Why am I posting so many times on the same issue - financially distressed homeowners?  Unfortunately, that’s where the market still is and will be for some time to come.  The number of contacts I have had recently pertaining to this issue has put this topic at the top of my mind.  It is important for people who are in fear of losing their homes to know that there are people in the real estate industry they can trust to discuss their situation.

I’ve mentioned in a previous post that many homeowners who are behind in their payments do not talk to anyone before being foreclosed on.  It is embarassing.  They didn’t expect to be in this situation.  They don’t know where to turn.  They don’t want their friends and family to know they are in trouble.  They think they can find a way out on their own.  But homes are being foreclosed on without any attempt to stop the process.  What they need to know is that there are options available.  If they wait until the last minute, it’s almost impossible to save their home from the public trustee’s sale.  One place to start is CDPE.com to find trained Realtors in the homeowner’s city.  Other training is becoming available to Realtors.  NAR now has the SFR (Short Sales and Foreclosure Resource certification).  If you don’t find a CDPE trained Realtor in your city, look for a Realtor with the SFR certification.  These Realtors have taken the time to educate themselves on the short sale process.

But the real reason for my post today is to warn you about scammers that take advantage of homeowners who are in default and who also take advantage of Realtors who don’t know what they are doing when it comes to short sales.  Everytime there is a crisis, creative criminals find ways to take money from well-intended individuals.  In this economy there are short sale scams, loan negotiation scams, you name it.  Here are some questions to ask before starting to work with any self-described short sale company.  I want to thank Brandon Brittingham of Maryland for his post of these tips on BrokerAgentSocial.

1.  Ask if the type of short sale practice they use is legal in your state.  Different states have different requirements.  Check your state laws and local laws or common practices and thoroughly research any company you are considering.  If they say they are short sale experts, what experience do they have to support that?  How many short sales have they closed?  Are they willing to give you legitimate references?  Do they work with reputable real estate brokers, lenders, and title companies who can provide those references?

2.  Are they asking for money upfront?  Some legitimate companies do charge upfront, but it isn’t the norm.  Realtors who are short sale specialists only get paid at closing and their payment is outlined on the HUD1 Settlement Statement.  How is the short sale company you are considering getting paid?  Are they accountable to the seller’s bank, who will be approving a short sale, or to anyone else?  What recourse do you have for getting your money back if they don’t do what they say they will?

3.  Be wary of companies that have no affiliation with a real estate company.  Companies Brandon says he has run across that are running scams or offer no real service are not affiliated with a real estate broker for a reason.  Real estate brokers and agents that are members of NAR are required to abide by the Code of Ethics of the National Association of Realtors.  Any licensed Realtor is required to abide by the laws of the state in which they are licensed.  If you aren’t a licensed real estate broker or agent you don’t have to follow these laws or codes.  So be cautious of companies who are not affiliated with legitimate brokers.  Do your homework to see if they are legitimate companies and provide the services they claim to offer.

Let me add one last caution.  In a short sale, the seller’s bank is agreeing to take less than is owed to allow the homeowner to sell their home.  Therefore, they have to approve the sale.  Some short sale or real estate investment companies do what is referred to as a double close.  An investor buys the property at the first closing and then shortly after (the same day) the investor sells the house to another buyer the seller has never met at a second closing and takes a profit from the transaction.  Do you think there is room for fraud in this type of activity?  Very much so.  If the seller could have gotten a higher price to begin with, don’t you think their bank would like to know that? 

There are people in the marketplace who want to take money out of the deal without putting down any money of their own or getting their own loan for the first closing.  Oftentimes the company you are talking to is the investor.  Please know there are legitimate investors who close and then sell to someone else.  And legitimate real estate investors are a group that will help get us out of the real estate mire we are currently in, but they do things according to the rules.  If the buyer won’t have their own hard money on the table at the first closing, be suspicious and cautious.  This same caution goes to buyers who know there is an intermediary between them and the seller.  Work with a reputable Realtor who can spot suspicious activity and help you avoid it.

As always, if we can help, we are here to do that.

First, let me share a little history lesson.  The change in the markets the past few years is now affecting what people are buying when they do buy a home.  During the roaring 90s when the dot com industry rose, people had a lot of extra cash in their pockets and built homes to reflect their desires.  Showy, big, extravagant homes dotted (that is a pun ) the landscape, especially in California.  Then the dot com bubble burst starting in 2000 and the market changed.  Investments in the stock market tied to technology went poof and bank accounts dwindled.  Real estate then became the go-to investment arena and we all know what happened.  Real estate prices escalated until 2006.  In markets like CA, FL, AZ, and Las Vegas, prices were surging 30-40% per year and those who were actually awake during that time realized what goes up must come down.  I personally could not believe that interest only loans were being used by consumers to purchase the home they would be living in.  Interest only loans are a strategic product used by real estate investors to manage cash flow.  I don’t think that description applies to most of our neighbors.  So what does all this have to do with smaller homes?

Just think how different the real estate market and our economy would be today if we had foregone the speculation of the past decade.  Did you know 1 in 4 homes was sold as an investment during the go-go years?  That’s 25%.  Do you think that had an impact on pricing?  Absolutely.  Just like tulip bulbs in Holland centuries ago.  We Americans went around with blinders on because getting money was so easy and we didn’t want to believe it could end.  But just like the dot com bubble, it was an upside down pyramid and collapsed under it’s own weight.  We ran out of buyers who could buy at such frothy prices.  Fortunately, in some markets such as Colorado Springs, we had more steady increases in prices and never saw huge increases, so most homeowners can weather the current market.  But even here prices have dropped about 20% on average over the past 3 years and people who bought at the height of the market are underwater unless they had a large down payment or have been making extra principal payments since they bought their home.  If they can stay put, they’ll be okay.  If they have to sell, they have a problem unless they can bring cash to closing.  For some, hardship will allow them to qualify for a short sale to avoid foreclosure.  Sadly, others will lose their homes.

