Westcoe Realtors, Riverside California…We have chronicled many times in this blog the frustrating procedure a buyer must endure these days when purchasing a bank owned property….the multiple offers, the overbidding, the lousy communication, etc.  However, we have never told you what happens once the Real Estate Gods smile upon you and your offer is accepted.  We cannot cover it all at one time, so today, we will simply prepare you for some of the disclosures the bank will require you to sign.

First, there is the “As-Is Disclosure”.  This is the mother of all disclosures, for the bottom line here is that the bank is telling you they take absolutely no responsibility for the condition of the home…that is all on you.  You can have the home inspected by whomever you want, but in the end, whatever issues your inspection discovers are going to be yours to fix.  Sometimes, depending upon the nature of the specific items shown in the inspection report, you can get the lender to so some…I repeat some…of the repairs.  But in most cases, they will simply tell you NO. 

Why?  Because they sold the home to you at a price well below what they could have gotten if they fixed the home up, because they have already lost tens if not hundreds of thousands of dollars on the home, because the decisions are really made by someone at a desk 5 states away who could care less about what you need, and because if you don’t sign this disclosure, one of the other 20 people whose offers were rejected in favor of yours will.  This sounds incredible cold, but such is the way of the foreclosure world when they have what you and 20 other people want.

The second disclosure you will find in your paperwork is the Mold Disclosure Form.  In this document, the lender is telling you that they have no idea if this home ever had a water leak, but if it did, there may be mold and it is your problem, not theirs.  You can’t really blame them for this, because they have never seen the home, do not know of any of the history of the home, and this is a total “Cover their a– form” in case your child develops a third eye after 5 years of mold exposure that they knew nothing about.  This why you should have a home inspection…so a professional can look at the home for you. 

As a note, you can ask your insurance agent for a CLUE report, which will at least tell you if any of the previous owners have ever filed a water related claim.  In almost all cases, if a claim has been filed, then that means that the problem was solved to the insurance company’s satisfaction…which is what the insurance company would require just before they cancelled the previous owners insurance.  But at least the problem would have been dealt with.

There is also a new disclosure form that is making the rounds…it is called a Drywall Disclosure…and this has to do with the recent revelations and claims regarding drywall that was manufactured in China and shipped to the states for use in new construction.  The bottom line here is that it appears some (much, most?) of the drywall made in China during the housing boom and used in various parts of the States now is alleged to create fumes, vapors, etc. that can lead to a rash of health problems.  So far, most of the use seems to be in the East and South, but who knows?  This is all a fairly new phenomena in our industry, but since the bank who owns your repo may be doing business all over the United States, then this form is one you will need to sign.  Check with your inspector for how one knows if the drywall is from China or not.

The above represent the major disclosure issues in most foreclosure properties, but each lender can add some more, depending on their mood, and current lawsuit status.  Some lenders are not as picky as others, but you will never know until you get into escrow.

In the end, you as a buyer always have the right to refuse to sign any of these disclosures…but understand that the bank will then cancel your contract and sell the home to someone else.  With regard to these and any other disclosures required by the banks, they are non-negotiable on this issue.  Sign them, or they will move on.  You cannot reason with them, or negotiate them away…it is the banks way, or the highway, and no amount of conversation will change this policy by the banks.  The bank will make sure that when you purchase your repo home, that you cannot come back and sue them for any part of it’s condition.

No one wants you to purchase a home unaware…but for now, we all have to play by the banks rules, or they will take their ball (repo) and go home…and no will get to play at all.

 Take care, and as always, let us know if there is any real estate issue you would like to see addressed in this blog.

Westcoe Realtors, Riverside California…According to the latest November 1, 2009 MLS statistics for the Riverside area, available housing inventory remains at historically low levels, which has led to a drop in sales of 14% from the previous month of October.  As has been chronicled in this blog many times, the artificial withholding of foreclosed properties by banks from the resale market (see blog post of 10/16/2009) has finally taken a toll on the number of properties sold, as the reduced inventory has led to a drop in sales of over 14% from the previous month…and from the sales high point of March, 2009, the drop in the number of sales is almost 30%.

