Why are there so many short sales?

This was followed 30 minutes later with another email:

This is frustrating.  All of the nice places are short sales.  What are the odds of buying a short sale as a Canadian?

Let’s tackle the first question first…

Why are there so many short sales?

Here’s a chart that shows the median sales price for all homes sold in the Phoenix area from January 2001 through August 2011. Keep in mind the “median price” reflects the price point where half the homes sold are lower than the median, and half are higher. So June 2006 (the tallest bar on the chart) shows the median sales price in the Phoenix area was $265,000. So that month, half the homes sold for less than $265K, and half the homes sold for more than $265K.

Personally, I think median price more accurately reflects current home values than average price because it only takes a few very high value homes (or for that matter very low value homes) to increase (or decrease) the average price. Median price is much less sensitive to outliers.

What this chart shows is that median sales price is the lowest it’s been in over 10 years. So the odds are pretty dang good that if you bought a home n the Phoenix area in the past 10 years, it is worth less – perhaps significantly less – now then it was when you bought it.

Sure, there are exceptions. This chart reflects median value, not the values of every single home sold. And there is no way to know from this data whether a home was paid for in cash, or financed with a mortgage using anything from zero percent down to 10, 20 or more percent down.

But you get the idea. Home values in general have dropped significantly. MANY homes are purchased with little to no money down financing, so there are MANY homes out there where the owner is underwater on their mortgage – they owe more on the home than they can sell it for.

And that folks, is the definition of a short sale – where the lender approves selling the home for less than the loan on it. There are simply a lot of homes out there worth less than what is owed on them. And don’t forget that many people refinanced their homes when values were exploding in 2005 – 2007. Cashing out all that “equity” might have seemed like a good idea at that time, but now those people also owe far more on their home than what they could sell it for today.

What are the odds of buying a short sale as a Canadian?

About the same as they are for a U.S. citizen. Not to sound flippant, but there really isn’t anything all that different between a Canadian citizen buying a home and a U.S. citizen doing the same. The biggest hurdle most Canadians face is finding a lender that has a “foreign national” mortgage product. Not all do, and most will usually require 30% down. But get over that hurdle and the differences between a Canadian and a U.S. buyer are negligible.

The problem with buying a short sale, regardless of your citizenship, is the successful closing is almost entirely dependent on two things almost completely out of your control – the lender (or lenders if there is more than one) and the listing agent.

The lender is really in control. They are, after all, the ones getting shorted on what is owed them. As such, they have the right to approve or deny (or ignore) any short sale offer you make.

And they can take weeks to months to make decisions.

The experience of the listing agent is also a critical component in the success of a short sale transactions. Let’s be blunt, there are agents who have listed properties for short sale that simply do not have the experience needed to poke, prod and essentially harass a lender to make a decision. On the other hand, there are some very experienced short sale agents that have a high success rate in getting short sales closed. The sad part of the equation is the experience of the buyer’s agent has little impact as they can not (normally) deal directly with the seller’s lender.

It is extremely difficult to gather statistics on the successful closing of short sale listed property. You may hear “only 10% of short sales ever close” bantered about but I have yet to see anyone who says that back it up with data. At this moment in time, there are 10,607 active short sale listings in the Phoenix area and there were 2,023 short sales closed last month. So that’s roughly 1 out of 5 listings (or 20%) closing. But even that number is tenuous at best.

Over the last year, short sale listings are down, and closings are up. Anecdotally some banks seem to be getting more cooperative. But there is little doubt that to actually close on a short sale one needs a bit of luck, a great deal of patience, and a cooperative lender. A good short sale listing agent helps tip the odds tremendously.

• Phoenix home buyers, are you being realistic?

Originally posted on Phoenix Real Estate Guy. If you are reading this anywhere but inside your RSS feed reader, the site you are on is guilty of stealing content.

We are moving to Tempe next year (May-June 2011) and have found your site and blogs very useful… and entertaining as well! Thank you!

We wanted to buy immediately, i.e. not rent while we look around for a suitable house. Is this a feasible strategy in this market? and if so, when should we plan our first visit?

Our plan was to
1. Short-list online properties we were interested in and set-up viewing appointments
2. Visit in the early part (?) of the year and choose
3. Get all the paperwork done so we can close and move-in when we arrive in May/June

From reading your website, It seems like this would rule out everything but a traditional sale.
Will this work or could too many things go wrong and would you advice to rent and look around while in the area. Any information you can provide would be helpful.

First, thanks for the kind words. I’m glad you find this a useful and entertaining place!

Here are my thoughts…

It probably goes without saying that relocating and purchasing a home are two things WAY up the list of “High Stress Activities”. If you go shopping and buy the wrong size shoes, a bad suit, or food your kids won’t eat, that’s not such a big deal.

Buy a home in the wrong area for you though, that is a big deal.

Ideally, we recommend that if you are relocating and not familiar with the Phoenix metro area that you rent first before you buy a home.

