Several of my flamethrowing posts of months past were reviewed by a colleague here in Las Vegas. Todd works almost exclusively with bank ASSet managers selling REO properties. Obviously he has a different perspective than I do on several of these matters and has spoken up! While I don’t necessarily agree that he is correct, he has LOTS of experience and is both serious and concientious. Enjoy the disagreements!!
Currently there is a lot of activity in the real estate market here in Las Vegas. Anyone looking at MLS statistics on a regular basis can see that we are selling lots of homes. Clearly there are lots of homes coming on the market as well, many of which are foreclosures. One segment of listings coming on the market are homes that have been foreclosed and purchased by investors œon the courthouse steps or purchased in bulk from a lender.
Many of these homes are purchased for steep discounts by investors whose intent is to do the needed rehabilitation before œflipping them to eventual owner-occupants. In most cases the work required is so extensive that only cash buyers can acquire them, as most buyers who want to make a home either do not have the time or inclination to do the needed work. Seems like the free market is working to move inventory doesn™t it?
But wait! When that investor sells the home, by definition, most buyers will need to get a new loan. And what do you need to obtain to get a new loan? Why a new appraisal of course! And how do appraisals, for the most part, get assigned? Through appraisal management companies. And who owns or controls most of the appraisal management companies? Well, dig through the layers of corporate ownership and you will find that a lot of control rests with the very same lenders that are making the loans and taking losses on the foreclosure sales and short sales.
It™s just my cynical nature, but most of the appraisal issues we are seeing are on these œflips. In recent months I have seen two very egregious examples of investors getting screwed by appraisals. The first was a case where the investor had acquired the property from an estate, spent money cleaning, updating, etc (about $35,000 I™m told) and when the appraisal came back the value was the same as the acquisition cost! The explanation from the appraiser was”œthere were no good comparables in the subdivision so I went outside (to an ungated subdivision!!) and used sales there. No appeal was allowed, and of course, unlike the days before the crash, we could not ask for a new appraisal. End result”the Buyer came up with a higher down payment and the Seller accepted a lower price and lower profit to make the sale work. A second case happened just last week. My Buyer offered $175K on a property worth every bit of that amount. The investor had purchased the home several weeks earlier for $130K, then spent about $15K in rehab work. The funds were well spent! The Buyer was putting down 35%, so there is little risk of default. However, an appraisal is still required, so it was ordered. That appraisal came back at $130K!! In other words, the appraiser gave the rehab work, time value of money, entrepreneurial effort, et al, ABSOLUTELY NO VALUE! Again the appraiser went outside the subdivision, to smaller homes on much smaller lots, justifying that move because the sales were more œrecent. We even tried to get the appraiser to use a smaller home around the corner from our subject that one of my colleagues has in escrow. œNope, that has not closed, so it isn™t a good comparable. says the appraiser, who uses listing comparables to drive the price down.
It just shows that even with all the political blather of all sides of the issues in our national and state capitals, our politicians really have no clue how to solve the problems, and the leading lending houses are making idiots of them (and us) again! Only when rational thought and real experience is brought back to the lending, appraisal, real estate, and escrow pieces of the real estate transaction will the markets really begin to heal.
In the last several months there have been lots of articles written, blogs blogged, Twitters tweeted, and blather blathered about the “thousands” of homes somehow being held off the market by the lenders. The Cassandras have warned about a “tsunami” of repos that are going to be dumped on the market, further depressing prices.
Can someone tell me where this inventory is being stored? Can anyone tell me why, with the supply of available listings hovering at or near 60 days for the last several months, some of this vast supply of homes hasn’t been brought to market? Is it possible that there are those who are interested in making the market seem worse than it actually is? Would this be just a lot of disinformation being spread by the lenders, thereby justifying the “declining market” box that is now being checked on many of the appraisals currently being done in the market?
Here’s an example. There are currently 1862 properties in our county whose ownership address is 400 Countrywide in Simi Valley, CA. For those who don’t know that is the address of the former Countrywide Mortgage Co. Of those 1862, I can’t find a single one that was foreclosed prior to January of this year that is not already on the market or in escrow! I suspect if I checked our Aurora Loan Service, or the other major lenders I would find similar information. Does that sound like there is a some sort of stash of unsold repo inventory?
Frankly, I think the market is in far better shape than the so-called experts think, and that the numbers are being manipulated to keep the public scared and off-balance. What do you think?
