Short Sale Closing Ratios

I talked about the benefits of buying short sales in past posts. However, its important to understand that the advantages of purchasing such property come with a case load of inconveniences.

One such inconvenience is closing the sale. Because the seller's mortgage company has to agree to forgive the seller of a portion of their existing mortgage balance, the process is uncertain until that forgiveness is obtained. There are a myriad of variables that also contribute to transaction failure. I won't go into detail here though.

Since I am still sick, I did some more research this morning to answer this question: Where in Weber County do short sales have the highest probability of closing?

Here are our findings:


On average over time, only 33% of all initiated short sales actually close. However, an average is made up of highs and lows. I wanted to find out if there was a geographic link to highs and lows and if so, where were they. The chart above is very revealing in this regard. The cities left in white (except Ogden) are too low in total closings to give us meaningful information. Huntsville's amazing 100% close ratio is invalidated by only having 1 closing. The same goes for Riverdale's 0%. Ogden sits right at the average which is very consistent with our 33% Rule. Ogden has a broad variety of neighborhoods across all economic levels.

The green cities are the ones that caught my eye because of their exceptionally high closing ratios. Pleasant View is a high end area and apparently buyers are pouncing on the opportunity to buy bargains there while lenders are willing to take a significant loss. Roy is not as much of a surprise since its been the busiest market in Weber County for some time.

What is interesting on the low end is North Ogden. North Ogden is a stones throw from Pleasant View, yet no one can seem to close a short sale there. I would equate North Ogden with South Ogden in average price. Yet, for some reason, short sales are not being done successfully there.

This is very interesting information to absorb. Hopefully it will help you establish your expectations when working with short sales.

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The Changing Face of Investment Financing

I have strep throat today, so instead of spreading my pestilence in client meetings, I decided to do some tedious market research to pass the time.

After doing some MLS history (not to be confused with genealogy) work, I have discovered some nuggets of market wisdom. Here is today's very revealing chart:


Sometimes when I do this research, I come up with information that isn't very exciting or helpful. But, what I discovered today is fascinating because it shows a tectonic shift in they way business is getting done.

This chart shows duplex-triplex-fourplex sales and what percentage in a given year were accomplished with specific types of financing. Our initial impression is that conventional financing has fallen off a cliff. This is no surprise to investors out there. Lenders are requiring 30% down payments to purchase these types of property. If you are a "stated-income" guy like me, they require 100% down. Underwriters are scrutinizing everything except borrower blood-type.

I have often talked about how seller financing will fill the void. This chart shows that after being almost non-existent for the last 8 years, its starting to take hold in a big way in the market place. However, the most intriguing part of this chart is the FHA financing. As a percentage of sales, there is also a tremendous surge in people buying duplexes and fourplexes to LIVE in. This is an aspect of the market that I have given little thought but clearly should be paying more attention to. This is an exploitable market niche.

To shift gears, here is a chart that shows the implications of lender tightening:



Its a good thing that its impossible to sell NEGATIVE homes. I didn't want to change the scale on the graph to show negative numbers. Keep in mind that 2009 is YTD. I anticipate probably 50 or so sales this year. For Q1 2009 we are only at 8.

What these charts demonstrate is that there are ways to get things done if you want to buy or sell investment property. Business IS getting done and there are ways to get it done. You just need to be prepared to adapt to the marketplace in order to do so. I believe seller financing will continue to surge in its percentage of market volume. Be sure to see Lessons In Seller Financing for a breakdown of how this useful tool works and how it can benefit you.

Ogden Trolly Campaign - Get Involved!

Shalae Larsen has written an fantastic essay on the proposed streetcar system for Ogden's East Central Bench Historic District Neighborhood..."The Trolley District". Our opportunity for public input is this coming Tuesday, March 24th at the Eccles Conference Center from 4pm-7pm. LET'S ALL BE THERE TO GIVE THEM OUR TWO CENTS!