In raw numbers, there were 983 properties available for sale on October 1, 2009, and that number held statistically steady at 997  for November 1.  However, there were 483 properties sold in September, and that number dropped to 415 for the month of October, or 14%.  Since the demand for housing is still at an enormous pace, the reduction in the number of properties sold in October can only be attributed to the incredible reduction in  available housing inventory.  Since January 1, 2009, the amount of available properties for sale in the Riverside area has fallen from 2385 to its current level of 997…a reduction of 58%.

Closed escrows will always lag about 30-60 days behind the sales (average escrow period is approximately 45 days), and closings for September were also down as well…from 503 in August to 463 in September…a reduction of almost 8%.  Once the closing figures become available for October, it would be no surprise for them to be down as well.

The actual numbers for since June are as follows: (please note:  the following columns are equally spaced when written, but will come out crooked when posted…software “bug”…what can I say?)

Month                    Active Listings                    Sales                    Closings

June                              1332                                 519                        587

July                               1184                                 488                        520

August                          1100                                 457                        503

September                   1056                                 483                        463

October                         983                                   415                        Not Avail.

November                     997                                   Not Avail.             Not Avail.

For the next few months, should the inventory numbers remain stabilized, then all the other numbers will stabilize as well, once the time lags are accounted for.  What happens from there is any-one’s guess, as we remain committed to the fact that this market cannot begin a full and steady recovery until all the bank foreclosures are out of our system…and at the rate the banks are strategically doling them out, that could be many months away.  Only time will tell.  Until then, the real estate purchasing market place will simply have to contend with an artificially controlled market, multiple offers, overbidding, and all the other frustrations that come with purchasing a home in today’s unique real estate market. 

Westcoe Realtors, Riverside California…Right now in our Inland Empire area, there currently exists a huge (as in massive) gap between the incredible frenzied activity by buyers in our real estate market, and the appraisal industry…whose job it is to establish a value for the home so the new bank can make the proper sized loan for the buyer.  Appraisers took far too much heat for the real estate meltdown of the past few years, and as a result, between the new regulations enacted to “protect” the buyer, and their own fear of reprisal from “appraisal reviewers”, this market is not expanding at the rate is should.  Let us explain.

Most people assume that there are two parties to the sale of a home…the buyer and the seller.  However, unless the buyer is paying all cash for the home (a rarity in today’s times), there is actually a third player to the purchasing game, and that is the lender…and in the end, we must all play by the lenders rules, or they will take their ball (in this case, their money) and go home…and no one will get to play at all. 

The representative for the lender in this game is the appraiser, who evaluates every property the bank is asked to make a loan on for a buyer.  The appraisers job is to make sure the home is worth at least what the buyer is paying, therefore protecting the lender from making too big a loan on the property. 

Most of the time, in a normal real estate market (whatever that is!), since the buyer, seller, real estate agents, and the appraiser are all looking at the same data regarding value, establishing a price for the home everyone can agree upon is relatively easy.  Yes, there can be some discrepancies in establishing a value for some amenities (views, lot size, upgrades, etc.), but most of the time everybody gets on the same page….except for this market.

As you are aware from previous blog posts, right now our purchasing market is in a frenzy.  We have a very limited number of homes for sale relative to previous markets, and this is creating multiple offers on almost every property reasonably priced for sale, and over 65% of all homes that close escrow do so at a price that is equal to or greater than the original list price.  In essence, buyers are forced to “bid” for homes against other buyers, and as a result, the home generally sells to the highest bidder.  That is our market…fast, frenzied, and totally tilted towards the seller…which should lead to rising home prices.  Simple economics dictates that huge demand and limited supply leads to a rising price for that which is in demand…in this case, housing.

However, that is not happening yet.  Why?  Because of the third party in this game…the appraisers.

