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How many appraiser calls a day is normal in this market?

Dec 8

Posted by Mike Fitzgerald in Real Estate Market Research | No Comments

I got three calls today from real estate appraisers.  Now that’s a high number — I usually average about one call a day but these calls were interesting in that the appraisers were not calling to verify specific sales comps from transactions that I brokered.  These appraisers were calling to inquire with me to see if I knew of any comps at all for land sales in Henry, Clayton and South Fulton Counties.

Now I suspect the recent uptick in appraisal activity has to do with the 4th quarter and for that matter the year coming to an end.  The problem is that the land market has been at a standstill for so long, the sales transactions of record are now too old to use in appraisals.  Most appraisers don’t want to use sales that occured more than 12 or 18 months ago.  Some counties don’t have a single transaction in this timeline and about half of the transactions that I’ve reviewed are not arms length sales — they are deed in lieu transactions or transactions between related parties.

Unfortunately, those ordering these appraisals — the banks who have foreclosed on land and subdivisions — are quickly finding out that the only way to truly know the value of their property is to sell it.  Appriasers use three approaches in valuing real estate: replacement cost, income approach and market comparables.  The first approach does not apply to land since land cannot be “replaced.”  The second approach very rarely applies to land since most land in northern Georgia produces no income in its undeveloped state.

When no comparable transactions exist, the only way to know the value of land is to make the market by accepting offers for properties that have received reasonable market exposure.  Once this starts to happen, we may start to see land trade hands again after over a year of almost no activity.

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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CoStar Vs. Loopnet and the release of the CoStar Real-Time Map of Commercial Real Estate

Dec 1

Posted by Mike Fitzgerald in Real Estate Market Research, Real Estate Technology | 2 Comments

CoStar just launched a nifty little mashup showing all searches, property listings and comparable sales records on their website as they are created in real time. I once saw something similar at the Metrobrokers office in Atlanta. I thought to myself wow this is neat but what real use does it have other than drawing some attention to its creator.  It’s really more of a marketing gimmick than a useful analytical tool, but I’d like to hear your comments.

CoStar and Loopnet have been in a heated contest for market share. CoStar is the established commercial real estate data provider with products that track sale and lease transactions, market research data, as well as provide leads on tenants that may have a lease up for renewal. Loopnet entered the market in the late 90’s almost 2 decades after CoStar. Loopnet has only recently added products that track comparable sales and provide market research data. From the beginning, Loopnet was a listing service and it has grown quickly by providing web visitors what they want most: property listings.

Until this Spring, CoStar only allowed paid members to search their database of listings, comps, and leases. Loopnet has always allowed free searches of premium property listing ads. CoStar’s argument for the longest time was that Loopnet would one day cut out brokers by allowing principals to have direct access to the holy grail of commercial real estate — the listings. Whether or not CoStar is correct is a topic for another post.

CoStar finally relented and opened their for lease and for sale listings to the public to search for free.  Only the premium listings and some random sampling of the non-premium listings are displayed.  CoStar is in the process of up-selling premium listings to their existing broker subscriber base and currently don’t appear to have enough premium listings for most searches to provide useful results.  This is whey they include a random sampling of basic listings in the free search.  Paid searchers see all properies premium and basic.

Earlier this year, Loopnet issued a press release claiming it’s traffic was 9.9 times greater than that of costar.com.  Compete.com is showing Loopnet has a strong lead by not quite the 10 fold lead of earlier this year.  I expect, CoStar will gain on Loopnet in the coming months by virtue of the fact they have opened their data up to public search.  The surprise in the Compete comparison is Catylist.com.  This site is working closely with the national realtors trade group and may become the commercial equivalent of REALOR.com on the residential side of the business.

What is a Right of First Refusal?

Nov 27

Posted by Mike Fitzgerald in Contract Questions, How-to, Legal Issues | 4 Comments

Sometimes also referred to as a First Right of Refusal is a right granted by the owner of the property to another entity (the Holder).  The Holder has the right to purchase the property in question in the event the owner receives an acceptable offer to buy.

Some common situations where you find Rights of First Refusal include:

  • Landlords may grant one to a tenant who wants to buy the property when the landlord is not ready to sell immediately.
  • When a property owner sells a portion of his property and retains the rest, he may grant a right of first refusal to the buyer on the seller’s remainder tract.
  • In partnerships, each partner may grant a right of first refusal to all other partners requiring him to offer his partners the right to buy his interest in the partnership before allowing some new entity to buy in.  (Also see “Shotgun Clause” on wikipedia for a more interesting arrangement.)

In the event the property owner receives an offer that he plans to accept, he must notify the Holder usually by delivering a copy of the purchase offer.  Certified Mail Return Receipt Requested is what I’ve used in the past to create proof of delivery along with a letter for the Holder to sign acknowledging notification.  The Holder then has a period of time (defined when the right of first refusal is granted) to elect to purchase the property under the exact same terms as the written offer or release the right of first refusal.  Sometimes a this release requires a Quit Claim deed and sometimes the expiration of the time limit on the right is sufficient depending on the requirements of the title company and the parties involved in the transaction.