During 2009, the MLS system in Las Vegas reported just under 42,000 closed residential transactions (single-family 33,126, town-home 2,477, condominium 5,887, and manufactured housing 106). That works out to about 4,470 closings each month. On January 4, when I ran these numbers, there were a total of 9,924 available residential properties in the MLS. These numbers reflect the Las Vegas Valley, which consists of the cities of Las Vegas, North Las Vegas, Henderson, and unincorporated areas of Clark County. The research does not include Boulder City, Laughlin, Mesquite, or other outlying areas of Clark County.
Does anyone see what I see in these numbers? What I see is that our Las Vegas Real Estate Market does NOT have some overwhelming inventory of unsold homes! With the monthly average of closings running at nearly 3500, does it not mean there are only 3 months worth of homes available?
It may be true that there are thousands of repos in some kind of “shadow inventory” that have yet to come on the market. But if so, where are they? The local paper ran a story the other day about Bank of America reporting they were going to release 6000 foreclosed homes into the market during 2010, but the reporting was a little vague about whether or not the Bank already owns these homes or whether they plan to foreclose that many more this year. Here is a link to the story:
I’ve written a couple of responses to that story, and here is one:
Let’s examine that possibility. Fortunately Clark County records are easy to check for ownership, so I just did so. As of a few minutes ago, a check of Clark County records showed that the number of residential properties owned by any owner with the words “Bank America” in their name totalled 169, and no, I did not drop any zeros or any commas. The same search showed that since October 1, 2009, Bank of America had acquired 81 of those 169 properties. During the same time period they had disposed of 147. So in fact, Bank of America owns 66 fewer homes today than on October 1, 2009. Assuming for discussion purposes that not all of BofA homes are held in their name directly, and further assuming that 90% are not so held, that still means that BofA owns or controls only about 1700 homes right now. That is not an insignificant number by any stretch, but it is far short of 6000. So again I ask–Where is this shadow inventory? How about if this question is put to BofA, Chase, Wells Fargo, and others? I wonder what the answers would be.
In yesterday’s paper, there was an article stating that Bank of America was going to release 6000 foreclosed homes into the market, at the rate of about 500 per month. Here is a link to the article:
My response is shown in the link as well, but here it is again:
I’m not clear from the article whether or not this 6000 homes are already owned by BofA or it is their guess that they will complete foreclosure on 6000 more in 2010 or is it some combination of the two. In working with clients around town and doing comparable searches of sold properties, I see lots of foreclosed properties. At the same time, however, I see the overwhelming majority of those homes put back on the market (and sold) quite quickly. If my admittedly unscientific observations are correct, where exactly is this “shadow inventory?” I don’t think anyone outside of BofA, Wells, or Chase can (or will) tell us the straight story, but I’m still at a loss to understand where there are thousands of unsold and unlisted bank repos. I’m certain there are some unsold homes, and unfortunately there are still thousands of foreclosures in process. But to claim that amounts to some kind of shadow inventory that banks can somehow control is understating the realities of the marketplace. Writers, pundits, and other media experts would be of more service to the market if they would ask these lenders to point out where this inventory really is. If, for example, BofA has an inventory of 6000 unsold repos today, that would tell the market they have been attempting to control price levels by releasing them piecemeal. It would also tell the market that waiting to buy may be a good thing. If, on the other hand, BofA is only predicting they will have 6000 more foreclosures to sell in 2010 that tells the market something else entirely. Which scenario is true? How does the market actually find out the truth?
I hope everyone had a great Thanksgiving yesterday. As usual I ate too much, but really had a nice time with my wife Jan, youngest daughter Powell, and brother-in-law Bill. While getting back to reality today and tomorrow, make sure to be thankful as well, and if you see a veteran, please make sure to thank them for their service!!
The argument put forward by the ASSet managers and their listing agents is that they are so overwhelmed by volume that to have to sign every offer and counteroffer would completely grind them to a stop. Perhaps there is merit in this argument, but where is the basic fairness to the Buyer? Until a contract is signed the ASSet manager is free to accept any other offers on the property. Indeed, in Nevadathe listing agent is required by statute to present offers until instructed otherwise by the Seller. This verbal negotiation and delays in obtaining a signed contract sets up a scenario where an unscrupulous ASSet manager or listing agent can see your offer, call up a friend or investor in the market for a home, and miraculously slip in another, better offer before the ASSet manager signs the final contract with your Buyer. The ASSet manager doesn™t care, their income is based upon the amount they are able to obtain for properties. Who loses? How about the first buyer, who, based upon verbal assurances, has ordered inspections, an appraisal, and has perhaps made moving plans? Sorry, they are out the money.
