From a recent Realty Times article by Ken Harney comes this report of the rise of investors as buyers in the current market
The quarterly "homeownership survey" by realty information firm Move.dot.com found that one of every eight buyers last month was an investor - someone looking to acquire property at a favorable price, planning to fix it up, rent it out or resell later for a profit.
The investor ratio is up from just one in 20 buyers as recently as March, and represents a huge turnaround in Americans' attitude toward real estate.
Buyers who target foreclosure sales are particularly active right now, according to the study, and account for 25 percent of all consumers looking to purchase houses.
Among these foreclosure buyers, fully 42 percent are investors. Thirteen percent say they're buying properties to convert into rentals. Eleven percent intend to rehab them and sell them as quickly as possible.
And interestingly, 17 percent say they plan to let a family member live in them for an extended period of time -- until market values have rebounded enough to sell the house at a substantial profit.
Certainly I see this in my market, especially with houses that banks have marked down to “dump it” prices. In that case I also see a lot of sleazy Realtor deals, too – those sales that take place just after a property comes on the market or just after the latest price reduction that somehow go to the friends and family of the listing Realtor, even if there are multiple offers. We’ve likely all hit those stinky deals. The recent HUD rules on giving potential owner-occupants first dibs on sales may help some, but the real sleaze-bags in our business will figure out how to get around that, too. Until such time as we get more transparency into real estate deals there will always be “Playa’s" scamming the system.
Those clowns aside, I guess I don’t see anything wrong with professional investors (and investor groups, which I see a lot) taking some of the excess inventory off the market. There seems to be lots of investor money out there right now and they are buying up some of the real dregs of the market, so more power to them. I do get a little concerned with the many amateur investors that are out bidding on houses. I know that they think they have done all the right homework – will the place cash-flow and all that – but many just don’t have a realistic picture of the cost to fix up some of these places, so that they can be rented or flipped. It’s from this group that I see the most “boomerang houses” – those that go back on the market within 6-8 months with half-finished fix-up projects.
I think that what some of these investor groups need to do is to put many of these properties back on the market as land contract deals. The investors could make great interest rates, if they would take the risks involved (and after all they were taking a risk on the initial investment). What they would find is a fairly large group of potential buyers, most of whom just went through a foreclosure, who now have steady incomes and manageable debt loads.
What a sweet deal, if some investor who has picked up a house for 20-30% below market value can now turn around and sell it for near market value at an above market rate interest rate. It’s sort of an investor double dip. Maybe that idea will catch on. It's probably too slow of a return for these fast movers.
Sunday, November 29, 2009
Thursday, November 26, 2009
Break out the petards again...
Get your petards out, we may be about to hoisted to the yardarms again by new FHA rules that go into affect next month. Michigan is one of several states that allows a developer to build what we call "site condos" – single family houses on individual lots, but within a complex that is classified as a condominium, because of shared areas like roads or playgrounds or just the island at the entrance to the development. So, it looks just like a regular subdivision full of regular single-family houses; but, it’s not – it’s a condo complex, at least in the eyes of the FHA.
From a recent RealtyTrac article by Peter Miller comes these highlights of the new rules.
The FHA says that starting December 7th condos must meet several new standards:
• All projects not deemed to be used primarily as residential real estate are out.
• Because of noise worries, FHA insurance will be unavailable when properties are within 1,000 feet of a highway, freeway, or heavily traveled road; 3,000 feet of a railroad; one mile of an airport; or five miles of a military airfield. The FHA says that lenders “must avoid or mitigate” such conditions before completing their loan review process, but how does one avoid or mitigate an air force base? How much mitigation is enough mitigation? The obvious result is that with an abundance of caution lenders will be unable to finance properties with potential noise hazards.
• There will be no more FHA loans if the “property has an unobstructed view, or is located within 2,000 feet, of any facility handling or storing explosive or fire-prone materials.”
• Also, FHA loans are out if the property is located within 3,000 feet of a dump, landfill, or super-fund site.
• Not more than 25 percent of the property’s total floor area can be used for commercial purposes.
• No more than 10 percent of the units may be owned by one investor. This will apply to developers/builders that subsequently rent vacant and unsold units. For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100 percent complete; and only one unit can be conveyed to non-owner occupants.
• No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
• At least 50 percent of the total units must be sold prior to endorsement of any mortgage on a unit. Valid presales include an executed sales agreement and evidence that a lender is willing to make the loan.
• At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units (the minimum presales requirement of 50 percent still applies).
• Projects in designated wetland and flood zones will not qualify for FHA insurance.
So, how will this impact us here in Michigan?
Well, unless there are exceptions made for our site condo designation or some process put in place for exceptions on a case-by-case basis, this could have a disastrous impact upon our market. Developers have been using the site condo development approach almost exclusively since the 1980’s, so most of our newer homes are actually site condos. There were sound economic reasons for developing this classification and for developers using it to build single-family homes.
However, think about the new neighborhoods that you may have visited lately. How many are near what could be classified as a “busy road” or how many are near a gas station or railroad or airport? And the wetlands rules may impact vast tracts of land in Michigan, which has extensive wetlands areas. Some of the new rules won’t have much impact in these neighborhoods, since few site-condo homes are usually rented out; however, the rule about the percentage of the complex that has been sold could prove to be a showstopper issue for stalled out or abandoned developments. Do you know anyone who bought one of those foreclosed homes in a stalled out development? They may be royally screwed by these new rules.
From a recent RealtyTrac article by Peter Miller comes these highlights of the new rules.
The FHA says that starting December 7th condos must meet several new standards:
• All projects not deemed to be used primarily as residential real estate are out.
• Because of noise worries, FHA insurance will be unavailable when properties are within 1,000 feet of a highway, freeway, or heavily traveled road; 3,000 feet of a railroad; one mile of an airport; or five miles of a military airfield. The FHA says that lenders “must avoid or mitigate” such conditions before completing their loan review process, but how does one avoid or mitigate an air force base? How much mitigation is enough mitigation? The obvious result is that with an abundance of caution lenders will be unable to finance properties with potential noise hazards.
• There will be no more FHA loans if the “property has an unobstructed view, or is located within 2,000 feet, of any facility handling or storing explosive or fire-prone materials.”
• Also, FHA loans are out if the property is located within 3,000 feet of a dump, landfill, or super-fund site.
• Not more than 25 percent of the property’s total floor area can be used for commercial purposes.
• No more than 10 percent of the units may be owned by one investor. This will apply to developers/builders that subsequently rent vacant and unsold units. For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100 percent complete; and only one unit can be conveyed to non-owner occupants.
• No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
• At least 50 percent of the total units must be sold prior to endorsement of any mortgage on a unit. Valid presales include an executed sales agreement and evidence that a lender is willing to make the loan.
• At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units (the minimum presales requirement of 50 percent still applies).
• Projects in designated wetland and flood zones will not qualify for FHA insurance.
So, how will this impact us here in Michigan?
Well, unless there are exceptions made for our site condo designation or some process put in place for exceptions on a case-by-case basis, this could have a disastrous impact upon our market. Developers have been using the site condo development approach almost exclusively since the 1980’s, so most of our newer homes are actually site condos. There were sound economic reasons for developing this classification and for developers using it to build single-family homes.
