I continue to receive questions daily about the future of our local market and what real estate sales and prices might do next year. I’m not sure why anyone would think that I have a better crystal ball than they, particularly since I have stated for two years that we won’t know the market has actually turned until several months after it occurs.
What I can state today is that we are witnessing the emergence of two distinct markets, and they are behaving quite differently. I will call them the “traditional market” and the “distressed market”.
The traditional market is the smaller of the two, at least in terms of unit sales. This market is characterized by a limited inventory of houses owned by private sellers. These sellers have made the decision to sell their property even though prices are at historic lows. They are not being forced to sell. Rather, they have decided for personal reasons to sell now, even at low market prices, and get on with their lives.
Homes in this segment are typically in good to excellent condition. One of the key features of this market is that buyers can negotiate with traditional sellers, expect reasonable response times and set reliable closing and possession dates within a fairly short period of time.
The distressed market now accounts for over half of all closings. It includes foreclosed bank owned properties and short sales. Short sales are owned by private sellers, but the properties involved are encumbered with more debt than their current market value, and therefore require third party lender approval in order to be sold.
Homes in this segment are usually in average to poor condition. Moreover, negotiations on these types of properties can be very cumbersome due to bank bureaucracy. Average closing times are measured on months, not weeks and many never close at all. Bank owned or approved transactions are structured quite differently than traditional transactions. Buyers of these types of properties face considerably more transactional risk. For these reasons, distressed properties are normally best suited for speculators and investors.
While there is plenty of distressed inventory available (and will be for some time to come), I am being told by our “agents in the trenches” that there is actually a shortage of well priced homes currently being offered by private sellers. Multiple offers are not uncommon as traditional buyers seek the certainty of a transaction with a traditional seller.
Economics 101 would indicate that properties in the distressed category will continue to suffer from price compression as supplies continue to overshadow demand. Private sellers, however, may see a bounce in prices if current demand continues to outstrip supply.
Wednesday, November 4, 2009
Sunday, October 25, 2009
CREATIVE TRANSACTIONS REQUIRE MORE EXPERTISE
It’s been nearly 30 years since the last significant real estate downturn in Michigan. That occurred in 1981 and was primarily driven by double digit interest rates. Mortgage rates peaked at about 18% then and real estate sales would have come to a screeching halt, but for many sellers having the ability to convey property via land contract.
Real estate sales are now being impacted by factors that are much different. While interest rates are at all time lows, sales are being hampered by the HVCC, buyers with wounded credit scores, sellers with little or negative equity and buyers wishing to buy with small down payments. In short, market dynamics today are completely different than in the early 1980’s.
Lately, there has been much discussion among real estate practitioners about returning to the use of land contracts or purchasing money mortgages to help create more sales by avoiding some of the issues mentioned above. We have already seen the proliferation of longer term leases and lease/option transactions over the past few years.
There certainly are instances where creativity in structuring a real estate transaction can benefit both the buyer and seller. There are many more instances, however, where such transactions are neither appropriate nor in the best interest of one or both parties to the transaction. Consideration should be given to the following in determining whether such a transaction makes sense.
• Underlying financing – Sellers typically require significant equity to facilitate a land contract sale. There are “due on sale” issues with respect to their underlying mortgage. Even if those are resolved by acquiring permission from the underlying lender, the monthly payments due under the land contract normally need to match or exceed the payments due on the underlying mortgage plus property tax and insurance payments.
• Creditworthiness of buyer – The seller assumes the risk as the lender in a land contract sale. The buyer’s ability to make the monthly payments becomes a critical issue to the seller, unlike a conventional sale.
• Down payment –Land contract sales normally require significantly higher down payments than under other types of financing. When land contract sales proliferated in the 80’s, down payments on all types of financed transactions of 20-40% were typical. That is not the case today.
When contemplating a land contract sale or lease/option of any kind, additional expertise must be brought to the transaction. Advice from outside counsel and/or a CBWM manager with this specific knowledge should be sought.
