Todd & Lisa Sheppard
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Lisa
Sheppard
Mobile:
707-483-9990
Email:
Lisa@TEAMSHEP.com
BRE # 01154225
Todd
Sheppard

Mobile:
707-235-6870
Email:
Todd@TEAMSHEP.com
BRE # 01314350

Archive for December 2011

Short Sale Vs. Foreclosure: A Short Sale Always Wins

December 29th, 2011   by lisasheppard

Today’s ever changing real estate industry has brought upon some very challenging questions from our clients. We as counselors, want to put forth the best, non-emotional advice that we can, in hopes that we can help our clients and their families navigate the rough waters of the short sale process.

The most prevalent question and one that continues to permeate the industry is:

“Why should a seller go through the short sale process rather than letting their house be foreclosed upon?” 

While we cannot speak to every client circumstance, we can say one thing with complete conviction.  In almost all instances in which a potential seller is contemplating whether they should short sell their house or let it go through the foreclosure process, a short sale is the better option. The following are examples to consider:

Example A- Short Sale

Mr. Smith owns a home in which he has a mortgage balance of $220,000 and a current market value of $150,000. Mr. Smith has elected to short sell his property. His Realtor successfully obtains a buyer who puts forth an offer price of $120,000 (80% current market value according to Realty Trac Foreclosure Report 5/26/2011). After reviewing the buyers offer and the financial hardship information from Mr. Smith, Mr Smith’s bank agrees to accept the short payoff of $120,000 which would leave a deficiency balance of $100,000.

The transaction closes and is final.  Mr. Smith then pulls his credit report 30 days after the transaction takes place. On the report he notices that the mortgage trade line states “Mortgage debt was settled for less than full” and the balance on the mortgage is $0.  Mr. Smith is now on the road to financial recovery.

Example B- Foreclosure

For the ease of illustration we will use the same value and mortgage debt amounts as in Example A. However, Mr. Smith has elected to forgo the short sale process and let the bank foreclose on the property.  The bank holding his mortgage facilitates the proper legal procedures to foreclose on the property, all of which are costly.  Mr. Smith is notified and his property foreclosed upon of which is taken back by the bank to sell as an REO.

Six months later, the bank finally sells Mr. Smith’s home only they sell it for $90,000 (60% of current market value according to Realty Trac Foreclosure report dated 5/26/2011). Remember, as a short sale, the home would have sold for $120,000 keeping the deficiency to $100,000. In addition to the deficiency now being $130,000, the bank has elected to add on legal costs of $15,000 and asset preservation costs of another $5000 for a total deficiency liability of $150,000. Mr. Smith pulls his credit report 30 days after being notified that the bank has sold his property and of his liability.

On the report he notices that the mortgage trade line states “Foreclosure” and the balance is $150,000. Because of Mr Smith’s choice to choose foreclosure vs. short sale his road to financial recovery has taken a major detour. He not only has a foreclosure on his credit report but now has a much larger deficiency balance in which the bank, in most cases, will report on his credit report as a balance owed.

The Best Option is Clear

While the financial and credit advantages are clear when choosing a short sale over a foreclosure, other advantages are sometimes overlooked. The most important of all of them is maintaining the seller’s dignity and peace of mind. We have heard too many stories of families having to leave their homes because of a Sheriff’s order or some other type of legal action. The short sale process alleviates this negative social impact. The process puts the control back in the seller’s hands so that they can get back on the road to financial recovery and start providing for their families. In the battle of the two evils, a short sale always wins!!!

Even the Naysayers Say Now Is the Time to Buy

December 28th, 2011   by lisasheppard

Business School professors Eli Beracha of East Carolina University and Ken H. Johnson of Florida International University have done extensive research on which makes more sense financially: to rent or own a home. They published, Lessons from Over 30 Years of Buy versus Rent Decisions: Is the American Dream Always Wise? In their paper, the professors do not dispute the social benefits of homeownership:

“Home ownership is touted as the “American Dream”. It is credited with enhancing wealth, increasing civic pride, improving self-esteem, crime prevention, child development, and better educational outcomes, among other benefits. This paper does not dispute any of these claims.”