Now please, this is not a bashing of appraisers.  No angry comments from appraisers please.  We know you have a tough job.  However, until the appraisal industry as a whole becomes less concerned about the past, and more tuned to the current market, then our housing prices will remain relatively stable…because the problem is that we can sell the houses for higher prices, but the appraisers are afraid to let the market grow…because right now, appraisers are continually bringing in their appraisals at levels far below the actual sales price.  As a result, the bank will not lend the buyer the money they need to purchase the home, and the entire transaction blows up…only for the home to sell again at the same “high” price to another buyer who totally wants the home…and the process starts over again.

We actually had one appraiser last week tell one of our agents that they were more afraid of an appraisal review (the process where a supervisor, who has not seen the property, slashes the price for reasons unknown, since we never get a chance to discuss it with the reviewer) than they were having the transaction fall out of escrow.  You see, the slashing by the reviewer makes the appraiser look bad…the mere falling out of the sale simply looks like the appraiser is “protecting” the bank.  Therefore, this appraiser readily admitted that the low price they were giving the home (sold for $220,000, appraised at $180,000 because the appraiser used comparable sales from 4 miles away, not the 1/2 mile radius that we used to establish the $220,000) was because they were in fear of getting reviewed!  As a result, the buyer, the seller, and the bank all lost out on a sale that they all wanted…simply because of a low appraisal.  And ironically, the only person who gets what they want in this scenario is the appraiser, who gets paid up front by the buyer.  Everyone else loses, and the cycle begins anew.  We have sellers who are so frustrated because they have 20 people who want their home and are willing to pay a price for it, only to get slammed to the floor with a low appraisal.

The bottom line here is that fear rules the appraisal world these days.  The reviewers, who many times sit behind a desk in another city or state, only know that the Inland Empire area appears on many lists as being one of the top 10 areas in the country for foreclosures…so naturally, the prices must be falling…right?   No, they are not.  This is like slamming the barn door after the horse has escaped.  Yes, our prices have fallen a huge amount from their highs of a few years ago…but our market is besieged with buyers who now want to take advantage of these low prices and purchase a home.  Our market is ready to bounce back if only the appraisers would stop looking back, and start looking forward.  Maybe that is not the case in hard hit areas like Detroit, or other areas of the country…but right here, in Riverside and the Inland Empire, we are chomping at the bit.  Isn’t that what the government and all it’s stimulus packages want to happen? A resurgence of the housing market?

In the end, this situation will ultimately remedy itself over time…but the question remains…over what period of time.  We could be basically out of this mess and on our way to recover if not for the issues addressed here.  Only time will tell when we can begin the march forward.  Until then, we will continue to do what we can with what we’ve got…no matter how restricting it is for all our sellers.

Westcoe Realtors, Riverside California…The local Press Enterprise reported yesterday that on a nationwide level, housing starts were below projections…and this news seemed to startle some on Wall Street.  For those of us in this business who work in the sales trenches on a daily basis, our only response was surprise that anyone in the world could be surprised that housing starts are down.  Unless you have been dwelling on another planet unaffected by the economic issues of the past couple of years, reduced housing starts are a “no-brainer”…and here’s why.

Understand that builders are hampered by such a long time frame between when they purchase land and when they actually have a product to sell (permits, environmental reports, plans, city regulations, etc) that unless they have a really good crystal ball, they are very hesitant to get involved unless they know the market will be good for selling when they are ready.  Holding on to vacant land until the market recovers is how one becomes an “ex-builder” in a hurry, so they want to get in and get out as quickly as they can….anywhere from 12-24 months.  So, until anyone can tell a builder what the market will be like in 12-24 months, most will simply pass and wait…which means once the market actually does get better, the builders will be about a year behind.  Hence, building starts are down, and will remain down until this market becomes stronger…or at least predictable.

Next, there is also the issue of pricing.  Right now, in the Inland Empire area, prices have fallen so much that it would be almost impossible for a new home builder to sell his finished product and break even, much less make a profit.  In fact, one large builder said that land in our area has a negative value…meaning that even if you gave him the land for free, he could not build a home and make a reasonable profit (let’s say around 10%).  In essence, it would cost him more in building and labor costs than he could make by selling the home…and last time I checked, no builder is going to take all the risk to lose money.  In essence, unless the land owner is going to pay the builder to take the land off his hands, the builder will simply wait until housing prices rise enough to make a profit.