However, think about the new neighborhoods that you may have visited lately. How many are near what could be classified as a “busy road” or how many are near a gas station or railroad or airport? And the wetlands rules may impact vast tracts of land in Michigan, which has extensive wetlands areas. Some of the new rules won’t have much impact in these neighborhoods, since few site-condo homes are usually rented out; however, the rule about the percentage of the complex that has been sold could prove to be a showstopper issue for stalled out or abandoned developments. Do you know anyone who bought one of those foreclosed homes in a stalled out development? They may be royally screwed by these new rules.
Every time that FHA puts out new rules there is uncertainty about how they might be interpreted and applied to our site-condos. It may well be that they have enough experience with that issue already to have a good and workable exception policy already in place. It may be that much of our housing stock just became uninsurable with an FHA loan guarantee. We just won’t know until we get some time and some test cases under our belts. Let’s hope we don’t need to use the petards again.
Wednesday, November 25, 2009
One in Four Borrowers Are Underwater
As reported in a Realtor News article from their Source: The Wall Street Journal, Ruth Simon and James R. Hagerty (11/24/2009), more than 23 percent of people with mortgages owe more on their properties than they are worth, according to a report released Tuesday by research firm First American CoreLogic.
Another 2.3 million homeowners are within 5 percent of being underwater, bringing the total of those who are upside down or close to it to about 28 percent.
About 5.3 million U.S. households have mortgages that are at least 20 percent higher than their home's value, the First American report says. Borrowers owing more than 120 percent of their home's value are the most likely to default, First American calculates.
The majority of underwater mortgages are in the following states:
Nevada: 65 percent of homeowners are underwater
Arizona: 48 percent
Florida: 45 percent
Michigan: 37 percent
California: 35 percent
The report also notes that most U.S. homeowners have home equity, and nearly 24 million owner-occupied homes don't have any mortgage at all, according to the U.S. Census Bureau.
I can certainly add my own anecdotal take on these numbers. I do 2-3 CMA’s a week for clients who request market analyses on their homes thru a Web-based service that subscribe to. Over the last 12-18 months almost every request that I received resulted in current market price numbers that are lower than what the public records show is owed on the property. Most of these underwater homeowners bought within the last 5 years, but many are long term owners who took out home equity lines of credit for whatever reason and now find themselves upside down on the debt vs. value of their homes.
It is tough and sometimes sad to have to tell owners that they can’t get out of their homes to move for a job or retirement because it’s now worth so much less than when they bought. For many the value of their home was a big part of their retirement nest egg, an egg now gone bad. For some the home they loved is now a ball and chain preventing them from making that move South for retirement or maybe closer to family. For others it is the thing holding them back from seeking work elsewhere, where jobs may be more plentiful than in Michigan. For many sellers these last 2-3 years that has meant bringing money to the table to sell their homes, so that they could move on. For some that has meant just walking away and losing everything that they had worked so hard to get. It’s not a pretty picture.
One might think that the Federal programs, like the Making Homes Affordable program, would help; however, the lenders have not jumped on board that program and would seem to prefer foreclosure to doing loan modifications and workouts with strapped owners. So. While Wall Street and the big banks give themselves obscene bonuses, Main Street America continues to see hopes and dreams go down the foreclosure drain. It’s got to stop somewhere, sometime and it may take a severe backlash and uprising of the borrowers to spur the changes that are needed.
I’m not necessarily a fan of bigger government, but the big players on Wall Street have proven over and over that they cannot police themselves and that greed always wins over common sense. The pendulum needs to swing back from the almost totally unregulated markets of the Bush years to something that allows for innovation and entrepreneurship without encouraging excess. I’m not sure that either of the political parties that we are stuck with have the intelligence or political will to find that middle ground. We shall see.
Another 2.3 million homeowners are within 5 percent of being underwater, bringing the total of those who are upside down or close to it to about 28 percent.
About 5.3 million U.S. households have mortgages that are at least 20 percent higher than their home's value, the First American report says. Borrowers owing more than 120 percent of their home's value are the most likely to default, First American calculates.
The majority of underwater mortgages are in the following states:
Nevada: 65 percent of homeowners are underwater
Arizona: 48 percent
Florida: 45 percent
Michigan: 37 percent
California: 35 percent
The report also notes that most U.S. homeowners have home equity, and nearly 24 million owner-occupied homes don't have any mortgage at all, according to the U.S. Census Bureau.
I can certainly add my own anecdotal take on these numbers. I do 2-3 CMA’s a week for clients who request market analyses on their homes thru a Web-based service that subscribe to. Over the last 12-18 months almost every request that I received resulted in current market price numbers that are lower than what the public records show is owed on the property. Most of these underwater homeowners bought within the last 5 years, but many are long term owners who took out home equity lines of credit for whatever reason and now find themselves upside down on the debt vs. value of their homes.
It is tough and sometimes sad to have to tell owners that they can’t get out of their homes to move for a job or retirement because it’s now worth so much less than when they bought. For many the value of their home was a big part of their retirement nest egg, an egg now gone bad. For some the home they loved is now a ball and chain preventing them from making that move South for retirement or maybe closer to family. For others it is the thing holding them back from seeking work elsewhere, where jobs may be more plentiful than in Michigan. For many sellers these last 2-3 years that has meant bringing money to the table to sell their homes, so that they could move on. For some that has meant just walking away and losing everything that they had worked so hard to get. It’s not a pretty picture.
One might think that the Federal programs, like the Making Homes Affordable program, would help; however, the lenders have not jumped on board that program and would seem to prefer foreclosure to doing loan modifications and workouts with strapped owners. So. While Wall Street and the big banks give themselves obscene bonuses, Main Street America continues to see hopes and dreams go down the foreclosure drain. It’s got to stop somewhere, sometime and it may take a severe backlash and uprising of the borrowers to spur the changes that are needed.
I’m not necessarily a fan of bigger government, but the big players on Wall Street have proven over and over that they cannot police themselves and that greed always wins over common sense. The pendulum needs to swing back from the almost totally unregulated markets of the Bush years to something that allows for innovation and entrepreneurship without encouraging excess. I’m not sure that either of the political parties that we are stuck with have the intelligence or political will to find that middle ground. We shall see.
Monday, November 23, 2009
Nothing is impossible...
“Nothing is impossible. Some things are just less likely than others.” (Jonathan Winters), from the Jack’s Winning Words Blog. Like Jack, I always enjoyed Jonathon Winters’ humor and remember his TV show. He made up some great characters to use in his comedy routines.
This week I’m trying to get two deals to the closing table. Neither is impossible, but one is more likely than the other. The one that is likely is one where we ran into a medical emergence that postponed a closing last week. Now we’re dealing with overnighting documents back and forth and other issues that, while inconvenient, are certainly not impossible. The other was delayed at the last minute due to lender concerns with the appraisal and the hideous process that has taken hold since HVCC was enacted.
The HVCC law, which had the good intention of removing undue lender pressures from appraisers has resulted in a convoluted and not well understood process of dealing through appraisal management companies to insure an arms-length distance between the lenders and the appraisers. That has added cost and time to the process, as well as having the unintended result of some out-of-area appraisers being assigned to do the work and not having local market knowledge.
In my case the appraiser apparently turned in an appraisal that the lender’s underwriter isn’t happy with; so, the underwriter has ordered the appraiser to submit more or different “comps” to justify the appraisal (whatever it turned out to be). Normally that wouldn’t be a problem, but in this case the original appraisal order took over two weeks to get done and the results took another week to get back to the lender and now they are ordering more work that will add a week or two more. We were supposed to close last week. The HVCC law was good in its intentions, but the bureaucracy that is had created is a nightmare. So it appears less likely that we’ll actually close that deal this week...but not impossible.
