A few weeks ago we wrote about attending a recent bank foreclosure and short sale conference.  We told you that banks and the US Treasury department have learned that home retention and loan modifications are not working, and that 2010 will be a year of “The Transaction” either by short sale or foreclosure.  More banks are actually pursuing both simultaneously. 

We’ve been illustrating graphs showing the percent of distressed sale activity in Fort Myers, Cape Coral, and Lehigh Acres for months now, and this week we decided to update Short Sale activity.  While analyzing MLS data this week we noticed foreclosure sales have dropped in January and February to about 579 per month, down from approximately 700 or so the previous 5 months.  This can be attributed to a backlog of foreclosures in process and a moratorium in place early in 2009. 

Closed Short Sales in SW Florida

We also noticed a stabilization and recent up tick in short sales, reversing a decline in December 2009.  Will these trends continue?  Let’s start with the foreclosures.  We believe foreclosure sales will increase in 2010 as the backlog comes to the market. In fact, we’ve received a large volume of foreclosure listings we’re working to bring to market.  It typically takes time to secure the property, assess the condition, the value, workup a Broker Price Opinion, compare that against the bank’s new appraisal, and meet with the investor to develop a marketing strategy on each property.  All of this is done through the use of a bank asset manager, either an employee of the bank or 3rd part asset manager.  Either way, asset managers specialize in disposing of REO (Real Estate Owned) bank foreclosures. 

Once the value and strategy is determined, the property goes from a pre-listing to an actual listing complete with instructions.  The agent then lists the property in MLS and solicits offers.  Many times the property elicits multiple offers, and the agent presents all offers that match the bank’s criteria.  For instance, we are not allowed to present any offers where we have not personally verified cash funds to close on all cash deals, nor are we allowed to present any subject to financing offers without pre-qualification from that bank’s in-house loan officers.  Banks do not want to take properties off the market simply because a buyer presents a pre-qualification letter from an unknown or out of town bank or mortgage broker.  Speaking from experience, banks and agents have had bad experience with pre-qualification letters.  They are easy to get, and are rarely worth the paper they’re written on, so it is quite natural the bank wants their own people to look at the qualifications of the buyer if they are getting a mortgage.  The borrower doesn’t have to use that bank, but the bank will not look at the offer unless they are offered their pre-qualification letter with the offer. 

So we know 2010 will offer more foreclosure properties that have been initiated in 2009.  What about short sales?  Banks are not offering loan modifications as much as they have proven that they do not work long term.  Politicians still promote the idea as it sounds politically correct, but it further exacerbates the problem.  We are seeing large banks making a push to go online.  Bank of America for example now negotiates their short sales online through a system called Equator.  We have been using Equator to handle Bank of America foreclosures for years.  We hear that banks such as Wells Fargo and perhaps others are in the process of adding their short sales to Equator.

This online venue will allow greater efficiency and allow more people to touch the file, reducing the time it takes to approve a short sale.  The short sale is still a complex transaction and homeowners should not attempt it alone.  In fact, your bank will refer you to use an agent who is familiar with the process.  Short sales are not for every agent and should only be tackled by agents who are committed to learning and operating in a very rigid and complex process.  Buyer agents regularly interview listing agents to make sure the listing agent knows what they’re doing, because if they don’t, the process will fail. 

Look for 2010 to see rising foreclosure sales throughout the year, and perhaps rising short sale numbers as well.  The banks are committing resources to it. We’ll keep reporting the numbers we track, so check back often.

Printed in the News Press, News Press Online, and Ellis Team Blog.

This is the time of year agents are busy selling properties.  If you look at the last two years, historically you will see that sales begin to build each month heading into summer.  The last two years are fairly typical as to how our local market works.  April and May closed sales are results of deals put together in March.  There is typically about a one month lag from contract to closing.  Some closings occur in the same month, and some take longer, especially short sales. 

We think everyone who possibly can buy is attempting to right now for several reasons.  Interest rates are headed higher.  The Treasury Department’s phase-out of buying mortgage backed securities on FNMA and Freddie Mac expires this month.  The last time this happened rates shot up about ¾% in a week or so, so we’re keeping our eye on rates in April and what if anything the government does when they shoot back up. 

We also have the Home Buyer tax credit in place for sales through April 30.  Buyers have a few months after that to actually close these sales, but essentially it allows first time home buyers a credit of up to $8,000 and repeat home buyers a credit up to $6,500.  This is real money, and buyers are acting to receive this money. 

Single Family Home Sales by Month Lee County Florida
Single Family Home Sales by Month Lee County Florida

Additionally, inventory in certain price ranges is drying up, and prices are low.  Buyers from near and far and reaching to scoop up these bargains.  Because these homes are so far below replacement cost, these prices won’t last once the economy improves and builders start building again.  Many of these homes are 40-50% below cost, so there’s a built-in profit for buyers willing to buy now and hold until market improves. 