The benefits of renting first:

• You get familiar with an area before making the home purchase plunge.
• If you don’t like where you end up renting, you can rent somewhere else. Or at least drive around different areas at different times, watch listen and observe the local area and news – basically get a long term, in-depth feel of different areas.
• Less initial cash outlay. Moving is expensive, even if you have corporate relo assistance.
• Home prices are still dropping. Sort of.
• It is much easier to work out timing issues between leaving your existing home and relocating to your new one. Closings are delayed all the time.
• Reduced stress. Maybe.

The disadvantages of renting first:

• You have to move multiple times. Let’s face it, moving sucks. Ever meet anyone that likes to move?
• If you have children, unless you rent in the same school district you ultimately purchase in, then the kids may have to switch schools. Again.
• Interest rates are at historic lows. They can’t drop much more. They could rise while you are in your rental.
• You have to move multiple times.
• Short term leases aren’t easy to find. You may be locked into a six month lease. Or more.
• You have to move multiple times.

So answering the question posed is difficult. Ideally, you probably want to rent first. But we don’t live in an ideal world.

The questioners plan is pretty solid. They need (I think) to know a few things to really nail down their nest steps.

Plan on it taking at least 45 days to close on a home purchase from the time you get an accepted contract. (Assuming you are financing. You can close in 2 weeks or less with cash).

This begs the question, “how long does it take to get an accepted contract?” In a “traditional sale” (not a bank owned home or short sale) you can often get a seller’s response to your offer in 24 hours. In a multiple bid scenario, add several days. Add several days for counter offers and negotiations.  Bottom line though is in a traditional sale, you get answers pretty quickly.

How about bank owned homes? Here it’s a bank, and their bureaucracy you have to plan for. Many REOs (Real Estate Owned, aka bank owned homes) in the Phoenix market get multiple offers. But you can still usually get a yay or nay on your offer within 10 days or so.

Short sales? Good luck. Lenders seem to be getting faster in some situations, but they can still take months (yes months) to grant approval for a short sale.

Be sure to have an “LSR” (Loan Status Report) from your lender before you plan to submit an offer. The LSR is basically a loan pre-qualification that is all but required to be submitted with the original offer.

Determine what you will do about the inspection period. In Arizona, the standard inspection period is 10 days, beginning at midnight after contract acceptance. Being out of town complicates things, but not unduly so. You just need to understand your options (return for the inspection, don’t return and rely on inspectors report, agent feedback, photos and video, etc).

If you’ve narrowed your possible locations to just Tempe, that is beneficial in many ways. But are you sure you want to exclude nearby areas?

The more time you can spend here, the better. It is *great* if you can drive around the areas you’re looking at different times of the day. Drive the route you’ll take to work – at the time you’ll be going to/from work. Get a feel for the neighborhoods. The better feel you get for where you’ll be living, the more comfortable you will be throughout the home buying process. And beyond.

If you can only make one trip however, all is not lost. We’ve helped people relocating that had ONE DAY for a house hunting trip and had NO IDEA where they wanted to live. It makes for a brutal and rather unpleasant day, but it can be done.

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Originally posted on Phoenix Real Estate Guy. If you are reading this anywhere but inside your RSS feed reader, the site you are on is guilty of stealing content.

How fast can you sell my home? Are we in a buyers or sellers market?

Well, it depends.

Depends on what?

A myriad of things. . .

• Where is the home located?
• Will this be a short sale, or a “traditional” sale? (Short sale meaning you owe more than the home can be sold for. Traditional meaning you have enough equity to satisfy the loan, and your closing costs).
• What is the condition of the home?
• How aggressive are you willing to price it?
• What are comparable homes selling for?
• Are you willing to provide any buyer concessions (paying their closing costs, buying a warranty, pre-paying HOA dues – there are many things a seller can do to “sweeten” the deal and appeal to more buyers).
• And more. . .

There is no single answer to how fast a home can sell, or whether we are in a buyers or sellers market. One good market statistic to examine when you are looking at (roughly) how long it may take to sell your home is absorption rate – which will tell you how long it takes on average to sell a home. The formula is pretty simple:

Find the number of homes currently listed for sale and divide that by the number of homes sold last month. The result is the number of months it would take to reduce that inventory to zero.

For example: Let’s say there were 100 homes listed for sale, and 25 homes were sold last month. The absorption rate in this example is 4 months (100 divided by 25 = 4). Assuming no other homes were listed, and sales rate stays flat) it would take 4 months to sell 100 homes.

The astute reader may be saying, “but more homes will be listed and the sales rate probably isn’t flat across all that time.”

True statements. But the calculation does give a basic idea of how many months of inventory is on the market at any given time.

Right now the Phoenix real estate market absorption rate is basically trifurcated (isn’t that a cool word?). There are three distinct absorption rates that can be seen when you look at different price ranges. And you should look at price ranges – don’t just lump the entire Phoenix metro area together. Here’s a nifty chart showing absorption rate by price range for the Phoenix real estate market:

Where’s the aforementioned trifurcation?