This week I’m trying to get two deals to the closing table. Neither is impossible, but one is more likely than the other. The one that is likely is one where we ran into a medical emergence that postponed a closing last week. Now we’re dealing with overnighting documents back and forth and other issues that, while inconvenient, are certainly not impossible. The other was delayed at the last minute due to lender concerns with the appraisal and the hideous process that has taken hold since HVCC was enacted.
The HVCC law, which had the good intention of removing undue lender pressures from appraisers has resulted in a convoluted and not well understood process of dealing through appraisal management companies to insure an arms-length distance between the lenders and the appraisers. That has added cost and time to the process, as well as having the unintended result of some out-of-area appraisers being assigned to do the work and not having local market knowledge.
In my case the appraiser apparently turned in an appraisal that the lender’s underwriter isn’t happy with; so, the underwriter has ordered the appraiser to submit more or different “comps” to justify the appraisal (whatever it turned out to be). Normally that wouldn’t be a problem, but in this case the original appraisal order took over two weeks to get done and the results took another week to get back to the lender and now they are ordering more work that will add a week or two more. We were supposed to close last week. The HVCC law was good in its intentions, but the bureaucracy that is had created is a nightmare. So it appears less likely that we’ll actually close that deal this week...but not impossible.
Friday, November 20, 2009
Housing most affordable in decades...
Here's some "mixed blessing news" from a recent CNN Money story. The typical U.S. family earning the nation’s median income of $64,000 a year could afford to buy 70.1 percent of all homes sold in the United States during the third quarter, according to a report from the National Association of Home Builders and Wells Fargo. The report relied on the government standard of spending no more than 28 percent on housing. In the same quarter of 2008, only 56.1 percent qualified.
The five most affordable areas are:
Indianapolis
Youngstown, Ohio
Detroit
Warren, Mich.
Grand Rapids, Mich.
The five least-affordable areas are:
New York City
San Francisco
Honolulu
Santa Ana, Calif.
Nassau and Suffolk, Long Island, N.Y.
That's great news...if you have a job, which some estimates for Michigan say would leave out about 20% of the population of Michigan. Interestingly enough, our estimated median income is higher than the national average at $72,591. (as estimated by Low-Income Home Energy Assistance Program (LIHEAP) Clearinghouse on September 24, 2009).
In another CNN Money article from April of this year they reported the county-by-county median incomes. Of course, Oakland County ranked high at $81,650, with Livingston County and Macomb Counties coming in at $103,385 (big surprise there) and $81,650 respectively. Wayne County clocked in at $63,020 and Washtenaw County felt the drag of Ypsilanti at only $60,605.
If one looks at the 28% of gross income for housing rule, you can see that people in Oakland County could afford homes with payments of about $1,900 per month, which would equate to a mortgage about $380,000. Believe me that would buy most of the nice homes on the market these days.
So home buyers have a very nice choice to make – either buy that bigger house now that you had on your wish list for the future or buy what you need now and sock the money away that you will save because of the lower prices and current low interest rates. Most financial advisers would likely recommend the latter course of action as a great way to save for the kid’s college or other future needs.
The other good thing that saving the extra money would do for you is to give you a cushion of savings to fall back on, should something happen to your job. Too many recent foreclosures happened because the owners were living right on the edge, pay check to pay check, with no leeway for any variation in income. Any little loss of overtime or job hours or any health related issue that kept them out of work for a while, put them over the edge. That’s why we are now seeing a wave of defaults in the Prime Mortgage space that is replacing the Sub-Prime as the biggest source of new foreclosures.
The five most affordable areas are:
Indianapolis
Youngstown, Ohio
Detroit
Warren, Mich.
Grand Rapids, Mich.
The five least-affordable areas are:
New York City
San Francisco
Honolulu
Santa Ana, Calif.
Nassau and Suffolk, Long Island, N.Y.
That's great news...if you have a job, which some estimates for Michigan say would leave out about 20% of the population of Michigan. Interestingly enough, our estimated median income is higher than the national average at $72,591. (as estimated by Low-Income Home Energy Assistance Program (LIHEAP) Clearinghouse on September 24, 2009).
In another CNN Money article from April of this year they reported the county-by-county median incomes. Of course, Oakland County ranked high at $81,650, with Livingston County and Macomb Counties coming in at $103,385 (big surprise there) and $81,650 respectively. Wayne County clocked in at $63,020 and Washtenaw County felt the drag of Ypsilanti at only $60,605.
If one looks at the 28% of gross income for housing rule, you can see that people in Oakland County could afford homes with payments of about $1,900 per month, which would equate to a mortgage about $380,000. Believe me that would buy most of the nice homes on the market these days.
So home buyers have a very nice choice to make – either buy that bigger house now that you had on your wish list for the future or buy what you need now and sock the money away that you will save because of the lower prices and current low interest rates. Most financial advisers would likely recommend the latter course of action as a great way to save for the kid’s college or other future needs.
The other good thing that saving the extra money would do for you is to give you a cushion of savings to fall back on, should something happen to your job. Too many recent foreclosures happened because the owners were living right on the edge, pay check to pay check, with no leeway for any variation in income. Any little loss of overtime or job hours or any health related issue that kept them out of work for a while, put them over the edge. That’s why we are now seeing a wave of defaults in the Prime Mortgage space that is replacing the Sub-Prime as the biggest source of new foreclosures.
Of course, how people spend their own money is up to them. Let’s just hope that most have learned something fro the crisis that we are still in and will make lifestyle changes to adjust to the “new reality”. Maybe they could make a reality TV show about that. Naw…it’s too boring watching people do intelligent things.
Wednesday, November 18, 2009
Fire Sprinklers Set to Become Standard in New Homes
Members of the International Code Council's Residential Building Code Committee (RBCC) have made it clear that fire sprinklers are destined to become a standard feature in all new homes. The fire sprinkler requirement was added to the International Residential Code (IRC) last year, and it is scheduled to become effective January 1, 2011, in states that adopt the latest version of this code. Currently, 48 states use the IRC as a basis of regulating residential construction, although some states lag behind in adopting updates. I checked and Michigan is one of the states that might be called “lagging behind”, since it currently has implemented only through the 2006 set of IRC standards. It is inevitable that the state will eventually catch up on this.
The National Association of Home Builders (NAHB) had petitioned the International Code Council (ICC), which publishes the IRC, to repeal the fire sprinkler requirement, but the RBCC rejected that request by a vote of 7 to 4. Following the committee vote, NAHB attempted to use a new procedure in the ICC process that allows members assembled at the hearing to overrule the committee decision, but the members made it clear that they were standing firm on protecting American families from fire. More than 1,000 ICC members in attendance voted overwhelmingly to affirm the RBCC's decision.
"ICC's message on this matter is pretty clear," said Jeffrey Shapiro, P.E., executive director of the IRC Fire Sprinkler Coalition. "Their membership has now supported the home fire sprinkler requirement at both the 2008 and 2009 annual hearings, and each of those votes passed by more than a two-thirds margin." Those decisions have now been further affirmed by the RBCC, which is a balanced, consensus committee that includes home builders, building and fire safety officials, architects and engineers.
