Tuesday, May 1, 2012
2012 could be record year for short sales
2012 is on track to become a record year for short sales, according to a report from foreclosure data aggregator RealtyTrac. Sales of U.S. homes in the foreclosure process, typically short sales, rose 33 percent year over year, to 35,000, in January. A total of 32 states saw annual increases in short sales, and 12 states saw more short sales than REO (real estate owned) sales.
The short-sale increase comes after three years of declines following the inauguration of "a new presidential administration with a new approach to the foreclosure problem," wrote Daren Blomquist, RealtyTrac's vice president and author of the report.
"Short sales have long held great promise as a market-based solution to the nation's foreclosure problem, but short sales transactions over the past three years have actually declined after peaking in the first quarter of 2009," Blomquist said in a statement.
"January foreclosure sales numbers, along with first-quarter foreclosure activity, strongly indicate that downward trend is ending, and we believe 2012 could be a record year for short sales."
Several states saw triple- or double-digit yearly jumps in short sales in January, including Georgia (up 113 percent), Michigan (90 percent), California (52 percent), Texas (48 percent), Arizona (44 percent), Nevada (36 percent), and Florida (20 percent).
Although REOs continue to outnumber short sales nationwide, there were only 2,600 more REO sales than short sales in January. Nearly a quarter of states had more short sales than REO sales, including Utah, California, Arizona, Florida, Indiana, Colorado, New York and New Jersey, according to the report.
Six out of the 10 states with the highest share of short sales in January were in the West.
Of the 50 largest U.S. metro areas, nine out of the 10 metros with the highest share of short sales in January were in the West, six of them in California.
Even as short sales increase, the prices buyers pay for them have decreased. In fourth-quarter 2011, a pre-foreclosure property sold for an average $184,221, down 11.3 percent from fourth-quarter 2010. In January, such a property sold for $174,120, down 10 percent year over year.
Short sales are also selling for bigger discounts when compared to the average sales prices of nondistressed homes. Short-sale buyers received an average 21 percent discount in January, up from an average discount of 17 percent the year before. RealtyTrac does not take into account property condition or size when calculating discounts for distressed properties. Short sales in Massachusetts, Missouri and California saw the biggest discounts in January.
Short-sale timelines appear to be getting shorter. After peaking at 318 days in third-quarter 2011, the average number of days it took for a property to go from the start of the foreclosure process to its sale as a pre-foreclosure was 306 days in the first quarter, slightly down from 308 days in the fourth quarter.'
Although foreclosure starts -- either default notices or scheduled foreclosure auctions, depending on the state -- were down 11 percent from the previous year in March, last month also saw the third straight monthly rise in foreclosure starts. There are nearly 3.5 million delinquent borrowers nationwide; 41 percent of those borrowers are seriously delinquent and therefore at high risk for entering the foreclosure process and becoming short sales, RealtyTrac said.
Another, bigger potential pool of short-sellers are borrowers with underwater mortgages. More than 12.5 million borrowers owe at least 25 percent more on their mortgage than their home is worth.
"Even if these homeowners aren't struggling to make mortgage payments and therefore are at low risk for foreclosure, if they need to sell sometime in the next five years it's likely they'll need to sell via short sale," the report said.
Among lenders and loan servicers, Bank of America had the highest short-sale volume in January, followed by Chase and Wells Fargo. PNC Financial saw the biggest annual jump in short sales, followed by the Federal Housing Administration, Fannie Mae and Freddie Mac combined.
Those three government-backed entities also had the lowest average short-sale prices in January, the biggest declines in average sales price for short sales, the lowest number of average days to sale, and the biggest decrease in time to sell.
Home seller pitfalls to avoid
Six years after the market peaked in 2006 and prices started to decline, many sellers are still in denial about the current market value of their homes. It's difficult for most sellers to accept the reality of today's home-sale market, whether they bought at or near the peak and will lose money selling today, or bought decades ago but are still stuck at 2006 prices.
One homeowner recently remarked that she was aware that home prices had dropped quite a bit over the last five years. But she felt that her home hadn't lost any value.
It's hard for homeowners to divorce themselves emotionally from a home they've enjoyed. But this is what sellers need to do so that they can make rational decisions about a list price that will actually result in a sale.
This decision should be based on listings that have sold in your area that could be considered somewhat comparable to your home. Some sellers go to open houses to evaluate the competition. If you're still emotionally wrapped up in your home, the exercise can be futile. You return home feeling that the other homes aren't as good as yours.