Generally speaking, about six months of inventory is considered a “neutral market”, less than six months a seller’s market and greater than six months is a buyer’s market.

Gaze longingly at the chart above and you’ll see that homes listed for less than $50K are selling quickly. Very quickly. That makes it a seller’s market. Homes priced between $50K and $500K are in the six month neutral market range, and homes priced above $500K have anywhere from a one year to six year absorption rate.

Keep in mind these price ranges all have hundreds to thousands of homes in them and just because you may be selling a home in the $175 – $200K price range it doesn’t necessarily mean it will take six months to sell your home. Some homes in that price range sell in days, some may never sell. On average though, you’re looking at around six months. Selling a higher end home? Expect it to take significantly longer.

As always, take real estate market stats with a grain of salt. The mainstream media likes to hype up the bad numbers (and ignore the good) and a metro area the size of Phoenix shouldn’t ever be all lumped in under one number. You’ve got to consider real estate stats in smaller chunks. As seen above, the “months supply of inventory” varies wildly by price range. I can assure you that other metrics also vary wildly across the Phoenix metro area as well.

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Question: I love my home .. bought in 2000 for 289,000  re-fi in 2006 at 376000.00 todays worth 305,000 according to zillow. I’m torn, should I short sell and cut my losses or should I keep fast and steady. I’m trying to figure out my home appreciation in 10 years. I reside in peoria zip 85383

What we have here is basically an unanswerable question. Please allow me to explain why….

I look at this as a two-parter – 1) “should I short sell and cut my losses or should I keep fast and steady”; and 2) I’m trying to figure out my home appreciation in 10 years.

Should I short sell and cut my losses or should I keep fast and steady?

First, you really should not use Zillow.com as a basis for your home’s value. Zillow (among others) uses an algorithm to calculate your home value. Basically it pulls public records for information on your home and others around it that have sold recently. Ostensibly using such “comparables” is correct – it’s what appraisers and real estate professionals use to estimate the market value of your home. The problem with any AVM (Automated Valuation Method) is that a computer can determine who your home really stacks up to said comparables. A computer can’t see your home, or the others around it.

By their own admission, Zillow’s “Zestimate” (their estimate of a homes value) has a median error of 12.7% in Maricopa county. They also state that 65% of the real estate transactions in Maricopa county had a Zestimate within 20% of the actual sales price. Simple math tells us that 35% of Zestimates in the Phoenix area are off by more than 20%.

In other words, the $305K valuation you are seeing in Zillow may not be accurate.

How do you get a better idea of the market value of your home? You can either pay for an appraisal, or have a real estate agent prepare a CMA (Comparative Market Analysis) for you. And of course, not all appraisals or CMAs are created equally either…

All that being said, refinancing in Maricopa county in 2006 means it’s probable you are indeed underwater – you owe more on your home than you could sell it for in today’s market. How much you are actually underwater is another question. It may not be as bad as Zillow indicates (to be fair to Zillow, that Zestimate could be spot on. Or you may be deeper underwater than indicated…).

So… do you short sell and cut your losses or keep fast and steady?

I can’t answer that question.

Short selling may not even be an option. Unless you can prove a hardship to your lender – prove that you can not continue to make the payments – it is unlikely they will approve a short sale. LOTS of people are underwater. I’ve yet to meet anyone that likes making payments on an home that isn’t worth now what it was then.  But your not liking to make the payments means nothing to the lender. To be honest, they could care less whether you like it or not… So if you still have the financial means to make your mortgage payments, short selling is probably not even an option.

If that’s the case, keeping fast and steady, getting a loan modification (good luck with that), “walking away”, or renting the home may be your only viable options. Yes, this stinks to high heaven, but that’s reality.

(Someone is likely to chime in and say, “But some lenders are approving short sales without proving a hardship”. That may, or may not, be true. I’ve personally not experienced such an approval. Heck, in a majority of cases lenders won’t approve a short sale even if you can prove a hardship…)

This brings us to the second part of the question,

I’m trying to figure out my home appreciation in 10 years

I wish I could predict home appreciation 10 years out. But there are way too many factors to comprehend, many of which are impossible to predict, for anyone to be able to accurately state future home appreciation rates. A historical analysis of appreciation rates is about the best we can do.

Here’s a chart showing average annual appreciation for Peoria since February 2001 (click image for larger view):

As you can see, it’s been a wild ride. Annual appreciation peaked at about 52% in August 2005, and bottomed out at –35% in March 2009. The good news is we appear to be back to zeroish. What happens next is really anyone’s guess. If you want my guess, I’ll say that appreciation rates will bounce along at 2 – 3% for the next several years, possibly returning to long term historical appreciation of 4 – 5% after that (along the lines of the first third of the chart above).

And I reserve the right to be completely wrong.

