Louis XIV of France, styled the Sun King, famously opined, “Apres moi, le deluge.” After me, the flood. He was right, of course, for his excesses so infuriated the people that his successor was guillotined and his monarchy overthrown in the French Revolution.
SoCal Plunge In Foreclosure Filings
Something similar seems to be brewing in Southern California and maybe even nationwide as lenders ratchet up their foreclosure filings after the “robo-signing” lull. Though foreclosures dropped dramatically in SoCal this fall, so, too, did all home sales. The reasons seem to be many: the end of the home buyer tax credit, stubbornly high unemployment and the generally still-moribund economy. In fact, sales are down a full 16% from November of 2009. This at the same time foreclosure filings fell 14% from the previous November after a 22% decline in October for a two-month total 36% decline. Nationwide, the filings fell 21%.
December is traditionally a slow month in real estate as consumers focus on retail buying, parties and holiday travel plans. Typically, though, also in December smart investors are out there snapping up last-minute bargains of the now-extremely motivated sellers still on the market. Competition is almost always much less, to put it mildly, and sellers are determined to close out their books for year’s end. This year seems to be different as even investors are holding back.
That may be because the huge drop in foreclosure filings this fall has ominous repercussions for home prices in the new year. With the foreclosure freeze over, informed observers now expect to see the banks ratchet up their foreclosures with a vengeance, restarting filings begun in October and November and barreling ahead with new ones in January. Executives from RealtyTrac, a real estate data collection firm, speculate that the housing recovery could be set back three months, if not more, as the foreclosures pile up. In fact, we can expect ” an avalanche” of foreclosures shortly.
SoCal Home Prices
The most immediate effect of an avalanche of foreclosed properties on the market will be to further depress prices in Southern California which had started a slight upward movement. Los Angeles County home prices had dropped 1.2% over November 2009 to a median of $325,000. Riverside and San Bernardino Counties, the hardest hit by the bursting of the real estate bubble, lost 2.5% and 5.0% respectively to medians of $195,000 and $152,000. But, that is a huge improvement over the 30% and 40% drops of previous years. Other SoCal counties actually gained in value. Orange County eked out a .6% improvement for a $435,000 median home price. San Diego topped the charts with a 3.1% improvement over last year to a median of $335,000 with Ventura County just behind at 2.7% uptick to a median of $375,000.
Future: More Underwater Homes
These hard-earned gains will soon be lost as the promised avalanche of foreclosures hits the market. Perhaps sales will pick up as buyers and investors are lured back into the game. But, bargain-hunting fun aside, another price drop for already distressed homeowners will plunge yet more homeowners underwater. That, in turn, spirals down into more foreclosures and more equity loss in future.
Like Louis XIV, banks see this as well as anyone, yet still refuse to modify loans in any serious way. Like Louis, they see, but, obviously, don’t give a damn as long as they get their bonuses. Short-term is the only term.
Sales in Southern California counties are slowing. While this is normal for this time of year as most of the population is occupied with holiday preparations and parties, the amount of real estate inventory continues to grow. The rise in inventory will, in turn, lead to a further decline in home values as home sellers, including banks, attempt to price their properties competitively.
This is the latest real estate info for Southern California counties. Compare to one month ago here. Time on the market is lengthening and prices are dropping–again…
Here’s the latest housing values news for many Southern California counties. Compare to one month ago.
Sometimes it’s best to cut to the chase. Buying a rental property is not brain surgery, but it does require preparation, called in real estate due diligence. I f you want to make money with your rental, you must do your due diligence.
Bottom line: Research the area, the demand, the renters, and the zoning. And listen to your gut instinct.
Buying a rental property is different from buying for yourself. Banks know this as well. Banks often require a larger down payment and charge higher interest rates for rental property than they do for owner-occupied homes. Today, for the best buyers, that is, those with those excellent FICO scores of 750+, lenders are offering 4.5% on 30-year conventional fixed loans for owner-occupied properties. For non-owner occupied, add 1%, so the rate for the same loan would be 5.5%. If your FICO is not quite as good, never mind, you’ll just pay a slightly higher rate. But, these are the best rates in 50 years!!
And never forget: Real estate is not a liquid asset. If you need to sell quickly, especially in a down market, you could have trouble getting the price you want or finding a buyer at all.