What the professors were proposing is that homeownership is not a better investment strategy than renting. The first of the two major findings was:

“After setting the holding period to the average American’s tenure in a residence, renting (not buying) proves to be the superior investment strategy over most of the study period… Individuals, on average, were better off in economic terms to have rented for most of the years in the study period. This first result is strongly dependent upon fiscally disciplined individuals that, without fail, reinvest any residual savings from renting.”

Historically, people do not actually reinvest savings “without fail”.  Check here for the findings of a recent study from The Joint Center for Housing Studies at Harvard.

The second major finding says it all. According to both professors Beracha and Johnson, NOW IS THE TIME TO BUY!

“(F)undamental drivers now appear to be in place that favor homeownership over renting in the near term future…

The second finding might seem unwise to many given the recent crash in the real estate markets around the country. However, rent-to-price ratios now seem to be in place along with other fundamental drivers that favor ownership over renting.”

They conclude their research paper with this sentence:

“Conditions (historically low mortgage rates and relatively low rent-to-price ratios) now seem in place to favor future purchases.”

Bottom Line

Two researchers set out to prove that homeownership is not a good financial decision. After completing that research, they have determined that now is the time to buy. What more needs to be said?

The First Question You Should Ask Your Listing Agent

December 27th, 2011   by lisasheppard

What is the most important thing a seller should look for when hiring a real estate agent to sell their house? We are often asked this question. Is it the size of the company they are licensed with? Is it their marketing program? Their years experience in the business? Should you choose the agent who suggests the highest listing price?

There are many things that should be taken into consideration when hiring someone and giving them the responsibility for selling your home. In our opinion, the most important question you can ask a potential listing agent is a simple one:

Do you truly believe that now is a good time to buy a home?

Why should this matter when hiring someone to SELL your home? Buyers are nervous about purchasing right now. They want to know they are making an intelligent choice. We believe, especially in today’s market, you need to hire someone who realizes that this is one of the best times in American real estate history to buy. If an agent doesn’t believe that, how will they be able to convince a potential buyer to buy your home?

When interviewing a real estate professional, ask them to explain why purchasing a home makes sense today. They should be able to explain it simply and effectively. See how many of the following facts (which should be shared with every potential purchaser) the agent knows:

The Wall Street Journal last week stated:

“With home sales starting to improve, and with prices now possibly forming a bottom, real estate could well be the asset class that represents the best low-risk buying opportunity out there today.”

Donald Trump was just quoted saying:

“I’m pretty sure this is a great time to go out and buy a house. And if you do, in 10 years you’re going to look back and say, ‘You know, I‘m glad I listened to Donald Trump’.”

John Paulson, a multibillionaire hedge fund operator and the investment genius who made a killing betting against housing a few years ago, is now bullish on residential real estate market. He recently said:

“If you don’t own a home, buy one. If you own one home, buy another one. If you own two homes, buy a third. And, lend your relatives the money to buy a home.”

A recent Gallup Poll showed that 67% of American’s think that now is a ‘good time’ to buy a home. The Gallup Organization went on to say:

“Overall, there is good reason for most Americans to think now is a good time to buy a house. Interest rates remain near historic lows. Home prices are down sharply, providing many incredible buys.”

The iconic financial paper in this country, the country’s most famous real estate investor, the most successful prognosticator of the housing market and 2/3 of all Americans say now is the time to buy a home. Shouldn’t your agent agree?

Bottom Line

Selling is nothing more than the transference of conviction. How can agents transfer that conviction if they themselves are not convinced? Find a listing agent who truly believes that someone should buy your home – TODAY! This is the single most important thing you should look for in a potential listing agent.

How Your Agent Markets Themselves, Indicates How They Will Market Your Home

December 22nd, 2011   by lisasheppard

With the glut of available homes on the market, how your home is marketed is the biggest factor in determining how quickly it will sell (assuming the price is reasonably presented). A real estate agent’s marketing plan should be the most crucial determinant in deciding who to list your home with. But, how can you really know about the agent’s marketing strategies?