What is going to drive future appreciation? The economy, the credit market, and the composition of the housing inventory. I wouldn’t even hazard a guess as to the future of the economy. I don’t think the credit market will ever return to where it was in 2004 – 2006 – where all that was required to get a mortgage was a pulse. In fact, I hope the credit market never returns to that state. I’m of the opinion that the ridiculous run up (and subsequent destruction) in appreciation rates was due in large part to lax lending standards.

As for the housing inventory, there is still a dearth of “distressed properties” (foreclosures and short sales – aka pre-foreclosures) for sale throughout the Phoenix metro area, including Peoria, as evidenced by this chart:

58% of the current listings in zip code 85383 are distressed properties. Until this inventory bleeds off, which could take years, the market can’t do a whole lot with respect to home appreciation.

Depressed yet?

The Bottom Line

The “What should I do?” questions are exceedingly difficult to answer. Especially if one isn’t privy to the questioners financial situation. “Strategic Default” (basically walking away from your home/mortgage) is a very personal decision – one that I could never answer for someone other than myself. A decision to short sell, if that is a viable option, is also a very personal decision. All I can do is arm someone with information (limited as it may be) and leave it to them to decide for themselves what is best given their personal decision.

—
Charts from CromfordReport.com using data from public records and  data licensed from the Arizona Multiple Listing Service (ARMLS). Cromford Associates LLC, ARMLS and yours truly, Jay Thompson, expressly disclaim and make no representations or warranties of any kind – express, implied or statutory – as to the accuracy of the data, nor its merchantability or fitness for any particular purpose.

In other less legal-like words, if you use this data to make personal, business or investment decisions and something blows up, it’s not our fault and you can’t sue us.

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Originally posted on Phoenix Real Estate Guy. If you are reading this anywhere but inside your RSS feed reader, the site you are on is guilty of stealing content.

I am a first time homebuyer.  I am close to settlement/closing and up until now I have done well with understanding all the documents placed in front of me coming from my realtor, mortgage broker and whatnot.

Long story, short….do I need a real estate attorney?

I’ve been looking for one and I was recently told by a colleague that Arizona doesn’t require a Real Estate Attorney for the buying & selling of residential properties and that the Title company does all that work for a quarter of the cost.

Is this true?

The documents coming from the title company seem to be much more ‘legal oriented’ (as far as language) and I want to make sure I am not missing anything or agreeing to something I may have issue with.  They may seem like boilerplate docs to a lawyer, but I am not a lawyer.

I could really use some guidance on this issue.
Thanks!

Great question!

BIG GIANT DISCLOSURE: I’m a real estate broker, not an attorney. My position on this may will be biased, and nothing I say here (there, or anywhere) should even remotely be construed as legal advice. And, this opinion only holds true for real estate in Arizona. Local and state real estate laws, rules and regulations vary. What you read here may quite possibly be meaningless in other states/jurisdictions.

The short answer:

No, you are not required to use an attorney in a real estate transaction in Arizona.

The lengthy answer:

Arizona is somewhat (if not completely) unique in that the Arizona State Constitution specifically permits real estate agents and brokers to prepare instruments (purchase agreements, contracts for sale, deeds, etc ) incidental to a real estate transaction.

Article 26, Section 1 of Arizona State Constitution:

1. Powers of real estate broker or salesman

Section 1. Any person holding a valid license as a real estate broker or a real estate salesman regularly issued by the Arizona State Real Estate Department when acting in such capacity as broker or salesman for the parties, or agent for one of the parties to a sale, exchange, or trade, or the renting and leasing of property, shall have the right to draft or fill out and complete, without charge, any and all instruments incident thereto including, but not limited to, preliminary purchase agreements and earnest money receipts, deeds, mortgages, leases, assignments, releases, contracts for sale of realty, and bills of sale.

Preparing real estate transaction documents and understanding them and the legal implication of them are two different things. As Michelle Lind, General Counsel to the Arizona Association of Realtors, wrote in a paper on the background of Article 26 points out:

These cases, and subsequent clarifications by the Arizona courts, indicate that Article 26 imposes a duty upon brokers and salespersons to give competent advice to their clients and to understand the legal implications of the documents they prepare. (My emphasis in bold.)

“Imposes a duty…” So us agent/broker types should be helping our clients understand all the documents surrounding their real estate transaction. In all honesty, I think the vast majority of agents do a good job of this. In my opinion, explaining the nuances of the documents is one of our most important duties to our clients. But let’s face it, as with any profession, not all practitioners are equal. Just because case law and court clarification imposes a duty does not mean that duty will always be successfully executed.

The bottom line answer:

You are not required to use an attorney in Arizona. An agent / broker can prepare documents, and a title company will help in managing the process. An agent should be able to explain the documents to you in a way you can understand. But these documents are prepared by attorneys and often the language is convoluted and peppered with “attorney speak”. You need to feel comfortable that you understand every aspect of your real estate transaction, and if hiring an attorney makes you more comfortable / confident, then by all means, hire one. If expenses are a concern, ask your agent to explain things in a different way, or ask their broker to explain it (or your title / escrow officer) – sometimes just having a different perspective and/or style of explanation might be all the clarification you need.

