The San Diego Home Blog

photo credit: TheTruthAboutMortgage.com

I vented about the joys of the short sale last week on Inman News. Yesterday, the San Diego Union Tribune published the story of an East County resident who lived the nightmare, not as an agent, but as a person simply trying to save his home. Sadly, he failed, and his story is so incredible, you can’t make this stuff up.

For those who are rusty on the concept of short sales, we talked about it here. From the CliffsNotes, short sales are sales in which the settlement charges (costs of sale including the pay-off of outstanding loans) will exceed the sale price of the home. Unfortunately, we aren’t seeing a light at the end of our short tunnel; these situations are going to be with us for awhile.

A year ago, we saw agents tending to avoid short sales like that gallon of expired milk. First, the whole idea of negotiating with a faceless lender was daunting; for so many of us who were doing other things during the last down market, the idea of navigating these waters was mysterious, the disclosures ominous, and the shear level of difficulty involved in meeting the paperwork requirements enormous.

Second, an agent takes on a potential short sale listing at great risk. There is no guarantee a lender will ultimately accept a short pay-off and, even if the odds are favorable, the entire exercise often becomes a game of Beat the Clock. As agents, we make the daily calls to the lender begging for action, calls during which we may speak to a half-dozen or more different people looking at different computer screens, each of whom will tell us we will be hearing something in “a week to ten days.” Each new day, we rinse and repeat, but we ultimately have no control over the pace at which they will consider and act on our client’s request. So, often, the weeks become months, the buyer loses interest, and we find ourselves in a position of having to start the process again. And sometimes, it is just too late.

Finally, while most of us have resigned ourselves to short sale listings, both because they are becoming so commonplace that they can’t be avoided and because we feel a social obligation to assist all sellers, even when it is not convenient, comfortable, or even lucrative, agents representing buyers today are running for the hills in greater numbers at the first sign of bank involvement. They are doing this for all of the reasons previously mentioned, and they are doing this because short sales do not pay handsomely. The listing contract can call for a 6% or a 16% commission, but if the bank’s approval after months of time and effort stipulates that I will make $1.95, that is what I will make. We have yet to see a short sale transaction of our own that didn’t involve an arbitrary, eleventh hour pay cut to the agents.

In Phoenix, it seems that even the listing agents are thinking twice about taking on short sale listings. Phoenix is a different market, however. While Jay Thompson cites a 90 to 95% failure rate for attempted short sales in his market, Steve and I are currently (and fortunately) batting a thousand.  But it hasn’t come without a lot of brain damage along the way.

Short sales are, at least for the foreseeable future, going to be a sad reality of our market. If you find yourself in the position of needing to sell short, recognize that the process is complex and potentially lengthy. There may be tax and credit consequences, so it is advisable to chat with a CPA or attorney at the first sign of trouble. Your second call should be to an agent who has some experience with these transactions and is prepared to stand by you throughout the process.

photo credit: sooperkuh

I had fully intended to quickly bury yesterday’s “What day is it?” stream of consciousness post with something a little more relevant to real estate, but I got sidetracked.  I had an unscheduled crisis on my hands. Consequently, I found myself spending the better part of the day appealing the appraisal of a seller client’s home, an appraisal which missed by not a few Benjamin’s but by a whole bunch and threatened to derail an otherwise fine escrow.

In the case of my low appraisal yesterday, there were so many things wrong, I didn’t know where to start. It marked only the second time in eleven years that I have had an appraisal come in low on one of our transactions, and the other not so coincidentally was just a couple of months ago. So, it seems like a good time to post a cautionary note to sellers. Just because you have a buyer who is willing to pay “X,” “X” being a palatable price to you, this doesn’t mean you are going to be cashing that check. And if you are unrealistic about pricing yet happen to hit pay dirt with that one buyer who is willing to pay more for your home than the market would suggest he should, you will still have a very large appraisal hurdle to overcome.

I often fret the appraisal these days for many reasons. A slower market and fewer sales means fewer “comps” on which the appraiser can base their estimate of market value. And, lenders who are paying for their blank check-writing practices of the past several years are skittish, with the result being that appraisers are under more pressure to make a defensible and even conservative determination of value.

I didn’t see this one coming. It was a no-brainer, as they say. In an area of few sales over the past six months, we were lucky enough to have a carbon copy, a model match, around the corner which sold just one month ago. Well, there was one difference — our model match enjoyed a location which, in technical appraisal speak, would be considered inferior. In this case, inferior means it backed to a very busy four-lane road. For all but the most devoted NASCAR enthusiasts, this would be considered a negative. 