So it looks fairly inevitable that new homes will eventually have to have sprinkler systems built in to them. That will undoubtedly save some live and most assuredly increase building costs. Some small amount of the cost increase may be off set by slightly lower insurance rates, but the insurance industry will likely argue that they must increase the water damage rate for the house by an equal amount, since the sprinklers going off will cause quite a bit of water damage. Then again, having the sprinkler systems in isn’t meant to save possessions; they are there to save people and that’s a good thing.
The National Association of Home Builders (NAHB) had petitioned the International Code Council (ICC), which publishes the IRC, to repeal the fire sprinkler requirement, but the RBCC rejected that request by a vote of 7 to 4. Following the committee vote, NAHB attempted to use a new procedure in the ICC process that allows members assembled at the hearing to overrule the committee decision, but the members made it clear that they were standing firm on protecting American families from fire. More than 1,000 ICC members in attendance voted overwhelmingly to affirm the RBCC's decision.
"ICC's message on this matter is pretty clear," said Jeffrey Shapiro, P.E., executive director of the IRC Fire Sprinkler Coalition. "Their membership has now supported the home fire sprinkler requirement at both the 2008 and 2009 annual hearings, and each of those votes passed by more than a two-thirds margin." Those decisions have now been further affirmed by the RBCC, which is a balanced, consensus committee that includes home builders, building and fire safety officials, architects and engineers.
So it looks fairly inevitable that new homes will eventually have to have sprinkler systems built in to them. That will undoubtedly save some live and most assuredly increase building costs. Some small amount of the cost increase may be off set by slightly lower insurance rates, but the insurance industry will likely argue that they must increase the water damage rate for the house by an equal amount, since the sprinklers going off will cause quite a bit of water damage. Then again, having the sprinkler systems in isn’t meant to save possessions; they are there to save people and that’s a good thing.
One site that I went to had a statistic that said that 90% of all residential fires could be contained by the operation of a single sprinkler. When you think about it, that's probably true, since most fires in homes start in a single room and then spread. If that original room fire was doused in that room, it certainly would save both the house and the lives of whoever was in the house at the time. As much as I occasionally rail about laws and rules designed to save us from ourselves (many are really stupid) this one seems to have merit. To read more about these systems, here's a site to visit.
Saturday, November 14, 2009
The second wave is a whopper...
Last week's Business Week has a big, front page story about the impending wave of commercial real estate foreclosures that certainly is scary. The article talks about how many really big companies and really big, important properties are in really big trouble and how many will end up falling into foreclosure or bankruptcy in 2010. Great, just what we need, another tsunami of foreclosures and bankruptcies to help the economy along. The issues in that space are as complex and muddled as they were in the residential space, perhaps more so.
I can see this happening even in my little village, where "office space available" signs are all over and store fronts sit empty after businesses have failed. Driving around the area there are tons of commercial buildings sitting empty and starting to deteriorate. We have an especially large supply of old manufacturing sites that have been abandoned in Michigan, most from the automotive companies, but quite a few from other companies that have shipped manufacturing operations to China or elsewhere.
This is a problem that the Federal government might have trouble helping with. I can't imagine a "first-time manufacturer" program to subsidize factory purchases; although there are state tax breaks available to those willing to locate their manufacturing in Michigan. Many of the empty manufacturing plants have major environmental issues that future owners might have to deal with, too. That can be a deal breaker for a start up company that is just looking for a place to set up a plant. There is also a glut of both retail and office space available, which is a holdover from the giddy days of the building bubble in the late 1990's and early 2000's. The days of a strip mall on every corner are over, but now what are we to do with all of that empty space?
Hopefully we can get through this next wave of real estate foreclosures without swamping the economy again. There doesn't seem to be the stomach for many publicly funded bailouts in this space, at least not yet. We'll have to see if there are some commercial owners who are "too big to let fail." I can just see the outcry if we all end up bailing out The Donald or some other high profile commercial landlord.
Thursday, November 12, 2009
Transfer tax exemption...
From our Capital Title sister company comes this short piece about a possible tax break for sellers in Michigan.
With lower property values due to our struggling economy, many homeowners have been able to take advantage of an exemption contained in the Michigan Transfer Tax Act. If a seller meets the criteria, they would be exempt from paying the state transfer tax. Following are the criteria:
- The property must have been occupied as a principle residence – classified as homestead property.
- The property’s SEV for the calendar year in which the transfer is made must be less than or equal to the property’s SEV for the calendar year in which the seller acquired the
property.
- The property cannot be transferred for consideration exceeding its “true cash value” for the year of the transfer.
For example:If the SEV of the homestead principle residence when acquired in 2005 is $100,000 and the current SEV on the property is $90,000, then the first two criteria have been met.
To establish the “true cash value” of the property, you must double the current SEV at the time of transfer. In this scenario, the true cash value would be $180,000. If the property sold for $170,000, then the 3rd criteria has been met of Exemption “u” as designated by the Michigan Transfer Tax Act.
Sellers who believe they may be eligible have up to 4 years from the transfer date to file for the exemption. It is also important to note that there are no similar exemptions in the County Real Estate Transfer Tax Act. The state transfer tax is the larger of the two taxes that are charged on a sale, equal to $7.50 for each $1,000 of the sale value; so, this can be a significant potential savings.
If you were a seller earlier in the year and didn't know about this exemption, you can still file a claim for it and get a refund of the transfer taxes that you paid on the sale, assuming that your sale meets all three criteria discussed above.
It is up to you as the seller to find out what the SEV was at the time that you bought the property, which you can do by calling the County Treasurer's office and having them look that up for you. They can also tell you what the SEV was this year at the time that you should, but you should already know that from this year's tax assessment notice.
You will be required to fill out an affidavit swearing that the information is correct when you file for the exemption; so, don’t try to “game the system” on this, because the penalty is fairly severe. The law reads - “If after an exemption is claimed under this subsection, the sale or transfer of property is found by the treasurer to be at a value other than the true cash value, then a penalty equal to 20% of the tax shall be assessed in addition to the tax due under this act to the seller or transferor."
Every little bit helps these days; so, put in your claim, if you sold or are selling and your sale meets the criteria. For a worksheet that you can fill out to to see if your sale qualifies, click here.
With lower property values due to our struggling economy, many homeowners have been able to take advantage of an exemption contained in the Michigan Transfer Tax Act. If a seller meets the criteria, they would be exempt from paying the state transfer tax. Following are the criteria:
- The property must have been occupied as a principle residence – classified as homestead property.
- The property’s SEV for the calendar year in which the transfer is made must be less than or equal to the property’s SEV for the calendar year in which the seller acquired the
property.
- The property cannot be transferred for consideration exceeding its “true cash value” for the year of the transfer.
For example:If the SEV of the homestead principle residence when acquired in 2005 is $100,000 and the current SEV on the property is $90,000, then the first two criteria have been met.
To establish the “true cash value” of the property, you must double the current SEV at the time of transfer. In this scenario, the true cash value would be $180,000. If the property sold for $170,000, then the 3rd criteria has been met of Exemption “u” as designated by the Michigan Transfer Tax Act.
Sellers who believe they may be eligible have up to 4 years from the transfer date to file for the exemption. It is also important to note that there are no similar exemptions in the County Real Estate Transfer Tax Act. The state transfer tax is the larger of the two taxes that are charged on a sale, equal to $7.50 for each $1,000 of the sale value; so, this can be a significant potential savings.