Does this scenario play out in a majority of cases? Of course not! But the lack of transparency in the process and the rules being set all for the convenience of the ASSet manager makes it hard to support. The real problem with ASSet managers, however, is that by their very existence they create extra costs for the investors in the original loans who actually are stuck owning property worth far less than the initial loan amount, while at the same time causing additional costs for the buyers wishing to own that property.
Further, because they are unregulated, ASSet managers can, and sometimes will, act in an outrageous manner. For instance in the last two weeks I have had a situation in which my Buyer made an offer on a FNMA-owned foreclosure, priced at $89,000. The home had no water heater and was missing a bathroom sink, so clearly the home would not allow for either FHA or VA financing. Do you think the ASSet manager would allow for those two repairs to be completed, thus allowing more buyers to purchase? Nope, the ASSet manager knew that either a cash investor would take up the property or some buyer would make the water heater and sink appear prior to the appraisal, thus allowing the home to qualify! Back to my client, who made an offer of $92,000, asking for assistance with closing costs totaling $5000. After some hemming and hawing, the ASSet manager agreed. Here™s another interesting sidebar, FNMA& FHLMC have taken the position that since they are quasi-governmental they fall under the waiver we have here in Clark County that exempts such entities from paying the property transfer tax. This particular aASSet manager takes the further position that other than commissions, the Seller (FNMA) needs to pay NO closing costs. This means that this so-called allowance for Buyer closing costs goes first to pay costs the Seller would normally pay in a transaction. This is really fair for Buyers, don’t you think?
So, when the property actually appraised for $85,000, the ASSet manager had the temerity to say “Well, I’ve just lost $7,000, so I am only going to pay $1000 in closing costs.” Finally, the listing agent managed to convince the ASSet manager to agree to pay $2500 in closing costs, which just about paid the normal seller closing costs. My Buyer had to negotiate a higher interest rate on the loan, in order to build most of her costs into the loan, and thereby have the cash reserves required to close. Some help for a first-time buyer!!
Yesterday I started a series of posts, ranting about the problems in the lending industry causing unneeded delays in the recovery of the housing market. Today I continue my discussion.
First, for purposes of full disclosure, I should tell you that for several years, up until about 8 or 10 years ago, I had a sister who was an REO property disposal specialist for a large lending house. That was back in the days when this particular lender was acquiring about 100-150 properties daily. I have to further admit that many of my expectations with regard to how REO should be disposed of are colored by what I learned from my sister. In those days, most if not all of the lenders disposed of their own REO using their in-house staff. Contracts were signed, properties were sold, commissions were paid, and the inevitable swings in the market took care of bringing values back up. Finally, I should say that in my experience the overwhelming majority of listing agents dealing with asset managers are competent, hardworking, honest, and more frustrated with asset managers than am I.
Lenders discovered in this latest market downturn that they did not have the staff to keep up with the flood of REO coming on to their books. A more cynical person would also say that the lenders, which is a broad description of loan service companies, banks, mortgage insurance companies, and Wall Street investment houses, figured out that if they create off-balance-sheet companies called asset managers there would be two great benefits. First, all of the activities of these asset managers would be completely free of any type of federal, state, or local banking regulations. Second, these asset managers are a method by which the lenders could find a source of income by charging fees and costs to the investment pools that owned the actual mortgages on the one hand, and by demanding lower commissions from the real estate professionals handling their listings. Pretty slick.
In a few years, some graduate student is going to write an interesting thesis on the subject, but for this blog post I will concentrate on the abuses perpetrated by the fact that asset managers have little or no regulatory oversight. Most of us remember in our early days of real estate education that most states have something in their laws called a œStatute of Frauds. Very broadly this means that all agreements involving real estate must be in writing to be enforceable.
Well, early on in the current market meltdown, asset managers realized they were not regulated, so the Statute of Frauds was thrown out. In our market, as in many others, all offers made by buyers must be in writing, but all counter offers made by the asset managers are verbal, or perhaps just an email from the listing agent. The acceptance of these counters or the re-countering by the Buyer, must again be in writing in most cases. Only upon final agreement of the parties is a purchase contract generated by the asset manager (or their listing agent). It must be completely signed by the Buyer first, before being sent on to the asset manager for eventual signing. This process can take anywhere from 3 days to 3 weeks. Just in our own team, it has been amazing the number of contracts that have been verbally negotiated, only to find new items suddenly appearing in the written contract. Is there any recourse? Sure, if you want to risk having your Buyer lose the property.
