Vladimir Kats, MBA, CDPE

Although less affected by the downturn in the economy and within the housing market, Annapolis still has a significant portion of Maryland’s distressed properties.

According to recent MRIS data, there were 43 homes sold by Annapolis short sale Realtors, in the first 6 months of 2011, with 61 distressed properties currently on the market.

In comparison, during the same time period, in Baltimore City, there were 190 short sale transactions closed, with over 500 distressed properties still actively being listed by Baltimore short sale agents.

The noticeable difference between Annapolis and Baltimore is not surprising given the concentration of housing and differences in demographics, as well as other social and economic factors. However it is still evident that the Annapolis short sale market is very much active, and presents an interesting opportunity for both buyers and sellers of distressed properties in Annapolis and Anne Arundel County as a whole.

When dealing with distressed properties, a Maryland Short Sale Specialist is an important key to ensuring that a short sale transaction is successful.

As your Maryland Short Sale Expert, I will continue providing you with more news and information on the current state of the short sale market in Annapolis, Baltimore and the rest of Maryland.

- Brought to you by your Maryland Short Sale Expert - Vlad Kats

The following column detailing the short sale process and REO transaction appeared in the January 4, 2011 edition of Essex.Patch.com. To go directly to the source, please copy and paste this URL into your browser: http://essex.patch.com/articles/process-plays-role-in-success-of-short-sale-bank-owned-home-sales

As we discussed in the last week's column, short sales and bank-owned homes, although similar in overall listing volume, differ significantly in their respective outcomes.

In 2009, according to the data from MRIS, Inc, only 14 percent of bank-owned homes that hit the Multiple Listing Service (MLS) failed to get to settlement, where as, 67 percent of short sales, met the same fate and likely contributed to even more bank-owned inventory in 2010 and beyond.

Why such a big discrepancy in the failure rates? Why are bank-owned homes settling quickly and easily while most short sales are doomed from the start?

Short sale process differs significantly from that of a bank-owned property on the market and, when combined with the inability of market participants to properly adjust to these differences, likely accounts for the increased pain for both short sale buyers and sellers.

Bank-Owned Property Sales Process

Typically, when a homeowner defaults on a loan and is successfully taken through the foreclosure proceedings by the lender's trustee, the property's first defining moment occurs at the foreclosure auction that takes place on courthouse steps. There, anyone can bid on the property and lender's sole goal is to recover as much of the outstanding loan amount as possible. In today's market, however, it is not an easy feat given the fact that most homeowners that default now are upside down on their mortgages.

Most properties do not sell at the auction and the lenders are forced to take them back. The home now becomes a part of lender's real-estate owned (REO) portfolio and, once the foreclosure is ratified by a judge, is physically owned by the lender.

Bigger, national lenders are not equipped to handle their swelling REO portfolios and usually hire third-party vendors known as asset managers whose specialty is the disposition of bank-owned inventory.

Once the home is transferred to an asset manager, he assigns a local real estate broker to handle the property. The broker is usually responsible for evicting anyone who might still be residing in the property; for hiring contractors to do clean up and needed repairs; and pricing and marketing the new asset.

Before a bank-owned home is listed on MLS, it goes through a vigorous evaluation process. The assigned real estate broker will prepare a broker-price opinion (BPO) based on property's condition, recent sales, and current competition. The asset manager may request a separate valuation from other local brokers or licensed appraisers to validate listing broker's assessment of current fair market value.

Although the lenders would like to recover as much of their losses as possible, the fair market value is usually the driver behind the initial list price of an REO property when it hits the MLS.

Once on MLS and syndicated to hundreds of Internet sites, it is available to buyers and their real estate agents. A prospective purchaser and her agent can now make an appointment to see the property just like they would any other available home.

The offer process is also fairly similar to a non-distressed transaction. The buyer's side submits a standard contract to the listing agent with any necessary bank addenda who in turn submits the offer, usually via an online portal, to the asset manager.

