Wednesday, November 26, 2008

So how do I buy a foreclosure? I'm still interested

Here's the deal:

If you really want to buy a foreclosure, and have the guts and the money, vision and heart, you can.

Plan to look and look and look to find the stuff that is good. Most of it is pretty horrifying, or overpriced. Or both.

And have a very strong credit score and a good mortgage broker.

Oh, and you need a good real estate agent. One willing to bring you through stinky and perhaps dangerous places. And then maybe get paid 2.5% of $9,000 for all of this work. Remember --we're paid on commission and 2.5% is a pretty typical payout to a buyer's agent. On $9,000, that's $225... and that's before my boss takes her cut. At those commissions, it's a hard thing for a realtor to do. We spend hours working on purchase agreements, hours searching for property, and worst of all, every hour we spend working on a deal that will pay $225 is every hour we are NOT working on bigger and better things.

But I really want to buy a house for pennies on the dollar!

Okay, fine. Let's find you a house for pennies on the dollar.

They are out there, they certainly are -- but again -- it's not what you think.

I once spent a couple hours talking a client OUT of buying a foreclosure for a rehab "project."

There are many, many homes out there that have been foreclosed and are available for low prices. Here are the current low prices in my nearby neighborhoods:

On the West Side:
403 Curtice Street E, $14,000

In Merriam Park:
1145 Selby Avenue, $43,900

In West 7th:
301 Goodrich, $28,500

In Midway:
1478 Sherburne, $29,900

In the area the MLS calls Crocus Hill:
332 Fisk #3S, $49,900

In Highland:
1774 Norfolk, $69,900

In Dayton's Bluff:
738 Bradley, $7,000

In Frogtown:
512 Edmund, $9,900

On the East Side:
1330 7th St E, $11,000

And you are probably thinking: Wow! I could put one of those babies on my credit card!

You sure could. And then you are looking at thousands and thousands of repair costs to make the home livable. Several of the above homes are slated to be torn down, they are just too far gone.

Just start thinking of the cost to rehab a house...
Roof: $5-$10k
All new wiring: $5-$15k
New pumbing: $10k
Exterior rot/siding repair: $5k
Regrading: $500 with a lot of shoveling
Plaster/drywall repair: $1k-$10k
Paint: $1k-$15k
Kitchens: $10k-$30k
Baths: $5k-$25k

Low end:$48k
High end:$125k

And believe me, any house listed for under $50k is likely to need $125 worth of work.

I have seen many foreclosed houses. I will say the cheapest one I have ever personally seen was about $30,000. At that price, the houses are pretty bad. I can't imagine what they are like at less than that. I have seen more expensive homes than the ones above with extensive mold, with foundations that were collapsing so badly it was a little scary, with environmental hazards, with no plumbing or heating, with no plaster, drywall, or flooring, with smells so horrifying I remember them to this day.

These houses are NOT for the average person to buy and rehab. These homes will take hundreds of hours of repairs, and many of them are too far gone to be repaired. Many of them are not even worth $125,000 when they are remodeled, because of the nearby properties, even if they had the perfect HGTV makeover. Even if Ty from Extreme Home Makeover ripped the top off and added new Kenmore appliances.

Let's pull some highlights from some of the comments on these homes:
- This property is going to be demolished and after the demo this listing will be transferred to a vacant lot listing.
- Category 3 on VBR list. Fire damage throughout. Location near highways and shopping.
- Boarded property. Needs lots of plaster, paint and carpet needed. Needs doors in and out. Property is SOLD As Is. Buyer is responsible for any work orders or repairs for a boarded property.

So what's a category 3? It means the CITY IS PLANNING TO TEAR THE PLACE DOWN. Sometimes investors can post a bond to the city to save the home from demolition, but the costs to rehab a house with "fire damage throughout" usually is prohibitive.
With properties the City of St Paul has declared Category 2 or 3, those homes MUST be brought up to CURRENT code. Since these buildings are older, that may mean MASSIVE retrofitting and repairs.

And where is all of that money coming from -- to make these repairs? Some buyers of Category 2 or 3 property must have cash out of pocket to give to the city as a bond to prove intent to repair the property. There is very little financing out there in the mortgage world to do these kinds of projects.

So -- if you plan to buy one of these houses, go ahead. But I hope you have $100,000 in the bank that you plan to spend on the rehab.

Can I really buy a home for pennies on the dollar? The Infomercial Promises

Well, not really pennies on the dollar. And it's not what you think it is.

I know some of you have seen these articles or infomercials telling people that they can buy foreclosures at the sherrif sale. That is true, but Minnesota has very different rules than other states, making it impractical. The current market also makes this undesirable.

Here's what the infomercials tell you to do:
1. Read the legal notices in the paper and choose a property from the foreclosure notices that you are interested in. And all of the addresses are in legal description, so be up on your legal descriptions. (Such as: Anna E Ramsey's Addition, Lot 10 Block 3. That's in the Lexington Hamline neighborhood.)