Our appraisal made no adjustment for location. Our appraisal was also fraught with errors in the areas of features, amenities and even views. More surprising though was that our appraisal factored in a time diminution of value. More recent sales were dinged at a rate of almost 1.5% a month to reflect a declining market. It was the whole declining market argument that had me scratching my head.

What a strange and different market we are dealing with. Five years ago, anyone could get a loan for any amount. Today, even the most qualified buyers are having to undergo a lengthy interrogation process to secure financing. When we were in the throes of a rapidly appreciating housing market, one where offers routinely exceeded asking price and always exceeded the price of the last comparable sale, we still had to sweat the appraisal, but we did so because appraisers were reluctant to give consideration to market trends. Today, the rules are apparently different.

Past performance may not be indicative of future results. Then why is it OK for an appraiser to assume as much? And if every appraisal used this declining market logic in determining value, how would our market or any market reverse course? I understand, from the lender’s perspective, the need for caution in this market. And I understand the need for appraisals to confirm that a contract price is reasonable, in the ball park. But, if a transaction is found to be legitimate, arms length, and absent fraud, shouldn’t appraisers be recognizing that the biggest determiner of value is what a buyer is willing to pay?

I suppose not. One last side note. Short-sales and bank-owned sales do matter. They are “comps” today and, at least in our case, no adjustment was made for the distress nature of these sales. Fortunately, we were successful in getting our appraisal overturned, but Seller beware. Your home is not sold until the Fat Lady closes escrow. And this requires that the property appraise at contract price, which is no small feat in our current market.

And the Powerball jackpot number is 697,500.

The big news today is that both the FHA and conforming loan limits for San Diego County are now $697,500, this according to the Department of Housing and Urban Development. That’s the easy part to digest. What precisely this will mean to borrowers, and when, is a little more unclear.

I took the opportunity to chat briefly this afternoon with Tim Fiero, Senior Loan Consultant for Home Services Lending.  Lenders and mortgage brokers are busy, busy folks this week, so a big Gracias to Tim for agreeing to give me a little of his time and a lot of insight.

 

 Podcast with Home Services Tim Fiero [16:59m]: Play Now | Play in Popup | Download

From Virginia’s Jim Duncan:

Honor and personal responsibility should have a place in our society. Sadly, that seems not to be the case.

Oh, this morning is not the time to get me started on that one, but I am moving on.

Alert reader and inquisitive mind Jakob asked me in an email yesterday what I thought about Ben Bernanke’s gentle nudging to lenders to forgive a portion of principal balances on troubled home loans. I had to let the question stew overnight for two reasons: I was really busy yesterday, and I needed to avoid an emotional response. It is what my father-in-law called the “24-hour rule,” and for a girl prone to spontaneity, I have found it an essential one.

Hat tip to Jim Duncan for saying what I wanted to say and for saving me a few brain cells in the process.

In fact, the more I think about it, the idea of rewarding those who fail to take responsibility and to live up to their commitments is just crazy-talk, a concept that should be snuffed out by those of us who play by the rules and live by our decisions. Sure, you can make the argument that the banks would be making a sound business decision, and the result would be reduced losses and a healthier bottom line. But if we were to allow this kind of corporate thinking to prevail, where would we be?

Imagine a world where someone could buy a dress from Nordstrom and return it after the event, no questions asked, resulting in higher overall prices for those who chose not to return a worn item. Consider a society where people would shoplift sundry items from the drug store, resulting in a mark-up on similar goods sold to the honest shoppers. Soon, hospitals would start charging more for their treatment of patients to compensate for non-payment from the patients who can’t or don’t pay. Reckless drivers and uninsured motorists could start causing insurance companies to raise their premium rates.

Heck, real estate agents might even argue that costs associated with marketing homes for clients who change their minds and with showing buyers homes every weekend for three months to have them walk into an open house and sign with the listing agent are necessarily factored into the fees they charge their most loyal customers.

It’s crazy-talk, I tell you. And it’s business as usual, like it or not.

Phil Hoover at the Boise Blog (they tell me that’s in Idaho) suggested that foreclosed properties aren’t always the best deals in town. You will find no argument from Steve and me, yet this seems to be a common misconception among many would-be buyers currently trying to sniff out an opportunity for instant equity.

