investors

The “Shadow” knows.

Back in July, I mentioned the growing phenomenon of the so-called “shadow” inventory, which are the properties that by all rights should have been foreclosed on a long time ago, but where the banks are, for reasons of their own, not taking any action. The mainstream media has caught up, and there are two recent articles about shadow inventory that you should know about. One is in the Wall Street Journal (subscription required), the other is in The Atlantic Monthly, which helpfully quotes at length from the original Wall Street Journal article. As the Journal puts it,

“there were 217,000 loans in July where the borrower hadn’t made a payment in at least a year but the lender hadn’t begun the foreclosure process. In other words, 17% of home mortgages that are at least 12 months overdue aren’t in foreclosure, up from 8% a year earlier.”

What is the cause of shadow inventory? It does not appear to be exactly clear what is motivating the banks’ lack of action on these properties. There may be differing reasons: a lack of personnel qualified to process the foreclosures or loan renegotiation; an unwillingness to add a flood of foreclosures to a brutalized real estate market (which might trigger other foreclosures as homeowners’ equity evaporates); or, perhaps the most sinister reason of all — the banks are simply hiding their toxic assets. While it is one thing to have a nonperforming loan on your books, it is another thing entirely to have to write down the entire loss that a foreclosure will entail. Once this loss is realized, bank regulators may require a concomitant increase in reserves, at a time when cash is in short supply. The end result could be bank failure, and we’ve seen plenty of these already this year.

What does this mean for the real estate investor? One possibility is that the banks will be able to carry a lot of this inventory until the broader market recovers, then start selling it off in in an orderly process. The other possibility is that the housing crash might not be over until all of REO inventory is cleaned out, whether or not the bank acknowledges it as an REO. What will happen? Only the shadow knows.

investors

Why I Joined Keller Williams® Realty

As some of you know, after interviewing with several companies, I recently changed my affiliation to Keller Williams® Realty, Inc. KW is now the third largest real estate company in the United States. Based in the high-tech hub of Austin, Texas, KW claimed the number three spot with 72,794 U.S. associates at the end of 2008. As my territory expands to cover the Westside and higher-end neighborhoods, I decided it was crucial to ally myself with a market leader like KW. How great is KW? Don’t take my word for it: JD Power & Associates rated Keller Williams as the Number 1 ranked real estate company in buyer satisfaction. My only goal is to keep us there, while improving the client experience in any way I can.

Why did I join the ranks? KW is a fast-paced and fast-growing company that has a presence in all the major market areas of Los Angeles. One of the reasons behind its growth, is that KW is one of the leaders in applying technology to dominate the real estate market. Either as a buyer or seller, when you have superior information, you have the power to get the best deal possible. I plan on bringing as many technological advances to my clients as possible — with KW’s assistance and the power of a large organization behind me.

Finally, for my investor clients, KW has a commercial side, and I plan to team with them when it comes to listing and locating appropriate properties for investors.

investors

Can You Afford to Throw Away Up to $8,000.00? November 30th Is Just Around the Corner.

The federal first time homebuyer tax credit will expire — poof! — and you’ll have officially blown your chance to access up to $8000 if you can’t get into escrow and actually CLOSE THE DEAL by no later than November 30th, 2009. Thus, some are suggesting that if you are a first time buyer that you try to get a property under contract by September 30, 2009 in order be able to have plenty of time to close before the deadline. (There is always a possibility, of course, that the credit will be renewed or changed by Congress — but are you feeling lucky?)

California is a very desirable place to live — but it is also the 47th lowest state in homeownership with a rate of only 56.9% according to the US Census Bureau. Since the last recession ended in the 1990s, it became increasingly difficult to afford to buy a property in California and, in particular, in Los Angeles. The recent real estate and financial market crash has had a silver lining — real estate is now more accessible then it has been in a long time.