2. Then, go to the courthouse and pay the price at the sheriff sale.
Sounds so easy! But here are some problems:
- You need to pay cash. Pretty much then and there.
- It is very unlikely you have seen the interior of the property, as the owners still live there
- The price you will pay is some amount ABOVE the mortgage amount. Many people going into foreclosure today owe more than the house is worth. So you are paying WAY MORE than the house is worth.
- And the big kicker, if the previous items aren't enough: in Minnesota, after the sheriff sale, the owners have 6 more months to live in the property. That's right -- if you buy that property at the sheriff sale, you have just bought a property with tenants that will be living there for free for 6 months. And you cannot control what they will or will not do to the property.

So, good luck with that.

Friday, August 22, 2008

Newsflash: Caron NOT to be Obama's VP Pick

At this late hour, I can now announce that I will NOT be Barak Obama's VP pick.

While friends, family and neighbors have speculated that I was speaking with Obama's campaign during my extensive and furtive cell phone conversations, it was simply clients, loan officers, other realtors and the occasional robo-caller.

My Sunday "open house schedule" has also been suspect, with family assuming I was spending time at Obama's Raymond Avenue Minnesota HQ. I was actually in St Paul and nearby suburbs, holding open houses.

With my extensive experience with the local real estate market, the foreclosure crisis, my credentials as a board member of the Lexington Hamline Community Council and prestigous Bachelor of Fine Arts, I was a must-call for the campaign.

However, I have decided the campaign trail would simply take too deep of a toll on The Annoying Cow Dog and The Brown Dog.

I have referred the campaign to other Famous LexHam/St Paul Bloggers. We'll see how they respond to Mr. Obama's inquiries.

Petit Flower
LexHam Rand
The Pirate
The Dork
Little Latin Lupe Lu
Blacktop Desciple

On the Other Side of the Shell Game

My last post talked about the death of the last $0 down program.

However, the bill passed by Congress also had some interesting angles for first time homebuyers.

One of them is a tax credit. If a first time homebuyer buys a house between now and next summer, you will get a $7,500 tax credit on your next tax bill.

You don't get a check when you close your house -- you get a giant refund check when you file your taxes.

What's the catch? Oh yeah, there is a pretty big catch.
This tax credit must be REPAID. Yep, the IRS giveth and the IRS taketh away.

What it means is that each subsequent year you file your taxes you will pay back (interest free, mind you) a few hundred dollars to the IRS for that $7,500 tax credit.

No, you cannot use the tax credit for your house downpayment, but you will get a fat check come next year. You can buy whatever you want with it.

I would buy cartons and cartons of Camel Lights and 50 pounds of prime rib.

(And no, I don't smoke. I just think the idea of buying cigarettes is funny.)

It's Now or Never, People

The party is officially over. A few weeks ago Congress and the Senate passed a big housing bill to help the flailing housing market. Some of what they did helped, some of it could hurt.

The biggest news: last $0 down "program" in the mortgage world is kaput as of October.

It was a funny deal -- called a Downpayment Assistance Program, it allowed a home seller to give a "gift" to a nonprofit who would turn around and give a buyer that money to use as a downpayment on the house purchase. My lawyer client called it legalized money laundering, but it is (was) legal. And now it is almost gone.

Sooo.... if there is anyone out there that wants to buy a house -- they can use this program now (and I mean, like, today, time is ticking) or they can save up 3.5% for a downpayment next month.

The difference is more than dramatic, to be frank.

Think of it in these terms:

You are a renter. You want to buy a house. You make, say, $50,000 a year. Or you're a couple and make $80,000 or so a year.

You can buy a house NOW for $0 down (well, you do need a few hundred dollars for the inspection and whatnot)


Next month, you will be required to put down 3.5% of the purchase price. On a $200,000 house, that would be $7,000.

All I know is when you are 25 years old and buying your first house, it is not an easy thing to scrape up $7,000.

But you protest:
I already own a house! Why would I care?

Because housing is a trickle down (trickle up?) kind of situation.
People sell $200,000 houses to buy $350,000 houses.
People sell $350,000 houses to buy $500,000 houses.

So if there are no buyers for a $200,000 house, that seller can't turn into a buyer for the next bracket up.

It's really tough out there and it just got tougher.

And -- if you are renting and want to buy something relatively soon and don't have $10,000 sitting in your bank account -- call me today. For reals, today. The house needs to be found, the offers need to be written and at the mortgage office by Friday August 29.

Wednesday, July 9, 2008

Everybody's Buying a Foreclosure

I think I have had only 2 deals this year that did not involve some kind of foreclosure/short sale/distressed property.

My buyers are pretty good at recognizing a bargain and are willing to go through the agony of it all to end up with a good house.

Last night I was lying in bed thinking about how fewer "normal people" are listing their homes and more and more the selection for buyers is mostly bank-owned property.

I dug through a report put out by the Minneapolis Area Association of Realtors called Foreclosures and Short Sales in the Twin Cities Housing Market. A quote illustrating my point is here:
The market share picture is similar for home sales, with foreclosures and short sales comprising a larger portion of overall sales than they have before. In Q1 2008, 27.6 percent of total residential closed sales were mediated by a financial institution, up substantially from the first quarter of the two years prior. And the number of traditional closed sales fell from 8,896 in Q1 2006 to 4,790 in Q1 2008, while the number of bank mediated sales increased from 324 to 1,828 for the same time period comparison.
So we are talking almost ONE THIRD of all sales in Q1 2008 were foreclosures. That's not ending anytime soon, either.
Read the full report here:

I'm seeing lots of bank-owned and soon-to-be bank-owned in Lakeville and Apple Valley, where I have some buyers. This is going to hit the suburbs, and it will be tough, very tough.