Put yourself in the buyers' shoes. This is easier for sellers who are also buying in this market. They know what it's like to want to make sure they're getting a good deal. Your house needs to be listed at a price that is enticing to buyers because it represents a good value. In most areas, buyers are buying in a market knowing that prices may continue to decline before the market fully recovers.
HOUSE HUNTING TIP: Be wary of real estate agents who tell you that your home will sell for a higher-than-supportable price just to get the listing. Then they work on you over time until you reduce the price to market value. Agents refer to this as buying a listing.
It's hard to resist the temptation of trying for a higher price than the comparable sales indicate. However, you won't be happy if your home is on the market for months with no activity, and each time you drop the price it feels like too little too late. You can end up selling for less later if home prices in your area are still declining.
Refinance appraisals are notoriously inaccurate in terms of market value -- either too high or too low. An appraiser is attempting to gauge what price a buyer would pay when there isn't a ratified contract that states what a buyer will pay. A high refinance appraisal can leave the seller with a false expectation.
Listing your home based on what you want or need to net from the sale won't motivate buyers to pay more. Buyers pay market value. They're won't overpay in today's market.
Find out what buyers are looking for in your area and see how your home matches up to their expectations. Generally, today's buyers are looking for a home that is well-located, in good condition and is priced right for the market.
If your home needs a lot of work compared with the competition, you'll either need to have work done before selling, or discount your price accordingly.
Walkable neighborhoods are highly desirable in some areas. If your home doesn't offer this amenity, you may have to make a price accommodation.
THE CLOSING: For best results, be realistic about the current market value of your home and what preparation it needs in order to sell successfully in today's market.
Dian Hymer is a real estate broker with more than 30 years' experience and a nationally syndicated real estate columnist.
A purchase strategy for distressed real estate
Many of the houses coming on the market today are foreclosure sales, which usually sell "as is" and are often in poor condition. This may create a buying opportunity for some buyers, but it may be a hazard for others.
Purchase opportunity
A purchase opportunity arises because many potential buyers don't want the hassle of fixing up a house in poor condition, which means that there are fewer competing buyers. In addition, those who sell houses "as is" are frequently in a hurry to get it done, which means that they are disinclined to wait for a higher offer.
The buyers in the best position to take advantage of such opportunities are those with the skills and knowledge required to assess what needs to be done and how much it will cost.
Risk of value uncertainty
But purchasing a house in poor condition has serious risks. One risk is the greater uncertainty connected to its value. The worse the condition, the more costly the improvements required to make the house livable, and the larger the potential error in judging in advance what these costs will be.
The appraisal may reduce but not eliminate the uncertainty connected to the property's value. Appraisers mainly rely on the sale prices of comparable properties, after adjusting for the differences between the subject property and the comparables.
But because information on the condition of comparables is often difficult for appraisers to obtain, the error in making price adjustments is relatively large when the property is in poor condition.
Risk of not finding a mortgage
But today the greater risk in buying a property in poor condition is that the buyer will be turned down for a mortgage or forced to find a lender who will make the loan but at a premium price.
This problem seldom arose before the financial crisis because there were very few foreclosure sales, and lenders generally operated on the assumption that valuation errors would be erased by property appreciation. Today, those looking to buy a house in poor condition need to consider this risk very carefully.
Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) recently developed a classification system for housing condition ranging from C1 (the best) to C6 (the worst), but only C6 is unacceptable to the agencies in "as is" condition. Nonetheless, many lenders require a C4 or better.
Rationale for condition requirement
It is understandable why the agencies that bear the risk of default would either require that the condition of mortgaged houses meet some minimum standard, or base their purchase prices or insurance premiums on house condition.
As noted above, the potential error in appraisals is larger for houses in poor condition, which would result in greater losses on loans that default. When defaults occur early, furthermore, the house that was in poor condition when the loan was made is very likely to be in poor condition at default, which increases marketing costs.
Why some lenders are stricter than the agencies, however, is not clear. Presumably the servicing of loans on properties in poor condition is less profitable, perhaps because these loans have relatively short lives. It is also possible that the cost to servicers of managing foreclosures of properties in poor condition is relatively high.
Whatever the reasons for lender caution, homebuyers looking for bargains in the sale of distressed properties need to take it into account in planning their purchase strategy.
