Archive for June, 2007

A Distressed Property Update: Las Vegas

Friday, June 29th, 2007

A NARREIA. “Since the implosion of the sub-prime mortgage market at the beginning of 2007, the distressed property market has really gained momentum. This is especially true of markets like Las Vegas, where the extreme appreciation of 2003-2005 has been met with a year long cool down and the start of a slide in property value.”

“When looking to invest in a market like Las Vegas, you need to consider which investment vehicles or strategies might actually be profitable. Rent is definitely too low for properties to cash flow positively with a down payment of 20% or less. This leads most local investors to the distressed property vehicles, but not all of these vehicles work well in down and depreciating market.”

“Therefore, before you invest too much time in learning about a specific vehicle you need to determine if it will actually result in a profit. The most well known distressed property investment vehicles are the Notice of Default List, Short Sales, Foreclosures (‘on the court house steps’), and Bank Owned REOs (Real Estate Owned).”

“There are a total of 25,659 available properties on the Las Vegas MLS with only 2,995 additional properties under contract. Of the available properties, 2,048 (7.9%) are flagged as short sales.”

“Working short sales is very different than working the other pre-foreclosure investment strategy, the Notice of Default (NOD) list. When working with the NOD list, you are dealing with the owner and you are looking for properties that have a high equity, low Loan-to-Value (LTV) ratio. You need the low LTV because your profit is the difference between what the value of the home is and the amount the banks need to pay off the loan.”

“While negotiating with the owners over the equity in their house might sound challenging, it is usually cut and dried. They either understand the situation they are in and are willing to negotiate or they don’t fully comprehend that they are about to lose their house and will shut you out entirely, and this can be determined quite quickly. If they stonewall you, you move on to the next property. If they are willing to negotiate, the process is relatively simple.”

“In a short sale, however, you will be dealing directly with the bank and you’ll be looking at properties where the LTV will likely exceed 100%. The problem for the investor is two fold. First, where is the profit in this deal with the bank? Logically, the bank will want to get the most they can for the property, minimizing their losses. Seldom are banks willing to let a property go for anything considerably below today’s current market value, so this makes it very hard for the investor to work in their profit.”

“The other hurdle that you will face is that the banks are notoriously slow in dealing with short sales. Banks regularly take 4-8 weeks just to respond to an offer, and if a property is already in the foreclosure process, that time could easily extend past the Notice of Foreclosure Sale date. Additionally, the owner will have to be very cooperative in coming up with the required financial statements and writing the hardship letter, and owners who are in these situations are not typically quick to respond.”

“True foreclosures, what people sometimes refer to as ‘buying on the court house steps,’ is a cash-intensive process that is very competitive in the Las Vegas market. This makes this vehicle very challenging for most individual investors. Clark County requires you to pay the full amount of the offer immediately before the next property is auctioned, which means you need to have cash for the entire purchase price with you right there.”

“While there are a few bargains to be had, it is not the fire sale that you might think as the banks would still rather hold on to the property than give them away.”

“The banks’ current stance on valuing the properties on the high side leads to a growing REO market. REO stands for Real Estate Owned, and it is the term for a property the bank has foreclosed upon and did not sell at the county auction. What is amazing is that the banks will deny a short sale on a property only to drag it several months through the entire foreclosure process and then list it for less than the denied short sale price. While it is not yet a ‘fish in a barrel market,’ some banks are starting to deal on a few of their properties.”

“Where is this all going? Either the banks will start dealing with the current owners utilizing workouts and short sales, or the REO market will explode.”

“At the beginning of June, 2007, the banks were still playing hard ball, unwilling to negotiate in most short sale situations even in very reasonable scenarios. The only positive sign that we’ve seen recently is their willingness to arrange for workout programs for the current owners. These programs allow the owners to miss a few payments to try to get back on their feet, but this is truly a band-aid approach.”

“Owners that are not able to make their payments today will more than likely not be able to make their payments at the end of summer, and we will still see the need for either a short sale or foreclosure.”

“Until the banks face the situation squarely and start accepting more short sales, the properties will flow to the REO market and that is a good place to be looking for some bargains.”

