remodel.

As you can see, there is no one way to buy foreclosed properties. You ll need to figure out your financing far in advance. Some distressed properties can t be purchased using traditional financing because of the home s condition.

The bottom line is every stage of the foreclosure process presents opportunities for investors that are prepared and have a competitive advantage of that stage. One investor I know only does pre-foreclosures. Others do quite well at auction. I personally look for REOs or other pre-foreclosure distressed properties. One can often find these properties on the MLS through driving neighborhoods or simply contacting lenders for REO lists. Make sure you are comfortable with whichever stage of the process you re looking at and figure out what your competitive advantage will be.

The real estate downturn has hit employees of the industry very hard. During the boom years everybody wanted to be a real estate agent and the numbers in those ranks soared. Now that the easy money is gone, so are the new agents. It s probably good for everyone involved.

Mortgage brokers are facing a similar dilemma. Not only has demand decreased, but so have offerings. I used to receive half a dozen rate sheets in my email each day. Now I receive one. Many wholesale lenders have gone out of business, while others have eliminated their wholesale broker divisions entirely.

Regardless, the housing crisis has triggered a huge shift in the industry s dynamics. Big banks, such as Bank of America Corp. and National City Corp., have stopped making loans through brokers entirely,

relying instead on their loan officers. National City said it was forced to do so by a continuing downturn in loan demand, while Bank of America said it saw better “long-term opportunity” in working through its own loan officers.

I ve seen reports saying broker originated business is defaulting at a rate of 20%. Lenders typically factor a default rate of 5% into their rates. On top of that, a housing downturn and a credit crunch are reducing the pool of borrowers available even nine months ago.

Mortgage brokers are having to adapt to this new environment. Some that have been in the business pre-boom are consolidating and hunkering down. Others are shutting their doors and finding work in a different profession. Others still are going to work directly for lenders in their retail divisions.

Count me in that third group. Effective April 1, I m going to work for a national FHA/VA lender with its own marketing department. I will no longer need to blog for business. With Utah s licensing requirements, I can t originate loans my new employer is unable to originate on the side.

You may have noticed some changes around here. The contact information is gone. I won t be soliciting business. But I will still blog. I love real estate and I love writing. Over time this site has blossomed on the search engines and is now providing a decent ancillary income through advertising. Without the constraints of seeking business and representing a company, I can speak freer about what s going on. Having my head fully immersed in real estate on a daily basis, I ll be able to provide a better perspective.

Over the past two weeks I ve been thinking a lot about how to proceed. I could quit blogging all together, or I could try and sell this site to another local company. I also considered restarting the nationally focused real estate blog I started last fall. The fact is this site ranks so well on the search engines, I d be starting all over from scratch with another blog. I don t want to do that. It s better for me to expand the focus than to restart. The Salt Lake Real Estate Blog has just gotten bigger!

One of the things I ve noticed is people who contact me tend to be from out of state. They find this site on the search engines when they look to move to Utah. As such, I ve left a contact form and I m happy to refer a lender and a real estate agent should you need such services. The same applies to locals as well.

Additionally, I plan to expand the advertising opportunities on this site. This is a geo-targeted site with lots of strong search engine positioning. Please contact me for a menu of inexpensive advertising options.

Besides death and taxes, the thing we can be absolutely sure of in this life is things will change. How you deal with change can really impact your quality of life. Since joining the mortgage industry in 2003, I ve only worked for one company. I d like to thank Byron Goates at Integrity First Financial for five great years. Byron gave me my start and has provided countless advice and help on many real estate issues. He even guest posts here from time to time and probably still will.

Get ready for the new and improved Salt Lake real estate blog, coming very soon.