We know why the market is Hot, but let’s go behind the scenes and explain some things that are affecting the market many people might not know about.   The first major obstacle is appraisals.  Appraisals have been coming up short up to 30% of the time as appraisers not familiar with the neighborhoods are using comparables that are not the best for the subject property.  They are not taking the time to discern if the two neighborhoods are similar, or if the comparables condition is similar.  We’ve seen appraisers use comparables from other neighborhoods that just don’t measure up while ignoring a good comp 2 doors down that closed last week.  We’ve also seen appraisers only use the foreclosures, but they don’t tell the whole picture.  The foreclosures can need lots of work and be in poor condition, and if the appraiser wants to use them as a comp, they need to research its actual condition when property sold. 

The next big issue is we often have multiple offers on each property, and buyers are bidding against each other.  Cash is king, and buyers wishing to finance have a hard time competing with cash buyers.  The seller doesn’t have to worry whether the buyer will get financing when a cash buyer is involved, nor worry about a bad appraisal.  Many of these properties are selling well over asking price, and many buyers are frustrated no matter what they do they can’t land a property.

We also have out of town buyers who believe they can bargain down these homes, and wonder why they lose home after home when the sellers accept someone else’s offer.  Many buyers have said they don’t pay full sticker price, and yet they’re downright frustrated when the seller accepts another buyer’s offer.  Agents I speak with say they are educating buyers right upfront about our market, but buyers often times have to try for themselves.  A buyer can find out the hard way and miss out on their first 6 choices or take their agent’s advice and have a chance at getting choices 1-3.  Even if you offer $10,000 over asking price all cash, there’s no guarantee you’ll get the home, but at least your chances are better.  It pays to study each submarket and determine how each home fits in that puzzle. 

Lastly, title can be an issue.  If you’re buying a foreclosed home, it’s not uncommon for a title issue to creep up and extend the closing out.  Banks don’t always complete the full title process until a contract is secured, and that’s when it could be discovered some outstanding liens, or homeowner associations trying to collect more than the law allows to issue an estoppel letter.  We’ve even experienced a home that needed to be re-foreclosed as it wasn’t done properly the first time. 

If our market wasn’t so challenging, we’d see even higher sales reported.  This market is more complex than ever, but at least it keeps people on their toes and moving.  That’s often little solace to those caught up in a deal when things are going wrong, but I guess it beats having a dead market.  There’s nothing dead about the SW Florida real estate market.

Recently we attended a class with the Five Star Institute which is the premiere resource for educating bank asset managers and real estate agents on effectively handling bank foreclosure transactions.  The class we attended was the REO/Short Sale Summit which focused on bank foreclosures and the short sale process.  The Five Star Institute brought in asset managers for us to talk to, appraisers, banks, and 3rd party asset management companies so we could gain a thorough understanding on how to best deal with foreclosures and short sales, and insight into the back-end servicing agreements that control what the banks can and cannot do on behalf of the investor when approving a short sale or placing a foreclosure.

Short Sales and Bank Foreclosures in Cape Coral, Fort Myers, Lehigh Acres
Short Sales and Bank Foreclosures in Cape Coral, Fort Myers, Lehigh Acres

 

We learned that the Treasury Dept has agreed that mortgage modifications are not working, and most loan modifications and workouts still end in default.  It was further agreed that 2009 was a year of home retention intended to keep people in their properties, and 2010 will be a year banks collect money, either through a short sale or a foreclosure and re-sale. 

Nationwide it is estimated there is 33 months of foreclosed inventory that has not been released.  Dave Liniger, founder of RE/MAX International told a group of banks a few weeks ago to release the inventory as holding it back is only harming the markets.  In the most distressed markets like Las Vegas, Phoenix, and SW Florida, there is actually a shortage of properties and holding back inventory only prolongs the recovery time of the market. 

A lawyer who handles nationwide short sales and REO properties addressed the audience and said that in many markets such as Florida, it takes over 1 year to get them through the foreclosure process, and 2010 will see many begin this process if short sales don’t succeed.  All agreed that politicians’ running for office like to tell voters they’ll keep them in their homes, but this is actually harming the system instead of helping.  Most blamed president Obama’s initiatives as short sided and designed to score points with voters, but largely ineffective contributing to the problem.  The entire panel feared that politicians running for office this year may further try to prolong the inevitable in hopes of scoring points with voters, but that would further exacerbate the problems today. 

In the last few months we’ve been able to help sellers sell through the short sale process, and from what we’ve heard we may see more of that in 2010 as banks pursue a simultaneous sale; short sale and foreclosure process.  Banks are stepping up their efforts by hiring more people, and moving their platforms online so agents, appraisers, banks, investors, attorneys, etc. can all work on the file together and streamline the process. 