Here is Shalae's essay:

THE MISSING LINK

An Essay by Shalae A. Larsen

For the past several decades, the people of Ogden have worked to revitalize our once great city. Yet despite the efforts of civic leaders and very real improvements in lowering crime rates, generating infrastructure, and improving the image of the city overall; we have not realized a dramatic transformation of the City of Ogden. What is the missing link in the greater Ogden revitalization picture? Redevelopment efforts to date have focused on promoting the work, shop, and play aspects of our city’s image through the development of the downtown with new retail and employment centers. The city has made great strides in connecting these amenities to the plethora of outdoor recreational opportunities that our unique geographic situation affords. The missing link in this over all picture is the LIVE component. We need to create livable neighborhoods adjacent to the downtown. The resulting semi‐urban residential population is key to supporting our downtown and outdoor recreational opportunities. Simultaneously, we need to create a meaningful linkage between this semi‐urban population and the downtown and east‐bench
opportunities that they will support. Now we have an opportunity to address this missing link, to make very real strides in revitalizing this community by creating meaningful linkages from downtown to the east bench, while interconnecting the East Central district as the missing link in the greater Ogden revitalization strategy.

In comparing downtown Ogden to similar urban centers, one key difference is that both areas like downtown Salt Lake City and Sugar House have adjacent residential populations: neighborhoods with substantially higher levels of education and income that provide the direct financial support of local downtown businesses, and the bodies to engage community activities (i.e. life on the street)! The problem with trying to garner the support of suburban dwellers for downtown redevelopment efforts is that this demographic is more likely to support big box and national brand businesses, and are far less likely to ride public transit or participate in downtown community activities. Conversely downtown adjacent residential populations, when a more affluent mix is engaged, will support local businesses, walk, bike, utilize public transit, and will be more engaged in the local community participating in art and civic events.

In Ogden’s golden railroad era an affluent yet diverse population settled the east bench directly adjacent to the booming downtown. This primarily residential area was serviced by streetcar lines running east‐west along 21st, 23rd, 25th, and 27th streets. This population provided the direct financial support for the downtown. There was clearly a symbiotic relationship between downtown and the East Central Bench, a relationship that still exists to this day. Today this area is designated as a National Historic District. There is even a local community movement to have the area renamed to “The Trolley District.” Yet despite efforts from local preservation groups and the city’s RDA program, this neighborhood is still languishing in decay. The solution to complete the revitalization of Ogden is the revitalization of the Trolley District as the missing link in the city’s overall revitalization strategy.

Now the Utah Transit Authority (UTA) is in the process of completing a study for a new transit corridor linking downtown Ogden and Weber State University. The study will examine alternative modes of transportation including the streetcar. It will also consider alternative east‐west routes to connect commercial and employment centers in downtown to the services and outdoor recreation on the east. In considering historic precedent, filling the missing “live” component described above, and new economic development potential a 25th street alignment of a streetcar from Washington Boulevard to Harrison Boulevard should be considered a priority. A streetcar traveling the 25th Street route engages potential redevelopment sites including the old Gold’s Gym, the RiteAid/Wheelwright block, and hundreds of smaller infill opportunities. This mode and route also accesses community
services including the Library, Oasis Community Garden, Academy Square, and Golden Hours Senior Center. This alignment also provides a Harrison linkage to Ogden High School and Mount Ogden Middle School. This route would help to attract a new mix of urban dwellers who would access the streetcar to work, shop, play, learn, and engage the community. The linkage of the streetcar through the Trolley District provides the missing link in the total revitalization of Ogden.

One of the main arguments against the 25th Street alignment of the streetcar is that Harrison Boulevard is too narrow north of 30th street. While Harrison is narrower north of 30th Street, there is still currently room to include a streetcar in the right of way without sacrificing a lane of travel. This would be achieved by removing the turning lane and the onstreet parking. The real reason that the Utah Department of Transportation (UDOT) is opposed to using this portion of Harrison for the streetcar, is that they still hope to expand Harrison to seven lanes in the future. Ultimately this expansion scenario would be a lose-lose situation. Widening Harrison would be a temporary traffic solution at best, while at worst bifurcates the Trolley District and the East Bench. Widening Harrison would further divide the community, impede pedestrian and bike circulation, increase noise and pollution, and would seriously jeopardizing the health safety and welfare of Ogden residents. Conversely, inclusion of the streetcar along Harrison significantly increases the transportation capacity of the corridor by focusing on moving people rather than cars. It would also generate significantly better and more economic development while also improving the local community and better connecting and serving the community as a whole.