“As the supply in that market swells, look for even further discounts to come. The local market tends to slow down in the fall and stagnate in the winter, so the distressed property market should be in its prime at that time.”

Sean Brown
Las Vegas, NV

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A Lot Worse Before It Gets Better

Thursday, June 21st, 2007

A from Bruce Norris. “California’s real estate downturn will be deep and long lasting, with home prices falling 15 to 30% during the next 36 to 42 months, according to a real estate expert. Bruce Norris, who correctly forecast both the real estate boom that began in 1997 and the subsequent doubling of home prices, said the downturn will reflect a perfect storm that includes record numbers of foreclosures, a sharp decline in migration to California, substantial increases in unsold inventory, and, of course, falling prices.”

“‘We are in for a very rough ride in California’s real estate market, which is likely to be far more severe than analysts, state officials and real estate industry associations have acknowledged,’ Norris said, adding, ‘Foreclosures alone are likely to be more numerous than anything we’ve ever experienced, with bank repossessions ultimately accounting for as high or as many as 25-30 percent of all homes sold during the next three years.’”

“Norris said prudent investors need to arm themselves with the facts and come to terms with the fact that analysts, state officials and the California Association of Realtors are either not being frank about the severity of the coming crisis or they simply aren’t looking at the right categories of statistics.”

“But while Norris’ outlook is gloomier than most observers for the short term, he expects California real estate prices to again rebound in 2011 as foreclosures decrease, the number of homes for sale declines to a manageable level and as California again experiences a net increase in population migration from other states.”

“‘There is light at the end of the tunnel,’ Norris said, ‘but we have to be very careful in this market environment. Investors need to know that marginal deals are no longer acceptable. The market will no longer cover their investment mistakes. If they don’t know what they’re doing, they need to stay out of the market until conditions change.’”

“The trouble with the analysis given by most real estate observers is that it’s based on flawed assumptions, including the widespread belief that interest rate adjustments can somehow hold back the looming real estate crisis.”

“‘Interest rates alone do not determine the direction of prices,’ Norris said. ‘Look what happened the last time we had a real estate downturn in California. Interest rates were actually lower in lower in 1997 than they were in 1990. Yet prices declined by as much as 35 percent in some areas.’”

“The most reliable indicator of a downturn in California is low affordability. Historic affordability lows signaled the previous two real estate recessions and prevented inventory from selling quickly.”

“‘We still have strong employment and historically low interest rates,’ Norris said, ‘yet we continue to see the inventory of homes soar, even as builders lower prices and give huge sales incentives. This change in the market caught economists off guard because they said that without an increase in unemployment, you can’t have a real estate downturn. That wasn’t true!’”

“Centex Corp., Hovnanian Enterprises, Pulte Homes, Lennar and D.R. Horton together have written off more than a half-billion dollars worth of land option agreements during the past year, Norris said, citing published reports. ‘If prices were heading upward and if demand for housing was strong, they wouldn’t be walking away from these land option agreements,’ he said.”

“‘Many economists and real estate observers and even government officials continue to offer rosy assessments because they are under political pressure to say nothing or because they are simply looking at the wrong statistics. Trouble is, there are many investors, including builders, who have been misled by their commentary,’ said Norris.”

“Various organizations are deliberately misleading investors and the general public, Norris said, adding that the National Association of Realtors (NAR) launched a $40 million ad camping in January of this year in which they told buyers that now is the perfect time to buy a home.”

“Even more recently, Jeff Davi, commissioner of the California Department of Real Estate, is quoted in this month’s issue of California Real Estate Magazine saying that California continues to need another 250,000 single and multifamily housing units to be built each year.”

“‘If this was truly the case,’ Norris asked, ‘why are we seeing vacant properties, increasing housing inventory and builders walking away from millions of dollars in land options? The reality is that the real estate market in California is going to get a lot worse before it gets better.’”

“The good news is that the market should turn upward again in 2011. By then, Norris said, prices will be low enough to lure many people back into California again, lenders will have again adjusted their lending guidelines and investors will again re-enter the market, sensing bargains and opportunities for additional profits and equity growth in the years ahead.”

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