If you were a seller earlier in the year and didn't know about this exemption, you can still file a claim for it and get a refund of the transfer taxes that you paid on the sale, assuming that your sale meets all three criteria discussed above.
It is up to you as the seller to find out what the SEV was at the time that you bought the property, which you can do by calling the County Treasurer's office and having them look that up for you. They can also tell you what the SEV was this year at the time that you should, but you should already know that from this year's tax assessment notice.
You will be required to fill out an affidavit swearing that the information is correct when you file for the exemption; so, don’t try to “game the system” on this, because the penalty is fairly severe. The law reads - “If after an exemption is claimed under this subsection, the sale or transfer of property is found by the treasurer to be at a value other than the true cash value, then a penalty equal to 20% of the tax shall be assessed in addition to the tax due under this act to the seller or transferor."
Every little bit helps these days; so, put in your claim, if you sold or are selling and your sale meets the criteria. For a worksheet that you can fill out to to see if your sale qualifies, click here.
Wednesday, November 11, 2009
Veterans Day thoughts...
“Grandpa, were you a hero in the war?” Grandpa replied, “No, but I served in a company of heroes.” (Richard Winters) from the Jack’s Wining Words Blog on Veterans Day. I don’t often think about my time in the service (Army) or the year that I spent in Viet Nam. That was a long time ago and I have moved on with life; however, Veterans Day always has lots of stories in the news about vets from various eras and wars, so that experience gets pushed to the front of mind once a year.
I have often told people that there is more truth to the old TV series M.A.S.H. than most realize. Even in Viet Nam, while the war raged in the “the bush”; there were quite a few fairly humorous things going on back on the bases. I served with an Army construction Group at the Battalion and Group levels in posts like Quang Tri, Phu Bi and DaNang (likely all three spelled wrong). Our guys would go out every morning to rebuild roads and bridges and the Viet Cong would come out every night to blow them up. It was perhaps a small metaphor for the frustration of the entire war there.
I recall that, once my outfit got to DaNang, it was almost as if the war was somewhere else. The Base at DaNang was so large, with a huge perimeter that stretched 50-60 miles around the bay of DaNang, that life inside it on the base seemed almost normal. The beaches there are some of the most beautiful anywhere in the world, albeit, punctuated at the time by barbed wire barriers at both ends. We spent many Sunday afternoons on the beach, almost as if the war stopped for the day.
I certainly don’t want to make the entire experience sound too idyllic. I wasn’t directly involved in any firefights; but the first couple of bases that I was on would regularly come under mortar and rocket attack, so there were some dicey moments and I found that the old saying “there are no atheists in the foxholes” was true. There is something about listening to mortars walk their way towards your bunker that can add clarity to your relationship with God.
I go every year and march in the Memorial Day parade in our little town. Hundreds of people line the streets of Milford to applaud the passing soldiers and vets. It is an event that helps put some perspective on why we serve and whom we serve. It’s easy to lose sight of that in the midst of a war zone. Hopefully, if you see an active duty soldier on days other than Memorial Day or Veterans Day you will take the time to say thank you for serving. It will make you and them feel better. So, thank you veterans and thank you to those serving in Afghanistan and Iraq and countless other foreign places in defense of our liberty.
I have often told people that there is more truth to the old TV series M.A.S.H. than most realize. Even in Viet Nam, while the war raged in the “the bush”; there were quite a few fairly humorous things going on back on the bases. I served with an Army construction Group at the Battalion and Group levels in posts like Quang Tri, Phu Bi and DaNang (likely all three spelled wrong). Our guys would go out every morning to rebuild roads and bridges and the Viet Cong would come out every night to blow them up. It was perhaps a small metaphor for the frustration of the entire war there.
I recall that, once my outfit got to DaNang, it was almost as if the war was somewhere else. The Base at DaNang was so large, with a huge perimeter that stretched 50-60 miles around the bay of DaNang, that life inside it on the base seemed almost normal. The beaches there are some of the most beautiful anywhere in the world, albeit, punctuated at the time by barbed wire barriers at both ends. We spent many Sunday afternoons on the beach, almost as if the war stopped for the day.
I certainly don’t want to make the entire experience sound too idyllic. I wasn’t directly involved in any firefights; but the first couple of bases that I was on would regularly come under mortar and rocket attack, so there were some dicey moments and I found that the old saying “there are no atheists in the foxholes” was true. There is something about listening to mortars walk their way towards your bunker that can add clarity to your relationship with God.
I go every year and march in the Memorial Day parade in our little town. Hundreds of people line the streets of Milford to applaud the passing soldiers and vets. It is an event that helps put some perspective on why we serve and whom we serve. It’s easy to lose sight of that in the midst of a war zone. Hopefully, if you see an active duty soldier on days other than Memorial Day or Veterans Day you will take the time to say thank you for serving. It will make you and them feel better. So, thank you veterans and thank you to those serving in Afghanistan and Iraq and countless other foreign places in defense of our liberty.
Tuesday, November 10, 2009
From the land of Droids...
OK, I've had my Motorola Droid since last Friday, so I've had a bit of time to play with it and add apps and see what it will do, at least for me. I'm not into music, so I haven't tried anything in that realm except to set up a Pandora radio station, which works fine. I was more interested in finding out how closely I could tie it into the rest of my home office compute environment - what things that I can do or share between my desktop (now mostly used as a file and print server) and my laptop over my WIFI net.
Let me preface the remainder of this post by admitting that I'm little more than a power user of PC's. I'm not a techie, although I'd admit to be a wanta-be sometimes. I've been around PCs since they were invented and worked for Digital Equipment Corp in sales when they were invented (that may give you a clue that I'm also and old dude). I'm not afraid to install hardware or software into PC's but I haven't a clue how to write software. I do create and maintain several Web sites, but that is just knowing how to use a good Website development tool. I'm basically a user, who knows just enough to get into deep doo-doo every now and then, but who isn't afraid to try things.
The good news for me is that I can share almost everything that I need to access. I have installed the Estongs File Manager and the DocsToGo Apps and set up my WIFI network to allow access to my laptop and desktop files. This all works great. I can "see" my word and excel and PowerPoint and pdf files from the phone and can copy them and paste them into the phones file space. Once they are there, I can open and manipulate them as needed with DocsToGo and then send them as attachments via email. I have all of my email accounts routed through one account that also forwards to the phone, which means that I can do useful email work while on the road. As a Realtor, I can also get to my local MLS database and "see" any listed property and even schedule a showing on-line with some of them. This is all good stuff to me.
My next challenge will be figuring out how to print a file from the phone, either over Bluetooth or over the WIFI net. I have yet to find any printer drivers to install or haven't really even figured out what I need to do that. I'm relatively certain that my company is not going to allow us to attached to the office WIFI Network from these phones and I guess I can't blame them, since there are security issues and potential virus issues that the corporate IT types need to worry about.
There were certainly lots of moments of frustration in the first couple of days as I figured out how to navigate to the functions that I was trying to use or how to order and install stuff or other "learning curve" issues; however, overall I must say that I'm quite impressed with what one can do with this little wonder Droid. There are already lots of things that I hope there will be apps written to accomplish with this tool. The possibilities with this much power in the palm of your hand are enormous.