We expect to see more short sales in 2010, and more foreclosures in 2011, depending on how successful the 2010 short sales are.  Agents increasingly are becoming better trained, either from getting their CDPE (Certified Distressed Property Expert) designation or their Five Star designation to handle foreclosures for the banks.  The process has become very complicated.  Even an agent that never wants to list a short sale or do all the required work an REO agent does to sell a property would benefit by taking these courses as it educates agents on what is truly involved in the sale, and it will help them represent their buyers better by helping their buyers structure their offer better so the bank is more likely to accept.  Of course, sellers should select someone strong in this arena, as success with the bank is determined by the seller meeting certain criteria, and the agent properly presenting that criterion. 

Only about 25% of all short sales actually sell, and yet this number can be increased substantially with education.  We are all for the industry getting better educated and increasing this closing ratio, which will help more sellers, help more buyers, and relieve frustrations by all.  The short sale process isn’t for everyone, but for those willing to be patient and properly work the system, the rewards are there.  And we’re for the banks improving their processes to make communication better.  We would actually be for loan modifications and home retention if they actually worked, but unless the banks and government will consider loan reductions instead of short term rate and term modification, we think this is a waste of time and is further harming everyone involved.

Last week we focused on the overall State of the Lee County real estate market, and this week we’ll continue with that theme, but zero in a little bit on how certain price ranges are doing. 

Much of our inventory has decreased in the last year as buyers have been scooping up properties faster than the system can bring them to the market. This is the reason inventory levels in certain price ranges have shifted to a seller’s market.  Last year at this time inventory level in the 0-$100k range was 20.26 months.  Today that number is down to 4.23 months.  Last year we talked about market equilibrium being somewhere in the neighborhood of 6-9 months.  6 Months seems about right to us.  As you can see, this price range has fallen from nearly 2 years to less than 6 months illustrating it has swung from a buyer’s market to a seller’s market. 

 

Home Inventory by Price Range 2009
Home Inventory by Price Range 2009

Buyers many times read national headlines and don’t realize they’re competing with other buyers for the best properties, and most of these properties are on the market only a few short days.  Practically any property in the 0-$100k range will have multiple offers and sell at or above asking price.  In fact, last year 8,051 single family homes sold at or above asking price.  That’s simply an amazing statistic. 

The next hot price range is of course $100-200k. Last year we had 12.06 months supply of inventory.  This was the hottest price range last year, and it’s still hot this year.  Today it stands at 6.23 months, almost half of last year.  As you can see, the 0-$200k range is on fire.  Last year we had a lot of Canadians coming down and buying properties in SW Florida.  In the 2nd half of 2009 we noticed more interest from Americans from up north, and this season we’re already seeing many baby boomers arriving and seeking out their piece of paradise.  Combining that with the brutal winter our northern friends are experiencing and we think this season stands a chance to eat into the $200k+ price ranges going forward. 

Last year the $200-300k range stood at 15.33 months, and this year it’s down to 10.03 months.  The $300-400k range last year stood at 18.05 and this year it’s at 15.65, so its better, but the changes aren’t improving as much the higher we go.  The $400-500k range improved by 3 months, down from 24.17 last year to 21.3 this year. 

What’s interesting to look at in this hot market is the $500-1 Million price range, and the $1million+ range.  Inventory levels actually went up in both ranges, and up dramatically in the $1 million price range.  This suggests to us a few things.  Sellers in the higher ends of the market have held out longer than most as the affluent have had the means to ride out a poor economy longer.  However, the drag on the economy may be catching up even to the highest of income earners.  Secondly, there are fewer buyers in the higher ranges, with lots of inventory to choose from. 

To put this in perspective, in the 0-$100k range, there are 3,530 active listings on the market, but there were 10,021 sales last year in that range.  In the $1 Million+ range there are 697 active listings, but only 124 sales all last year. 

Top end sellers may “Need” more out of their home, but as we’ve seen with the foreclosure crisis, what a seller needs is irrelevant to what buyers will pay.  Higher end sellers may not qualify for a short sale because they have other assets, so they may not be motivated to take losses and are testing the market.  Oh, they surely may wish to sell, but not motivated to sell where the buyers are.  Affluent sellers may have the ability to wait the market out longer, even if a property is draining them financially. 

So, $500k+ buyers are in the driver’s seat and can buy the best value properties, and buyers in the lower price ranges are competing against each other to snap up today’s lower prices.  Prices across the county have begun to rise, and buyers are responding by studying the market and moving off the fence.  2010 should be an exciting year to watch.  Download the entire 2010 State of the Market Report free at http://www.topagent.com/