The concept of linkages is one that is key to urban design and planning, especially when it comes to mass transit. The issue of linkages is one that the city of Ogden has been dealing with for nearly its entire life, but more recently in the form of the current transit study linking downtown Ogden to the bench located and mountain adjacent Weber State University. This is an opportunity to provide meaningful linkages throughout the community resulting in pedestrian friendly environments, increased bike opportunities, viable economic development, and increase the desirability and livability of the community. Both route and mode are critical concepts. The streetcar as the primary mode provides long‐term infrastructural improvements proven to stimulate economic development. The 25th street alignment of the streetcar provides the essential linkages needed to addressOgden’s greater redevelopment picture – specifically the missing link in the total revitalization of the Ogden community – the integration of the Trolley District.

Artwork Courtesy Shalae Larsen

Market Times Continue Climb

Here is an update of our Days-On-Market chart:



For homes that are selling, we are nearing the 90 day mark. This increase can be attributed to higher inventory levels and fewer buyers in the marketplace.

Analysis of a Bargain: 824 24th Street

I recently met with some clients interested in investing in real estate. Their intent was to purchase property, fix it up, and resell it for a profit.

After sleuthing the market for a few days we found some reasonable candidates. Ultimately, we whittled our list down and placed an offer on this property:



824 24th Street was a bank owned (REO) property. It was originally listed by the bank in August 2008 for $79,900. No offers were accepted. Then a month later they reduced the price to $72,900. No offer were accepted then either. Two weeks later...another price drop to $69,900. Then three weeks later yet another to $67,500. At that point, the bank received and accepted an offer. The offer included FHA financing. The home didn't pass FHA inspection so it came back on the market in January 2009. The bank reduced the price to $64,500. No takers. A month later they reduced the price again to $59,900.

That's when we arrived and placed our cash offer of $55,000. The bank immediately accepted. However, our inspections revealed some foundation issues, electrical problems, and a few other issues that were not apparent upon our initial view of the property. We amended our offer to $49,000 based on what we found. The bank tried to counteroffer us but ultimately accepted our terms. Are all these numbers confusing you? Here is what I just said in chart form:


You will notice that the price follows a nice stair step pattern. This is traditionally how bank owned property is listed and sold. For those of you frustrated by overpriced bank property, it's important to watch because it may be just a matter of time before the price drops and the property makes sense as an investment.

So what kind of bargain did our lucky (or well advised by a real estate professional) investors get? Here are the post-fixup comparable sales:



By looking at these comparables, our investors have done well for themselves. A CMA puts the post fixup value around $95K. Here is another way to look at the value comparison:


I always resort to $/SQFT when doing investment analysis. As we can see here, our investors are paying about half price for their investment property. Not a bad deal at all! As long as rehab costs are managed effectively, they should do well and be on their way to their next property.

Want to do this same thing? Bring your cash and your contractor and lets start making you some money!

Suburban Road to Blight: Residents in HOA Rebellion

I have talked many times here about how important HOA's are to quality of life in suburban settings. I have also reiterated the fact that HOA's in Utah loose their teeth over time and suburban neighborhoods that were "THE PLACE" to live become uncool and out of style as HOA rules are relaxed and then become perpetually uneneforceable.

Well it looks like another community is in a tizzy over HOA problems. This morning's Standard Examiner reports that Clinton residents are fighting the prospect of having to create an HOA to maintain "common" land in thier community. In this case a park strip area. Here is a synopsis of the situation from the Standard:

Ivory Homes maintained Lexington Estate’s park strip for about three years, ending last spring, when the last home in the subdivision was sold. At that time, the company sent a letter informing the residents that an HOA must be formed and the park strip would be the HOA’s responsibility from then on. Today, the Lexington Estates HOA board still has not been formed and some residents are looking for a way out. Rasband is one of those residents. A former HOA board member in California, Rasband says there’s no need for an HOA in his neighborhood. There is no park, no tennis court, no pool. The HOA’s only responsibility would be maintaining that park strip, Rasband said, which hardly requires a governing body.

This Rasband guy they interviewed doesn't know what an HOA is for. I wonder what his neighborhood in California looked like. HOA's are supposed to enforce CC&R's...not just mow grass. These residents want to have thier cake and eat it too. They don't want to pay for an HOA yet they want to live in a "new" orderly neighborhood.