One way is to see what they are doing with their current clients. Do those homes “stand out”? Contact those sellers. Are they getting a lot of showings and offers?

Another way is looking at how the agent markets themselves and their services:

  • § Does the photo they use for themselves represent how they look?
  • § Does their print advertising look like everyone else’s?
  • § What technology are they using to show your home? Are they using video?
  • § Is their website interesting and full of current information or just cookie cutter?
  • § Do they have a professional presence on social networks?
  • § Does their marketing show them as an expert or does it merely pat them on the back?

Quality photos on the web and top notch video may be the factor that drives people to see your house (and they are very important). However, how an agent drives traffic to see those photos and videos is even more important.

We all know the saying – “It’s not what you know…it’s who you know.” However, in marketing, it’s more crucial to know “who knows you”. Agents who are unknown are not good marketers. Today, you need an excellent marketer to represent you.

Real Estate: Today’s Golden Opportunity

December 20th, 2011   by lisasheppard

 

Everyone wants to comment on the current real estate market. They want to talk about how now is not the time to buy a home. Some even argue owning a house has never been a great investment. Most say it will be a long time before real estate again begins to appreciate. It all sounds so familiar to us. It was just a decade ago that many made the same arguments about gold as an investment.

Gold had dropped from over $400 an ounce to $250 an ounce (a 40% decline) from February 1996 to August 1999. People ran from gold as though it was a plague.

Lord William Rees-Mogg, the current Chairman of The Zurich Club, in 1997 said:

“No investment has been so thoroughly exploded as gold; most people think that there will no more be another gold boom than there will be another boom in tulip futures in The Netherlands.”

Two years later in 1999, Don Wolanchuk author of the Wolanchuk Report explained:

“Everybody hates gold. You can’t have a bottom until everybody is out. And everybody is out of the gold sector.”

Everyone knows what happened next. The proclamation of gold’s death was rather premature. Gold rose from $250 an ounce to over $1,500 an ounce in the next twelve years. We see the same situation with real estate today. We are not predicting that real estate will see the same levels of appreciation. I do believe however that the market will rebound strongly.

Those who continued to believe in gold as an investment were rewarded. Those who continue to believe in real estate as a sound investment will also be rewarded.

Here is what Adam Hamilton wrote in October 2000 in an essay titled Is Gold Dead?

The road for gold investors has been long and parched in the last five years.  They have wandered through a seemingly endless desert, occasionally tempted by what proves to be an illusory mirage.  Many have fallen beside the sun-cracked path, their white bones picked clean by buzzards and gleaming in the sun.  Nevertheless, a brave contrarian core continues to march forward.  They have studied history, currency, gold, investments, economics, and finance.  They understand the timeless value of gold, the cyclical nature of the markets, and the vagaries of human psychology.  They realize it is darkest before the dawn, and the journey most difficult right before the homestretch is reached.  Gold is in an INCREDIBLE position, and it will have its day.  Nothing goes up in price forever, and nothing goes down in price forever.  Investments are cyclical.  Gold is NOT dead, it is simply biding its time, waiting for its next earth-shattering mega-rally.  The spoils that go to the few remaining gold investors when that day inevitably arrives will be fantastic.  The stunning victory will quickly blot out the painful memories of the long struggle…

You could replace the word ‘gold’ with the words ‘real estate’ throughout this essay and it would apply today.

NAR’s Sales Count: Not News and Not Really Important

December 19th, 2011   by lisasheppard

CoreLogic Blasts NAR for Overstating Home Sales”

If you looked at this headline from a recent UPI article, you would think that CoreLogic attacked the National Association of Realtors (NAR) for purposely misleading the public regarding the real estate market by misstating the number of annual home sales. Some have mentioned the word ‘conspiracy’. Others have suggested a federal investigation. Let’s take a more in-depth look at the situation.