The asset manager reviews the offer and evaluates it based on the net to seller, type of financing, settlement date, and the amount of earnest money deposit, amongst other factors. Buyers of REO properties should keep in mind that although the bottom line to seller is a very important factor in lender's decision to accept or decline an offer, it is not the only one. There are other variables in play.

Once the offer is accepted and the contract is ratified, the parties move toward settlement in almost the same manner as in a regular transaction: buyer secures financing, goes through the home inspections, if any, all while title-work is prepared by an attorney.

There are two main reasons for a potential derailment of an REO transaction.

First, if the foreclosure paperwork was not prepared properly by the trustee when taking the property through foreclosure process, clean title might not be able to pass from seller to buyer. Given the high number of foreclosure filings, more and more properties are mishandled by foreclosure attorneys working on behalf of lenders.

Often times, title defects force the lenders to cancel the contract with the buyer and take the property back to auction. Needless to say, it is essential for any buyer of a bank-owned property to work with a title company that's knowledgeable and experienced in handling REO transactions.

And then there is the home inspection.

Bank-owned homes are always sold as is, possibly with inspections. Neither the lender nor its representatives have ever occupied the property and thus can not attest to the property's condition. The lender is also exempt from providing the buyer with either a property disclosure or disclaimer - a task mandated by Maryland law for other sellers.

Many buyers of REO properties, however, go into the transaction with the notion that once the home inspection is done, they will be able to ask the seller to do repairs or compensate the buyer based on the findings. That happens very rarely and, based on my conversations with local REO listing agents, accounts for most of the failed deals.

Buyers should be prepared to take the property in its current condition or, if the inspection reveals serious structural or mechanical issues, to walk away from the deal.

Even with the two main hurdles, potential title defects and negative results of the home inspection, buying a bank-owned home is a fairly straight forward process that mimics that of purchasing a regular home from a conventional seller. Thus, it is safe to expect a high success rate when involved in this type of transaction.

Unfortunately, it is not the case when it comes to the short sale process which we will dissect in the next week's article. Stay tuned.

Do you have any real estate or distressed property related questions? Do want them answered by a Maryland short sale expert? Email them to Vlad@BaltimoreRealEstateExpert.com. Selected questions and answers will appear monthly.

Dear Vlad,
I just received my Baltimore County property tax reassessment and my home's value went down by over 20%!! What does that do to my home's value? Especially considering the fact that I was thinking of selling my home in the near future. Will my tax payments go down now?

Thanks,
Greg from Pikesville

Thank you for your questions Greg. There are thousands of homeowners in our State that I am sure are wondering the same thing. Both of your questions are somewhat "loaded" and will require some in-depth explaining on my part. Let me tackle your last question first.

Will your tax payments go down?

It depends...

The State of Maryland re-assesses the value of each home every three years and the new value determines the amount of subsequent property tax bill. That valuation will be attached to your home for the next three years unless you choose to appeal it in during that timeframe.

So if your assessment decreased, as you say by over 20 percent, you should expect your property tax bill to decrease as well. However, it does not mean that your property tax payment will go down.

Let me explain further.

Let's say that you purchased your home in 2008 when the market was still somewhat strong and at that time, the State assessed your residence at $500K. Let's also assume that you live in Baltimore County with a property tax rate of about 1.2% and you're on well and septic and are not required to pay additional water and sewer fees that are included on the property tax bill for those of us that use these public services.

In that case, your 2008-09 property tax bill would be for approximately $6,000 ($500K x 1.2%). So if this year, your value in the eye of the State is only $400K, your corresponding tax bill that will come out in early July will about $4800. If this is the situation that you find yourself in, your property tax payments will actually decrease.

Now let's assume that you bought your home in early 2005, right before the real estate boom, and at that time your home was valued by the State at $300K (please notice that we're not discussing your purchase price in any of these scenarios). That means that at that time, your tax bill was approximately $3600.

Between 2005 and 2008, you, just like the rest of the homeowners in the region, enjoyed significant appreciation of their real estate and probably when the $500K assessment came out in 2008 had no objections that your home was indeed worth that kind of money.