Much like agents like to toss acronyms about (MLS, NAR, GRI)  forgetting that not everyone in the real world understands our curious language, we tend to speak in tongues when it comes to distressed property sales: REO, short sale, foreclosure, NOD. These terms are so much of my daily life, that I often forget that not everyone really understands their meanings. I was recently discussing a home for sale with a (very savvy) client. Upon my mentioning that it was a short sale, my client asked, “What does that mean?” So, first a little primer.

Homes for sale in the San Diego real estate market today come in many different flavors, and can generally be broken down as follows:

• Traditional, non-distress sale: Owner needs to or wants to sell and has equity. At closing, seller will receive proceeds from the sale.
• Traditional, distress sale: Owner needs to sell due to personal circumstances. Time is of the essence, they are highly motivated (not selling is not an option). 
• Short sale: At closing, proceeds from the sale will be insufficient to cover the costs and encumbrances including costs of sale (title, escrow, agent fees) and money owed to lenders, the tax collector, and other lien holders. In these cases, the seller will look to the lender(s) to accept less than what is owed as repayment. The lender may forgive the debt or they may require future repayment of the balance due. This may have credit rating and state income tax implications, but thanks to recent Federal legislation, the forgiven debt might not be subject to Federal income taxation.
• Potential short sale: Depending on the final sale price, the seller may or may not be in a short position. We call these “squeakers.”
• REO (or Real Estate Owned): The lender has foreclosed on the property and was unable to sell the home (for an “acceptable” price) at auction. The bank is now the owner, and they are trying to clear the inventory.
• NOD (or Notice of Default): This is not a type of sale, but a circumstance which may apply to all but the REO and Traditional/Non-distress sales. A Notice of Default is recorded by the lender when an owner has failed to make scheduled loan payments over a period of time, usually three months, but this can vary. A NOD marks the beginning of the foreclosure process.

Steve is working with a buyer right now who only wants to see bank-owned and short sale listings. No matter how often he reminds the buyer that there are equally attractive opportunities in the form of traditionally listed properties, he only wants to see the REOs and shorts. Alas, the customer is always right, so that is what he gets. But, as Phil pointed out, REOs and short sales come with a lot of baggage, and a buyer shouldn’t assume that these situations present the best value proposition. They often don’t.

First, these distress sale properties are rarely in excellent condition, and the buyer will most likely be taking them in their present state; what you see is what you get. There is a slightly better chance that you can negotiate repairs in the REO situation (and we have successfully done this on numerous occasions), but this will come in the form of a credit, usually toward price, so don’t expect a turn-key home delivered to you at closing.

Secondly, banks do not perform at Mach speed. They are big, they are bureaucratic, and, mostly, they are very, very busy. A response within thirty days of offer submittal is cause for breaking out the party hats. In fact, our most recent short sale listing left buyer, seller, and agents living in a three-month cone of silence. Some lenders are better than others, and REOs tend to move more swiftly, but every distress sale adventure is a surprise package. If timing is an issue, these are not the homes for you.

Finally, if your purchase is contingent on the sale of another property (you have a home to sell), forget about it. You are automatically disqualified; thank you for playing.

Homes are sold for many reasons, and the sellers each have different reasons and different degrees of urgency. “Motivated” sellers come in many flavors. A stereotype may sometimes, even often, prove true, but when a buyer limits themselves to only one type of sale situation, they may be selling themselves short.

(Standard disclaimer applies: We are not attorneys or accountants. You should always seek the advice of these professionals if you are a homeowner who finds yourself in one of these distress sale situations.)

Amended to add this link to a related (much more comprehensive) article: 3OceansRealty. Geez, what a copy-cat I am! I need to get out more.

 Now that Kris has documented her deteriorating physical condition to the world (see previous Post), the sympathy messages are pouring in. The least I can do is pitch in around the home-front while she is swimming in the depths of self pity and feeling really icky. The really sick part about this is what she would appreciate most from me right now - A substitute blog post. Off the bench I come.

I usually don’t do well under this kind of severe pressure, but I have about 15 minutes to pull this off before she drags herself back into our office and starts another post. If I am successful, I may get her to go back to bed and have a chance at tomorrow.

So this is my opportunity to throw my hat into the ring that is already full of hats from all those who have dissed the governments economic incentive/recovery plan. Let me be the 10 millionth person to say that the rebate concept sucks and won’t work. It’s pocket change, nothing more. But it’s politically “necessary”, especially in an election year. Who would oppose it, even though it will have no more beneficial value than the Doc telling Kris to take two aspirin and call him in the morning.     