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Originally posted on Phoenix Real Estate Guy. If you are reading this anywhere but inside your RSS feed reader, the site you are on is guilty of stealing content.

Question: There are a lot of bank owned homes up in Anthem – is it legal to place 2 separate offers on 2 different houses?

The short answer is yes, it’s perfectly legal (at least in Arizona) to place multiple offers on multiple properties. Your mileage could vary in other states.

But, I’d be remiss if I didn’t discuss the potential ramifications of having multiple offers out.

In an absolute worse case scenario, you could have multiple offers accepted, you dilly-dally around and find yourself with no way out of a contract – meaning you are now under contract to purchase more than one home.

Fortunately, there are ways to cancel a purchase contract without running afoul of the law or risking loss of your earnest money deposit. Primarily this can be done through the inspection period that is generally 10 days from contract acceptance.

I emphasize generally because no two contracts are the same. The boilerplate language in the standard Arizona Residential Resale Purchase Contract provides for a 10 day inspection period. Section 6j of the purchase contract and the Buyer’s Inspection Notice and Seller’s Response (BINSR), which is delivered from the buyer to the seller, contain a provision for the buyer to immediately cancel the contract if they disapprove of items uncovered during the inspection period.

Technically, this is not the “free pass” out of the contract that many say it is. In reality though, as long as you have an item to disapprove, any item, then the contract can be cancelled.

If you are looking at bank owned (REO) properties, you should be very cognizant of the lender’s addendums. They trump the contract and may contain language that significantly shortens your inspection period. Some will even attempt to eliminate the inspection period all together, which should be cause to run, not just walk, away.

So, should you submit multiple offers on multiple properties?

Every situation is different, and there are no blanket answers for a question like this. In the Phoenix real estate market, if you are interested in purchasing a short sale, you almost have to submit multiple offers. It doesn’t seem prudent to submit one short sale offer, and wait 3, 6, 15 weeks or more to get an answer – an answer that may just be “no thanks” so you wind up starting all over again.

If you are looking at purchasing an REO property, particularly one priced at less than $150K-ish, then be advised that these properties often get multiple offers and while some banks respond swiftly, others can take days. If you only submit one offer and you’re outbid, then many other similar homes may have come and gone while you had your one offer under review.

In a traditional sale (not a short sale or bank owned home) you generally give the seller 24 hours to respond to an offer. In this case, it doesn’t make much sense to put in simultaneous offers on multiple homes.

If you chose to go down the multiple offer road, what you want to make sure of is that you’re working with a competent agent that will help you keep track of offers you have out, accepted offers, and all the timelines. Goof this up, and you may find yourself in a situation where you can’t get out of a contract and are well on your way to losing your earnest deposit on one or more of your accepted contracts.

Standard disclaimer: I am not an attorney, nor do I play one on TV, the internet, radio, print or anywhere. You should always seek competent professional legal help for any law related question.

Photo Credit: dbking on Flickr. Creative Commons License.

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Originally posted on Phoenix Real Estate Guy. If you are reading this anywhere but inside your RSS feed reader, the site you are on is guilty of stealing content.

I’ve put an offer in on a home and found out it has a “Lis Pendens” on it. I asked my agent what that meant and she didn’t know. Can I still buy this house?

I’ll resist the temptation to say, “find a new agent”.  If you’re under contract, it’s a little too late for that.

Lis pendens is Latin for “suit pending”. The book definition is:

Lis pendens is a written notice that a lawsuit has been filed which concerns the title to real property or some interest in that real property. The lis pendens (or notice of pending action) is filed with the clerk of the court, certified that it has been filed, and then recorded with the County Recorder. This gives notice to the defendant who owns real estate that there is a claim on the property, and the recording informs the general public (and particularly anyone interested in buying or financing the property) that there is this potential claim against it. (source)

So what does this mean in English and what does it mean to a potential real estate buyer?

In a nutshell, if there has been a lis pendens filed, someone is saying, “Hey, I have a piece of this property and you can’t have it.” They may (think) they own all or part of it, or they may have a lien against it and they have (or are about to) file a law suit stating their claim.

Now whether or not this claim is true may, or may not, be a different story. That will be up to the court to decide.

A lis pendens will place a “cloud” on the title that will have to be cleared before you can take title to the property. I haven’t met a title company yet that will issue title insurance if a lis pendens has been filed. They can’t, as they don’t know if the title will be clear to transfer to you, the prospective buyer.  No title insurance, no loan.

Now this isn’t to say that a lis pendens will prevent the purchase of a property, but it will have to be resolved. In these days of frivolous litigation, many of these things just fall apart as they progress through the system, the lawsuit is dropped, and the lis pendens is removed. If you are a cash buyer, and for some ridiculous reason decide you don’t want title insurance, a lis pendens won’t prevent a sale. Just be aware that should the reason for the lis pendens be true, you may not be able to take title or you may have to cough up more money to satisfy a lien holder.