So back to my question.  What would the market be like if the housing market had been steady instead of the scenario we did have?  First off, not as many people would own homes or if they did, they would own smaller homes than they purchased because they wouldn’t have based their decision on an expectation that their home was going to appreciate in the double digits every year and make them rich.  Home ownership DOES make people rich, but it is a slow steady process that lasts a lifetime.  The other thing we would have seen is smaller homes because they would be more affordable.  In some places, like California and Hawaii, they’ve had to keep home sizes smaller in general because land is so expensive.  If speculators hadn’t driven up prices buying properties with loans that required no verification of income or assets, more people would still be in their homes because they would have been given those loans based on more realistic requirements.  Hind sight is always 20-20, and looking into the past shows us a process that was totally out of control.

Fortunately, our economy provides the answers and we will dig ourselves out of this mess.  Without buyers who can or will pay inflated prices, home sellers have had to reduce prices in order to sell.  Many people who would like to sell have kept their homes off the market for now, reducing inventory, which will help with recovery.  The market is winding down, although in some places, it definitely crashed.  At some point we will reach equilibrium.  We are getting closer, although there are still more foreclosed homes coming to the market that will keep prices down for the next few years.  As prices have come down, people who didn’t want to or couldn’t buy when prices were high, are now finding that homes are affordable.  The rate of affordability has increased.  Builders will build smaller homes to entice first time buyers and seniors who are downsizing.  The other good thing that has happened is that people have started saving again and are being more cautious about buying.  Loans aren’t as easy to get and people have to jump through hoops to prove they can pay their mortgage in order to get a loan.  Many people will wait until they feel more secure in their work or feel they will be in the house long enough for buying to make sense.  But more people who didn’t think they could ever afford to buy, can now find homes within their means.  And ultimately we will help the environment as green technologies become more prevalent in building and remodeling and energy efficiency becomes more important.

If we keep the recent market lesson fresh in our minds, what has happened can prove to be a good thing because it is changing how people view money.  Perhaps individually people will remember and not allow themselves to be drawn into craziness in the future.  New homes built will be smaller so that builders can keep prices where buyers can afford to buy.  Condo owners will ultimately be helped as people discover that is an affordable option in not so affordable markets.  As baby boomers retire they will still want 2nd homes and that will once again help the Florida, Arizona, and condo markets recover.  Some baby boomers will retire to smaller, more affordable communities and will help the economies of those areas where their spending will create more jobs.  First time home buyers have a fantastic opportunity right now to get into a home at lower prices and amazingly low interest rates.  Even when the $8000 tax credit ends, homes will still be affordable.  But that still doesn’t mean everyone should buy.  It still needs to be a careful decision.

For those who can’t buy yet, investors are buying foreclosure and short sale homes and renting them out, so renters will find more choices available to them.  Investors will be part of the solution as well.  So there is light at the end of the tunnel.  Now is the perfect time to put money aside and plan to one day be a homeowner or get that 2nd home or move up to a bigger home.  With planning they are all great choices.  If you are in a position to act now, congratulations!  This will prove to be one of the greatest opportunities of the 21st century.

What a crazy year 2009 has been already.  I’ve been busy listing homes, took 2 full days to attend CDPE (Certified Distressed Property Expert) training in January, and attended the CRS Sellabration in San Francisco in early February.  The real estate market continues to change and opportunities for buyers and investors are ripe.  Low interest rates, prices that haven’t been seen in many a moon, and lots of people looking for rentals in our local Colorado Springs market has created those opportunities.

Sales in January 2009 were down close to 17% from December, primarily because of everyone sitting back with bated breath waiting to hear if there is something in the stimulus package that will make their home purchase more profitable.  Many potential buyers are also waiting to see if their job will still be in place as the economy tumbles.  Stock portfolios have been hit hard as well, so investors are licking their wounds at the moment and trying to figure out if they can jump into the real estate fray anytime soon.  The good news is that inventories are also down, making it easier for sellers who are trying to sell increase their chances of a sale.

In this market, price is paramount!  We saw 1/3 of our sales go to distressed properties in November and December of 2008.  Some markets are much much worse.  What it means for sellers is they have to compete on price with short sales and foreclosures.  That will continue to reduce inventory and voila, one day the market will turn around because there will be more buyers than homes available.  That isn’t going to be anytime soon because another wave of foreclosures is coming, but history tells us it will happen.  Real estate has always been cyclical and we are in one hell of a cycle since 2007.

Prices rose too quickly because of easy money and lack of accountability.  One of 4 homes sold in recent years was either an investment purchase or 2nd home.  A whopping 25%!!!  When the bubble burst, there was a lot of collateral damage as plunging prices were brought to most neighborhoods.  As the cycle continues, buyers who were priced out of the market over the past several years will now have an opportunity to buy.  Investors will salivate over the opportunities for low priced rental properties.  Yes, the people with money will make money.  Wouldn’t you like to know how to be in that group during the next buying opportunity.  Stay tuned as I launch seminars to help you later this spring.

So that’s where we are now.  Lots of opportunity, but not a lot of credit available unless you have stellar financials.  For buyers who can buy now, have fun shopping.  It’s a great time to be in the real estate market!  Your dream home awaits.