Real estate sales are now being impacted by factors that are much different. While interest rates are at all time lows, sales are being hampered by the HVCC, buyers with wounded credit scores, sellers with little or negative equity and buyers wishing to buy with small down payments. In short, market dynamics today are completely different than in the early 1980’s.
Lately, there has been much discussion among real estate practitioners about returning to the use of land contracts or purchasing money mortgages to help create more sales by avoiding some of the issues mentioned above. We have already seen the proliferation of longer term leases and lease/option transactions over the past few years.
There certainly are instances where creativity in structuring a real estate transaction can benefit both the buyer and seller. There are many more instances, however, where such transactions are neither appropriate nor in the best interest of one or both parties to the transaction. Consideration should be given to the following in determining whether such a transaction makes sense.
• Underlying financing – Sellers typically require significant equity to facilitate a land contract sale. There are “due on sale” issues with respect to their underlying mortgage. Even if those are resolved by acquiring permission from the underlying lender, the monthly payments due under the land contract normally need to match or exceed the payments due on the underlying mortgage plus property tax and insurance payments.
• Creditworthiness of buyer – The seller assumes the risk as the lender in a land contract sale. The buyer’s ability to make the monthly payments becomes a critical issue to the seller, unlike a conventional sale.
• Down payment –Land contract sales normally require significantly higher down payments than under other types of financing. When land contract sales proliferated in the 80’s, down payments on all types of financed transactions of 20-40% were typical. That is not the case today.
When contemplating a land contract sale or lease/option of any kind, additional expertise must be brought to the transaction. Advice from outside counsel and/or a CBWM manager with this specific knowledge should be sought.
Tuesday, October 20, 2009
LEGAL LINES ‐ BEWARE OF LENDER DOCUMENT FINE PRINT!
Over half of all transactions closed today fall into the bank‐owned or bank‐approved short sale category. In these cases, many offers to purchase are either written on contract forms provided by a lender or modified by an addendum provided by a lender.
In virtually all these cases, the provisions of these contracts transfer much of the transaction risk from the seller to the buyer. It is imperative that practitioners and buyers read and understand every word in these documents as their provisions are typically quite different from normal accepted practices in our market.
Here are some key things to watch for:
Transaction expenses normally paid by the seller are often transferred to the buyer. This can include almost anything, such as title insurance premiums, transfer taxes, tax and other pro‐rations, de‐winterizing, repairs, credits, etc.
When title insurance is provided by the seller, the policies specified frequently include so many exceptions that they provide little or no protection to the buyer. In these cases or when no title insurance of any kind is provided by the seller, we highly recommend that buyers acquire their own title policy from a reputable local agency.
Sometimes there are additional fees charged to the buyer.
The risk of loss is frequently placed on the buyer. This means that if the house is vandalized
or otherwise damaged prior to closing, the buyer has no right to rescind and must close anyway or lose his deposit. Small earnest money deposits are recommended in these cases.
Some agreements do not create a tangible interest in the property for the buyer. Some allow the seller or lender to continue to solicit additional offers from other buyers and replace an existing offer with another that is deemed more desirable for the seller.
Buyers should be counseled to weigh the benefit of “getting a good deal” on a distressed property against the additional cost and risk associated with the acquisition of a bank owned or short sale property. These types of properties can represent great opportunities for some buyers, but only if they understand the risks and additional costs in advance.
In virtually all these cases, the provisions of these contracts transfer much of the transaction risk from the seller to the buyer. It is imperative that practitioners and buyers read and understand every word in these documents as their provisions are typically quite different from normal accepted practices in our market.
Here are some key things to watch for:
Transaction expenses normally paid by the seller are often transferred to the buyer. This can include almost anything, such as title insurance premiums, transfer taxes, tax and other pro‐rations, de‐winterizing, repairs, credits, etc.