All this means is that housing starts will remain down until housing prices start to rise again…and who knows exactly when that will happen.  Almost all of the new homes being sold now were already in the process when the real estate market began its swoon, and therefore the builders had no choice but to forge ahead and finish what they had started.  They were damned if they stopped, and damned if they continued, but continuing was the better of two evils.  However, that does not mean they will volunteer for this path again…which implies that housing starts will continue to decline until there is hope that pricing will rise again…and even then, unless a builder has taken a huge gamble and tried to “predict and jump the market”, new homes will be 12-24 months behind the rising price market.

Take care, have a good weekend, and let us know if there is any issues you would like to see addressed in our blog.

Westcoe Realtors, Riverside California…According to the MLS closing statistics for September, 2009, properties that closed at or above the list price for the Riverside/Moreno Valley has reached a new all time high of 73%.  This is up from 67% in August, and represents the largest jump in the past 6 months.

This increase is the direct result of the vast upward spiral of multiple offers that are now received on most properties currently for sale.  Due to the extreme decrease in the number of properties now on the market (read previous posts on this blog), and the increased demand by first time home buyers anxious to purchase a home at today’s lower prices and interest rates, the number of multiple offers on the majority of properties available for sale has skyrocketed in the past few months. 

More buyers and fewer sellers means everybody is left to fight over the few available properties for sale.  This type of huge inequity between supply and demand means a bidding war for anyone desiring to purchase a home…and this bidding war results in eventual closings for the successful bidder in excess of the original list price.

In the price range of $350,000 and below, the ”overbids’ are actually higher, at 75%…which would make sense given that the majority of buyers are shopping in this price range.  In the higher price range of over $350,000, the statistics fall sharply to 58%, but even at that level, this current 58% is significantly higher than last month’s level of 50%.

Many buyers are concerned and frustrated by this frenzied overbidding process, and hoped that when banks release the thousands of repossessions they still have in some state of foreclosure, then supply will rise and the overbidding will not be as necessary.  However, if the banks continue to “piece-meal” their foreclosures and only release a limited number at a time, then there is no assurances that our current market will change any time in the near future…and the real estate buying public will see these overbidding statistics continue to hover at their current percentages.

Given the opinion of this writer that the banks are more concerned with their quarterly Wall Street profit pictures than they are in selling their massive supply of foreclosed properties (see previous blog post), then the manic, intense-pace purchasing real estate market we are now experiencing will be the norm for quite some time.  We would love to be wrong about this, but we fear we are not.  Only time will tell, but in the meantime, if you are considering purchasing a home in this pricing environment, strap on your helmet, get a good agent who can guide you through this maze, and take a heaping dose of anti-frustration medicine…because if you can get a home at today’s prices, it will be worth it.

Take care, and as always, let us know if there is any issue you would like to see addressed in this blog. 

Westcoe Realtors, Riverside California…The great unanswered question that has vexed the real estate community for the past 6 months or so has been this:  “Where are all the repos?”  We’ve known for months that there are literally tens of thousands of unaccounted repos in the Riverside area that have not been placed on the market for sale. So where are they?

Well, we think we finally have an answer for that question.  Granted, what will follow is merely our opinion, but it is based on 30 years in the real estate business and the reading of just a few financial tea leaves.

First, in a simple explanation, understand that the rules for banks used to be that once a property was identified as a “non-paying” asset (like when the foreclosure process was initiated), the bank had to reassess the asset’s value at that time.  As an example, if the bank held a note for $400,000 on a home, and then they had to repossess that home for non-payment, then the bank would have to reassess the home’s value at that time.  In this market, it would not be unusual for the $400,000 note to really be worth approximately $250,000.  So…the bank would have to show a loss of $150,000 on it’s books, which would certainly affect both their profits for that particular month/quarter, as well as increase the cash reserves the bank would be required to carry…because the more losses a bank has, the more cash it is required to have on hand.