In Woodland Hills, from the beginning of this year up to 7-26-09, a 3 bedroom 2 bath house with about 1315 square feet averaged just over $400,000. This translates to a monthly payment of less than $2,250.00 with 3.5% down payment (FHA) and a hypothetical interest rate of 5.6%. By comparison, it would likely cost you $2,300.00 to rent the equivalent place, a rent payment that is very likely to increase over the next thirty years. What you gain by owning vs. renting is the interest tax deduction, and up to $8,000.00 in the form of a tax CREDIT provided you qualify and close escrow in time. (Do keep in mind that there are other costs, taxes, insurance etc. — but also intangible benefits to homeownership. Plus, if you get a fixed rate mortgage, as we advocate, your investment will be sheltered from inflation.)

If you find yourself overwhelmed by the buying process (from getting pre-approved to selecting your property), please let me guide you so that the process is as smooth as possible — perhaps you will find yourself in a new home in time for the holidays.

investors

Prices down 12% — But Inventory Plunges 75% in the Northwest San Fernando Valley!

Compared to a year ago, the median sold price for a single family residence located in the northwest San Fernando Valley has dropped 12% to $425,500. However, a few months ago the numbers were even uglier. Since April 2009, the price trend has started back up, possibly in part due to the influence of the first-time buyer $8,000.00 tax credit — which is set to expire in December, and investors snapping up distressed properties.

But, even more interestingly, we are now looking at only two months of inventory for single family houses! This figure shows that how little inventory there is to meet demand, potentially contributing to a surge in prices. Much of the current inventory is REO or short sales. However, the real inventory may be even higher: the published figures don’t take into consideration what is referred as “shadow inventory,” where banks are either delaying putting their inventory on the market, or are delaying foreclosure, meaning that some “zombie” properties are not being taken back . . . yet.

If you are interested in finding out how your particular area is doing, please email me and I will be happy to forward it to you.

investors

Gazing Into the Crystal Ball: When Is the “Best” Time to Buy a Home or Investment Property?

Have we hit bottom yet in Southern California?   I’d love to look you straight in the eye and confidently predict “yes, this is it, break out your checkbook and buy, buy, buy,” except for one thing.  I’m not a fortune teller and I don’t have a crystal ball.   In fact, I can honestly tell you I have no idea where the bottom will be reached (presuming it is not there already.)   Moreover,  as you already probably know quite well,  no one can predict the future.  Even the professionals to whom we pay good money for their prognostications can’t do it either.  Not your stockbroker, not the ratings agencies, and certainly not the big name pundits you see on TV.  For a hilarious if somewhat long video of some famous folks (like Ben Stein) who got it famously wrong on a very public forum see this:

That might be enough to make you sick to your stomach, and at least,  to swear off financial pundits forever.  Unfortunately, real estate punditry is not much better.   While real estate tends to move in much slower cycles than the stock market, and is therefore somewhat easier to predict, no one will know when the bottom has been hit.   Everyone wants to buy at the bottom, to have something to brag about over the water cooler if for no other reason.  While there have been some “green shoots” on display recently, many are bracing for the next wave of foreclosures and layoffs.   However, as real estate broker and blogger Frank Borges Llosa put it in his blog, the exact correct day to buy is simply “the day you stop caring about the bottom of the market and you decide you are ready to live in a place for 5-10+ years and enjoy life.”

Of course, even Frank’s sound advice falls a bit short if you are looking for an investment property, like a duplex, triplex or fourplex.   However, there are some rules of thumb I like to consider.  How close is the cost to the replacement cost?  What is the potential appreciation?  Since the San Fernando Valley is pretty much built out, they are not making any more land around here.  (The same cannot be said for some other areas, such as Riverside or San Bernardino.)  Given that construction costs are likely to go up with increasing regulations and costs of materials, the closer you can get to buying something  at or below replacement cost, the less risky the investment — presuming it is in an area where the rental demand will remain relatively stable.  Can I make money off it — if not right now, when?   What is the job climate like?  Admittedly, Los Angeles is not as economically healthy as it has been in the past, but there are some things that will always make this area desirable to many — the climate, beaches, entertainment business, etc.    Finally, real estate is an illiquid investment and one in which the market is still quite inefficient — which can be a good thing if you are a buyer and can score a property for significantly below market value, you can protect yourself against some further declines in the market.   (Good luck trying to buy a stock below market value!)