A purchase strategy for distressed properties
An inspection report from a licensed expert will help in the decision as to whether to buy the house but will not eliminate uncertainty regarding how an appraiser will classify the condition of the house. If the house is classified C5 or C6, a loan may not be available.
If the sales contract has a mortgage contingency clause, which is a standard provision in some states, the buyer who can't get a mortgage because the property is classified C6 or C5 will get his earnest deposit back and the deal is canceled. However, the thwarted buyer will not be reimbursed for the cost of the inspection or the appraisal, which might total about $700.
If a property is being sold "as is" and the standard sales contract does not have a mortgage contingency clause, I would pass unless the seller agreed to return my earnest deposit if the property is classified C6 by the appraiser. You could be more conservative and require the return of the deposit with a C5, which would avoid a mortgage problem because most lenders will accept a C4 or better, but it may substantially reduce the number of sellers who will deal with you.
While accepting a C5 will give you access to more houses, you must find one or more lenders who will accept a C5. You would be well advised to do this in advance of purchase.
Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania.
Purchase opportunity
A purchase opportunity arises because many potential buyers don't want the hassle of fixing up a house in poor condition, which means that there are fewer competing buyers. In addition, those who sell houses "as is" are frequently in a hurry to get it done, which means that they are disinclined to wait for a higher offer.
The buyers in the best position to take advantage of such opportunities are those with the skills and knowledge required to assess what needs to be done and how much it will cost.
Risk of value uncertainty
But purchasing a house in poor condition has serious risks. One risk is the greater uncertainty connected to its value. The worse the condition, the more costly the improvements required to make the house livable, and the larger the potential error in judging in advance what these costs will be.
The appraisal may reduce but not eliminate the uncertainty connected to the property's value. Appraisers mainly rely on the sale prices of comparable properties, after adjusting for the differences between the subject property and the comparables.
But because information on the condition of comparables is often difficult for appraisers to obtain, the error in making price adjustments is relatively large when the property is in poor condition.
Risk of not finding a mortgage
But today the greater risk in buying a property in poor condition is that the buyer will be turned down for a mortgage or forced to find a lender who will make the loan but at a premium price.
This problem seldom arose before the financial crisis because there were very few foreclosure sales, and lenders generally operated on the assumption that valuation errors would be erased by property appreciation. Today, those looking to buy a house in poor condition need to consider this risk very carefully.
Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) recently developed a classification system for housing condition ranging from C1 (the best) to C6 (the worst), but only C6 is unacceptable to the agencies in "as is" condition. Nonetheless, many lenders require a C4 or better.
Rationale for condition requirement
It is understandable why the agencies that bear the risk of default would either require that the condition of mortgaged houses meet some minimum standard, or base their purchase prices or insurance premiums on house condition.
As noted above, the potential error in appraisals is larger for houses in poor condition, which would result in greater losses on loans that default. When defaults occur early, furthermore, the house that was in poor condition when the loan was made is very likely to be in poor condition at default, which increases marketing costs.
Why some lenders are stricter than the agencies, however, is not clear. Presumably the servicing of loans on properties in poor condition is less profitable, perhaps because these loans have relatively short lives. It is also possible that the cost to servicers of managing foreclosures of properties in poor condition is relatively high.
Whatever the reasons for lender caution, homebuyers looking for bargains in the sale of distressed properties need to take it into account in planning their purchase strategy.
A purchase strategy for distressed properties
An inspection report from a licensed expert will help in the decision as to whether to buy the house but will not eliminate uncertainty regarding how an appraiser will classify the condition of the house. If the house is classified C5 or C6, a loan may not be available.
If the sales contract has a mortgage contingency clause, which is a standard provision in some states, the buyer who can't get a mortgage because the property is classified C6 or C5 will get his earnest deposit back and the deal is canceled. However, the thwarted buyer will not be reimbursed for the cost of the inspection or the appraisal, which might total about $700.
If a property is being sold "as is" and the standard sales contract does not have a mortgage contingency clause, I would pass unless the seller agreed to return my earnest deposit if the property is classified C6 by the appraiser. You could be more conservative and require the return of the deposit with a C5, which would avoid a mortgage problem because most lenders will accept a C4 or better, but it may substantially reduce the number of sellers who will deal with you.
While accepting a C5 will give you access to more houses, you must find one or more lenders who will accept a C5. You would be well advised to do this in advance of purchase.
Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania.