There's more:

(Ivory) says through the sale process that everybody who purchased was told or signed papers dealing with (the HOA),” Cluff said. “Some of the home owners say they didn’t know, but sometimes you go in to sign for a house, you’ve got a hundred papers to sign and you don’t always read it all.”

So in other words, the residents wanted to live in "the new" neighborhood so badly they didn't bother to read the paperwork they signed that obligated them to form an HOA when the development was completed.

Little do these residents realize that an HOA is likely all that's keeping their neighborhood from becoming a junk-car-dead-grass-aluminum-foil-in-the-window atrocity in 10 years. I would like to see how nice their park strip looks this August after nobody maintains it.

Ivory Homes says it best:

“(Lexington residents’) concern is ‘I don’t like the HOA and I wish this park strip didn’t exist.’ Well, it does, it did and it has for four years and you bought into it, so let’s move on to maintaining it, shall we?”

Here Here!

Historic Street Car Lines in Ogden

At the East Central Bench community planning meeting yesterday, Shalae Larsen gave several of us a copy of a map showing the old street car lines in Ogden. As the study gets under way to determine which route is best, she is campaigning for the 26th Street route. Here is a copy of the map she provided (click to enlarge):


North is to the right on this map. From this representation you can tell that the First Bench neighborhood just east of Washington was chuck full of rail lines. Lines ran up 21st, 23rd, 25th, and 27th when this map was printed in 1914.

Utah Senate Tries to Flush Excess Home Inventory

It looks like the Utah legislature is trying to put Federal "stimulus" money to use. Senator Scott Jenkins from Plain City has written an interesting bill targeting new-home inventory.

Click here to read the actual text of the bill. It is an easy read.

The bill creates a program whereby buyers of newly constructed homes can receive a $6,000 grant from the state. There are only a couple of qualifiers:

1. The financing on the home must be with a 30-year fixed mortgage.
2. The purchasers cannot make more than $75,000 if a single person or $150,000 if married.

Although this program is not much in dollar terms, it will help move a few existing new homes. I seriously doubt it will create much demand for new construction however. The incentives are not enough, plus most people that purchase new construction are moving up to it. That means that there needs to be a buyer for their prior existing property. This program does nothing to provide an incentive for that necessary part of the transaction.

However, the bill defines a home as a "newly constructed, never-occupied residence in Utah". By this definition, I believe townhomes qualify. There are many new townhomes sitting on the market right now that I would qualify as starter homes. This program may be helpful in eliminating that glut of inventory.

Although I disagree with the principle of federal "stimulus", since the money is here, it would be wise for us to use it for the maximum possible benefit that it can create. This program may be a good use of those funds.

Paradigm Real Estate Acquires 24/7 Property Management

I received word this week that 24/7 Property Management, my preferred service provider for managing client properties, has been sold to Paradigm Real Estate. I understand that Nate Vidrine, owner and manager at 24/7, will be working together with Paradigm through a transition period to ease clients into Paradigm's customer service program. Best of luck to Nate Vidrine and his new venture in Las Vegas!

Seasonal Increase In Sales

February is over. When watching the sales numbers come in, it made me a bit nervous. Now that we have the majority of sales reported, I am pleased to see us return to our natural seasonal cycle. The sales count for Weber County in February is 148.

Here is our updated monthly comparison chart:


If you look carefully you can actually see the air being let out of the sales bubble year over year. Like I was saying in last months post on sales volume, I think January will stand as rock bottom. We may not see much improvement overall for a couple years but I don't see us going lower in volume. Let's see how next January pans out.

Black Widow Real Estate: My Brush With Death

Editor's Note 12/15/2011:  I am a believer in redemption.  Although I cannot speak for the individual below, in order to help the healing process, I have redacted the individual's name and removed the real mug shot photo.  Hopefully, this will help wounds heal while also preserving the story.
 
Caveat Emptor - Buyer Beware

I have come to learn that there are a few people in the real estate business that will chew you up and spit you out. They operate by their own rules with total disregard for the well-being of others. Unfortunately, they tend to be silver tongued devils and sway many unsuspecting individuals. This is what makes them so dangerous to our industry.

I have a list of about four folks I know in the business that I avoid if at all possible. My list just grew to five today.