In conclusion:  I still love real estate as an investment — the long term fundamentals are hard to beat, notwithstanding the day-to-day uncertainties of the market.   Just make sure to buy the right property and lock in your fixed rate financing.  How can you find a great deal?  You’ve got to work at it, I’m afraid.  But I can help:  send me an email and I’ll get you started with daily MLS search information tailored to your particular wishes.  Then I’ll help you sort through the choices.  Also, I may already know of a suitable property:  don’t be afraid to call me anytime.

investors

Hipster Alert! Is Woodland Hills Destined to Become the Next Trendy Destination?

Ok, that might be a bit of an exaggeration. But there are big changes planned for the West Valley that may well affect the desirability (and price) of homes in Woodland Hills and surrounding areas. On the almost-empty (save for a new Crate & Barrel) parcel of land that separates the Westfield Promenade and Westfield Topanga, megadeveloper the Westfield Group is planning to construct what may become the “Third Street Promenade” of the West Valley. In fact, the planned development (called The Village at Westfield Topanga) will look so much like the Third Street Promenade in Santa Monica, that Westfield used a photo of the actual Third Street Promenade in its marketing efforts: check out the fourth slide on http://westfield.com/thevillage/

Westfield’s information about the Village on its site is a bit sparse – it does not seem to have been significantly updated since 2007 – but the developer claims to be “exploring” “community amenities” for the Village including a “senior/community center, museum component with interactive educational programs for children, water features . . . public art displays, such as sculpture gardens, gourmet grocery store, and open air plaza.”
What does the planned Village development mean for the West Valley? Perhaps, finally, some nightlife of the non-enclosed mall variety, some more restaurants and a place to hang out during the warm Valley nights. Time will tell whether the actual development will be a plastic-y replicant of actual life (like the taste-challenged Universal Citywalk), or something with some character. Given the current state of the economy it may be some time before the Village is anything besides a dream on a piece of paper. But, if the Village development takes place as planned and it is well executed, it will add a sorely needed amenity to Woodland hills, and may well have a positive impact on the market value of surrounding areas.

investors

Number of Woodland Hills Homes In Escrow up 55% over last year

It appears that home buyers have finally been coming out of the woodwork lately. Looking only at single family detached homes in Woodland Hills, the number of properties going into escrow has been leaping recently. The latest figures from SROAR comparing May 08 to May 09, show an increase of 55% of such homes going into escrow. I would not be surprised to see this trend continue, at least if the interest rates stay relatively low (and they still are, even after the latest uptick).

investors

The San Fernando Valley is Hot, Hot, Hot!

Just in: the latest information from the Southland Regional Association of Realtors, as reported in the Daily News, is that the San Fernando Valley is heating up – with home sales reportedly leaping 26 percent in April, 2009. Moreover, the median price of a previously owned Valley house actually increased by 3 percent in April!

I can’t say I’m completely surprised by these stats, having recently seen lower priced houses fly off of the market, being snatched up by eager investors and homebuyers, frequently with multiple offers. The reasons are straightforward: historically low interest rates and excellent housing affordability. Many people recall what happened after the last real estate crunch of the early 90’s and are eager to buy in at such attractive prices, and many, many more can afford to buy now. In particular, the SRAR’s data on housing affordability makes the case:

“The minimum household income needed to purchase an entry-level home at $213,040 in California in the first quarter of 2009 was $38,090, based on an adjustable interest rate of 4.96 percent and assuming a 10 percent down payment. . . . The monthly payment including taxes and insurance was $1,270 for the first quarter of 2009.”

This amounts to a 41% lower qualifying income than just twelve months ago. No wonder Valley buyers are getting back into the game. I’m guessing that the real estate weather this summer will get even hotter – barring any radical spiking in the interest rates, of course.

investors

Short Sales: Walk, Run, or Run Away?