And when one third of all listings are foreclosures -- just by mathmatical odds -- a third of all of my sales should be foreclosures. We are all dealing with this, not just the "inner city," or the late-night infomercial watchers. It's here.

Land Ho!

I've been talking with my friend John from Shelter Architecture about how now is a good time to build your dream home in the city.

Here's why -- it's really hard to find a lot in the city. However, the glut of cheap foreclosures could allow someone to tear down an existing house to build a new house. With houses selling for as little as $7,000 in the metro, it's a good time to jump on this. And yes, there are foreclosures in all neighborhoods -- from Bald Eagle Lake and North Oaks to Kenwood and Crocus Hill.

Financing is tight right now, but I think this is a nice opportunity time for a lot of people.

It's also a good time to take a shell of a house and turn it into something new.

Incredibly Lucky

Serendipity seems to strike every once in a while in real estate.

I was in the office making my open houses flyers and the front desk paged me. There was a walk-in customer that wanted to talk to an agent.

I was rushing to get to my opens and I did not have much time to talk. I went away with some doubts -- first time homebuyers, small budget, grand ideas. Not sure this was going anywhere, but I agreed to meet him next week.

I was really busy and scrambled to put together a couple houses to show them. I thought at least I could talk to them more and find out if buying was a possibility for them, or just a dream.

I showed them two houses in their price range - both foreclosures on the West Side. One was a grandpa house that needed a lot of work. The other was a beautiful house that had been overlooked for a long time because it was a foreclosure. It had just been reduced in price, and the buyers loved it. It was in great shape and just needed appliances.

It's unusual to find a beautiful house in a great neighborhood for dirt cheap, and my buyers knew it. They acted quickly, and found out that night that they were approved for $5,000 less than the list price.

We wrote the offer for $5,000 less than the list price -- exactly what the buyer was approved for. The next day I was sick with the flu, and the bank counters with a few thousand over the level the buyers can spend. I was demoralized and I told the list agent we would work with the lender to get my buyers approved to go to the new level, which might be hard. While I slept off the flu, I got an email that the list agent had simply re-submitted our offer and we got it!

I was thrilled. It's so rewarding when you have a buyer with a small budget and you can find them a beautiful house in a good neighborhood. We are all thrilled, I'm excited to see this one close.

Forcing It

This year I have had several closings (all related to distressed properties, go figure) that were pretty brutal. A closing usually takes about an hour and I have had several now that have taken 3 or more hours. Yesterday was a whopper -- I was at the closing office for almost 5 hours.

The property was incredible, in the historic district, and cheap cheap cheap. About 30% less than the previous owner paid a few years ago. It was a real once-in-a-lifetime for the buyer.

My buyer was incredible -- smart and motivated and charming to boot.

The deal was less than incredible. A short sale, with Countrywide, while they were going through a merger with Bank of America. The seller lives in Europe and was hard to reach, and maybe did not want to be reached.

Luckily, the list agent was a gem. She worked really hard on this but she almost gave up on the deal because Countrywide was not approving any short sales during the BOA merger and was giving them the runaround.

About 5 months after we wrote our offer, Countrywide decided to take it. It was a huge effort by the list agent to get Countrywide to accept a big loss. It was a definite relief, but it was not the end of our hurdles.

It was FHA financing, and there is nothing FHA loves more than to require a house to be painted before it is sold, or not allow it to be sold at all. And yes, this big old Victorian needed paint, and fast. The buyer got to work and had it painted in less than 3 days. I was shocked and stunned, and knew this closing had a chance to happen.

Yesterday at the closing table we were missing a few elements, but the buyer began signing anyway. As he signed the last few papers, we still did not have an email or phone call back from Countrywide with final approval on our numbers.

We let the buyer go and I got on the phone. I called the number we had. I called other Countrywide numbers I found online. I could not reach the "only person" that would be allowed to approve this sale. We had to have it wrapped up in 48 hours or the entire deal would be lost. It was high stakes and I was not going to let it fall apart.

Finally I checked Countrywide's SEC filings and called the number that connected me to the office where the executives are. I was connected through to one of the VP's admins and she was more than happy to stop coloring spreadsheets and pulled a few strings for me. After more than two and a half hours on the phone, Countrywide approved the sale.

I think it took six days off my life, this closing. It's kind of a miracle it happened at all -- the list agent filled me in on some details that I did not know before that make it clear this is a real miracle.

I had champagne on the buyer's new deck last night with his friends and family. It was very rewarding to have this one done. As I was going to sleep that night, all of my adrenaline came rushing through and my heart was just palpitating. I had spent so long keeping a cool head that it all fell on me right then. I don't think anyone other than other realtors know what we go through to keep it together sometimes.