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When is it Time to Throw in the Towel on Financed Land?

Apr 13

Posted by Mike Fitzgerald in Bank-owned, Foreclosure, Legal Issues, Loan Workout, REO | No Comments

NOTE:  I am not an attorney and this article merely relates different strategies I have seen friends and customers try when faced with land that is worth less than the amount borrowed against it.  Please visit our Professional Resources  page to find an attorney that knows far more about these issues than I do.  The goal of this article is to give landowners some frame of reference to engage in dialogue with their lender before the situation becomes desperate.

I hear the same story all too often about land developers and builders who hold on until the very end trying to make payments on raw land or developed subdivisions until all their money is gone.  Land speculation and development is very different from other forms of real estate investment because there is no possibility of income until the very end of the investment cycle when the property is sold.  Unlike houses, apartments, office buildings, warehouses, or retail stores, it is next to impossible to derive lease income from land and lots.  When the market for land evaporates as it has done in the last 12-18 months in Metro Atlanta, the land owners have no way to generate cash from their holdings.  Many have tried to find work, but there aren’t many vacancies in the two industries hit hardest by the Great Recession in Atlanta:  Construction and Real Estate.  To complicate matters, the loan payments must still be paid on a regular schedule.

So what is a land owner to do in this current environment?  One option is to continue making loan payments until all resources are depleted and then turn over the property by a process known as deed-in-lieu foreclosure and file bankruptcy.  Another option is to stop making loan payments, lose the property by foreclosure and then defend a lawsuit filed by the bank for their loss on the deal.  Neither of these options seems very attractive to the land owner.  Relocating to Belize might be somewhat more attractive.

A third option is a short sale – yes these work for land too.  A short sale is when the bank agrees to release the lien on the real estate for a payment that is “short” of the amount due on the loan.  There are two types of short sales – recourse and non-recourse.  In a recourse short sale the bank does not forgive the remaining debt and may pursue the borrower to collect that debt just as if the bank foreclosed on the property.  There are two benefits to a recourse short sale: 1) the borrower won’t have a foreclosure on his record and 2) the borrower has some control over the selling price of the land.  In a foreclosure situation, the bank takes the property back in at their most current appraised amount and that’s the number they use as a basis for the deficiency lawsuit.

The non-recourse short sale is the best option for the land owner – in this arrangement, the lender and land owner work together to market and sell the property at a price they can both live with.  The borrower then agrees to pay some portion (or in some cases none) of the deficiency between the selling price and the loan balance.  The bank in turn agrees to forgive the unpaid balance and will not pursue the borrower for this amount in the future.  There are two disadvantages to the borrower however:  1) The bank will send the borrower a 1099 for the forgiven debt and the borrower may have to pay income tax and 2) the borrower may have a notation on his credit report that says that the loan was satisfied for less than the amount owed.

FDIC Foreclosed Land Sealed Bid Event Opens Today

Mar 31

Posted by Mike Fitzgerald in Bank-owned, Foreclosure, REO | 1 Comment

In today’s Wall Street Journal, the FDIC announced a sealed bid sale of over $12,000,000 worth of raw land and residential lots in Metro Atlanta.  For the past year, Fitzgerald Land has listed and marketed FDIC owned land and lots but this is first time any of the properties have been offered in a sealed bid auction.
Bids are due by May 12, 2010 and potential purchasers are encouraged to perform their due diligence ahead of submitting a bid.  Bids will be evaluated based on the conditions of the sale as well as the bid price.  For example, two bids might be received for the same amount, but the bid with the quick close will win out.
Please contact one of our agents today if you would like to learn more about this exciting opportunity to purchase land and subdivision lots at unbelievably low prices.  We can provide you with sample bid forms, bid instructions and due diligence information on the properties offered for sale.
UPDATE:  The properties are posted at http://sealedbidlistings.cbre.com Contact us if you would like to place a bid.

New Study: Residential Lots in Atlanta worth $8,000 Each

Dec 14

Posted by Mike Fitzgerald in Foreclosure, REO, Real Estate Market Research | 1 Comment

The Lincoln Institute of Land Policy publishes Land Prices for 46 Metro Areas in the US with quarterly data from the 4th quarter of 1984 to the 1st quarter of 2009.  The graph below shows quarterly lot values for the Atlanta metropolitan area.

Residential Lot Values in Metro Atlanta

Residential Lot Values in Metro Atlanta

The Lincoln Land Policy data takes a different approach to surveying residential lot values than the other two major research providers in the Atlanta market.  Since lots rarely change hands in built-up areas, it is difficult to ascertain lot values from direct sales.  Instead Lincoln takes home resale prices and backs out the construction cost to arrive at the value of the underlying lot.