The response period is usually 30-60 days and can make any property with a right of first refusal very difficult to market because a potential buyer has to wait for a month or two without any certainty that they will actually get the property.  Sometimes rights of first refusal specify a price trigger such that the seller only has to contact the right holder if the offer to purchase is below a specific price.  Sometimes the right expires for example a right may expire at the end of lease if granted by a landlord to a tenant.

The correct way to do a right of first refusal is to record the right on the title of the property in question.  This protects the holder of the right because anyone trying to buy the property would most likely do a title search and discover the right of first refusal.  In practice, the right is written directly into the lease.

What happens if the owner sells property bound by a right of first refusal without notifying the Holder.  That’s probably where an several attorneys could rack up fees trying to sort the matter out.  My advice is to always have a real estate attorney’s help in creating or exercising a right of first refusal.

Footnote:  Rights of First Refusal are one of the best reasons for Brokers not to accept Open Listings.

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.

Real Estate: A Cyclical Business

Nov 24

Posted by Mike Fitzgerald in Real Estate Market Research, Real Estate Technology | 2 Comments

Any broker worth his salt will tell you that real estate runs in cycles.  It’s a well known fact that residential home sales peak in the summer months when families try to move while the kids are out of school.  The commercial cycle is a little more difficult to relate to since so many property types make up commercial sales including apartments, warehouses, shopping centers, offices, and undeveloped land.  Below is a chart for Loopnet.com’s traffic for the past 2+ years.  It shows that activity picks up in the Spring and Fall each year and declines in the summer and winter.  I have some of my own theories about why this is true, but I would like to hear what you think.  Please post your ideas in the comment section below.

Alternately, the graph below shows traffic on the largest residential real estate website, REALTOR.com. Traffic peaks at the end of the summer and bottoms out around the 1st of the year.

Home Buyer Tax Credit Extended – Not Just for 1st-Timers

Nov 23

Posted by Mike Fitzgerald in Finances and Taxes | No Comments

On November 9, President Obama signed an extension of the Home Buyer tax credit as part of a $24 billion economic stimulus bill that will also extend unemployment benefits.  The tax credit applies to new and resale homes.

There are some significant changes to the tax credit that was due to expire at the end of this month.  Namely, the new tax credit is for first time home buyers (anyone who has not owned a home in the previous 3 years) who purchase a home by April 30, 2010 or by June 30, 2010 when a binding purchase agreement was in place by April 30, 2010.

The tax credit is equal to 10% of the purchase price up to a maximum of $8,000 and is refundable meaning you can get the money back even if your tax bill is less than the amount of the tax credit.  The income limits were increased to an Modified Adjusted Gross Income (MAGI) of $125,000 for individuals or $225,000 for joint filers.  The credit phases out by 10% by every $2,000 you make over these limits.  The law allows some flexibility as to the tax year you use to calculate your MAGI.

The tax credit is only good for purchases under $800,000, but it does apply to all types of homes including detached houses, townhomes, condos, manufactured homes, and houseboats.  The home must meet the definition of a primary residence used to determine the $250,000/$500,000 capital gains exemption.  You can also apply the tax credit to a home you build on land that you already own.

Repeat Home Buyer Tax Credit

There’s also a new twist that provides a tax credit to repeat buyers defined as those who have lived in their current primary residence  during 5 of the 8 years directly before the sale.  The tax credit is equal to 10% of the Purchase Price up to $6,500.  Otherwise, the same guidelines as the $8,000 New Home Buyer tax credit apply to the Repeat Home Buyer Tax Credit.

You may be able to access your tax credit before you file your next return by reducing your federal income tax withholding.  For FHA-insured mortgages, HUD is also allowing the tax credit to be monetized at closing to pay certain down-payment and closing expenses.  Non-profits and FHA lenders may extend short term loans of up to $8,000 to monetize the tax credit at closing.  In some cases these short term loans may qualify to meet the FHA’s 3.5% down-payment requirement.

Check with your financial adviser if you believe you qualify — more information is available at http://www.federalhousingtaxcredit.com/.

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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Creating a Real Estate Blog

Nov 17

Posted by Mike Fitzgerald in Real Estate Technology | No Comments

I’ve toyed around with blogger.com and the most popular real estate blog at activerain.com.  With both sites, I was ready to post blogs in a matter of minutes and the sites claimed to bring a ready pool of readers to my posts.  Activerain’s blog highlighted my first post on their main page and over 30 comments followed mostly from members looking to get Activerain points by leaving a comment.  The blogger.com site was even easier to set up but no one ever saw it as far as I could tell.

Both blogs included advertisements and Activerain even added a feature to search for property, but the search promoted my competitor.  I discovered that I was basically creating free content for these sites which helped them sell ads and drive visitors away from my blog.

I had heard a lot about wordpress, but was afraid it would be too difficult to install and setup on my website.  I was pleasantly surprised when the setup took only 15 minutes and my web hosting company  even had an online tutorial .  Wordpress.com claims you can install in 5 minutes and provides their own instructions on how to do so.  My install took a little longer because of some extra steps my web hosting company required.

The Fitzgerald Realty blog at Activerain is still up and I guess it will remain there unless they start putting links to my competitors directly on my blog posts!

P.S. I started adding posts to localism.com but didn’t really get any response.  No ads on that site but I believe the goal is to build content for each community and then sell rights to moderate the posts to that community to a local realtor in each city.