Prosper Weekly Real Estate Podcast 4-27-09

Prosper Weekly Real Estate Podcast 4-20-09

A recent survey of participants at the Southeast chapter of the Real Estate Investment Advisory Council included a survey of the 165 participants to obtain their views on when the current recession would end. These participants whose primary focus is commercial real estate agreed that the primary leading indicator would be the housing market – that is “investors will know an economic recovery is under way when the housing market finds price stability and foreclosures moderate”. These and other opinions from the survey are contained in the article below which was recently published in the National Real Estate Investor.

Investor Survey: Housing Market Bottom Will Signal Recovery

Mar 25, 2009 1:09 PM, By Sibley Fleming, National Real Estate Investor

ATLANTA — Investors will know an economic recovery is under way when the housing market finds price stability and foreclosures moderate. That’s the majority view of a regional real estate investment group.

“During the housing boom, consumer spending grew faster than income because their wealth was fueled by home equity,” said Sam Chandan, president and chief economist of New York-based Real Estate Economics LLC. “Households lost $5 trillion of wealth in the fourth quarter and about $2 trillion in the third. It’s unprecedented.”

Chandan’s remarks came during a meeting this week of the Southeast chapter of the Real Estate Investment Advisory Council (REIAC), where roughly 165 members voted electronically on current economic topics, offering an instant snapshot of the developers’ and investors’ concerns. Kieran Quinn, vice chairman of Bethesda, Md.-based Walker & Dunlop and outgoing chairman of the Mortgage Bankers Association, served as moderator.

When the audience was asked which event would signal that an economic recovery had begun, 39% said the bottoming out of the housing market would be the leading indicator. New job formation followed close behind with 36% of the vote.

“If you look at the 2001 recession, according to the National Bureau of Economic Research, it ran until November of 2001,” said Chandan. “We continued to experience job losses in the recovery for another two years after that. The magnitude of the numbers can’t stay at 500,000 or 600,000 but the job market is going to be a lagging indicator of stability in the economy.”

Others on the panel, including Egbert Perry, chairman and CEO of Atlanta-based Integral Group LLC, a director of Fannie Mae and former director of the Atlanta Fed, agreed.

The relationship between the housing market and commercial real estate is worth noting. “There’s that old axiom that commercial lags residential by six quarters,” said panelist Chris Marinac, managing principal and research analyst for FIG Partners LLC, based in Atlanta. “We’re going to top at about 4.5%, which means we’re just at the edge of commercial delinquencies.”

The audience and panelists were also asked to look into their crystal balls and predict when the recovery would begin in earnest. The second half of 2010 drew the most responses at 39%, followed by sometime in 2011 at 25% and year-end 2009 or the first half of 2010, 21%.

An overwhelming number of respondents — 64% — expected unemployment to peak at 10% to 12%. “The unemployment rate, in our view, will creep to 10% to 12%,” said Chandan. “Part of what is being reflected here is a lower labor participation rate. There are fewer people looking for work, a larger number of discouraged workers so the number is a little bit misleading.”

The U.S. Region with the brightest future over the next five years was the Southeast with 57% of the vote. Atlanta was ranked the U.S. city with the brightest future, at 45%. Population trends indicate that 40% of the U.S. population will be living in the Southeast by 2050, according to Perry.

Overall U.S. commercial real estate supply/demand fundamentals over the next two years are expected to weaken significantly with widespread problems of greater severity and duration and many tenant and ownership defaults, according to 53% of the survey respondents. Another 31% expected that supply/demand fundamentals are going to weaken only moderately with serious weakening isolated in specific geographic areas and commercial real estate sectors.

“One area that we should have concerns about of further deterioration that haven’t really been anticipated by the market is industrial warehouse distribution,” said Chandan. “The risk is we could adopt more protectionist policies in the United States. That will limit the flow of goods in and out of the country. Once you separate services and look at the aggregate flow of goods in and out of the United States, it’s down about 35% from a year ago.”

Not surprisingly, participants predicted that retail (52%) will be the weakest sector over the next five years and multifamily (77%) will be the strongest.