However, note in the explanation above we used the phrase “used to.”  Approximately 6 months ago (if you are really anal, you can look up the exact date, but 6 months works for us at this point), there was a change in how banks had to evaluate their “non-performing assets”.  In the old way, as above, they had to “mark-to-market” (mark-to-market means that you had to establish the new value based on the current market for that asset, not the original market) the asset when they realized it was no longer worth it’s $400,000 value…and certainly the foreclosure process would be a good indicator that something was wrong with the value!  NOW…the bank does not have to “mark-to-market” the non-performing asset until they finally acquire the home through the foreclosure process or are ready to sell it.  A HUGE difference.  This means that a bank can throw as many non-performing assets as they want into the closet, and only pull them out when they are ready to declare the loss.

Why would a bank want to sit on these properties instead of selling them right away?  Because a bank would rather dole out their losses a little at a time instead of all at once so that their monthly/quarterly profits look better for Wall Street investors…and that is the ugly little secret massive financial institutions don’t want us to know.  Their closets are full of repos, or potential repos, that they are sitting on so they do not have to declare their losses now…they want to control the date when these losses are admitted on their books.

Remember when, during the heat of the financial crisis, major banks (almost all of them) were announcing “write downs” in the billions of dollars?  This was because at that time, they were required to perform their “mark-to-market” reassessments at the time foreclosure was initiated.  It seemed like almost every day some major bank was announcing another billion dollar “set aside” to cover bad real estate loans.  They were all doing it because they all had bad real estate loans.

Now, fast forward to today.  Most of the remaining large banks still have as many, if not more, bad real estate loans (and huge amounts of foreclosed properties as well), but you are no longer hearing about massive “write-downs.”  Why?  Because they are no longer required to report these repos and bad loans until they finally acquire or sell them.  They are still there, but locked in the “repo” closet, only to be let out when the bank wants to acknowledge them.

Eventually, the banks will have to deal with all this closet mess…but they want to have the time to offset these obvious losses with some future gains.  In theory, it’s just like your own house payment.  You could pay it all off today, or make monthly payments over the life of the loan…which is easier?  However, in reality, this delay is, in our opinion, only going to cause more problems for the real estate market.

First, the above scenario explains why banks are still very reluctant to use their own money to make real estate loans unless they can sell the loan to FNMA, Freddie Mac etc.  If they sell the loan, they get their money back from Fannie or Freddie…if they use their own money, then they will not have that cash on hand to cover any future real estate loan losses they currently have in their “closet.”  This explains why any type of lending (business, credit lines, personal loans, etc) that requires the banks to use their own funds is very difficult to obtain at the moment.

Secondly, this approach will significantly prolong our current real estate market…making it much longer for “regular” home owners to see a rise in their equity.  As we have said many times before in this blog, as long as banks remain in the home ownership business, this market cannot expand….and with thousands and thousands of repos sitting in the closet, who knows when this will all be over.

Thirdly, anyone else wondering about the true health of today’s banks and financial markets?  There was a big hoopla over the Dow hitting 10,000 this week, but does anyone else think this is all smoke and mirrors?  We are not “doom and gloomers” here by any stretch of the imagination, but with all these unaccounted for repos hanging around in a dark bank closet, what is the real picture out there?  Also, according to one source, there is  about 3.4 trillion dollars of commercial loans out in our system, with approximately 800 billion of that behind in payments.  So far, we have only been talking about single family housing here…but what about all the commercial loans as well?  Better get a bigger closet.

And finally, if all the above analysis is even remotely accurate, then all those buyers who have heard about the pending “tidal wave” of foreclosures that will be coming on the market soon…well, it could be a long wait.  If we are accurate here with our analysis, then there will be no tidal wave coming, but more of a steady flow…and right now, in our Riverside area, our housing demand is so strong that this steady flow does not cut it.

So…what to think?  Only time will tell..and in may ways, we sincerely hope we are wrong on some of the above conclusions.  However, there is no denying that there are thousands of unaccounted for repos in the Riverside area…and in many other cities as well. Anyone else  got a better idea where they are?