The increased conforming loan limits, now that’s another story. For San Diego it’s equivalent to an announcement that a couple of Fortune 100 companies have decided to move here (no wait, that’s nirvana). With an average sale price of over $712,000 last year (SANDICOR) it does not take a math degree to figure out that this will help a lot of people here.  Which brings me to the mortgage issue.

According to the “Average rates and indexes” (Federal Reserve Statistical Release  H-15, whatever that is) in the San Diego Union last Sunday, conforming loan rates last week were 5.51% w/1.2 points. Nonconforming loan rates were 6.53% w/1.2 points. It’s obvious that with an average savings of 1%, or more, many more buyers will be able to come off the sidelines, maybe just in time for American Homebuying Day.

What really amazed me, though, was that the FHA/VA rate was 6.58% w/1.9 points. Excuse me? Does any one else see the cruel irony? Here we have two government programs that were established first and foremost to help qualified but lower income borrowers and our veterans and they are offering loans at the highest rates around.

How about this? Maybe instead of sending $150 billion in meaningless checks out this spring, the government ought to take those funds and offer to subsidize/buy down the interest rates for the tens of thousands of veterans who have given up so much for the rest of us. BTW- In the interest of full disclosure, I proudly count myself among them. I have never been able to take advantage of my GI Bill - VA loan benefit because the rate has almost always been higher than prevailing rates. Now it’s higher than the rate for a non-conforming loan! That’s gratitude for you.

I would enjoy hearing from the mortgage experts out there who may be able to explain this. I would certainly be interested in knowing why the government is offering a “penalty” rate to our veterans. Disgraceful.  

Sometimes we (”we” being one-dimensional real estate agents) assume that our clients know something simply because we are on board. This week, I had conversations with two separate people during which I was reminded that not everyone is all-consumed with matters of real estate. What may be common knowledge to us may not be so for our clients who lead more normal lives with more balanced interests.

So, today I bring you a new twist on our old version of “Ask the Brokers.” I call it “What You Might Have Asked the Brokers Had You Known the Question.”

Q: What does the Mortgage Forgiveness Debt Relief Act of 2007 mean to me?

A: This bill was signed into law on December 20, 2007. For homeowners in a mortgage mess, the Debt Relief Act was President Bush’s Christmas present to you.

Prior to December, any debt forgiveness on the part of your lender, such as might occur during a short-sale or foreclosure, came with the potential for the “gift” to be considered gross income and subject to Federal income tax. Under the new law, forgiven debt on a principle residence is not subject to this taxation. There is one caveat - Any forgiven debt will be subtracted from the basis of the property, so in theory a homeowner could find themselves with a taxable gain, but I suspect these cases will be rare, since Federal law still allows exemptions of $250,000 for individuals and $500,000 for married couples.

As a somewhat unrelated aside, this law also gives a surviving spouse two years after the death of a spouse to sell a principle residence and still qualify for the full $500,000 married capital gains exemption.

Q: Can I lower my property taxes?

A: You can not lower your property tax rate, of course. The rate is set by law. You may, however, be in a position to lower the assessed value of your property which is the amount on which you are taxed.

In California, only when a property transfers (is sold), or in the case of new construction, is completed, is it reassessed. For ownership transfers, the purchase price becomes the new assessed value. Proposition 13 limits subsequent increases in the assessed value to 2% annually, based on the California Consumer Price Index. Our California property tax rate is 1% plus any bonds, fees, or special charges.

In an environment of declining home values, many homeowners are now finding that the market value of their home is less than when it when it was purchased. The County of San Diego has a process for dealing with these situations wherein the homeowner may appeal their assessed value.  

From the San Diego County Tax Assessor’s web site:

Under State law, if the current market value of your property (recent comparable sales) falls below the assessed or taxable value as shown on your tax bill, the Assessor’s Office is required to lower the assessment. This type of property tax relief generally applies to recently purchased property. There are two periods during the year in which the taxpayer may appeal their assessed value for a temporary reduction:

(1) Between March through May:

During this period, the taxpayer may submit a written request to the Assessor, indicating their opinion of value and providing supporting documentation, such as sales of comparable properties or a recent appraisal. For more information, call (858) 505-6262.

(2) Between July 2 and November 30:

During this period, the taxpayer must file an application form. Appeal forms can be obtained and must be filed with the Clerk of the Board at 1600 Pacific Highway, Room 402, San Diego, CA 92101-2471. For more information, call (619) 531-5777.

So, there you have it, since you didn’t ask.