Did your property tax bill increase from $3600 to $6000 in 2008? It did.

Your payments, however, did not go up due to the infamous Homestead Property Tax Credit that limits the amount our property tax payments can rise for owner occupied properties and phases in the increases over a period of time. It's very likely that, although your assessment almost doubled, your actual payments went up only slightly in 2008 and in the following three years due to the Credit.

In this situation, your new assessment of $400K might not reduce your actual payments at all since you might only be paying property taxes on a lower, phased-in amount. In some cases, depending on the effect of the Credit and the valuation fluctuations, you might be paying more than you did last year.

Now let's look at your first part of the question.
What does that do to my home's value? Especially considering the fact that I was thinking of selling my home in the near future.

The value of your home, Greg, is an elusive concept. Homeowners are constantly bombarded with different "valuations" from appraisers, the State, real estate brokers, websites such as Zillow, etc. Most homeowners, furthermore, tend to overestimate the value of their own properties given their intricate knowledge of the home.

My determinant of value is simple: it is how much a buyer is willing to pay for it at any given time.

Thus, it is the buyer's opinion of your home's value that you, as a potential seller, should be concerned about and that value directly translates to an objective standard - currency.

The question is how much influence does the State's assessment of your home have on a potential buyer's opinion of value.

An astute buyer, and seller for that matter, will understand that employees of the State, when re-assessing your home, did not actually come inside the property during the process. They might have only looked at the tax records for the size of your home and compared it to other homes in your area that have sold over the past year. They might have adjusted for the square footage difference and the fact that you might have more garages than your neighbors do.

They probably did not take into consideration that you just replaced your kitchen and put in brand new stainless steel appliances or finished your basement and added a full bathroom there. In the eyes of the State, your home might be worth the same as your next door neighbors that has no updates but is identical in size.

In the eyes of the buyer, however, your home is worth more than the neighbor's. You see Greg, the buyers will go from home to home and actually pay attention to the differences between homes beyond the square footage and number of garages. They will be able to determine the true value of your home because they will have a lot more in depth knowledge about it than the State.

Furthermore, the State looks at a year of sales at once. As we saw in 2010, there could be three different markets in the same year - hot, not so hot, and really slow. Buyers tend to look back less than a year and at much more recent comparables. Also, the buyers will look at active competition whereas the State only looks at closed sales. At the end of the day, it is possible for the State to overestimate the value of your home given the downward market.

What's to prevent a buyer from using a lower State assessment in negotiations with the seller? Nothing! It can be a great tool for a buyer. You as the seller would need to point out the logic proposed above to preserve your bottom line.

I hope that I answered your questions to your satisfaction Greg. If you have any additional ones, let me know. As your Baltimore realtor, I am here to help!

As your Annapolis area short sale expert realtor, I am looking forward to providing you with timely data on the state of the real estate market and particularly, short sale activity within the Annapolis area.

If you or anyone you know is having difficulties making their mortgage payments, please call me at 443-660-8032 for a free, no obligation consultation.

I believe that, although somewhat isolated from the downturn in the market given its demographic and economic composition, the Annapolis area will be seeing an increased number of distressed properties in the nearest future. This phenomenon will occur due to worsening economic conditions in the area as well as the resetting interest rates on adjustable rate mortgages (ARMs) that are anticipated later in 2011.

Many homeowners used ARMs during the height of the market in order to get into higher priced homes all over the Annapolis region. Once they reset at potentially higher interest rates, homeowners' required housing payment will increase. This change can be significant, especially for those who took out interest rate mortgages and will now need to start making principal payments with a shorter amortization period. For many families, even in this area, this event can be of great concern and may force them into default.

In 2010, 171 short sales were listed by local short sale agents in Annapolis. During the same time period, only 70 short sales actually closed. This means that over 100 short sale listings are still lingering on the market with many more in the pipeline.

