Beating out Investors for REO Properties

The ongoing real estate crisis has created huge opportunities for buyers and investors in the Real Estate Owned (by bank) or REO properties. Where there is opportunity, there is competition. Since banks usually prefer cash for REO transactions, individual buyers considering purchasing a REO must often combat competition from investors. But there are ways for home buyers to stay ahead of the competition from investors.

The first step starts with picking the right agent. It’s a good idea to call and interview a bunch of agents in your area. Ask them about their experience with REO sales. Ask them how many they have sold in the past few months. Get some client references. Experienced agents can help find homes that are in better shape than others, and can also help you with various aspects of the paperwork involved.

The fiercest competition for REOs is for the entry level or first time home buyer properties. This is because such homes can be rented quickly by investors, which gives them positive cash flow. Investors also like fixer-uppers because they can be easily fixed and flipped to first time homebuyers that qualify for FHA mortgages. Most first time buyers make lowball offers on REOs and this is where they get beat by seasoned investors. That’s why it behooves to seek the services of an agent that’s well-experienced in REOs.

Since most REOs are sold as cash-only deals by banks, it is imperative to get prequalified and obtain a “proof of funds letter” from your bank. This must be submitted along with the initial offer. This letter is typically a bank or brokerage statement which proves that the buyer has cash in hand to purchase the home immediately. So if you have liquid cash and an experienced agent to represent you, buying a bank owned property can be a very good deal.

Both Fannie Mae and Freddie Mac are currently offering incentives to buyers and selling agents as a way of liquidating their REO inventories. Fannie Mae sells its REOs through its HomePath program. Agents can get $1,200 as selling bonus on qualified properties. Buyers can get up to 3.5% of the sales price to put toward closing costs if they make the REO their primary residence. Buyers must request the incentive during the initial offer. Offers submitted on or after June 14, 2011 and closed by the end of October 2011 are eligible.

Freddie Mac’s HomeSteps’ program also includes a $1,200 bonus for selling agents, and up to 3.5% of the buyer’s closing costs on offers that meet the criteria. Initial offers must be received between May 16 and July 31, 2011 and closed by September 30, 2011. Buyers also get a 2-year Home Protect Home Warranty, which covers plumbing, electrical, air conditioning, heating, and other major systems and appliances. These offers are only available for owner-occupied homes.

Freddie Mac, Fannie Mae and the Department of Housing and Urban Development (HUD) prefer buyers that occupy homes over investors who typically rent or resell them. Therefore, some banks will only accept offers from potential owner-occupants for the first 10 or 15 days that a property is on the market. If you are fully prepared, you can move fast and capitalize on the opportunity.

In addition to being prequalified for financing, you must also have an inspector lined up to help you evaluate any property you are seriously considering buying, since foreclosed properties tend to be in worse shape than those sold by homeowners. The few hundred dollars you would spend on the inspection is definitely worth it because you’ll know what’s wrong and how much it would take to fix. Having this knowledge can help you negotiate with the bank.

Although these steps cannot guarantee that you would beat an investor in scoring a REO, it will certainly improve your odds.

Freddie Mac offers incentives on REOs

Freddie Mac has come up with a summer sales promotion to promote its inventory of foreclosed homes. This is being done through Freddie Mac’s real estate sales unit, HomeSteps.


The promotion, which is an extension of Freddie Mac’s First Look Initiative program, hopes to boost sales of foreclosed homes by offering up to 3.5 percent in closing cost assistance to homebuyers. The promotion also offers a $1,200 signing bonus to buyer’s agents for offers received between May 16, 2011 – July 31, 2011 and escrow closings no later than September 30, 2011.

Fannie Mae, which offered a similar closing-cost incentive this past spring on its HomePath properties, requires escrows to close before June 30, 2011. Fannie Mae has also advised that offers submitted after May 15, 2011 may not meet the June 30 deadline.

Similar closing-cost incentives offered by Fannie Mae on HomePath properties this spring require escrow to close by June 30, with Fannie Mae advising that offers submitted after May 15 may not meet that deadline.

The HomeSteps summer sales promotion is not available for investors. This offer is valid only on HomeSteps homes sold to owner-occupant buyers. People taking advantage of this promotion don’t need to be first time homebuyers to be eligible, but they must buy the home as their primary residence.

