Robert Smith

Strategic default is defined as walking away from a mortgage that you have the ability to pay. Why do homeowners do this? Or not do this? It can be pretty much broken into two schools of thought.

First, the ethical argument. You agreed to buy your house at a then fair market price with a mortgage at the then market rate. You signed a contract obligating you to keep making payments even if similar houses are now selling for half the value of what you paid. Even if a new mortgage can be obtained at a lower interest rate by another buyer. Even if you can’t refinance.

The other argument is that this is a business deal, plain and simple. If I don’t make the payments, you take the house. I’m not going to make the payments, so feel free to take the house.

The report examines the use of social media and social influence on our decision making. If enough people that you know (or are connected to) are saying its fine to strategically default, you begin to get more receptive to the idea. After all, it worked out great for them, why not me? (A lot like the continual anecdotes I hear about the ‘buddy’ that picked up a $600,000 house for $100,000 as a foreclosure - I can do it, too.)

An industry source, CoreLogic, says that 11 million homes (22 percent of the housing market) are underwater and that another 2.4 million have less than 5% equity, so there’s a lot of potential for more strategic defaults out there.

Banks are also part of the problem. People looking for refinance options often get the runaround or can’t qualify with the current stringent requirements. I know mortgage reps that can’t refi their own homes, what chance does a regular consumer have? It may be easier for some people to opt into strategic default as a result of feeling helpless, or because they think the big corporations don’t care about them.

A single strategic default (which ends up as a foreclosure home) won’t kill the value in a neighborhood. But think about the areas where there are a lot of strategic defaults in addition to the short sales and foreclosures due to hardship – loss of a spouse, losing a job, illness. Distressed sales do, in fact, bring down property values and are not good for neighborhoods. Strategic default is only a part of the overall problem.

A report in DS News quotes a study that claims 38% of all homes bought in 2011 were financed by cash, not mortgages. Tight lending criteria is likely one of the causes, but investors are also looking for ways to make their money yield better returns, too. This trend is expected to continue for the near future.

My own experience is that there are a lot of cash buyers who want to be owner-occupants. It’s not unusual for me to see cash offers on homes up to the $140,000 price point, so there’s a lot of competition for homes in ‘move-in’ condition.

A recently released Realtor Confidence Index for November 2011 also indicated that 28% of home purchases were cash financed. This report was based upon results obtained from just over 3,000 Realtors nationwide and is conducted monthly by the National Association of Realtors Research Division.

Please remember one very important thing. A cash offer does not guarantee that you will be the successful bidder in multiple offer situations. While it takes some uncertainty out of the equation for the seller, many sellers are still looking at the bottom line. Depending on the margin between a cash and financed offer, they may take a ‘cleaner’ and lower priced cash offer or they may take the higher priced mortgage offer knowing that it will take up to 45 days to close.

Everybody wants a deal but if you’re seriously underbidding on homes that have been on the market less than a month, you’re not going to be in the game.

My main market area (Livingston County Michigan) is one of the ‘lucky’ areas that’s experiencing nominal value increases over all. Of course, some individual homes, neighborhoods, and market areas are still seeing decreases in both the average and median prices. Market stats can be a funny thing. Remember what Mark Twain said about statistics, “There are lies, damn lies and statistics.”

So what’s a buyer to do? Here’s a couple of thoughts for you.

My first recommendation is to talk to your Realtor® about the value of a house that has your interest. The inventory is down (no subjectivity here, it’s a fact!) and the ones that you like are probably going to appeal to other buyers. I am amazed at the number of multiple offers I’m getting as a listing agent this year – and every one of them sold for more than list price. And they’re appraising, too!

Your agent can tell you if a home has a chance at appraising higher than list price. If you’re looking at a bank-owned that has been renovated and is truly in ‘move in’ condition, it’s not unusual for a term to be added to the inevitable multiple offer situations. That is that YOU are responsible for any shortfall between the accepted offer price and the appraised value. So if you tried bidding $160,000 on a house listed at $130,000 and it appraised at $150,000, guess what? You have to dig for the extra $10,000 ($160K accepted offer price - $150K appraised value = $10K shortfall). If you can’t cover it, you forfeit your EMD.

That’s just so nobody overbids on purpose with the hope of locking in the offer to later whittle down the purchase price. Yes, there’s isn’t much that the banks haven’t seen in the last few years.

My second recommendation is to see a lot of houses. At least a dozen. Of what you really want. If you looked at a few foreclosures and said, “ugh! Too much work”, or “not for me”, then you need to concentrate on the move-in condition homes. It won’t take long for you to instinctively know when a property is priced right and when it is overpriced. If you’re not familiar with the area, really grill the agent on your concerns and what is important to you. I’ve always felt that an educated buyer is the best buyer and I welcome those kinds of questions.

Last, don’t wait. Be ready to pull the trigger. Some banks are building in a waiting period for offers on foreclosures. It can range from a week to longer. They want to make sure the property gets some market visibility before taking an offer. The days of a low ball offer first day on the market are pretty much gone.

Make your offer reasonable in price and be prepared for what you will do in the case of multiple offers. Have an inspector selected so you can schedule that event quickly. It’s taking 30-45 days to close so do everything that you can to keep the process rolling along.

Take media reports with a grain of salt. All of the "home prices still dumping" reports do not apply to every state, city or neighborhood. Value is an ever changing thing and you have to be able to recognize those changes. Working with a market-savvy Realtor® and trusting your instincts will give you the edge.

My kids went to this school. A dedicated pre-K and Kindergarten building at the time, it was a wonderful transition to elementary school for them, and many others. But Pinckney Schools, like many other Michigan School Districts, has been losing families and school age children and had some tough choices to make. They’re still making them, for that matter.

I recently drove through downtown Pinckney (Village) and a turn down a side street brought me to the now boarded up school. It’s a sad and too common sight – buildings that were an integral part of a community sitting unused. I knew that voters had approved a bond issue to reuse this building as the new Pinckney Community Library but of course it takes time to go through the formalities of site plan approval, construction bids and the like.

I’m happy to say that the work should start soon. Even though the building’s size will be trimmed from more than 30,000 square feet to a more modest 13,000 square feet, this new library will be a huge improvement for the community. Keeping buildings in use, providing needed services to the community, and yes, eliminating the blighted look that a boarded up building conveys are all good things.

As reported in the Livingston County Daily Press & Argus, it’s hoped that the new facility will be open in the Fall of 2012. The groundbreaking ceremony will take place this Saturday, December 10, 2011 at 10am at 125 W. Putnam, Pinckney.

OK, I admit it. I’m a big proponent of shopping local. I don’t care if you’re from Waterford or Birmingham, Ann Arbor or Brighton – patronize your local shops.

A couple of weeks ago, some business owners in Brighton got together and made a video about just that topic.

Now we have a great promo video of being in downtown Howell during the Holidays. A lot of video was shot during the Fantasy of Lights Parade (which everybody should see at least once!) and really gives you the feeling of shopping in a downtown area.

Big box stores and malls are fine for some things, but don’t forget about the folks who work right there on your Main Street. They usually do a lot more for your community than the big franchises (sorry, corporate policy doesn’t let us do that) and they really are more a part of your town than the big outfits.

Make a pledge to yourself that you’ll do at least some of your shopping at the smaller, local businesses this year. And while you’re in your downtown, why don’t you stop at a local restaurant for lunch or an appetizer and try something new?