Let me preface the remainder of this post by admitting that I'm little more than a power user of PC's. I'm not a techie, although I'd admit to be a wanta-be sometimes. I've been around PCs since they were invented and worked for Digital Equipment Corp in sales when they were invented (that may give you a clue that I'm also and old dude). I'm not afraid to install hardware or software into PC's but I haven't a clue how to write software. I do create and maintain several Web sites, but that is just knowing how to use a good Website development tool. I'm basically a user, who knows just enough to get into deep doo-doo every now and then, but who isn't afraid to try things.
The good news for me is that I can share almost everything that I need to access. I have installed the Estongs File Manager and the DocsToGo Apps and set up my WIFI network to allow access to my laptop and desktop files. This all works great. I can "see" my word and excel and PowerPoint and pdf files from the phone and can copy them and paste them into the phones file space. Once they are there, I can open and manipulate them as needed with DocsToGo and then send them as attachments via email. I have all of my email accounts routed through one account that also forwards to the phone, which means that I can do useful email work while on the road. As a Realtor, I can also get to my local MLS database and "see" any listed property and even schedule a showing on-line with some of them. This is all good stuff to me.
My next challenge will be figuring out how to print a file from the phone, either over Bluetooth or over the WIFI net. I have yet to find any printer drivers to install or haven't really even figured out what I need to do that. I'm relatively certain that my company is not going to allow us to attached to the office WIFI Network from these phones and I guess I can't blame them, since there are security issues and potential virus issues that the corporate IT types need to worry about.
There were certainly lots of moments of frustration in the first couple of days as I figured out how to navigate to the functions that I was trying to use or how to order and install stuff or other "learning curve" issues; however, overall I must say that I'm quite impressed with what one can do with this little wonder Droid. There are already lots of things that I hope there will be apps written to accomplish with this tool. The possibilities with this much power in the palm of your hand are enormous.
Monday, November 9, 2009
Come on along for the ride…
Congress passed and the President signed the law extending the first-time tax credit until next June 30th. They also threw in a $6,500 carrot for people who were not eligible for the original credit – current homeowners. The new $6,500 federal tax credit for so-called "move up" buyers took effect immediately upon enactment. That means that potentially hundreds of thousands of Americans who fit the key ownership and income criteria for the new credit are eligible for it … right now.
What are those tests?
Number one: You have to have owned and used your current home as your principal residence for five consecutive years out the past eight;
Number two: Your adjusted household annual income cannot exceed $125,000 if you file taxes as a single, or $225,000 if you are married filing jointly.
To qualify, you've got to sign a contract to purchase a replacement residence before next April 30, and go to closing on it by June 30, 2010.
In addition to the traditional move up buyers, this is great news for the thousands of baby boomers who were hoping to downsize in retirement. This tax credit may help take some of the sting out of the loss that many will have to take on their current homes.
This is also good news for the real estate industry. While first-time buyers have fueled a huge surge in the market, most of the homes that they are buying are starter homes or foreclosed and short sale properties at the lower end of the market. This new incentive may help fence sitters in the middle of the market take action to buy that next house. Many will have to sell their current home; so, that will add to the inventory at the lower end, giving the first-time buyers more choices.
This new incentive is likely to have the most impact in the middle of the country, where homes are more reasonably priced and incomes a bit lower, than on the coasts. That’s good news, since Middle America can use a break about now. The fact that it may help the battered baby boomer generation is good news too, although they still have to get out from under their McMansions in order to use the tax break.
For a FAQ from the National Association of Realtors on the new tax law, click here.
What are those tests?
Number one: You have to have owned and used your current home as your principal residence for five consecutive years out the past eight;
Number two: Your adjusted household annual income cannot exceed $125,000 if you file taxes as a single, or $225,000 if you are married filing jointly.
To qualify, you've got to sign a contract to purchase a replacement residence before next April 30, and go to closing on it by June 30, 2010.
In addition to the traditional move up buyers, this is great news for the thousands of baby boomers who were hoping to downsize in retirement. This tax credit may help take some of the sting out of the loss that many will have to take on their current homes.
This is also good news for the real estate industry. While first-time buyers have fueled a huge surge in the market, most of the homes that they are buying are starter homes or foreclosed and short sale properties at the lower end of the market. This new incentive may help fence sitters in the middle of the market take action to buy that next house. Many will have to sell their current home; so, that will add to the inventory at the lower end, giving the first-time buyers more choices.
This new incentive is likely to have the most impact in the middle of the country, where homes are more reasonably priced and incomes a bit lower, than on the coasts. That’s good news, since Middle America can use a break about now. The fact that it may help the battered baby boomer generation is good news too, although they still have to get out from under their McMansions in order to use the tax break.
For a FAQ from the National Association of Realtors on the new tax law, click here.
Saturday, November 7, 2009
Just do it...
“I don’t think anything is unrealistic if you can do it.” (Mike Ditka). Yogi might have put it slightly differently, maybe “Don’t say it can’t be done, if you can do it – just do it.” Things that are sometimes labeled as unrealistic, such as personal goals in athletics or maybe business goals, are usually just stretches that one may not have bought into yet or may not believe are achievable. Many times the difficulties imagined in reaching an “unrealistic” goal are just that – imagined. Some people have an uncanny knack for throwing up imagined obstacles as a way to avoid even trying – they are usually labeled as pessimists. Some have just the opposite bent, imagining and attempting things well beyond their apparent skills or capabilities or perhaps in the face of great odds– these are the optimists of the world.
So, who is happier in the end, the pessimist who never tries because he/she believes that they can’t accomplish some goal, or the optimist who may try and try and try again to reach a goal that remains just out of reach? There are a number of classic sayings that would lead one to believe that it is better to have tried and filed than never to have tried at all. The optimist even finds some comfort in the learning from his/her failures and continues to make adjustments to the approach or technique that they are using to achieve the goal. The pessimist might adjust the goal down to be in line with his/her performance or abandon the goal altogether.
So, who is happier in the end, the pessimist who never tries because he/she believes that they can’t accomplish some goal, or the optimist who may try and try and try again to reach a goal that remains just out of reach? There are a number of classic sayings that would lead one to believe that it is better to have tried and filed than never to have tried at all. The optimist even finds some comfort in the learning from his/her failures and continues to make adjustments to the approach or technique that they are using to achieve the goal. The pessimist might adjust the goal down to be in line with his/her performance or abandon the goal altogether.
So how are you dealing with the struggles that most are going through to achieve success in the current real estate market? Have you learned and adapted and kept on trying, or have you given up and decided to sit out the recession and wait until the market comes back to you? Look around you and you will see both types of agents in most companies. Whom do you wish to emulate? Who seems happier to you? We can’t all be unbridled optimists, but perhaps we can learn from them and try to emulate some of their traits and practices. Who knows, maybe some of that enthusiasm will rub off on you; and then you’ll become a role model for some other struggling agent.
Friday, November 6, 2009
Is there no middle ground left anymore?
As I read things in various places – newspapers, blogs, magazine articles and elsewhere – it appears more and more like there is no middle ground left anymore on most issues. Polarization in our political system is so pervasive and so complete that every issue becomes black and white, them or us, left or right, red or blue. The other day I read something in what is supposed to be a real estate oriented blog that started out discussing the housing crisis, but which quickly devolved into accusations that everything that the Democrats in Washington are doing right now is leading the country into Socialism. In fact the discussion concluded that there can apparently only be two states for the country to be in – Capitalism or Socialism. How completely ridiculous is that?