What are some reasons a lis pendens is recorded?

In my experience, divorce or separation situations take the top slot.  Mikey and Susie are married and they hate each other. Susie says, “Oh fine, you can have the house, just get out of my life”, so Mikey puts the home up for sale. Susie comes to her senses and realizes her soon to be ex is going to pocket some cash from the sale. So Susie’s divorce lawyer slaps a lis pendens on the the property until he figures out how to get Susie’s (and his) slice of the pie. Typically they will duke it out, resolve their differences, and the home will be sold.

Inheritance disputes often result in litigation. Let’s face it, when people die and will real property to an heir, others often come out of the woodwork and make a claim to the property.

Sometimes lenders will file a lis pendens on a property when they think foreclosure will be necessary. This stalls any attempt to sell the property to evade foreclosure.

There are a litany or reasons a lis pendens may be recorded. A title company will research the situation and should be able to advise you and your agent of what will be involved to clear the cloud on the title. Attorneys may or may not have to be consulted.

Can you buy a property that has had a lis pendens recorded? Yes. Just be careful and make sure you understand all of the potential ramifications.

Photo Credit: Creative Commons photo by umjanedoan

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Originally posted on Phoenix Real Estate Guy. If you are reading this anywhere but inside your RSS feed reader, the site you are on is guilty of stealing content.

I’m a Canadian looking to get into the Foreclosure market in your area. What’s the best way for me to approach this and where can I find the best information on the process and the pitfalls of these transactions?

Great question Darrell!

<< Fair warning – interminably long post ahead >>

I’m assuming here (and I really hate to assume anything) that the question is asking about homes that have already been foreclosed on — that being taken back by the lender and placed on the open market for sale. If you are wanting information on buying homes at foreclosure auctions, then that’s a post for another day. The quick fact is, the vast majority of homes at foreclosure auctions (more accurately in Arizona — a Trustee Sale) are not bought and they wind up reverting to the bank. Why? The bank wants too much at the auction. They’re attempting to recoup all their losses.

Here’s a couple of points regarding the Phoenix foreclosure market (as defined above) that you want to be aware of.

First, there are a lot of bank owned homes on the market. Keep in mind that “bank owned” = “Foreclosed” = “REO” (Real Estate Owned).

How many is a lot?

Hard to say. At this moment in time, there are 10,770 single-family home listings 9,509 in the immediate Phoenix metro area) and 1,106 condo/town homes in the MLS ((Multiple Listing Service — a database where the vast majority of homes for sale are entered)) flagged as “Lender Owned Property”. Likely there are some properties out there that are either: 1) not really lender owned but are flagged as such; or 2) are lender owned but not flagged as such. After all, the data in the MLS is only as good as what is entered.

Suffice it to say, there are many, many lender owned homes to chose from.

Second, be advised that many of these homes are not in good condition. It’s not unusual for foreclosed homes to be missing such functional items as cabinets, toilets, stoves and light fixtures. Sadly, when faced with foreclosure, many people take everything they can from the home in a last ditch effort to “get something” from their home purchase. I’ve seen foreclosures where the owners ripped out all the wiring. Others were trashed to the point where college frat house residents would be ashamed.

Contrary to somewhat popular belief, not all bank owned homes are trashed. There are many that are in pristine condition (and all points in between). You just have to either shop carefully, or be prepared with money, time and desire to address any deficiencies.

What is the best way to search for foreclosures in Phoenix?

Why right here! You can use our home search and select “Bank / lender owned” from the Foreclosures drop down. Or, if you prefer, just go straight to this page that is dedicated to searching for Phoenix foreclosed homes.

We don’t require any registration for any of our home search tools. If you want to save searches or get automatic updates of new listings via email, then we do require very minimal information. But you will never be hassled with follow up emails/calls. If you need anything, ever, just ask.

But wait! What about BUYING foreclosures?

The process of actually buying a foreclosed home is basically identical to buying any other home owned by an individual. The contracts are the same, the disclosures and time periods are all the same (though you’ll almost never get a sellers property disclosure statement from a lender owned home). Also be advised that some lenders will have additional addendums for the seller to sign.

That said, it is important to know that you should use a buyers agent that is familiar with the REO ((Real Estate Owned — the less nasty sounding term for foreclosed / bank owned homed)) paperwork and process. It can greatly help your chances of having your offer accepted if your agent knows how to handle REO paperwork. I’d tell you which Phoenix agent to choose, but you already know… .

The lender, who is in effect the seller, will want the same assurances as any other seller that you can secure financing. Like any other seller, they will want to know you’re serious and committed to purchasing the home you place an offer on.

For Canadian home buyers of US property, securing financing can be challenging. Thanks to the credit crunch, some lenders no longer service loans for foreign nationals. But some still do. They typically require 25 – 30% down. Other requirements vary from lender to lender. Given the recent volatility of the Canadian / US dollar exchange rate, it makes sense to at least investigate a foreign currency broker — they can save you a bundle.