In addition, if you’re without a tenant for a period of time, the investment goes from cash cow to cash drain. For that reason,the typical advice for landlords is set aside about six months of monthly expenses. It’s good advice, but easier said than done. If you wait until you’re completely safe, you may never take the plunge.
Do the Math
Besides doing your due diligence on the area and the property, take some time to sit down with a calculator and run the numbers.
First, you need a good idea of what rental prices for comparable properties in the area fetch. How to find out? You could ask your friendly Realtor or these days check out the local Craigslist and figure it out for yourself.
Then total what you’d pay each month for the mortgage, insurance, and 1/12 of the annual property taxes. Include any expenses that you’re paying, like water, maintenance or community dues. If you’re not managing the property yourself, include the management fees. This is your monthly cost.
What you want to see on that balance sheet is a positive cash flow of at least 6 percent.
In addition to income, you can get a break on your income taxes. The Internal Revenue Service lets you depreciate the building portion of your property (minus the value of the land) over 27.5 years, which means much of your cash flow will be tax-deferred. If you ever sell the property, you’ll have to pay taxes on that depreciation, but if you don’t sell it, your heirs will never have to pay it.
And realize that this is not a short-term investment, you have to be in it for the long haul. The longer you hold the property, the greater your gain.
Before you consider buying a rental property, get an inspection from a certified professional home inspector. That way, you know exactly what you’re getting and what, if any maintenance issues you may have. Also, especially in the current financial climate, be prepared for “all those negative emotions” from people on the sidelines telling you not to buy. The people who are telling you this, I guarantee they are not investors.
While owning rental property can be challenging at times, financially and even emotionally the rewards of a well-bought and well-managed property are really worthwhile. You are providing housing to families, you are making money for yourself, and you are running your own operation. What could be better?
Locally, the rate of foreclosures continues to rise. Previously, the worst of the crisis seemed limited to Riverside and San Bernardino Counties, but, little by little the foreclosure boom has extended to the San Gabriel Valley as well.
For some quick examples, let’s look at one of the worst hit areas, Azusa with 27 foreclosures priced from $159,900 to $659,000. As noted here previously, an obvious place where foreclosures will be widespread is anywhere with many new homes. Voila Azusa where home builders have flooded the market in the past 5 years. This is one reason so many foreclosures are occurring there.
Covina is another foreclosure hotspot with 30 currently on the market ranging in price from $184,900 to $729,000. Single family homes priced below $200,000 are still a rarity, so the lower figures are usually condos. In West Covina currently 48 repos are on the market, priced from $205,000 to $527,000. Even pricey Walnut has 6: $209,900 to $994,900. Prestigious Claremont has 9 priced from $237,500 to $489,900.
LaVerne has 6 foreclosures for sale. San Dimas has 8 priced from $269,900 to $631,659. Glendora also has 6 with prices starting at $297,000.
In the western San Gabriel Valley fewer new homes can be built as the area has been built up for a long time. Nevertheless, here as elsewhere, foreclosures are abundant. Our largest city, Pasadena has 32 on the market ranging from $219,000 to $649,000. Monrovia has 10: $220,000 to $579,000. Altadena shows 12 REOs, priced from $190,000 to $565,000. Tiny South Pasadena has 3 and Arcadia has 4.
Economic woes have hit Duarte a bit harder and it shows. Duarte has 16 foreclosures ranging from $106,900 to $474,000.
As always, though, the title of Heartbreak City goes to Pomona which now has 119 foreclosure listings, priced from $106,600 to $454,000 for a lovely 4-bedroom in Phillips Ranch.
Besides our own misery, we also know now that nationwide 12 million homeowners are underwater or owing more than their homes are worth. That is definitely true here as well where on average prices have dropped 25% to 30% over the last year, creating many more “underwater” homeowners. Of course, that presages more foreclosures in the future as these homeowners bail out of their now way overpriced homes.
Across the country, foreclosures are up a whopping 71% in the third quarter over the same period last year. Almost 766,000 homeowners nationwide had a sheriff show up at the door and with a foreclosure complaint in hand.