Just to give you an idea, another 56 short sales were listed during Q1 of 2011 while only 32 short sales went to the settlement table.

Absorption rate of short sales is an important concept to digest. Given the more technical and specialized nature of the short sale process, it goes without saying that we can expect the success rates of short sale listings to be much lower than those of regular listings or bank-owned properties.

According to data from MRIS, Inc, in 2010 Anne Arundel County had only about 27% of short sales listings actually close. The success rate is even lower in Baltimore County and Baltimore City.

For a detailed explanation of difficulties encountered by short sale sellers, please read my column on the intricacies associated with short sales which appeared on patch.com.

As a short sale specialist, I am here to assist my clients in the most difficult of times. Find out why, when it comes to short sales, my team is a cut above the rest in terms of knowledge, experience, and client service. Call us today at 443-660-8032. You do have options!

As published on Patch.com 5-17-2011

April 2011 turned out to be yet another month of solid activity for the region's real estate market and serves as yet another sign of highly anticipated and long overdue market recovery even as the market deal with continued declining home sale values.

In all, 512 homes exchanged hands in Baltimore County and 40 in the Essex-Middle River area in April 2011. Although these figures are dwarfed by the totals from April 2010 (681 and 56, respectively) when the homebuyer tax credits were driving the activity, it still represents a solid level of activity especially when compared to the bottom year of 2009. In April 2009, only 469 homes sold in Baltimore County and 37 in our area.

Also, 747 properties went under contract this past April in the county and 56 in the Essex-Middle River area - the highest totals, excluding over inflated 2010, since April 2007 for both jurisdictions. This phenomenon underscores the fact that those buyers who remained on the sidelines since the start of the downturn are now finally entering the market.

This past April, 1,217 new listings came on the market in Baltimore County and 104 in our area. Absorption of these and subsequent new listings will be one of the major determinants of market's recovery.

As expected, home prices in the region continued to decline despite increased level of activity. In Baltimore County, the median price in April 2011 was $184,000 compared to $215,000 in April 2010 and $220,000 in April 2009. We can certainly project this trend to continue at least for the near future as sellers price their homes to the current market and buyers scoop up the best deals with the best value available.

Homes sold in Baltimore County in April 2011, on average, stayed on the market for 138 days, the same as in March 2011. In the fast moving April 2010, the average stay was only 103 days; in April 2009 it was 116 days.

The sellers received approximately 87 percent of their asking price for all properties closed in April 2011. An interesting picture forms when we look at the sold-to-list price ratios broken down by days on the market.

For sellers that receive an offer within the first 30 days, the ratio is about 97 percent. Those properties that linger on the market for more than a month, the sellers can expect the ratio to drop less than 90 percent and for those on the market for more than 90 days to just around 80 percent. Pricing the property right from the start is essential for a successful sale.

Distressed properties such as bank owned homes and short sales in Baltimore County continued to comprise a somewhat large portion of the overall sales. Out of 512 closed transactions in the county, about 28 percent were in this category. Out of all newly listed homes, 18 percent were either listed by REO agents or Baltimore short sale realtors. As the economy and the Baltimore area's real estate market struggles towardsrecovery, we can expect more distressed homes in our area.

The prevailing trend since the start of the year has been a higher level of transactions while continually decreasing average and median prices. Although the former is welcomed, the latter, without a doubt, is causing a lot of unease in the media and in many local communities, as our personal balance sheets are, for a lack of a better phrase, getting more and more off balance.

It is important to realize, however, that this is the normal path toward the recovery. The prices must decrease low enough for buyers to consider them a great value and actually purchase.

Aside from an artificial stimulus such as another homebuyer tax credit, rebounding of prices will take time and patience. It will happen sooner or later.

The question is: once it does happen, how long will we keep the lessons learned over the previous decade in our memories? Or will we quickly forget and do it all over again?

About this column:

The ‘Real' Deal will examine real estate trends in the Essex/Middle River area. Vladimir Kats is an associate real estate broker with Passport Realty in Baltimore.