Westcoe Realtors, Riverside California…There is starting to be some grumbling in the financial world about FHA loans and the potential for a possible meltdown like what occurred in the conventional loan world over the past 2 years or so.  One of our clients asked us our opinion…so here it is.

First, you need to understand how FHA loans work.  FHA is not a bank, and they do not lend money.  All FHA loans are originated and funded by your local bank…a bank that has been approved by FHA to originate FHA loans.  However, the big difference here is that once the loan is funded, approved and accepted by FHA,  that loan is now insured for 100% of its face value by FHA.  In essence, the bank who made the loan has no potential for loss if the borrowers decide to stop making their payments, because like any type of insurance policy, if the lender has a loss (foreclosure, short sale, etc.), they simply collect from their “FHA insurance plan” whatever money they lost on the property.

Secondly, understand that an FHA loan only requires the borrower to have as a down payment 3.5% of the purchase price…and the closing costs associated with the loan can be paid by the seller if that is how the transaction is negotiated (in many cases, the sales price is “bumped” by the closing costs the seller is being asked to pay).  The bottom line here is that on a $200,000 home, a buyer would only have to have $7,000 down…the rest could be financing.  Hence, when things get tight for an FHA borrower, it is far easier to walk away from 3.5% than the required 10-20% down for a conventional loan.  Many experts feel an FHA buyer does not have enough “skin” in the game.

The irony here is that the government decried the existence of the 100% financing  loans as the major reason for the mortgage crisis, yet they offer a program that finances 96.5% with a 100% money back guarantee to the lender.  This may be good for the real estate business, and for buyers to purchase a home, but as a fiscal policy where tax payer money may be at risk, it is fairly insane.  Think about it…would you lend 96.5% to a perfect stranger?

Anyway, when our real estate market was inundated with all the 100% ”funny money” loans, FHA was regulated to the dinosaur heap.  Why pay 3% down when you could buy a home for “0″ down?  However, once the you-know-what hit the fan in 2006-2007, FHA came back into vogue like wide ties and mini-skirts.  The Wall Street Journal recently reported that in approximately the past 3 years, the insurance commitments for FHA loans has risen from 410 billion to just over 1 trillion dollars…with 1 in 4 new loans now being insured by FHA.

So, what’s the problem?

There is none if everyone who has a FHA insured loan makes their payments…but if they don’t, then FHA is on the hook for some very serious money….and right now, the delinquency rate on FHA loans created since 2006 is hovering near 15%…which is 2-3 times higher than conventional loans created during the same time period.  Also, FHA is required to have in reserve 2% of their potential liabilities…and they are rapidly approaching that number.  Rumor has it that there is a very real possibility that by the end of this year, that reserve number may fall below the 2%…which, by the way, is a congressionally mandated percentage amount. Never mind that the Administration has imposed much higher reserve requirements on all lenders who make the loans (in order to prevent future meltdowns)…for FHA, that number is still at only 2%. 

So…what happens now?  Who knows…we will all have to wait and see.  Could FHA get in over it’s head and require a taxpayer bailout?  According to the head of FHA, that answer is no…but to the rest of us, this looks an awful lot like the bank mess of 2 years ago.  Understand, again according to the Wall Street Journal, FHA is leveraged far greater than Bear Stearns was when it went under.  The other possibility here is that FHA could either raise their qualifying requirements, down payment required, or a variety of other things bandied about in fiscal conversation these days.

For now, the ship sails ahead at maximum speed.  But as for what lies ahead, well, we suggest you baton down the hatches…because no one really knows for sure what potential storm my be coming our way.

Westcoe Realtors, Riverside California…The latest Multiple Listing Data for the Riverside area as of today, October 1 shows a continued decline in the number of properties for sale.  For the 11th straight month, the number of properties listed for sale has declined, from a high of 2,895 in November of 2008 to today’s level of 983.  This new figure represents a drop of 7% from just last month, and an overall drop of 66% since this decline started.