When title insurance is provided by the seller, the policies specified frequently include so many exceptions that they provide little or no protection to the buyer. In these cases or when no title insurance of any kind is provided by the seller, we highly recommend that buyers acquire their own title policy from a reputable local agency.
Sometimes there are additional fees charged to the buyer.
The risk of loss is frequently placed on the buyer. This means that if the house is vandalized
or otherwise damaged prior to closing, the buyer has no right to rescind and must close anyway or lose his deposit. Small earnest money deposits are recommended in these cases.
Some agreements do not create a tangible interest in the property for the buyer. Some allow the seller or lender to continue to solicit additional offers from other buyers and replace an existing offer with another that is deemed more desirable for the seller.
Buyers should be counseled to weigh the benefit of “getting a good deal” on a distressed property against the additional cost and risk associated with the acquisition of a bank owned or short sale property. These types of properties can represent great opportunities for some buyers, but only if they understand the risks and additional costs in advance.
Monday, October 19, 2009
BEWARE OF LENDER DOCUMENT FINE PRINT
Over half of all transactions closed today fall into the bank-owned or bank-approved short sale category. In these cases, many offers to purchase are either written on contract forms provided by a lender or modified by an addendum provided by a lender.
In virtually all these cases, the provisions of these contracts transfer much of the transaction risk from the seller to the buyer. It is imperative that practitioners and buyers read and understand every word in these documents as their provisions are typically quite different from normal accepted practices in our market.
Here are some key things to watch for:
• Transaction expenses normally paid by the seller are often transferred to the buyer. This can include almost anything, such as title insurance premiums, transfer taxes, tax and other pro-rations, de-winterizing, repairs, credits, etc.
• When title insurance is provided by the seller, the policies specified frequently include so many exceptions that they provide little or no protection to the buyer. In these cases or when no title insurance of any kind is provided by the seller, we highly recommend that buyers acquire their own title policy from a reputable local agency.
• Sometimes there are additional fees charged to the buyer.
• The risk of loss is frequently placed on the buyer. This means that if the house is vandalized or otherwise damaged prior to closing, the buyer has no right to rescind and must close anyway or lose his deposit. Small earnest money deposits are recommended in these cases.
• Some agreements do not create a tangible interest in the property for the buyer. Some allow the seller or lender to continue to solicit additional offers from other buyers and replace an existing offer with another that is deemed more desirable for the seller.
Buyers should be counseled to weigh the benefit of “getting a good deal” on a distressed property against the additional cost and risk associated with the acquisition of a bank owned or short sale property. These types of properties can represent great opportunities for some buyers, but only if they understand the risks and additional costs in advance.
In virtually all these cases, the provisions of these contracts transfer much of the transaction risk from the seller to the buyer. It is imperative that practitioners and buyers read and understand every word in these documents as their provisions are typically quite different from normal accepted practices in our market.
Here are some key things to watch for:
• Transaction expenses normally paid by the seller are often transferred to the buyer. This can include almost anything, such as title insurance premiums, transfer taxes, tax and other pro-rations, de-winterizing, repairs, credits, etc.
• When title insurance is provided by the seller, the policies specified frequently include so many exceptions that they provide little or no protection to the buyer. In these cases or when no title insurance of any kind is provided by the seller, we highly recommend that buyers acquire their own title policy from a reputable local agency.
• Sometimes there are additional fees charged to the buyer.
• The risk of loss is frequently placed on the buyer. This means that if the house is vandalized or otherwise damaged prior to closing, the buyer has no right to rescind and must close anyway or lose his deposit. Small earnest money deposits are recommended in these cases.
• Some agreements do not create a tangible interest in the property for the buyer. Some allow the seller or lender to continue to solicit additional offers from other buyers and replace an existing offer with another that is deemed more desirable for the seller.
Buyers should be counseled to weigh the benefit of “getting a good deal” on a distressed property against the additional cost and risk associated with the acquisition of a bank owned or short sale property. These types of properties can represent great opportunities for some buyers, but only if they understand the risks and additional costs in advance.
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