Here is the perpetrator's mug shot. In April 2008 a friend asked me to work with him and a female colleague to form a new Real Estate company. I began attending broker school and we started putting the pieces of the plan together. However, by August, my friend had a falling out with her over some details of the plan. He left the partnership. That left me to deal with her to see if the plan could still work. I remember asking her up front if she could assure me that she had the financial capability to finance a new office. She said she couldn't provide that assurance. So I left.

What caused me to inquire about financial capability had to do with all the new furniture in the office and the new Mercedes in the parking lot. I feared she was spending wildly on credit.
Today's newspaper sheds light on the real story:

A Washington Terrace woman has been charged with 11 felonies for allegedly bilking three investors of almost $200,000 in a real estate scam. [REDACTED], 47, was arraigned this week on four counts of communications fraud and four counts of theft by deception, all second-degree felonies, and three counts of forgery, a third-degree felony. Weber County Attorney Mark DeCaria said he could only say that the investigation of [REDACTED] by his office is continuing. “To date, there are also about 30 other investors who have made similar complaints, with [REDACTED] as the suspect,” according to a probable cause affidavit in the charging documents. They list three victims so far in the case, one who lost $141,000, another who lost $35,000 and a third out $10,000.

One of the plans that was in the works while I was there was to use investor money to purchase, rehab, and then resell investment property. The investors would be paid back with interest at the sale of the property. That is a legitimate business model. Here was her plan for the investors:

[REDACTED] worked as a real estate agent at Exit Realty, in South Ogden, when, in the early part of 2008, she “entered into agreements with a number of people telling them that she had received calls from loan officers about people who were applying for loans and could not qualify,” according to the charges.[REDACTED] told prospective investors the loan officers who called asked her to find individuals willing to invest money to help the people obtain financing, the charges read. [REDACTED] informed prospective investors that Exit Realty would guarantee the loans they made to help the struggling applicants up to $10,000. She also informed investors that they would receive an 18 percent monthly return on their investment. [REDACTED] also forged trusted deeds and notary public seals as part of the scam, according to the court documents.

Nice! Promise somebody a return that is unrealistic and back it up with a guarantee from somebody that you have no authority to speak in behalf of. Then make it all happen by forging legal paperwork!

Sounds like a good plan to me. Looks like she will be moving from Washington Terrace to Draper soon.

America West Bank: Hubris, Greed, and Insolvency

In January 2008, I had the opportunity to sit and chat with a manager at America West Bank in Layton. At that time the residential mortgage market was collapsing. Lending was tightening very rapidly. I asked him: "What do you do to keep your business going?". His response stunned me because it was counter to what I knew to be prudent. He says, "We are focused on expanding our commercial lending. It is the core of our business."

Real Estate Economic cycles happen in waves. Residential is first, commercial is second, and industrial is third. At that time with residential markets clearly in a downturn and commercial markets in queue to be next, I was flabbergasted that they would choose to put such a heavy emphasis on commercial lending. Economic indicators at that time suggested that the floor was about to drop out of the commercial real estate market. Clearly, management was not reading (or refused to believe) those indicators. Nobody is interested in hearing that their "core" business is about to end.

Well today's Standard Examiner reports the chickens came home to roost with an FDIC cease and desist order:

Without providing specifics, the FDIC order complains that the bank was “operating with inadequate capital” ,“inadequate loan valuation reserve” and “engaging in unsatisfactory lending practices.” The order also slams bank management and the bank’s board of directors for detrimental policies and inadequate oversight. FDIC data shows the bank had $299 million in total assets versus $286 million in total liabilities at year-end 2008.

On paper it looks like America West Bank has a net worth of a mere $13 million. Yet, the report states that $40 million of commercial loans (assets) are non-performing. Non performing loans are typically valued at 50% of face value. So, lets subtract $20 million from the net worth. Uh-Oh! America West Bank is already underwater $7 Million! Yikes!

My conversation last year with America West Bank management ended on a sour note as I told him that making commercial loans was not where I would be focusing.

Now, the market is coming back into equilibrium. I anticipate more commercial loans to default so that $7 million negative worth is likely to get much larger for America West Bank. If the ship isn't righted, look for the FDIC to take custody of the bank and liquidate its assets.

Depositors beware.

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