In terms of the least problematic solution to the U.S. banking crisis, 45% of respondents said an aggregator bank to remove “toxic assets” and recapitalize banks was the best option.

“I think the greatest transfer of wealth is happening right now as we wipe out everybody’s values,” noted Perry. “But I think the biggest problem we have in an effort to accelerate or purge the problem out of the system, we’re dumping so much product onto the market that the banks themselves by trying to respond to regulation are in fact aggravating the problem.”

Have you ever found a property advertised as a short sale* but the real estate agent said the bank would have to approve your offer? You go to the trouble of putting your offer together, but the agent is clearly trying to get other potential buyers to make offers too. You are attracted to the potential profit in the short sale, but you are afraid someone else will outbid you. What can you do? This article will show you how to take control and sweeten the deal.

You will often hear this statement: “A short sale offer requires the approval of the lien holders**,” but this is not an accurate view of what is really happening. To clarify, let’s cover some basic real estate theory. First, an agreement for the sale of real estate is between the buyer and the seller. Period. If they choose to involve other parties (like the bank), they may because everything is up to them, including which contract they use.

Second, changing ownership of real estate does NOT require paying off liens. While new lenders usually require a clean title, as do most buyers and sellers, the clerk in the land records office never verifies that debts are paid before changing ownership by recording the deed! Examples of this include “subject to” deals and “wrap-around” mortgages.

Third, the influence of a lien holder on a property comes from two places: the power of the lien itself to encumber the property or allow a foreclosure, and any power given by the buyer and seller. Having a lien does not permit the lien holder to “approve” or “disapprove” a purchase agreement. It only means that the lien holder may specify the conditions under which the lien will be removed, according to the terms of the loan documents. Note, the removal of liens is usually required by a new lender when obtaining a new loan.

Understanding these basic concepts will help you in your investing, but here is a strategy to help you get control of almost any short sale deal you find.

Make these changes and additions in the contract you use to make your offer?:

1. Set the offer price as high as necessary to beat the competition. (Stay with me here.)

2. Set the closing deadline just like this: “on or before the date of the foreclosure auction.”

3. Add these three sentences to the “Other Terms” section of your contract:

“This offer is subject to the buyer’s approval of all short sale conditions at the buyer’s sole discretion. To that end the buyer may adjust the purchase price. Seller authorizes all lien holders to share any information with the buyer.”

These terms give the buyer complete control of the deal. Setting the initial price a little higher than the competition gets the offer past the agent, into the hands of the seller. The buyer has walk-away power because he may cancel the agreement if he doesn’t like anything about the short sale, including the price! This literally means that the buyer may change the price either up OR DOWN. Also, setting the closing deadline to match the foreclosure auction means the contract will never expire unless the bank forecloses, which it would rather not do. Time is on the buyer’s side.

Finally, the last sentence authorizes the buyer to negotiate with the lien holders for the short sale, instead of allowing the agent to do so. Lien holders may require a form, often called an Authorization to Release Loan Information, to be signed by the seller before they will talk to the buyer. Having this language in the contract facilitates getting that form signed.

There are many sources of information about negotiating a short sale with a bank or other lien holder. Ultimately they will have two choices: 1) come to an agreement with the buyer on the price and terms, or 2) allow the foreclosure. The bank will go ahead and foreclose if there is not enough value in the short sale; but the buyer has walk-away power with no negative consequences and therefore is in the strongest negotiating position. It shouldn’t be too difficult to get the bank down to their lowest price.

With these modifications to your purchase agreement, you should be able to profitably buy almost any short sale property on the market. Sweet!

Notes:

* The term “short sale” is used to describe a situation where a property cannot be sold for enough money to pay off all the liens (debts) on the property. If the liens are to be removed when the property is sold, the lien holders must agree to accept a payment that is less (or “short”) of the amounts actually owed.

** Lien holders are usually mortgage lenders, banks, mortgage insurers, bankruptcy trustees, plaintiffs, contractors, and federal, state and local taxing authorities (such as the IRS or State Tax Commission).

? The reader is encouraged to obtain legal counsel regarding possible consequences of contract language.