Metrostudy and Smartnumbers rely on actual residential lot sales to reveal lot values.  The problem with this market based approach is that it only reflects the sales of vacant lots in new subdivisions that are most frequently located in outlying areas of the Atlanta metropolitan area.

The Lincoln Land Policy data is not intended to establish market comparables for actual residential lot sales.  Instead it can be used as a gauge of the market feasibility for new housing starts at any given time.  For most of the history of the study, the residential lot “share” fluctuated within a quarter to a third of the value of the house sale price (house plus lot) as shown in the graph below.

Lot Value as a Percentage of total House Value (Lot plus House)

Lot Value as a Percentage of total House Value (Lot plus House)

Even during the housing boom of the last decade, we did not see the lot share deviate from the established range.  I remember when shopping for developed lots, most tract builders would try to purchase lots at 20-25% of the finished home selling price.  We saw lots for move-up and high end homes in the 25-50% range.

The current lot share value is 5% of the home selling price.  So if the average lot is worth $8,000 and the lot share is 5%, then the average home selling price would be roughly $160,000.   It’s fairly easy to see that if the average home price declines an additional $8,000, the value of the lot will go to zero.

What does this mean for home builders?

  • It becomes very difficult to compete with resale homes when the average home price is roughly equal to the new home construction cost.  The builder needs to basically get the lot for free in order to compete.
  • Construction costs will need to decline by decreasing square footage and finish levels in new homes to bring the lot share back in line with historical trends.
  • Builders will pass along the cheaper lot prices to the buyers through lower new home selling prices in order to stay competitive with resale homes.
  • Since it is not possible to deliver new lots at $8,000 each or less, new homes can only compete with resales if the builders purchase distressed lots at depressed prices.  Most new homes in the next couple of years will be built on foreclosed lots.
  • Builders must be extremely selective in determining the price to pay for lots and the location to build.

Reference:  Davis, Morris A. and Michael G. Palumbo, 2007, “The Price of Residential Land in Large US Cities,” Journal of Urban Economics, vol. 63 (1), p. 352-384; data located at Land and Property Values in the U.S., Lincoln Institute of Land Policy http://www.lincolninst.edu/resources/

Treasury Department announces new Home Affordable Foreclosure Alternatives (HAFA) program

Dec 7

Posted by Mike Fitzgerald in Bank-owned, Foreclosure, Loan Workout, REO | No Comments

Add another acronym to the alphabet soup of programs for homeowners facing foreclosure.  The Treasury Department  rolled out its new HAFA program (Home Affordable Foreclosure Alternatives) on November 30th.  This program is a last resort for borrowers unable to make payments, sell their property or refinance their loan.  The HAFA program seeks to address many of the complaints surrounding short sales and deed in lieu of foreclosure transations.

Any agent that has worked a short sale, can attest to the difficulty and senseless time wasting involved in a short sale.  The first problem is there is no accepted process to obtain a bank’s consent to a short sale prior to listing the home for sale.  So homeowners and agents are forced to list the property without knowing whether or not the bank will approve the sale at the listed price.  Many banks will only begin to speak with a borrower about a short sale when a written offer for the house is received.

The best way to generate an offer quickly is to list the price for an absurdly low price.  The listing broker and seller use the first offer to find out what the bank would actually accept short of the loan payoff.  Unfortunately, the prospective buyer and buyer’s agent unknowingly provide a valuable service for the seller but waste their own time and energy in the process since the list price on the house was never in the acceptable range for the lender.

Once the lender gives some guidance as to the price they would accept, the homeowner adjusts the list price to a more realistic number.  The next offer has a much better chance, but not before the bank attempts to squeeze the real estate agents out of the deal by making him accept a lower than market commission rate as a condition of approval of the short sale agreement.

The Making Home Affordable initiative sent out an email today describing the HAFA program and the ways in which it would address the current concerns with short sales:

The HAFA program simplifies and encourages short sale and DIL (deed in lieu) options by:

  • Offering eligible borrowers viable alternatives to avoid foreclosure;
  • Providing a standardized process and time frames for handling viable alternatives;
  • Allowing pre-approved short sale terms before a property is listed;
  • Preventing servicers from attempting to reduce real estate commissions established in the listing agreement as a condition for short sale approval;
  • Releasing borrowers from future liability for the debt; and
  • Providing financial incentives to borrowers, servicers and investors.

Borrowers should be (or request to be) considered for a Home Affordable Modification Program (HAMP) modification and other retention programs before being considered for HAFA.

There are sample documents on the website including a sample short sale agreement, request for approval of short sale, alternative request for approval of short sale, and deed-in-lieu of foreclosure agreement.

