Noel Padilla, CDPE

If you've tried to buy a property lately you know it hasn't been easy. Multiple offers, offers above list price, cash offers and prices that are so high you know they won’t appraise-are all happening with more and more regularity today. It closely resembles the boom of the early 2000's and it's the same type of buyers doing it again with mostly cash.

It seems as though this group of buyers doesn't want to miss out this time around so they are jumping in and artificially inflating an already delicate market. This could spell disaster down the road. Eventually the cash will run out and we will be right back to where we were at a few months ago, but worse.

Sooner or later financing will have to play a role in market stabilization. If agents and banks don't begin entertaining financed offers, we are going to see homes selling for pennies on the dollar.

Eventually the foreclosure with no kitchen will have to be dealt with by the municipalities. What happens when you pay cash, as-is for one of these homes and the municipality requires all work be permitted, inspected and signed off on? Now your weekend project just turned into a money pit and you don't have the cash to cover the added expense (probably 4 times the cost)...ouch.

These 'investors' are over paying and once again inflating the market and once again they will eventually get burned.

To make matters worse homeowners with properties that have plenty of equity are trying to take advantage of the buyer frenzy and listing their homes as “non-short sales” at exuberant prices. These homes will never appraise and their direct competition-distressed properties-are burying them. These homeowners are in la-la land and refuse to accept their homes market value. Eventually they will be upside down as well. The agents who list these homes should have their licenses revoked. They are doing a disservice to the homeowner, prospective buyer and the industry as a whole, all so they can brag about their listing inventory but we all know listings don’t make you any money until they close.

Look for the market to take another dip and slide further until true stabilization sometime in 2012. Don’t believe me? Wait until the effects of the recession take root and those foreclosures begin to hit the market the beginning of next year and we may be in this thing beyond 2013. It’s still a great time to buy, just don’t overpay and be prepared for a long frustrating search.

Noel Padilla

I wrote this article in August of 2007 although it seems as I was being naive about the real trouble we were going to be in, the numbers seem to be working out. Enjoy

The media has reported gloom and doom for the real estate market for some time now. I wanted to take the time and clear some things up about the market as a whole.

Real estate is a localized business in nature. What happens in one part of the country doesn’t necessarily affect another. This is true in any market including the one we are in today. There are parts of the country that are enjoying property appreciation and brisk sales. While most of the country is in a market where there are plenty of homes but no buyers, however we must keep this situation in perspective. (You’ll see what I mean at the end of the article.)

What we are seeing today is good old fashion panic and hysteria induced in part by the media, bad investments, bad loans and a market that was bound to adjust. You see, those buyers that were snapping up properties a few months ago were most likely the same ones that couldn’t get a mortgage pre-2001.

Some lenders loosened their criteria and to stay competitive, others followed suit. All of a sudden just about anyone could get a mortgage. Some of these individuals did quite well and went on their way. Others got caught in that ARM* re-adjusting nightmare.

Speaking of ARM re-adjustments, let’s discuss that for a minute. What would happen if thousands if not millions of loans are re-adjusting ARM’s, set to re-adjust anywhere from 2005 through 2008 or perhaps later? I’ll tell you what would happen, those people (Attracted by low introductory rates and by people with less than stellar credit ratings.) would run to their banker/broker and try to refinance.

To make matters worse this is all happening as the market is cooling, causing home prices to drop as well as appraisals. Now those same homes are worth less than they are mortgaged for and these poor souls are stuck with an overvalued home with a high mortgage and no way to refinance. What’s the next logical step to salvage an already bad situation? You guessed it, “Honey we’ll just sell the house, we’ll be all right.” And there doing it by the droves.

Thousands of folks are stuck in this same scenario. Now others who want to sell their home maybe because they want a bigger home or have outgrown their current home are stuck in a market with too much inventory and not enough qualified buyers. Thousands of homes languish on the market because they are priced too high to sell, while others slip into foreclosure. Owners simply can’t afford to lower the price, so they just walk away. Simple economics: supply and demand, prices drop as inventory rises and vice versa. Not gloom and doom.

When will it all go back to ‘normal’ you ask? In a sense this is normal, maybe even a little on the flat side sales wise. Considering we just came out of a record setting market that saw property values appreciate at 20% and above annually. This is unheard of and we will probably never see it in our lifetimes again.

Now for the brighter side of things: If you were to buy an average property: house, second home, condominium or small multi-dwelling for $200,000, and that property were to increase in value at a modest 6% per year (7%-8% is more accurate historical average), the chart below illustrates the appreciation of that one property.

Ten - Year Projections
6% Annual Appreciation - $200,000 Property

The value of the average $200,000 property appreciating at 6% for ten years is about $350,000. Now let’s take a look at what would have happened to that same property if the boom market would have continued using the 20% appreciation rate we spoke about earlier.