Did CoreLogic claim the NAR numbers were inaccurate?

Yes. In CoreLogic‘s most recent monthly report, which was five pages long, there were two paragraphs addressing the issue:

Although it’s been widely reported that the National Association of Realtors’s (NAR) existing home sales data fell only 5% to 4.9 million in 2010, down from 5.2 million in 2009 and flat relative to 2008, the CoreLogic data indicates otherwise…CoreLogic existing home sales data did not experience an increase in 2009 and that sales fell again slightly in 2010.

Historically, the CoreLogic existing sales data have covered about 85% to 90% of all NAR’s existing home sales data. However, in 2006 NAR’s sales data became elevated relative to the CoreLogic, MBA, HMDA and Census sales related data, and that trend has continued and become more pronounced through 2010…Net, NAR’s existing home sales data are overstated by about 15% to 20%.

Did NAR intentionally mislead the public?

No. They have always been totally transparent with their methodology which they define at the bottom of every Existing Homes Sales Report. Even CoreLogic attests to this in a Wall Street Journal article on the issue:

“This is an economic data issue, not a gaming-the-numbers issue,” said Sam Khater, senior economist at CoreLogic. “Any time you get big shifts in the market, the numbers go haywire for a bit.”

However, NAR’s methodology is no longer current. The overstating of sales was caused by the continued use of this outdated methodology. Let’s take a look at NAR’s explanation. They calculate whether sales were up or down based on data collected from MLSs across the country:

NAR collects sales data from numerous MLSs, with a reporting sample of about 40 percent. If data computes to be a 5 percent increase from one year ago then we say home sales rose 5 percent from one year ago.

Statistically, this is a rather large sampling to work from so there is no problem with this part of their equation. The question is: What is the base number of sales they go by? If there is a 5% increase, what number do they use to add that 5% to in order to give us total sales (ex. 5.4 million units).

NAR explains:

A base figure is used from Census 2000 where one can compute how many homes were bought. If you recall there was a long-form of Census which asked questions about whether you moved or not and whether or not you bought a home. Based on this, one knows that 5.2 million existing homes were sold in 2000. Note that this benchmarking process does not use any data from MLSs. Hence, it is considered clean. With this base figure, we then apply the percent changes to sales obtained from MLSs. So if MLSs data addition says a 5 percent increase then we would say there were 5.4 million home sales.

The challenge came because this benchmark number was no longer accurate. The ratio of sales being done through MLSs since 2000 has increased significantly. Therefore, just because MLS sales showed an increase no longer meant that overall sales actually increased. It could just reflect an increased percentage of deals being done by the MLSs. The original methodology is now flawed. CoreLogic addresses this in their report:

There are several reasons for the divergence, including benchmarking drift, more sales going through MLS systems due to consolidation and a lower share of for sale by owners (FSBO) home sales.

Should NAR have discovered this earlier and made the necessary adjustments? Probably. Was there anything sinister in the fact they didn’t? We don’t believe so.

How will NAR correct this situation?

NAR must now deal with two issues:

  • § How to correct the current situation as quickly as possible
  • § How to make sure it doesn’t happen again

They are addressing both issues:

In 2010 Census, a long-form questionnaire was not used. Therefore, the Census no longer asked about whether people moved and bought a home. So another brand new benchmarking process is needed. NAR has already been in contact with all key housing economists in the industry and government agencies and a few in the academia about finding a new benchmarking process. We expect a new clean, agreed-upon benchmark figure by the summer of this year.

In addition, we will be determining a new way to re-benchmark on a more frequent basis, possibly annually, to lessen any drift that can accumulate over time. This frequent re-benchmarking, rather than waiting every 10 years, is needed since the Census no longer collects a long-form questionnaire. With benchmarking, we will be working with various outside housing economists to develop a new-agreed upon methodology.

Bottom Line

There was no conspiracy being perpetrated. Just a degree of sloppiness. Should we tolerate this? Of course not. The good news is we won’t have to. The accuracy of housing data is getting more reliable every day. And the companies which profit from distributing this information will always strive for a greater degree of accuracy. They will also continue to keep the competition on their toes; just like CoreLogic did with NAR.