The Phoenix Foreclosure Market

We’ve already discussed the bloated inventory of foreclosure homes on the market in Phoenix. So how does this impact the foreclosure market?

Bank owned homes in Phoenix tend to be aggressively priced. Lenders aren’t in the business of holding homes. They want them sold. (Which is why the tortuous process of short sales ((A short sale is when a home is sold on the open market for less than what is owed on it.))  is dumb-founding.) So don’t expect to get an offer that is pennies on the dollar accepted. In fact, it’s not uncommon for foreclosed homes to receive multiple offers at or even above list price.

Bank owned homes can often move very quickly. While it is disappointing to get over-bid on a home you really like, keep in mind the 10,000 plus foreclosures on the market and more coming on every day. The odds are overwhelming you can find another home to go after.

The Lowdown – Advantages and Disadvantages of Buying Foreclosures

To wrap this up (finally!) here are a couple of lists. . .

Advantages of Buying Foreclosures:

• Aggressively priced.
• The owner (the bank) really wants them sold.
• Lots to chose from.
• Banks are relatively swift in making an offer decision — often as quickly as a few days (in stark contrast to the weeks on end a short sale decision can take).
• You will have an inspection period (typically 10 days) after contract acceptance to have the home inspected. Cancellation in this period is not difficult.
• The bank is not emotionally attached to the home. This can make negotiations swifter — though there is typically little if any room in price negotiations.

Disadvantages of Buying Foreclosures:

• Condition may be an issue.
• Typically sold “as is” — meaning the bank will not do any repairs (though sometimes they will).
• Buyer competition — may be in a multiple bid situation. ((Multiple Bid — where more than one potential buyer submits an offer on a home))
• Update: Financing Concerns. Sean Terry of the fabulous Deal Makers Blog made a great point in Comment #1 below about potential financing concerns regarding property in poor condition. Be sure to read it!

Hopefully this tome answers some of Darrell’s (and others) questions. I could ramble on forever about this and still miss something. Should anyone have any questions, drop a comment here or contact me!

As always, anyone reading who has anything to add is welcome and encouraged to do so!

• Phoenix home buyers, are you being realistic?
• What is a Short Sale?

Originally posted on Phoenix Real Estate Guy. If you are reading this anywhere but inside your RSS feed reader, the site you are on is guilty of stealing content.

Hello – I may be relocating to Phoenix from Ireland and have noticed that some homes listed say, “NO HOA!!!” which makes it sound like it’s a good thing not to have one. What exactly is an HOA and what are the advantages and disadvantages? I’ve been in the UK for almost 30 years and don’t remember HOAs being so prevalent when I was in the US.

Great question!

A HOA (Home Owners Association) — at least in Arizona — is typically created by the builder/developer of a subdivision. They are the “governing body” of the development and enforce the “CC&Rs” (Covenants, Conditions and Restrictions) and manage the common areas such as green belts, play areas, walking/biking trails, community swimming pools, club houses, amenities, etc.

Virtually without fail, once the subdivision is built out (or almost built out), the developer turns the control of the HOA over to the homeowners. At that point the HOA is managed privately by the homeowners, or a property management firm is contracted to manage the HOA. In either case, a homeowner elected Board of Directors overseas the management of the HOA.

Homeowners pay dues to the HOA. In the Phoenix area, these dues can vary wildly from one development to the next. Sometimes in a seemingly random fashion. Generally speaking, the more amenities and common areas a development has, the higher the association dues will be.

As with just about anything, there are advantages and disadvantages to an HOA. I’ll be honest, many people hate the restrictions some HOAs impose. Others seem to have no issue with them.

Advantages of an HOA

Proponents of HOAs typically site “maintaining or improving property values” as a major benefit. The developments CC&Rs will almost certainly have guidelines for things like landscaping care, exterior maintenance and even a “color pallet” that homes must comply with. There will probably be rules that have to be complied with like no parking in the streets overnight, no large vehicles, and activities that are not allowable such as certain home businesses.

In the sense that an HOA prevents your neighbor from painting his house purple, or allowing 4 foot weeds to consume the front yard, then yes, most HOAs do serve some purpose and help maintain neighborhood standards which in theory helps preserve home values.

Disadvantages of an HOA

“It’s my house, I’m paying for it and I ought to be able to do whatever the hell I want with it.”

As a real estate agent, I hear that mantra frequently. And I certainly understand the feeling. The removal of “freedom” is probably what annoys most people. Sometimes there appears to be haphazard enforcement of the CC&Rs. Then there are the annoying letters and fines that the “HOA Police” send out. I got a letter once saying that my satellite dish had not been “approved by the Board”. It had been installed on my home in compliance with the CC&Rs for three years. That seems just a wee bit silly. I also got a letter once that said my grass was too long. I have desert landscaping without a blade of grass. It took three phone calls to the management company to stop the fine process.