As an example of savings through this offer, if the purchase price of your home is $150,000, HomeSteps will pay up to $5,250 towards your closing costs. However, it must be noted that HomeSteps will only pay up to 3.5% of your purchase price in closing costs, not to exceed the total closing costs. For example, if your purchase price is $125,000, and your closing costs are $4,250, HomeSteps will only pay $4,250, an amount equal to 3.5% of your purchase price. In any event, HomeSteps will not be obligated to pay any closing costs if you do not pursue and obtain financing for a qualifying home. You will pay all closing costs not covered by HomeSteps.

To make the offer even more enticing to buyers, HomeSteps is throwing in warranty benefits through SmartBuy. Since the home is a foreclosure property, it may have had damaged or missing appliances and systems prior to closing, Home Protect provides discounts of up to 30% on repairs for these instances. It also provides discounts of up to 30 percent on the purchase of appliances. This gives buyers some peace-of-mind, knowing that their home and budget are protected. The two-year Home Protect limited home warranty covers electrical, plumbing, air conditioning, heating and other major systems and appliances.

According to Fannie Mae, its REO inventory was up 39 percent to 153, 224 homes from March 2010. Fannie Mae reported 65,159 single-family homes in its REO inventory at the end of March, which was up 21 percent from March 2010.

Homes in foreclosure may sell more quickly this summer due to the HomeSteps summer sales promotion. To take advantage of this great offer, contact one of our real estate agents to show you HomeSteps homes in your area.

Draft bill would hike FHA loan down payments to 5%, slash loan limits...

A bill has been drafted by Republicans in the House Financial Services Committee which would raise the minimum down payment for FHA mortgages to 5 percent, reduce FHA loan limits in most markets and transfer the Agriculture Department’s rural housing program to U.S. Department of Housing and Urban Development (HUD), FHA’s parent agency.


Although the draft bill has not been introduced, it is likely to be formalized and rushed through subcommittee and committee votes and forwarded to the full House for action. It appears that the draft bill is a partial response by the House Republicans to the Obama administration’s call for reducing the size of federal government in housing.

The bill is expected to shrink the FHA loan volume in the country by lowering the maximum FHA loan limits in large numbers of local areas, which is well below the limits that are currently scheduled to apply on October 1. This will eliminate a resource for some home buyers who find it difficult to obtain a conventional mortgage.

Here’s an example of the current FHA loan ceiling, how it is scheduled to change in October, and where it would end up under the proposed draft bill. Monroe County in Florida would see maximum FHA loan limits go from $729,750 to $425,000. Under the scheduled Oct. 1 statutory decrease, the county which comprises the Florida Keys would have a $529,000 maximum. Sarasota would see a $261,250 drop under the bill, Miami-Dade a decrease of $161,250, and Orange County (Orlando) limits would decline by $128,750.

The FHA loan limit formula under the proposed draft legislation would be revised to 125 percent of the median home sale price in the local county, and the current $271,050 floor for loan limits nationwide would be eliminated.

Many industry groups are criticizing the bill’s call for a 5 percent minimum down payment on FHA loans. The National Association of Home Builders (NAHB) and the National Association of Realtors have opposed such legislation in the past, stating the lack of statistical evidence that adding 1.5 percent to the current 3.5 percent minimum would drastically affect default probabilities of new FHA homes.

It is expected that the higher down payment requirements along with the bill’s exclusion of financing closing costs, would make it difficult to purchase a home for a large number of home buyers. Analysts estimate about 40 percent of FHA borrowers to fail because they will not be able to afford the transaction.

The sponsoring members of the bill said the move to transfer the Agriculture Department’s rural housing program to HUD makes sense because it already has the housing responsibility and the expertise.

The proposed bill has a good chance of passage in the full House because it is controlled by Republicans, but it is definitely a tough sell in the Democrat controlled Senate, where the support for continuing FHA’s role in the market is much stronger, and any drastic cuts in loan limits in expensive housing markets is not likely to happen.

NAR Study finds Americans favor Smart-Growth communities

The National Association of Realtors’ (NAR) Smart Growth program conducts various surveys to gauge public opinion on land use, growth and community issues.


Smart Growth is an urban planning and transportation concept that concentrates growth in dense urban areas to minimize sprawl and advocates compact, transit-oriented, walk-able, bicycle-friendly land use, including neighborhood schools, complete streets, and mixed-use development with a range of housing choices.