The reason for this drop has been well reported in the media and this blog…moratoriums, law changes, and government restrictions are but a few of the reasons there is such a sparse amount of inventory.  Ironically, there are thousands of foreclosures in our Inland Empire area that are at some point in the foreclosure pipeline, but until they are released to the market (and when and how they will be released is the magic question….no one knows at this point), buyers are left to fight over a far smaller inventory than normal.

This intense competition for the few available properties has led to a frenzied market for buyers, where 15-25 offers are the norm for many bank owned properties.  The demand for housing in our area is at an incredible high, due to the lower prices, historically low interest rates, and Federal and State tax credits.  When this limited supply is matched with overwhelming demand, the resulting chaos is intense, and for many buyers, frustration with the process rules the day.  Hopefully, the vast number of bank repos yet to appear on the horizon will arrive soon, but there is no assurance of that happening.  Therefore, until the banks decide on when and how to release all the properties they now own, the buying public (and real estate professionals as well) will simply have to accept the frustrations that come with huge demand and limited supply.

Westcoe Realtors, Riverside California…I get calls a couple times a week from potential buyers who are so frustrated with trying to purchase a bank REO (REO…stands for Real Estate Owned..same as the word repo).  The scenario is generally built around a similar theme…that no matter what they seem to offer for a home, the asset manager of the bank rejects their offer for another…and sometimes that other offer is even for less money.  So, what’s the deal?

Well, let me tell you the dirty little secret that is permeating our real estate business at the moment…and that is that banks are rejecting you for your financing, not your price or qualifications, or job, etc.  You are losing your offers because of the type of loan you are obtaining…because there is a pecking order to financing that almost asset managers observe. 

Allow me to rank the type of financing the REO asset manager looks for in an offer, from best to worst.

ALL CASH…no surprise here.  An offer that is all cash will beat other higher priced offers almost every time.  Why?  First, there will be no appraisal needed, which eliminates a huge source of pain for the REO manager.  They do not have to worry about the value coming in low and jeopardizing the loan, and it also eliminates any work requirements that the appraiser my demand for the bank to make the loan.  All cash kills two birds with one stone.  Secondly, these escrows can generally close much quicker than an escrow with a loan…and speed is very important to these managers.  While it is seldom discussed, many asset managers get paid a bonus if the REO property closes escrow within a certain time frame…a time frame that can always be met with a cash buyer, and seldom be met with a loan buyer.  Rumor has it that some bank asset managers will keep an REO on the market for a longer period of time just to get a cash offer.  Stranger things have happened, but while we have no proof, we hear it happens. So…remember, when buying a home in today’s market, cash is king.

CONVENTIONAL FINANCING…If you need a loan to purchase your home (and let’s face it, most of us do), then almost all asset managers prefer conventional financing to those listed below.  Again, why?…Because conventional appraisals have fewer work requirements, as a general rule, than an FHA or VA loan.  Remember, fewer work requirements means the REO lender has less money to expend in order to close the home, and this is critical since they have already lost tens if not hundreds of thousands of dollars on the property already.  Also, a conventional buyer must have a little more money for a down payment (minimum of 10% as opposed to 3.5% FHA), and this makes them a stronger buyer in the eyes of the asset manager.  Therefore, when splitting financing hairs, conventional loan financing will always win out over any other type.

FHA FINANCING…BUYER PAYING THEIR OWN LOAN COSTS.  This is next in the bank owned pecking order.  FHA financing has its issues for an asset manager, principal among them is the appraisal.  Not only is the appraisal itself subject to a more stringent guideline, but many times must “protect” the buyer from purchasing a home is major disrepair.  As a result, and FHA appraisal will almost always have more work requirements than a conventional appraisal.  This means the buyers new bank will not make the loan if certain repairs are not made to the home.  As I said earlier, the REO lender is already taking a bath on the home, and the do not want to put in any additional money into the home to sell it.  The buyer can make the repairs, but most of the time, an FHA buyer does not have the money to do this…so the bank is either forced to spend the money on the repairs, or cancel the escrow and put the home back on the market.  Neither option is especially appealing to the REO bank, so do not expect the bank to do handstands when presented with your offer.