I am old enough to recall when we had an extreme right wing in the Republican Party (Barry Goldwater comes to mind) and an extreme left wing in the Democratic Party (remember George McGovern and Hubert Humphery?) and a whole bunch of politicians somewhere in the middle who actually got things done. Those days seem long gone, as the two parties have coalesced around the two extremes. Now both parties seem to have litmus tests for party members and whoa to those who don’t toe the party line. The number of liberal Republicans and conservative Democrats around these days is so small that they have been marginalized; unless, of course, the party is control wants to tout “bi-partisan” support for something.
Now we hear the screams of the right and left wing nuts on every issue. It used to be that only very weighty issues like abortion rights would bring out the protestors screaming that the other side is leading the country into hell. Now everything is a threat to our very way of life in America and it’s all the fault of the other side – the side in control at the moment. There is no ability for compromise at the national political level, because the radicals from both sides are in control of the parties and the politicians. As soon as President Obama won the election the signs of “Stop Socialism” popped up on lawns. They replaced the “Stop Fascism” signs that had been there when Bush was in office.
Perhaps it’s time for the rise of a reasonable and reasoning third party in America. Ross Perot, who had his own problems and eventually self-destructed, mounted the last valid challenge to our dysfunctional two-party system. It would likely take someone like Perot, with the personal fortune to mount a national campaign, to lead a successful effort at creating a new political middle ground. I suspect that there is a very large untapped group of very dissatisfied Americans who are tired of all of the polarization and stagnation in our current political system who would flock to this middle ground. I could be wrong, but they’d get a good long look from me.
I am old enough to recall when we had an extreme right wing in the Republican Party (Barry Goldwater comes to mind) and an extreme left wing in the Democratic Party (remember George McGovern and Hubert Humphery?) and a whole bunch of politicians somewhere in the middle who actually got things done. Those days seem long gone, as the two parties have coalesced around the two extremes. Now both parties seem to have litmus tests for party members and whoa to those who don’t toe the party line. The number of liberal Republicans and conservative Democrats around these days is so small that they have been marginalized; unless, of course, the party is control wants to tout “bi-partisan” support for something.
Now we hear the screams of the right and left wing nuts on every issue. It used to be that only very weighty issues like abortion rights would bring out the protestors screaming that the other side is leading the country into hell. Now everything is a threat to our very way of life in America and it’s all the fault of the other side – the side in control at the moment. There is no ability for compromise at the national political level, because the radicals from both sides are in control of the parties and the politicians. As soon as President Obama won the election the signs of “Stop Socialism” popped up on lawns. They replaced the “Stop Fascism” signs that had been there when Bush was in office.
Perhaps it’s time for the rise of a reasonable and reasoning third party in America. Ross Perot, who had his own problems and eventually self-destructed, mounted the last valid challenge to our dysfunctional two-party system. It would likely take someone like Perot, with the personal fortune to mount a national campaign, to lead a successful effort at creating a new political middle ground. I suspect that there is a very large untapped group of very dissatisfied Americans who are tired of all of the polarization and stagnation in our current political system who would flock to this middle ground. I could be wrong, but they’d get a good long look from me.
Wednesday, November 4, 2009
Seeing the real stars of real estate?
The little saying from Jack’s Winning Words Blog for today is, “When it’s dark enough, you can see the stars.” (Charles A. Beard). I had an initial reaction to that saying and then thought about it a bit more and came to a second conclusion.
The first reaction is the most obvious – to find something positive in any situation, like seeing a rainbow on a rainy day. The second was more real estate oriented and has to do with seeing who the real “stars” are in these dark days for Realtors. The gloom and doom that descended over the market a couple of years back has had the impact of clearing out lots and lots of would-be or pretend Realtors – those who jumped in thinking that it is an easy way to make a living or some extra bucks. Not so!
This real estate crisis has also brought down to earth many of the high-flying super teams and super agents, although the best of them have adapted and flourished through this mess. It has also created new “stars” of sorts – those agents and teams that jumped on the REO bandwagon and now represent most of the foreclosed homes in any area. Many of those likely will prove to be shooting starts, ready to burn out as son as the crisis is over.
Also created in this mess are what I would call black holes (to continue and already strained metaphor) – those sleazy real estate operators on the fringes who specialize in short sales and foreclosures, but not always to the best interests of the sellers involved. To be sure, these people always existed; it’s just that the current environment encouraged them to become more visible and bold.
The first reaction is the most obvious – to find something positive in any situation, like seeing a rainbow on a rainy day. The second was more real estate oriented and has to do with seeing who the real “stars” are in these dark days for Realtors. The gloom and doom that descended over the market a couple of years back has had the impact of clearing out lots and lots of would-be or pretend Realtors – those who jumped in thinking that it is an easy way to make a living or some extra bucks. Not so!
This real estate crisis has also brought down to earth many of the high-flying super teams and super agents, although the best of them have adapted and flourished through this mess. It has also created new “stars” of sorts – those agents and teams that jumped on the REO bandwagon and now represent most of the foreclosed homes in any area. Many of those likely will prove to be shooting starts, ready to burn out as son as the crisis is over.
Also created in this mess are what I would call black holes (to continue and already strained metaphor) – those sleazy real estate operators on the fringes who specialize in short sales and foreclosures, but not always to the best interests of the sellers involved. To be sure, these people always existed; it’s just that the current environment encouraged them to become more visible and bold.
But amidst all of the darkness there are also real stars in the business – agents who are out there day after day honestly trying to provide counsel and help for distressed homeowners and helping buyers find just the right new home out of an overwhelming inventory. These agents aren’t necessarily blazing across the sky; they just get out there every day working hard in trying times and keeping the Realtor torch lit in the darkness. It’s not easy to be a Realtor these days and certainly not easy to make a decent living doing it. The easy thing to do would be to go find a “real job” doing something else; however, the thousands of stars of real estate have found a way to persevere through the current hardships and carry on. I salute you – the stars that brighten the gloomy darkness.
Tuesday, November 3, 2009
Just walk away Renee and leave your home behind you…
That isn’t how the song went in 1966 when The Left Banke recorded it, but it’s the advice that a University of Arizona professor is giving in a recently published paper. The professor, Brent T. White, an associate professor of law at the University of Arizona, makes the case that our social mores, more so that any logic, forces people to struggle too long against the odds of their mortgage being severely under water.
In a move that White euphemistically labels a “strategic default”, he argues that the playing field is too far tilted towards the lenders and that too few borrowers understand that defaulting is not the end of the world that they have been told. Certainly there is damage to ones credit from a default; but, White argues that borrowers have not been told the whole story about how to rebuild their credit and how fast that can occur.
White argues that borrowers are too focused upon the shame or stigma of a default to think clearly about it as the strategic thing to do, when they are severely under water. The fact is that it actually causes more damage to the owner to “hang tough” trying to find a way to salvage an impossible situation. Too often these people burn through their savings and maybe their retirement savings trying to keep up with rising payments from ARMs that have reset or to keep up a lifestyle, even after things at work have changed and income has dropped dramatically. White would argue that the pride involved in not admitting defeat and waling away may cause more damage than just giving up the house.
I must admit that I have become very disillusioned about short sales as a solution to the problem. In my estimation, short sales do no one but the Realtors involved any good. The seller ends up with a blemish on his/her credit record that is almost indistinguishable from a foreclosure and the bank ends up taking less for the house. Only the Realtors involved get anything positive out of the deal – their commissions. That is why I have shut down my short sale Web site. I just couldn’t in good conscience continue to recommend this path to sellers who are under water on their homes.