Six elements of a compelling home seller love letter
Recent reports suggest that the real estate market might be picking up. That said, sellers from coast to coast are still doing everything within their power to differentiate their home from the scads of other competitive listings.
However, there is one super-simple, vastly underrated marketing technique for homes that are having a hard time standing out from the rest of the market: the seller love letter.A seller love letter is a note, personally written or typed up by the home's seller. Among other things, it expresses the love the seller's family has had for the home, and explains the facts and events underlying that sentiment.I've seen these be as short as a single page, and as long as a binder containing a 10-page letter and a collection of supporting pictures and other documents.
If the power of staging lies in depersonalizing the property so buyers can picture their own family living out their own lives in the home, the power of a seller love letter is that it leaves buyers with a warm feeling that the home has a positive energy and history, which is especially desirable in today's distressed property-riddled market.
Here are six things smart sellers should consider including in their love letters about their homes to their buyers:
1. Fond family memories. Now, there's no reason to get all "TMI" (too much information) about it, but the fact is that buyers do love to hear sweet, fond family memories about a property. Buyers who like a home can fall desperately in love with it as they read about the seller's parents' building the home, and then raising a flourishing family there.
Even much newer homes can have their own endearing stories, whether they be about a hard-charging professional bachelor who is moving out of a loft to start a family; about retirees who raised their kids there and are now moving to downsize and be near their grandkids; or about a smart, single woman who was the first person in her family to own a home.
The goal here is to create warm fuzzies while you satisfy the buyer's craving to know why on earth anyone would want to move from such a lovely place. And if you can tell a happy story, you can kill another bird with a single stone – distinguishing your place from all the tragic stories and sadness surrounding the short sales and foreclosures with which your home is competing.
2. Favorite neighborhood vendors and local businesses. One reason people dread moving so much is that it forces them to find new vendors for everything, especially for the practicalities and minutiae that can derail our schedules and lives if they don't run well. If you have neighborhood businesses you love, making a list of them and including them with your love letter is very much appreciated by buyers.
Take care to include things like: dry cleaners, house cleaners, landscapers, carpet cleaners, produce markets and butchers, and especially restaurants that have great take-out and delivery services.
You get extra points if you know the proprietor and authorize the buyer to drop your name, or you include menus with your list of restaurants that deliver to the property address.
3. Lifestyle amenities that map to local buyer wish lists. Give some thought to the sorts of things people looking to buy a home like yours might be looking for, from a lifestyle perspective, and include notes about any of those amenities in the neighborhood that you and your family or housemates have especially enjoyed. Things like dog parks, playgrounds, running trails, yoga studios, libraries and bookstores, museums and outdoor recreational opportunities make great fodder for this list.
4. History of upgrades. Of course, your state-required disclosure forms will include a pithy section for relating the repairs and upgrades you've done in the time you owned the property, but you can take that to a new level in your seller love letter with a free-form description of the work, color commentary (if it makes sense) around why and how you had it done, and a little appendix that includes any relevant plans, permits warranties, receipts, service contracts and the like.
(Obviously, you don't want to include the originals of these items if this love letter document will be left out in the property during showings.)
If there are any issues or repairs that are likely to come up in the buyer's inspection reports that you want to explain in more detail, the love letter can give you your chance to do just that.
5. Property details and tricks. If you have a detailed landscape plan that identifies all the plants and trees in your yards, tricks for how to work the heating and cooling timer or the tricky downstairs doors, details on when the neighborhood trash pickup happens, or info about your alarm, termite or other service contracts, prospective buyers will feel well taken care of if you compile and include all this information with your love letter and let them see it before they even make an offer.
6. Neighbors. If you have particularly close and friendly relationships with any specific neighbors, or there are block parties, online or email Listservs, homeowners association (HOA) or neighborhood watch meetings or other favorites, ones with kids, block party, watch meetings, other things being planned/organized, let the buyers know.
You see, a good seller love letter is equal parts lovey-dovey and logistical, but the care that goes into preparing it and the love that is evident in its content can be a significant selling point to buyers weary of dealing with bank sellers or stressful short-sale situations.
Whatever you do, if you decide to write a seller love letter for your home, review your plans and thoughts about what to include with your local agent first. You want to make sure not to run afoul of any equal opportunity housing laws or disclosure laws.
As well, waxing rhapsodic about all the weekends you invested in the terrible mural on the wall might be more concerning than compelling to buyers who think they could live in your home easily -- assuming they paint over the mural on day one as the new owners.