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Georgia Banks: Not So Bad on Paper

Nov 24

Posted by Mike Fitzgerald in Bank-owned, Foreclosure, REO, Real Estate Market Research | No Comments

The FDIC published their quarterly State Banking Performance Summary today and the data sends a troubling message. While assets (mainly loans secured by real estate) were down from $276 billion to $257 billion from 3rd quarter 2008 to 3rd quarter of this year, banks lost $2.4 billion from operations compared to a $1.2 billion profit during the same period. Fully 62% of Georgia banks were not profitable in the third quarter.

Banking profits declined 300% quarter over quarter while assets declined by 7%. It’s fairly easy to see how a small variation in a banks assets translates into a large impact on their bottom line. The troubling part is that a net decline in asset value of 7% does not reflect what is actually happening in the real estate market. During the same period the Case-Shiller home price index declined 9.3% in Atlanta. While the Moody’s/REAL Commercial Price index for repeat sales of the same properties is down an amazing 37% 3rd quarter 2009 over 3rd quarter 2008 nationwide.  Even these numbers don’t reflect the true state of the market because they don’t account for the decline in transaction volume that is result of decreased demand, lack of financing and the gulf between bid and ask on real estate listings.  When you look at total commercial investment activity, a recent Loopnet report showed dollar sales volumes down 90% year over year.

Why are banks assets not showing losses as great as the other real estate indices.  A major reason is that these assets or loans are made on many different types of real estate.  While rents are down across the board, many borrowers on apartment, office, industrial and retail loans are still making payments.  The lion’s share of bad loans and foreclosed assets reside in the land category.  Development loans are the real culprit in this banking crises.

As a broker working on land transactions in Metro Atlanta, I have a great deal of anecdotal evidence that suggests that banks are not willing to sell their land.  With the exception of the larger regional banks, national banks and the FDIC, bank land is simply not selling.

But what motivation do these community banks have to take the loss when most of the toxic assets are in vacant land and subdivision lots. Unlike improved assets, land does not have a high carrying cost and virtually no management is required when compared to revenue producing assets like offices, warehouses, and apartment complexes. Unless regulators force their hands, the banks are content holding the bad loans and foreclosed land on their books. If these assets were sold in today’s market, the sale price would invariably be much less than the value the bank assigns to them on paper. Realizing the the actual loss would further erode the capital reserves and draw even more pressure from bank regulators to increase reserves or shut down.

Put simply, the borrowers on subdivision development and other land loans were the first to stop paying when the real estate market turned south. Without a steady stream of lot and home sales, the developers had no means to pay the debt service. Unlike improved commercial property, the income stream on land development is pretty much all or nothing. Now the banks are left holding notes or title to land that is worth far less than the original loan. They mark down the value incrementally based on appraisals and wait for the market to improve so they don’t have to realize the actual losses that result from selling the land in this terrible market. The whole situation serves to prolong the pain and extend the time required for the land market to reset itself.

Even if the banks wanted to sell their foreclosed land and lots, many could not because they do not have adequate reserves to absorb the loss. The all to familiar news of a bank closing on a Friday afternoon have most bankers thinking about their jobs when faced with selling an asset that would reduce their reserves. I can’t say that I blame them, but my job as a broker isn’t made any easier when banks don’t  sell the assets they have nor lend money to buyers who want to purchase real estate.

Bank Failures: Where is the Opportunity?

Nov 22

Posted by Mike Fitzgerald in Bank-owned, Foreclosure, REO | 1 Comment

I know you hear a lot about the bank failures nationwide. Georgia tops the list as far as number of banks although our banks are smaller on average than the rest of the country. You can also check here to see the list of banks that have already failed: http://www.fdic.gov/bank/individual/failed/banklist.html

I expect we’re not even halfway through the purge of bad banks. So what does this mean to us as real estate agents? And how can we profit?

For resale homes, you won’t see much of a change. 99% of loans on resale homes are held by national banks like BofA and Wells Fargo – these banks appear to be in good condition. However, most new homes, vacant land and commercial property is financed by Community Banks. Many of these loans and bank REO’s will be transferred to the FDIC in the coming months as these banks fail. This can delay or jeopardize closings and generally make doing business difficult.

The silver lining is that once the FDIC gets title to the real estate and loans, they move quickly to sell them at market price – something the community banks aren’t doing now. I am actively pursuing several opportunities to obtain more FDIC business (most of what they have right now is land).

A large opportunity still exists to sell foreclosed homes for loan servicers – there are literally hundreds of them all of the country. I encourage you to go after listings with these groups. I know a couple of you took an REO class that explained this in more detail. The next class is offered on December 9 and I encourage you to attend:

Sign up at http://www.georgiarealestateschool.com/schedules/schedcourse.cfm?CourseID=269 It’s taught at the GAMLS North office in Sugar Hill. The cost is $50.

Many other courses are also offered including topics like Short Sales, Writing BPO’s and Managing REO properties.

http://www.georgiarealestateschool.com/courses/salesce.cfm

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