“As A Home Seller, Why Should You Care About Involving A LENDER In The Home Selling Equation?”

December 15th, 2011   by lisasheppard

One thing many real estate agents have learned is the importance of having a team of professionals to facilitate a smooth transaction. Having a lending expert on the team, can make available the following services to you…all for FREE:

  • § They stand ready to screen all potential buyers. Today’s lending landscape is a rapidly changing environment. Programs and requirements are changing regularly. A good loan officer should have a reputation for being on top of current guidelines and finding the best solutions for prospective clients. You need to know that when you accept an offer, the buyer can actually close.
  • § Financing is an important component to getting a home sold. Whether it’s marketing flyers, carrying costs, unique mortgage strategies (such as buy-downs and Sales Concessions) or even loan programs to differentiate your home (ex. loans that can incorporate monies for the purchase and renovation of a home), the best loan officers take pride in their ability to help increase the number of people for whom your home could be a fit. More prospects equals higher sales prices.
  • § In so far as a professional loan officer is seen as an educator, they would want to offer you the chance to tune into some of their online seminars (called webinars) and videos. As an example, some lenders have webinars with topics ranging from “How Lenders Look At A Mortgage Application” to “Renovation Lending” to “Getting Your Optimal Credit Score”, as well as videos that can fully explain your Good Faith Estimate. They are constantly striving to be a resource for everyone they come in contact with.
  • § Lastly, your loan officer knows that most home sellers become home buyers. Not only will they run your credit and analyze your income and assets, but they will also pre-approve you for your next mortgage, typically free of charge.

Both your agent and the loan officer on their team are committed to the highest level of advice and integrity. Reach out to them for any questions you may have.

A Better Indicator of a Healthy Market: Liquidity

December 13th, 2011   by lisasheppard

 

What is the definition of a healthy housing market?  Is it a housing market in which home prices are decreasing?  Few would agree with this.  Is it a market in which home prices are increasing?  At first glance, many would agree with this definition.  However, increasing prices cannot be used to diagnose a healthy housing market.  If increasing prices indicate market health, then in 2005 housing markets were “very” healthy, and we know that this is not true.

If pricing does not indicate market health, then what does?  The answer is simple: it is market liquidity and not pricing that indicates the health of a housing market.  Liquidity has been defined in many ways but it basically boils down to: can an individual seller, at a time of their choosing, successfully market their property at or near market value?  We often hear of rates (turn-over and absorption) that are related to this concept.  Unfortunately, these measures are difficult to estimate and they all have something to do with outstanding inventory.  What really matters, regardless of outstanding inventory, is the likelihood that a property will close.  This is the most basic meaning of market liquidity and it can easily be proxied.  

All of the data necessary to proxy a particular market’s liquidity (and thereby its health) is available on the daily “hot sheets” of almost every MLS in country.  Since liquidity is really just a batting average all that needs to be done is total the successful transactions (closed properties) and divide these by the failed listing transactions (Expireds + Withdrawns + Cease Efforts + Cancelled)[1][2].  The resulting number is a very close approximate to the probability that any given property listed in that market will close and an increasing trend in this number indicates improving market health.

Implications

Pricing trends do not indicate the health of a housing market.  Keep in mind.  For almost every sell in an increasing market, there is a repurchase at a higher price.  For almost every sell in a decreasing market, there is a repurchase at a lower price.  Thus, pricing is a “double edged sword”.  Gains/Losses on a sell are almost always accompanied by higher/lower repurchases.  Thus, pricing trends can never indicate the health of a particular real estate market.  Instead, it is market liquidly, which can be easily proxied, that actually indicates market health.  After all, the real goal is for a seller of property to be able to transact at or near market value with a high degree of certainty.  Fortunately, most MLS’s around the country have the information at their fingertips to estimate the health of their particular market. 