NAR’S 2011 Community Preference Survey explores Americans' wants regarding neighborhood characteristics such as proximity to parks and shopping, walk-ability, and commuting time, and the trade-offs in home type and size that people may be willing to accept in order to obtain those neighborhood preferences. Walk-able communities are defined as those where shops, restaurants and local businesses are within walking distance from homes.

Interestingly, the survey reveals that most Americans would like to live in “live, work and play” planned communities where shops, restaurants, and local business are within a short commute (by walk or other means) from their homes, as long as those communities can provide detached single-family homes.

According to the survey, 56% of respondents prefer smart growth neighborhoods over neighborhoods that require more driving between home, work and recreation. The survey also shows that most Americans would choose a smaller home and smaller lot if it would keep their commute time to 20 minutes or less.

When considering a home purchase, 77% of respondents said they would look for neighborhoods with abundant sidewalks and other pedestrian-friendly features, and 50% would like to see improvements to existing public transportation rather than initiatives to build new roads and developments.

The survey also revealed that while space is important to home buyers, many are willing to sacrifice square footage for less driving. Eighty percent of those surveyed would prefer to live in a single-family, detached home as long as it didn’t require a longer commute, but nearly three out of five of those surveyed—59%—would choose a smaller home if it meant a commute time of 20 minutes or less.

Community characteristics are very important to most people according to the survey. When considering a home purchase, 88% of respondents placed more value on the quality of the neighborhood than the size of the home, and 77% of those surveyed want communities with high-quality schools.

So what does all this mean? Is the pendulum slowly swinging back to smaller houses, or is this a reaction to rising energy prices and the push to reduce America’s consumption habits? It could also be due to the aging baby boomers who’ve been tired of long commutes to the ever-sprawling suburbs in metro areas for decades. There are no clear answers and only time will tell if this trend is here to stay.

NAR’s President Ron Phipps said “Realtors care about improving communities through smart growth initiatives. Our members don’t just sell homes, they sell neighborhoods. Realtors understand that different home buyers are looking for all kinds of neighborhood settings and that many home buyers want walkable, transit-accessible communities.”

Regulators, Banks Reach Deal to Correct Foreclosure Flaws

Complaints about the foreclosure process being unfair to delinquent borrowers who have been trying to keep their homes were finally addressed in the second week of April, when the country’s largest mortgage lenders reached agreements with federal banking regulators.


Consumer advocates had been raising red flags for a long time about what they considered to be fundamental flaws in the foreclosure process. These flaws are expected be corrected by the settlement that was reached with the largest banks. In a related development, the attorneys general from all 50 states as well as the Department of Justice and other federal agencies are also seeking to settle with lenders.

The Federal Reserve and other enforcers of bank regulations launched a review of banking practices last year, which unveiled many violations of foreclosure processes and unsound practices. Rules were allegedly bent to hastily process applications, with an emphasis on quantity rather than quality and accuracy. The newly reached agreement is expected to fix the problems unearthed during the investigation, as well as improve governance, and the loan-modification process.

The agreements require the mortgage servicers to improve their communications with borrowers and to limit the extent to which they can pursue foreclosure during the loan-modification process.

Lenders are also required to ensure foreclosures are not pursued once a mortgage has been approved for modification. It also requires a single point of contact for borrowers throughout the loan-modification and repossession processes.



The agreements mandate lenders to establish systems to govern external companies that conduct foreclosures and related services on their behalf, including outside law firms. Banks must hire an independent company to conduct a review of all foreclosures conducted between Jan. 1, 2009, and December 31, 2010.



Banks are also required to establish a process for providing financial remedies to homeowners that believe they have been improperly foreclosed on by the institutions.



For a long time, federal regulators had been accused and criticized for not doing anything about the unsafe lending practices that were responsible for the housing bubble and its lingering after effects. Many consumer groups have expressed their displeasure with the new agreements because they believe regulators have not gone far enough to correct the flawed foreclosure process.



These groups criticized the proposed agreements to be dilute and toothless. The main bone of contention is the fact that banks are free to come up with their own internally developed plans for correcting and fixing problems. Banks get 60 days to create their plans.