FHA FINANCING…REO BANK PAYING YOUR CLOSING COSTS.  FHA financing only requires the buyer to have 3.5% of the purchase price as a down payment…and the closing and loan costs can be paid by either the buyer or seller.  In most cases, when the buyer does not have the money to pay their closing costs themselves, they ask the bank to do it, and in almost all cases, the amount of the closing costs the buyer is asking the seller to pay is added to the offering price.  This is all fine, and overbidding on a REO home is absolutely OK, but sometimes the price has to be inflated so high that there is the possibility the home will not appraise for the higher price.  Now the REO bank has a problem, and they either have to accept the lower appraisal price, or cancel the escrow and start again.  Therefore, if an REO bank is going to accept an FHA offer, asking the bank to pay the closing costs only compounds the potential problems for the REO seller.

VA OFFERS…This is the lowest rung on the REO asset manager’s ladder, and it is too bad, since anyone who has served his or her country in the services deserves better.  However, the REO bank is not bound by what “should be”, but instead is bound by “what is.”  The major problem with a VA buyer is twofold…the appraisal and the closing costs.  A VA appraisal is the most stringent of them all, and many REO properties simply cannot be brought up to the standards a VA appraisal requires without massive repairs.  Even properties in relatively good shape can have trouble passing a VA appraisal, so you can imagine what the repair costs are for your average repo.  Secondly, the closing costs to the seller of any property that accepts a VA offer are larger than with any other type of financing.  By law, there are some costs the veteran buyer is not allowed to pay, and therefore must be paid by the seller.  The original intent here was to give the veteran a break for services rendered…and in a “regular” housing market, this normally works..but not in an REO dominated market.  For a REO seller, it is all about dollars and  cents, and unfortunately, the VA buyers costs the bank the most money to work with on an offer.  Hence, there are very few successful VA offers accepted by REO asset managers.

 In the end, none of these problems would be an issue, or even exist, if the market was not frenzied with too many buyers and not enough sellers.  The only reason the asset managers can pick and choose like this is because they have about 20 offers per property to choose from.  Trust me, if this was 2 years ago, when all this REO “junk” had just started, and REO banks were begging for buyers, nobody was “cherry-picking” the financing.  However, markets change like a politicians promises, and in the not-to-distant future, things will equalize and buyers will not be at the mercy of the REO sellers.  Until then, do the best you can, manage your frustration, and try to save enough down payment to hit that 10% mark for a conventional loan.

 Take care, and as always, let us know if there are any issues you would like to see us address in this blog.

Westcoe Realtors, Riverside California…A brief post here before we all head off to the weekend, where perhaps we can restore the sanity that is slowly drained from those of us in the real estate business by the amazing things we deal with during what passes these days as a normal week.

Today…big item in the business section about housing sales were down this month nationally after 3-4 months of steady increases.  There are lots of theories offered as to why, and the more politicians and “experts” talk, the less sense they make.  What a shock.  The answer is simple…

…TURN LOSE THE INVENTORY.

We have been posting here for months that the over 50% reduction in available housing inventory due to State and Federal Foreclosure moratoriums has reeked havoc with the amount of homes available for sale.  Say what you want, but if you go to your local store to buy milk, and none is on the shelf, doesn’t it stand to reason that your milk sales will go down?  Call me crazy, but it is really that simple.

As we have said before, in our Riverside area, there are thousands of properties in some stage of the foreclosure process…but where are they?  They are certainly not on the market for sale.  Trust me…we could absorb all the inventory that is waiting to sell if we could only find it…our demand by buyers is that strong.

So…when will we see all these homes hit the market?  If you can answer that question, then be sure to buy a lotto ticket…because no one seems to know what is going on.  All we in the real estate business can do is wait and wonder…and offer simple explanations in place of the complicated one’s spouted in the press about why housing sales are down.  They are down because there is nothing to sell.

Take care, and have a good weekend.  I am going to try and locate my sanity.