 It is liquidity (not price) that matters.

Common Sense Isn’t Common Practice

December 8th, 2011   by lisasheppard

 

It used to be that there was logic applied in the world of mortgage lending. An appraiser determined the value of a home by the axiom, “what a reasonable buyer would pay a reasonable seller”. An underwriter weighed the plusses and minuses of a file (after analyzing the income, the assets, the credit profile and the appraisal) and made a judgment call based on their experience.

Loans with sizable down payments used to be more flexible with how income was documented or what quality of credit was required. Even the decision of what made up “good credit” has been reduced to a FICO score. Determining the risk of a loan affected its approval or denial. Further, loans deemed riskier were given less favorable terms (higher rates and/or costs or larger down payments).

But today, everyone has tried to quantify everything and put everything into a matrix. Credit scores are numerical, and the number determines eligibility and cost. Gone is the concept of explaining why you have defects in your credit. We don’t care why, we just look at your score. Appraisers now are being scored and their data being scrutinized to a level most would find mind-boggling. Amenities that make a home worth more for a particular buyer (like a pool or upgraded basement) are virtually ignored. Underwriters have primarily become fact-checkers and quality control as a computer software program underwrites the vast majority of mortgages today.

Gone is common sense. It has been replaced by numerical formulas and a cover-my-behind, justify-everything-with-data mentality. Basically, the pendulum has swung too far. It used to be that lending was too easy (see the subprime debacle), but now we have eliminated too much of the human element. We need common sense back.

People who have saved 30% for a down payment know what they can afford monthly. Don’t they?

People who had a medical challenge two years ago that is not likely to reappear should not have a twenty year credit history destroyed. Should they?

People aren’t likely to overpay for a home with so much inventory and all the media exposure about falling prices. Are they?

Bring back some common sense when we need it most!

Do Subprime Concentrations Lead to Other Foreclosures?

December 7th, 2011   by lisasheppard

 

Does the presence of a cluster of subprime mortgages in a neighborhood lead to a greater likelihood of foreclosure in that neighborhood among other non-subprime borrowers?  This question must be on the minds of many.  If you live in a neighborhood with a significant number of subprime loans, you are most certainly wondering if the presence of these loans will increase the likelihood that your property will be foreclosed upon.  If you are a lender with a portfolio of loans that are in close proximity to subprime borrowers, you are most probably speculating on their impact on the chance that their presence will lead to foreclosures on your loans.  If you are a politician and you supported the expansion of credit to less than perfectly qualified borrower in the interest of expanding home ownership, you are most certainly interested in the answer to this question.

The worry is that too many foreclosures caused by the presence of subprime borrowers will lead to lower neighborhood prices resulting in otherwise healthy loans going “under water” and resulting in their eventual foreclosure.  This seems like such a critical question.  You have to wonder why no one has attempted to answer it.  Well someone has but few know about it. 

Specifically, Agarwal et al[1], in a forthcoming paper in Real Estate Economics, address this very question.  In fact, they find that the presence of a cluster of subprime loans does not increase the chance that other neighborhood properties will fall into foreclosure.  They do, however, find that the local presence of a cluster of the most aggressive hybrid ARM products and low/no doc loans (a subclass of subprime loans) does increase the likelihood that other nearby properties will fall into foreclosure.

Implications

The mere presence of nearby subprime loans does not in itself appear to impact the chance of foreclosure.  However, a clustering of interest only ARMs and low/no doc loans does hurt everyone’s chances of falling into foreclosure.  This is mostly likely occurring because prices in these latter neighborhoods are not holding up in the face of nearby foreclosures.  So, the results appear to be mixed.  While most can breathe a sigh of relief, those that: (a) live in neighborhoods heavily populated with hybrid ARMs and low/no doc loans, (b) hold loans in these same neighborhoods, and (c) politicians that supported the availability of these wildly unconventional loans have to worry about the fallout.  Clearly, the first two groups face the potential of future financial loss; however, it remains unclear how politicians who supported “a house for everyone” will have to ante up.