These letters and the control that some HOAs have annoy many people.

So do you buy in an HOA or not?

If you do some research, you will find horror stories of HOA Boards Gone Wild. Over two years ago I wrote, Incredibly inept HOA action!, which outlined one such out of control HOA board. And here is another sad tale right here in the Phoenix area – Silly HOA Moves.

On the other hand, there are some great HOAs out there that do really good things for the community. My own HOA is one example, which I wrote about in, Why I *Like* my HOA.

A good (or bad) Board of Directors can make or break an HOA. Voting out an entrenched board can be difficult as let’s face it — many homeowners are apathetic about voting, and getting someone to agree to volunteer for an utterly thankless job is very difficult. The single best way to make your HOA better, serve your needs and be reasonably is to participate. You don’t have to get on the board. Just participate. I was on my HOA board for two years and could count the number of homeowners that regularly attended meetings on one hand.

In most of the Phoenix metro area, if you want a home newer than say 20 years old, it’s not really a matter of whether to buy in an HOA or not. It’s more a matter of which HOA to buy in. They just aren’t building homes in non-HOA areas for the most part (though a few can still be found in outlying areas).

The standard Arizona Residential Resale Purchase Contract and specifically the HOA Condominium / Planned Community Addendum clearly spells out the documents and time lines that a seller (or the HOA depending on the size of the development) are required to deliver and abide by to a prospective buyer. This includes such things as the CC&Rs, bylaws, and the financial status of the HOA. The astute buyer would be well advised to go over these documents with their agents in excruciating detail. The last thing you want to do is buy a home only to find out that something in the CC&Rs prevents you from doing something important to you.

Further reading: Here is a good article from a Phoenix real estate attorney regarding your rights in an HOA.

• Ask the Broker: Is Cash Still King?

Originally posted on Phoenix Real Estate Guy. If you are reading this anywhere but inside your RSS feed reader, the site you are on is guilty of stealing content.

I am interested in buying two acres of property that are part of a five acre parcel that has a mortgage. There is a house on the remaining three acres in which the owners live. How do we proceed with releasing the acreage in which I am interested from the mortgage?

Theoretically the lender could “split” their lien — placing one lien on the home and three acres and a separate lien on the remaining two acres. This is however, extremely unlikely. A more viable solution is for the lender to retain a lien on the home and three acres and release their lien on two acres.

There are several factors at play here, and without knowing more information, it is difficult to answer the question completely and accurately.

Let’s assume the entire property, land and home, was purchased and financed together and the lender has one lien covering both the land and home. In this case, the homeowner would need to petition the lender to release their lien on the two acres you are interested in purchasing. This will likely come down to a pure financial decision on the lien holders part. If they feel they could recover the balance of the loan by retaining a lien on the home and three acres, they may be willing to release the lien on the other two acres. Or maybe not.

There are many factors
to consider in
purchasing a partial lot

Let’s do a little math example:
Current market value of only the home: $200,000
Current market value of the land, per acre: $50,000 (for a total land value of $250,000 — 5 acres * $50K/acre)
Total current market value, land and home: $450,000

The key factor here is what is the current balance of the loan. There will need to be at least $100,000 in equity (2 acres at $50K/acre = $100K) before the lender will even think about releasing part of their lien. In this example, the current amount of the loan would have to be less than $350K. In all probability, given generally declining home values and slow sales, the lender would want to see a loan balance significantly less than $350K. How much less is anyone’s guess, but it wouldn’t surprise me at all they would want to see a remaining LTV ratio (Loan-to-Value) of at least 80%. So in our math example, multiplying that $350K by 0.8 means the loan balance would need to be less than $280K.  The lender may consider all, part or none of your purchase price in their determination — usually part in my experience.

Another factor to consider is how the land has been platted and recorded. The most likely scenario is the 5 acre lot is a single recorded parcel. If this is the case, then a survey will need to be conducted and a request filed with the appropriate county and city governments to split the parcel.

Existing zoning and deed restrictions could prevent splitting the acreage into two or more smaller parcels.

In a nutshell:

• Determine if the land parcel needs to be split — if it even can be.
• Get a current appraisal of both the home and the land values.
• Petition the lender to rework the lien to be held on the home and three acres, in effect releasing the two acres of land you are interested in purchasing.

It is also possible that the land and home were financed separately and are held under different liens. If this is the case, nothing really changes other than there is no need to determine the market value of the home.

Ultimately, it’s all up to the lien holder — at a somewhat significant expense to the seller, who is most likely going to want to pass that cost on to you the buyer.

• What is a Lis Pendens?
• Ask the Broker: Is Cash Still King?
• 7 Habits of Highly Effective Real Estate Agents
• Specifying a Lender. Steering? Illegal? Or just Stupid?
• 7 Habits of Highly Effective Home Buyers

Originally posted on Phoenix Real Estate Guy. If you are reading this anywhere but inside your RSS feed reader, the site you are on is guilty of stealing content.