“While homeowners and communities continue to face breached contracts, obstruction and misrepresentations from servicers, the proposed consent orders provide no new directions or standards to the financial institutions subject to your supervision,” a coalition of advocates, including the National Consumer Law Center and the Center for Responsible Lending, wrote in a letter to the federal regulators. “Rather, the proposal permits the perpetrators of these abuses to design a plan to comply with existing laws and contracts. This is insufficient to halt the abuses.”

Who's the boss: real estate agent or client?

Perhaps an easy way to approach the answer to this question is by using an analogy of a car owner and an auto repair shop owner. Technically, the client is the boss at the repair shop, but does that mean the client has mastery over fixing cars? Not really in most cases. Going by the norm, the car owner is rightfully the client, but the owner of the repair shop is a “subject matter expert or SME.” In order to accomplish objectives, the car owner (the client) must appreciate and acknowledge that he/she cannot fix cars and only the repair shop owner (the SME) can. The logical conclusion of this analogy is a common goal can be achieved only with the client and the SME work cohesively, like partners. After all, their objective is the same: to get the car fixed.


The very same analogy is equally applicable and relevant while answering whether the real estate agent or the home owner is the boss. In this case, the real estate agent is the SME and the potential home owner is the client. Their objectives are the same: to find the right home. The American approach to customer service has only two golden rules: 1. the customer is always right, and 2. go back to rule number 1.

Yes, we all understand these golden rules. But the fact is not all clients are made the same way. Some are demanding, some are patient and cooperative, some are punctual and some are not…and the list goes on. In an ideal world, every real estate agent would find an ideal customer. But unfortunately, we live in the real world which is not always ideal. This is where the 80-20 rule comes in handy. Like in most real life and business scenarios, a real estate agent can consider themselves lucky if they find two ideal clients for every ten clients they represent. It would be nice if there was a scientific way of pre-screening potential clients to determine if they had all the ideal qualities. But in the absence of such magic bullets, the onus is on the agent to adapt as best as they can to all varieties of clients, or take some proactive steps to weed out the avoidable ones.

So how does an agent do that? For starters, it may be prudent for the agent to arrange a preliminary meeting with a potential client and use it as an opportunity to not only figure out the prospect’s wish list, but to also determine if the prospect has the qualities of becoming an ideal client. This can be done by keenly observing several obvious and subtle behavior patterns. Was the prospect on time for the meeting? Were they very clear and organized about their wish list or was it vague? Did the prospect think of the agent as a SME or someone who is only interested in collecting commission after the sale? Was the prospect too demanding, rude or disrespectful in any way?

Answers to these and many other mental observations can help an agent in creating a win-win, boss-less relationship that’s transformational instead of just transactional. With this approach, it is also possible for the agent to achieve a near 100 percent “ideal client” rate, wherein both the client and the SME end up “working with” each other as partners, instead of the agent ending up “working for” the Boss (client) in a one-way transactional direction.

The Role of a Short-Sale Specialist

In the midst of record foreclosures, homeowners that are desperate to avoid foreclosure are increasingly seeking short sales, where the lender avoids foreclosure of a property by selling it at a price that’s less than the mortgage on it. Short sales have tripled since 2008, with numbers reaching four million in 2010. The popularity of short sales has inspired several scam artists as well. Therefore it is very important to prudently choose a short sale specialist from a reputed real estate firm.

 

An agent that specializes in short sales plays a critical role in the entire process. The qualities and roles of a great short-sales specialist are intertwined. Here’s a short list of both: 

• Must have well developed relationships and contacts with many banks
• Be knowledgeable in bank-specific foreclosure processes
• Possess great negotiation skills to deal with multiple lien holders
•  Be familiar with Broker Price Opinions (BPO) and property valuations
• Know state laws regarding short-sales and foreclosure prevention thoroughly
• Prepare short-sales packages that get the attention of negotiators
• Know the technical process of preparing preliminary HUD-1 closing statements
• Ability to handle multiple offers effectively
• Communicate with title companies, attorneys and third parties to coordinate closing
• Deal effectively with environmental risks and code violations
• Determine if and when postponing a foreclosure proceedings is appropriate
• Prevent banks from cutting real estate commissions deeply
• Protect and offer competitive commissions so that other Realtors are incentivized
• Get banks to pay for FHA repairs to make the house more saleable
• Avoid or minimize the chances of sellers having to sign promissory notes for portions of the deficit.