So maybe a “strategic default” is the best way out of these bad situations. A deed-in-lieu offer to your lender at least puts you in the position of having suggested pro-actively the way out for both of you. It saves the bank having to go through the Sheriff’s sale and saves the homeowner having to see his/her name show up in the local papers in the foreclosure ads. It’s still no better than a foreclosure from a credit standpoint, but it can make the owner feel more empowered and more in charge of the situation. White also makes a strong case that there are actually financial benefits to be gained from walking away vs. staying in a bad mortgage situation.
The article by White is one of those scholarly tomes, with footnotes that about equal the length of the article itself. Here’s the bottom line – if you bought a house in the 2004-2007 time frame, you likely bought at the peak of the market and your house in now worth 30-40% less than what you paid for it. It makes no sense to try to sell it and it may make no sense to try to hold on to it. The banks were given every opportunity and much encouragement by the government to work with owners to modify loans on upside down houses and they have refused. You don’t owe them any more loyalty that they have shown you. Just walk away and let them have the houses that they still insist are worth 30-40% more than the market price. You won’t get off Scott free – your credit score will take a big hit and it will take you time to rebuild it, plus you’ll end up paying taxes to bail the clowns at the bank out, too; however, you won’t have to wreck your savings and your retirement plan trying to save a lost cause.
In a move that White euphemistically labels a “strategic default”, he argues that the playing field is too far tilted towards the lenders and that too few borrowers understand that defaulting is not the end of the world that they have been told. Certainly there is damage to ones credit from a default; but, White argues that borrowers have not been told the whole story about how to rebuild their credit and how fast that can occur.
White argues that borrowers are too focused upon the shame or stigma of a default to think clearly about it as the strategic thing to do, when they are severely under water. The fact is that it actually causes more damage to the owner to “hang tough” trying to find a way to salvage an impossible situation. Too often these people burn through their savings and maybe their retirement savings trying to keep up with rising payments from ARMs that have reset or to keep up a lifestyle, even after things at work have changed and income has dropped dramatically. White would argue that the pride involved in not admitting defeat and waling away may cause more damage than just giving up the house.
I must admit that I have become very disillusioned about short sales as a solution to the problem. In my estimation, short sales do no one but the Realtors involved any good. The seller ends up with a blemish on his/her credit record that is almost indistinguishable from a foreclosure and the bank ends up taking less for the house. Only the Realtors involved get anything positive out of the deal – their commissions. That is why I have shut down my short sale Web site. I just couldn’t in good conscience continue to recommend this path to sellers who are under water on their homes.
So maybe a “strategic default” is the best way out of these bad situations. A deed-in-lieu offer to your lender at least puts you in the position of having suggested pro-actively the way out for both of you. It saves the bank having to go through the Sheriff’s sale and saves the homeowner having to see his/her name show up in the local papers in the foreclosure ads. It’s still no better than a foreclosure from a credit standpoint, but it can make the owner feel more empowered and more in charge of the situation. White also makes a strong case that there are actually financial benefits to be gained from walking away vs. staying in a bad mortgage situation.
The article by White is one of those scholarly tomes, with footnotes that about equal the length of the article itself. Here’s the bottom line – if you bought a house in the 2004-2007 time frame, you likely bought at the peak of the market and your house in now worth 30-40% less than what you paid for it. It makes no sense to try to sell it and it may make no sense to try to hold on to it. The banks were given every opportunity and much encouragement by the government to work with owners to modify loans on upside down houses and they have refused. You don’t owe them any more loyalty that they have shown you. Just walk away and let them have the houses that they still insist are worth 30-40% more than the market price. You won’t get off Scott free – your credit score will take a big hit and it will take you time to rebuild it, plus you’ll end up paying taxes to bail the clowns at the bank out, too; however, you won’t have to wreck your savings and your retirement plan trying to save a lost cause.
Monday, November 2, 2009
Real Estate Remorse…
As with any big purchase or sale in our lives, there is a tendency for remorse to grab us shortly after the decision is made. In real estate this can be sellers remorse or buyer remorse or both on the same transaction. The reaction is the same, no mater which side you are on. The “Oh, my God, what have I done?” feeling that sets in about 24-48 hours after the euphoria of reaching agreement on a deal. It’s then that the doubts surface and fears take hold. What if I paid too much? What if I sold for too little? What if I move in and don’t really like it? Where will I go now that I’ve sold?
Those are all quite natural fears or doubts that we all have and sometime they can be overpowering for buyers or sellers. I’ve seen this reaction to a sale from both sides of the deal. I actually had a buyer back out of a transaction well after all of the normal hurdles had been cleared – she accepted the house “as is”, even after the inspection turned up several defects that would be costly to fix later (it was a foreclosed house). She also was approved for her mortgage, although she got a bit surprised by the closing costs that her mortgage rep finally showed her. In the end she just could no longer justify the cost and expenses that she was facing and backed out. In that case she lost her earnest money deposit.
I’ve also had sellers get remorse after accepting offers and progressing through the process of inspections and appraisals. Sellers who try to back out of deals face the very real probability of being sued by the buyers and that can be much more expensive than just losing an earnest money deposit. While courts have been loath to force the would be sellers out of their homes, they have awarded the jilted buyers quite hefty damages and usually also make the seller pay the real estate commissions that would have been paid on the defunct deal. Judgments can run in the 10s of thousands of dollars. Sellers with cold feet need to really consider that before backing out of a deal.
The home buying process is an emotional roller coaster for both sides, with highs and lows occurring at various times between the time an offer is made and accepted and the actual closing. Part of a Realtor’s job is to try anticipating and managing those emotional highs and lows through education and counseling. Sometimes we just have to let the emotions play out and continue to give what reassurance that we can that the correct decisions have been made. It can be a gut-wrenching ride for the Realtor, too; but I have no remorse about being in the business and having to take on these issues, too.
Those are all quite natural fears or doubts that we all have and sometime they can be overpowering for buyers or sellers. I’ve seen this reaction to a sale from both sides of the deal. I actually had a buyer back out of a transaction well after all of the normal hurdles had been cleared – she accepted the house “as is”, even after the inspection turned up several defects that would be costly to fix later (it was a foreclosed house). She also was approved for her mortgage, although she got a bit surprised by the closing costs that her mortgage rep finally showed her. In the end she just could no longer justify the cost and expenses that she was facing and backed out. In that case she lost her earnest money deposit.
I’ve also had sellers get remorse after accepting offers and progressing through the process of inspections and appraisals. Sellers who try to back out of deals face the very real probability of being sued by the buyers and that can be much more expensive than just losing an earnest money deposit. While courts have been loath to force the would be sellers out of their homes, they have awarded the jilted buyers quite hefty damages and usually also make the seller pay the real estate commissions that would have been paid on the defunct deal. Judgments can run in the 10s of thousands of dollars. Sellers with cold feet need to really consider that before backing out of a deal.
The home buying process is an emotional roller coaster for both sides, with highs and lows occurring at various times between the time an offer is made and accepted and the actual closing. Part of a Realtor’s job is to try anticipating and managing those emotional highs and lows through education and counseling. Sometimes we just have to let the emotions play out and continue to give what reassurance that we can that the correct decisions have been made. It can be a gut-wrenching ride for the Realtor, too; but I have no remorse about being in the business and having to take on these issues, too.
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