Six states made up for nearly 60% of the list: Arizona, California, Florida, Michigan, Ohio, and Nevada. Actually, in California Notices of Default, the first stage in the foreclosure process, are down significantly–from 121,673 in the second quarter of this year to 92,240 in the third quarter. Despite appearances, that’s not really not much to cheer about. A new state law came online October 1. That law ia requires lenders in California to contact defaulting homeowners first, then to wait 30 days before beginning the foreclosure process. So, that drop is a delay, not any really good news.
Maybe Californians behind on their mortgages will slide through Christmas, but the first quarter of 2009 looks bleak indeed for the many homeowners now behind on their mortgages.
The good news? Southern California home sales are up. Prices are now at 2003 levels.
“Sinking home values continued to drive home sales in September as bargain hunters snared properties at 2003 prices.The median Southern California home sales price was $308,500 in September, the lowest since May 2003 and down 33% from the September 2007 peak of $462,000, according to real estate research firm MDA DataQuick.
The number of homes sold in Los Angeles, Orange, San Bernardino, Riverside, Ventura and San Diego counties shot up 65% compared with September 2007. Fifty percent of homes sold last month had been foreclosed.
Of course, even the good news comes with a caveat. These homes were purchased mid to late summer before the horrific slide on Wall Street, before the Bailout and before the news that even corporate giants like Ford and General Electric were facing economic extinction. As usual, with bargains galore, many are too scared to buy.
Foreclosures! For sure we’ve got ’em as indicated in a previous post. If you’re looking for a foreclosure, though, there are few things to consider first.
- What do you really want when you say foreclosure? Most buyers say foreclosure, REO or short sale as shorthand for a bargain home. Think about it. You don’t really care if it’s a foreclosure, do you? What you want is a very well-priced home so you get value for your money. Since that is the case, be sure to let your Realtor know that. Otherwise, you might get just a list of REOs.
- Foreclosures usually mean more competition. Since the banks are overloaded with these “non-performing ” properties right now, they are priced very competitively, so they attract lots of competition from other bargain-hunting buyers. You need to be prepared to move fast. If you’re the type who likes to mull things over, not a bad idea when forking over hundreds of thousands of dollars, this market niche may be too fast for your taste.
- Be prepared to move fast. So many homes are on the market these days that frequently buyers avoid the preparatory steps and go right for the cake–looking at homes. You Realtor will tell you to get yourself pre-qualified with a good lender. Don’t dodge the call. It takes only a few minutes. You not only now know what you can afford to buy and what the rate will be, but, pre-approval in hand, you can now instantly offer on that foreclosure that just came on the market.
- Be prepared to wait. Banks have different modus operandi. Some will immediately take your offer, especially if you have a down payment, have that lender’s letter and offer close to the list price. Others wait and collect as many offers as possible, then counteroffer all to make their “highest and best” offer. Then, it’s a guessing game. If you are offering on a short sale, a pre-foreclosure, be prepared to wait for a significant amount of time, sometimes months.
- Inspect, inspect, inspect. You should never buy a home without a professional inspection, of course. It’s even more important for foreclosures and pre-foreclosures. Often the previous owners had been in financial difficulties for quite some time before surrendering the house. Most likely they couldn’t or didn’t do any maintenance either, especially once the foreclosures was a done deal. Sometimes, banks repair REOs damaged by their original owners, but almost always the job is slapdash. Remember that when choosing a foreclosure over someone’s lovingly nurtured home.
- Get a good broker. This is crucial. The listing agent represents the seller. That would be the bank in the case of the foreclosure and for short sales often several banks. You need a professional who understands the process and represents your interest. Ideally, you will find an agent with experience who understands the various addenda which all banks require and can explain what you are signing to you.
- Take the time to understand the procedure. Your good broker should and will be eager to explain the process, the loan, the rates, the comparables and help with any negotiation during the inspection period which in California is usually 17 days. The bank may try to shorten this time. Again, you are shelling out big bucks. Don’t be the schmuck who doesn’t read his loan docs.
Getting a bargain-priced home is a joy forever. In future years, your friends and relatives, even casual acquaintances, will marvel at your financial acuity once prices skyrocket once again as they are bound to do here in the Golden State. But make sure you are getting a bargain. Repairing sloppy cover-up work or removing improperly-maintained systems, whether air conditioners, pool equipment, roofs or electrical wiring can wind up costing far more than anticipated. Make sure your repo is really a bargain.