  

As a realtor with Coldwell Banker Ackley Realty, Paul Antonelli has watched hundreds of people ask for help to avoid foreclosure and most of them have been given bad information about what they can do. To make sure homeowners are armed with accurate and trustable information, the Central Florida Real Estate Show will boast two additional Orlando-based experts including Colleen Mitchell, a Wells Fargo Mortgage Broker, and Charles Castellon, a real estate foreclosure attorney.

  

Antonelli said, “It is my goal to make sure homeowners know what road to take before they make any decisions, because the wrong decision could cost you. For example, if a home goes into foreclosure and the bank sells it for less than it owned, most people are completely unaware that the bank can still come after them to pay off the rest of the money even if it already foreclosed.”

 

 

You can contact a short-sale specialist at Coldwell Banker Ackley Realty by sending an email to CBARShortSale@gmail.com or visit our Short Sale Savvy Blog.

 

Decline in real estate sales greater than stated?

While most experts had predicted that the residential real estate market in 2011 would remain unchanged from 2010, many had also expected a faster absorption rate of unsold inventory of existing homes compared to the previous year. This expectation seemed real for a fleeting moment in early 2011, mostly due to the buzz created by expectations. However, recent data indicates that sales of existing homes may decline further this year.

According to statistics released by the National Association of Realtors (NAR), 4.9 million existing homes were sold in 2010, which amounted to a 5 percent decrease from 2009. But data collected by CoreLogic estimates that sales of existing homes actually fell 12 percent to 3.6 million homes. The difference in these figures is largely due to the data sources and methodologies used by NAR and others.

NAR's numbers are based on data collected from multiple listing services and large brokerages. This means properties bought by banks at auctions for the value of their outstanding loans would likely be considered as sales on the NAR data. Such properties also show up on comps as “sold,” whereas in reality, these are bank-owned unsold properties. CoreLogic gets its numbers from public sales records from courts and counties. CoreLogic believes NAR’s methodology inflates actual sales by 15-20 percent. Inventory of unsold homes on the market in November 2010 represented a 16 month supply according to CoreLogic, as compared to NAR’s 9.5 months.
If CoreLogic’s numbers are true, there are plenty of unpleasant implications worth mentioning. A slower sales rate means it will take longer to sell unsold inventory. More homes for sale in a given market mean lower prices. There are many factors contributing to the decline in sales. Anemic sales caused by the expiration of the federal homebuyer tax credits, the impact of sales of distressed properties, and the excess supply of unsold homes are all choking the sales and prices of real estate.

A national repeat-sales home-price index compiled by CoreLogic was down 5.1 percent in November 2010 from a year ago. If that trend continues, home prices nationally will probably be down 10 percent year-over-year by spring of 2011.

US Foreclosures Reach Record Highs

Foreclosures reached record heights in 2010. Almost 26 percent of residential sales in the U.S. were foreclosures in 2010, with the average sales price of these properties 28 percent less than those that weren't in the foreclosure process. Although the entire nation faced the foreclosure wrath, metro areas in particular were the hardest hit, with California, Nevada, Florida, and Arizona home to 19 of the top 20 foreclosure cities in the country.


It was a buyer's market like never before in recent times. Although there were plenty of repossessions, there were also a record number of home buyers at foreclosure sales. Foreclosures were sold at rock-bottom prices and they provided a fantastic opportunity for first-time homebuyers and investors. Private and institutional investors from Europe and other parts of the world flocked to the U.S. in great numbers to cash in on the new "gold rush."

In early 2010 foreclosures seemed to slow down. This turned out to be a smoke screen caused by government policies that were designed to apply the brakes on foreclosures. These policies added more funds to foreclosure education programs and gave lenders incentives to provide loan modifications and refinancing for troubled home owners. Experts said these new policies just stalled foreclosures in the short term.

Foreclosures in the first quarter of 2010 were 35 percent higher than in 2009. By summer, more homes in the U.S. were seized by lenders than in any three-month stretch since the housing market began to go downhill in 2006. Fourth quarter foreclosure sales were pressured because the home-buyer tax credit expired and also because of the robo-signing controversy.

Experts are expecting foreclosures to climb even higher in 2011. Some say the statistics for foreclosures in 2011 are going to look very similar to those filed in 2010.