Ten - Year Projections
20% Annual Appreciation - $200,000 Property

Some of us are in the 4 to 5 year range in the above chart as it relates to the property value of our homes. If you compare that to the previous chart, a home purchased in 2001 for $200,000 should be worth about $268,000 today that property is probably in the neighborhood of $414,000 to $497,000. So we’re about $200,000 ahead of the ballgame. No reason to panic, unless of course you ‘cashed out’ all of the equity, then you’ll just have to live there a little longer provided you can afford the payments.

I wouldn’t pay much attention to the media. They get paid to keep you buying newspapers and watching commercials while you wait for that ‘Real Estate Exclusive.’

Keep your head up and your ear to the ground you never know, you might run into a great real estate bargain.

Regards,

Noel Padilla

*An ARM, acronym for "adjustable rate mortgage", is a mortgage on which the interest rate is not fixed for the entire life of the loan. The rate is fixed for a period at the beginning, called the "initial rate period", but after that it may change based on movements in an interest rate index.

The rave that seems to be making the rounds in the Real Estate community is the short sale option contract. It goes something like this: A Realtor gets a call from a prospect to list a property for sale which is worth less than owed (Short Sale Scenario). The agent does not want another short sale listing but reluctantly takes it and turns to an investor for help. The investor makes an extremely low offer with an option to sell. He then takes over the short sale negotiation from the agent who has agreed to let him do so.

The hitch is that the property is then actively marketed for a higher price while under contract. A buyer is found and a contract is written with the investor as the seller. Once it closes it is immediately sold to the buyer. Of course there are other variables and scenarios painted in different lights to try and masquerade what is going on but this is essentially what is happening. Oh by the way the listing agent is promised the second listing as well along with a reduced commission, but who cares the agent is getting two commissions days apart, nice!

The problem with that is the little thing called code of ethics. A Realtor has a fiduciary responsibility to get the highest and best price for the seller. The other wrinkle is this other little thing called fraud. If the agent knew full well he could get a higher sales price, why didn't the bank receive those funds? Especially when he listed it for the investor and sold it a few days later.

If this scheme is properly disclosed to all parties, I doubt the bank will accept the first offer, especially when they do their homework and find out what the property is worth. Most of the time it is not even called an option contract because that phrase raises red flags. You can see why the "investor" wants to control the negotiation process. This way he controls the information to the lender. He probably manipulates the BPO as well to get the sales price accepted. This is why the Realtor has to be in on the scam.

Most option contracts require either one of two elements to make them work ethically. The first is time, and the other more practical one is buying low with all parties aware of what is going on. The property needs to have enough equity and the seller needs to be sophisticated enough to know he is leaving money on the table in exchange for a quick sale.

Common sense should prevail here. Think about it, if the property can be sold at that much of a discount don't you think you can find plenty of buyers? Why use a middle man?

What I see happening is a bunch of Realtors being duped to buy a course that packages this type of transaction in the form of books, cd's and webinars in exchange for putting their license and freedom on the line. Heaven forbid an agent actually gets involved in a short sale option contract. The ones making the money are the endless amounts of gurus, so called investors and overnight experts. If it sounds too good to be true it usually is.

See this article for an actual case. http://www.nationalmortgagenews.com/fraud/stories/?id=289

Recently I received an unsolicited e-mail (spam) from someone named Sally Larabee about a very interesting subject. She claimed that Realtors all over the nation will be getting sued for calling themselves experts in short sales, when in fact they haven’t completed not one. It went on to list how this would take place and the only way to avoid it is to take their course (probably at a hefty price). It also states that if you really want to call yourself an expert you need to take their course and prepare yourself. I thought to myself now wait one minute you just said if I don’t do a bunch of short sales and gain “experience” that I can’t call myself an expert, now you tell me if I take your course you can call yourself an expert. Which one is it? Expertise is not measured by how many times you perform a task, that’s called experience.

Although the argument is very compelling, it’s fairly easy to protect ones self with the proper disclosures without taking another short sale course. If you are doing short sales and haven’t had an attorney write a disclosure for you, shame on you. Get it done today and have all parties sign it.

Finally what I found interesting is that when I surfed the Real Estate Radio Blog, low and behold I found the exact same article written by Barry Cunningham, I thought the e-mail had Barry’s tone. I also wrote a post to that blog and somehow it was never published. I just wanted to let Barry know that his stuff had been plagiarized-or vice versa.

Every sale I get close to closing seems to come with new nuances. Two rather recent ones are associations not having adequate insurance (if any at all). And the other being banks no longer willing to provide payoffs without homeowner authorization. I had to order a payoff and forward it to the title company since I already had an authorization through my short sale package.

I heard of agents asking their buyers to pay for the entire associations insurance just to close. Why would you put your buyer in a community that is in financial peril? I had the same situation and I advised my buyer to find another property. Probably explains why I ain't selling much now-a-days (Darn my parents for giving me scruples).