A short sale is a sale in which the lender(s) agree to take less than the amount owed upon the sale of the property. The problem in a nutshell: because so few short sales have historically resulted in closed deals they can amount to a colossal waste of everyone’s time. The Washington Post has written about the problem: “Why Short Sales Stumble.” There are a number of reasons for problems with short sales, some of which can be blamed directly on the financial institutions involved (which, in their defense, are typically overwhelmed these days), but others can be blamed on good old-fashioned PPP (poor prior preparation). In the words of the Washington Post, “Too often, sellers and their agents are calling a listing a ‘short sale’ or saying that ‘offers are subject to third-party review’ without even having talked with the lender. They plan to get a live fish on the hook before they try to tempt the lender. Do you want to be that fish?” While banks were formerly very reluctant to approve short sales, the word on the street is that they have found religion, and are now more willing than ever to short sell than ever, to avoid adding to bloated REO inventories and the costs of the foreclosure process.

How can the buyer – or, more likely your agent – separate the wheat from the chaff? Frank Llosa, a Virginia-based real estate broker (and blogger) has created an excellent and very comprehensive screening list of screening questions for the listing agent of a short sale, (assuming, of course, you can get them to answer). Mr. Llosa’s suggested email questions include:

1. Have you closed a Short Sale before?

2. Have you requested and received the short sale package from the bank, including the hardship letter?

3. Have you sent the package AND have you confirmed receipt?

4. What communications, if any, have you had with the bank?

5. Has the bank approved the list price?

6. Have you received any other offers that you are waiting to hear back from the bank on?

7. Does the loan have PMI on it? (Private mortgage insurance)

8. [Are] there one or two trusts? Any other liens?

9. What are the names of the banks? Are these FHA or VA loans?

10. How long do you estimate that the lender will take to provide an answer to an offer?

11. Has your seller completely stopped making payments on their loan.

Unfortunately, as even Mr. Llosa concedes, the chances of getting a response to all of these questions is not great, particularly via email. I prefer to just cut to the chase and see if the property is worth further evaluation with a “quick and dirty” list. Here’s the minimum questions I ask before conducting any further investigation or even thinking about showing a short sale to a client – most likely over the phone:

1. Have ALL the lenders involved approved the short sale price? If not, why do you think they will?

2. Are there any other offers on the property?

3. Do you know how long the lender typically takes to respond to an offer?

If the answers to these questions are satisfactory, and everything else pans out, I may well advise my client to put in an appropriate offer. My next advice is to move along, and continue the house-hunt as if the first offer does not exist. The reason for this is that it can easily take three months or longer to even get a response on a short sale offer, and I don’t want my clients to miss any deals that come along in the meantime. If they find something else, we simply withdraw the original offer. (As you can tell, the short-sale game is particularly suited for investors: I’m not expecting my investor clients to fall in love with a property: if it makes sense, they buy, if not, they should move on. As someone once said, “real estate deals are like buses – if you miss one, there will be another coming along any minute.”)

investors

Signs of Seller Capitulation in the Los Angeles Market: Is The Bust (Finally) Over?

According to Forbes.com and Radar Logic, a New York-based data provider, sales of non-distressed Los Angeles properties are up 6% from a year ago and now make up 58% of all transactions. The same article reports that L.A. houses were recently going for $236 a square foot on average, down 25% from March 2008. What do these statistics mean? Certainly, more sellers have given up on unrealistic price expectations. In financial markets, market capitulation is the “term is used to indicate the point in time when investors have decided to give up on trying to recapture lost gains . . .” and may signal a bottoming (if not rebounding) of the market if enough sellers join the capitulation party. Thus, Wall Street pundits spend a lot of time trying to decipher when the market has finally “capitulated” so they can go plowing back into equities. However, the problem is that no one really knows when the bottom has been reached: at least not until after the fact. Intriguingly, the Associated Press recently reported an upswing in prices in Northern California – is Southern California next? We suspect that, for the low-end properties in the San Fernando Valley, the bottom may already be in place. The reason we think this is that the rent to purchase price ratio (the equivelent to the price/earnings ratio or P/E ratio for stocks) is at the most attractive valuations in years. This fact, coupled with historically low interest rates, is driving a resurgence in demand in cheaper properties, and rightfully so.

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