Another game played by asset managers (sometimes aided by their listing agents) is to delay accepting offers for 5-10 days, thus allowing more than one offer to be presented, but at the same time allowing for the same problem of œbetter offers suddenly being presented at the last minute. Of course, during this waiting period the Buyer is frozen in place, not knowing whether or not their offer is going to be (verbally) accepted. By the way, if your offer is not accepted, do you think the asset manager rejects the offer in writing, which is required of EVERY seller by law in Nevada? Not a chance, they are way too busy, and of course, don™t believe they are controlled by ANY law or statute! Do you have any recourse? How do you find the asset manager? If the listing agent gives you the information, he or she runs the very real risk of losing that asset manager™s future business.
Next”ASSet Managers and excuses!
In my opinion, our market, and indeed real estate markets around the country, would be much further along the road to recovery if there were any sense of either old-fashioned good business sense or fair play in the lending industry. Now, there is a broad indictment of an entire industry, and perhaps unfair as well. In fact, without lenders, how would our buyers be able to purchase homes? Indeed, there has been much improvement in the quality of loan decisions over the last year or so, and while there are clear exceptions, most of the loans currently being granted are to real people with real credit scores, real jobs, and real incomes. Clearly, increased oversight has made a huge and positive change to this end of the business. However there are large issues in the lending industry, and in a series of blogs, I want to describe what I am seeing out œwhere the rubber meets the road.
Let™s talk about appraisals. As anyone who has read my previous posts will attest, this has been a hot-button subject to me for quite a while. By and large the appraisers I have been honored to know are a hard-working group of professionals, and there is no œbut coming. At this time, however, they are, as a profession, being squeezed unmercifully by regulations written by those who know nothing of the requirements as well as œappraisal management companies whose only real job is to extort large portions of the appraisers income under the guise of œefficiency or œcoordination. At the same time, lenders have made it clear to appraisers (in the words of an old friend whose name I promised not to use) that the appraisers are not going to get in trouble for appraising too low.
Here are two cases from the last 90 days here in Las Vegas. In the first case, my Buyers had agreed to purchase a home for $383,000, and the Sellers had agreed to sell for that price. It is a lovely home, built of brick (rare in this area), situated on an acre of fully landscaped property (also rare in this area). Back in the day, I learned that one definition of value is the amount one person will agree to pay and another one will agree to sell. Classic real-world case. Not so fast. The appraiser compared the home to several repos in the area, ignored several non-repo sales, and came up with a value of $250,000! A builder starting from scratch would have trouble reproducing the home for $383,000, and the home, I am told is insured for over $400,000 right now, but that has no bearing on the final appraisal. Needless to say, the transaction did not close. In another case, I have had one sale nearly cancelled because a review appraiser thought the first appraiser had not reduced the initial appraisal nearly enough. My client, the Seller, had agreed to sell their home for $240,000. The first appraisal came in at $218,000 which caused a gulp from my Seller, but was finally agreed upon. The lender chose to review the appraisal and the review appraiser reduced the appraisal to $205,000. The reviewer never looked at the property, just chose different comparables, including several bank repos in terrible shape. Without a great deal of pressure from both Buyer and his agent, the lender would have gone with this review appraisal, which would have blown the transaction. When we finally closed escrow at the lower price, my client still had to write a check in order to close. By the way, the home is over 2300SF, in a good setting, and was in immaculate shape. In other words, a great value. However, since the appraisers cannot get in trouble for appraising too low, they felt comfortable using œcomparable sales that were not really comparable. In fact, appraisers are now required to use listings as part of the value, instead of sales. A million years ago, when I was a young real estate professional, we were taught that value was determined by a melding of replacement cost, potential income, and comparable sales, with the income approach only being used for rental properties or a situation where an investor was the buyer. Now, replacement cost has NO BEARING on the final value and listings carry as much weight as actual sales. Is it just me, or has the whole process gone completely screwy?
Next”ASSet managers. Stay tuned!
It has been some time since I have posted on this blog. Mostly because we have been working hard on more transactions than we have seen in over a two years. That is good, and over time it bodes well for the market. Our inventory, swollen to nearly 26,000 available homes less than a year ago, is much reduced. As of this morning, there were but 9842 available listings on the Multiple Listing Service, with 7800 being single-family residences, 1255 being condominiums, and 585 being townhomes.
So far this year, there have been 34,562 closings on the MLS, with 25,232 being bank repos and 4338 being short sales. Contrary to what is written of or spoken about Las Vegas, it is obvious that many people see the value in our real estate and are buying for long-term investment. So far this year we have sold homes to people from several states, plus a couple of Canadian provinces. Later this morning I am going to speak to a gentleman in Cairo, Egypt, who is purchasing a home now for retirement in a year or two.