Tara-Nicholle Nelson is an author and is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com.
However, there is one super-simple, vastly underrated marketing technique for homes that are having a hard time standing out from the rest of the market: the seller love letter.A seller love letter is a note, personally written or typed up by the home's seller. Among other things, it expresses the love the seller's family has had for the home, and explains the facts and events underlying that sentiment.I've seen these be as short as a single page, and as long as a binder containing a 10-page letter and a collection of supporting pictures and other documents.
If the power of staging lies in depersonalizing the property so buyers can picture their own family living out their own lives in the home, the power of a seller love letter is that it leaves buyers with a warm feeling that the home has a positive energy and history, which is especially desirable in today's distressed property-riddled market.
Here are six things smart sellers should consider including in their love letters about their homes to their buyers:
1. Fond family memories. Now, there's no reason to get all "TMI" (too much information) about it, but the fact is that buyers do love to hear sweet, fond family memories about a property. Buyers who like a home can fall desperately in love with it as they read about the seller's parents' building the home, and then raising a flourishing family there.
Even much newer homes can have their own endearing stories, whether they be about a hard-charging professional bachelor who is moving out of a loft to start a family; about retirees who raised their kids there and are now moving to downsize and be near their grandkids; or about a smart, single woman who was the first person in her family to own a home.
The goal here is to create warm fuzzies while you satisfy the buyer's craving to know why on earth anyone would want to move from such a lovely place. And if you can tell a happy story, you can kill another bird with a single stone – distinguishing your place from all the tragic stories and sadness surrounding the short sales and foreclosures with which your home is competing.
2. Favorite neighborhood vendors and local businesses. One reason people dread moving so much is that it forces them to find new vendors for everything, especially for the practicalities and minutiae that can derail our schedules and lives if they don't run well. If you have neighborhood businesses you love, making a list of them and including them with your love letter is very much appreciated by buyers.
Take care to include things like: dry cleaners, house cleaners, landscapers, carpet cleaners, produce markets and butchers, and especially restaurants that have great take-out and delivery services.
You get extra points if you know the proprietor and authorize the buyer to drop your name, or you include menus with your list of restaurants that deliver to the property address.
3. Lifestyle amenities that map to local buyer wish lists. Give some thought to the sorts of things people looking to buy a home like yours might be looking for, from a lifestyle perspective, and include notes about any of those amenities in the neighborhood that you and your family or housemates have especially enjoyed. Things like dog parks, playgrounds, running trails, yoga studios, libraries and bookstores, museums and outdoor recreational opportunities make great fodder for this list.
4. History of upgrades. Of course, your state-required disclosure forms will include a pithy section for relating the repairs and upgrades you've done in the time you owned the property, but you can take that to a new level in your seller love letter with a free-form description of the work, color commentary (if it makes sense) around why and how you had it done, and a little appendix that includes any relevant plans, permits warranties, receipts, service contracts and the like.
(Obviously, you don't want to include the originals of these items if this love letter document will be left out in the property during showings.)
If there are any issues or repairs that are likely to come up in the buyer's inspection reports that you want to explain in more detail, the love letter can give you your chance to do just that.
5. Property details and tricks. If you have a detailed landscape plan that identifies all the plants and trees in your yards, tricks for how to work the heating and cooling timer or the tricky downstairs doors, details on when the neighborhood trash pickup happens, or info about your alarm, termite or other service contracts, prospective buyers will feel well taken care of if you compile and include all this information with your love letter and let them see it before they even make an offer.
6. Neighbors. If you have particularly close and friendly relationships with any specific neighbors, or there are block parties, online or email Listservs, homeowners association (HOA) or neighborhood watch meetings or other favorites, ones with kids, block party, watch meetings, other things being planned/organized, let the buyers know.
You see, a good seller love letter is equal parts lovey-dovey and logistical, but the care that goes into preparing it and the love that is evident in its content can be a significant selling point to buyers weary of dealing with bank sellers or stressful short-sale situations.
Whatever you do, if you decide to write a seller love letter for your home, review your plans and thoughts about what to include with your local agent first. You want to make sure not to run afoul of any equal opportunity housing laws or disclosure laws.
As well, waxing rhapsodic about all the weekends you invested in the terrible mural on the wall might be more concerning than compelling to buyers who think they could live in your home easily -- assuming they paint over the mural on day one as the new owners.
Tara-Nicholle Nelson is an author and is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com.
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