Our sister site, habitationstation.com, ran a post on why buying a short sale property may be better for most people than buying a foreclosure. It’s worth a read and should hold true most of the time. But is there a way to buy bank-owned homes and make good money on it?

Yes, but it’s really hard to do, and I’m exploring how to do it. The habitationstation.com article notes that unless there’s a lot of equity in the home, you won’t be making that good of a deal. People with a lot of quity in their homes are not likely to go into foreclosure, although some certainly do. But there may be another way to profit.

Find a home that had a fair-szed second mortgage when it went into foreclosure. It’s nearly always the first trust deed holder who forecloses, and when that happens, the holder of the second mortgage is wiped out. Take, for example, a $275,000 house that was bought in 2006 with an 80-20 piggyback loan–not at all uncommon. And say it’s worth $250,000 on today’s market when it went into foreclosure.

The back end of the the original puchase loan–the 20%, or $55,000, was extinguished when the holder of the first mortgage foreclosed. The home will be priced around $220,000, or roughly the amount of the first mortgage. Whoever buys this home will own a $250,000 house for $220,000 (for simplification’s sake, reapir costs have been left out).

The trick is to find foreclosed homes that had big seconds on them, and short of attending a lot of auctions, I’m not sure how to do that. But I do have some ideas, and I’ll report back when I see if they work.

Want to buy a home in Portland Metro? Would you just like to kick around through the listings and see what’s for sale–just for fun?

Our new marketing and property site is Habitation Station, where you can search by neighborhood, housing type, price or whatever.  Give it a look!

I offer free, no-charge foreclosure avoidance counseling. It is, however, somewhat limited, because I won’t do someone’s loan modification package. Why?

A couple of reasons. First, because of all the loan mod scammers out there, the liability thing is huge. Second, loan mods can take a lot of time. Since I’m a one-broker shop, I need to be really careful how much time I give away, and people can get just as good a deal on their own anyway. And there are always the HUD-certified counselors out there to help–for free, by the way, which is one more reason to NEVER pay someone for a loan mod (except, maybe, as discussed below).

That said, people more often than not need help with the process. The language is technical, you often get someone different every time you call, lenders’ staff in different departments don’t seem to talk to one another, and so on. You never know where you stand and it can be very frustrating.

I just read an article on Inman News by Jack Guttentag, Professor Emeritus and mortgage guru if there ever was one about a couple of places where people can get loan modification help, ranging from free to low cost. For the record, I receive nothing from them for referrals and have no financial interest whatsoever.

The first is called Mycaal.  Borrowers fill out a questionnaire based on the information servicers need for a decision, and Mycaal provides all the documents you need based on the data in the questionnaire. They charge $98 for their services, which includes, as I understand it, some personal coaching. This is far more than I can provoide and, I suspect, more than some of the HUD agencies.

The other site is the DMM Portal, operated my Default Mitigation Management LLC. This site is kind of a communication platform with many servicers. At no charge, you can develop the documents the servicer needs, submit the package electronically and follow up to see how things are doing. This is cool. And for $150, you can get counseling and assistance in developing your package.

According to Dr. Guttentag, servicers now using DMM Portal are 21st  Mortgage Corp., America’s Servicing Co., Bank of America (but only if you are  in an active bankruptcy), JP Morgan Chase/EMC, Ocwen Loan Servicing LLC/Litton  Loan Servicing, Resurgent Capital Services, Saxon, Select Portfolio Servicing,  Washington Mutual, and Wells Fargo Home Mortgage.

If a borrower came to me for counseling and needed to go further than I can go–and felt a HUD-certified counselor was not a good fit–I would refer him or her to these sites.

For more than a month, we’ve been working on our new marketing website, Habitation Station.

While we’re adding specialization foreclosures and short sales, we retain a special clientele in many parts of Portland Metro. We have clients in Ladd’s Addition, Hillsdale, Beaverton, Cedar Mill, and Milwaukie, just to name a few, and we get more calls every day.

Many other brokers claim to be the “neighborhood expert” wherever they are. Sometimes they really are. While we are certainly more knowledgeable about some areas (Orenco Station comes to mind) than others, we have the resources to learn what needs to be learned and pass it along to customers in the hope of making them clients.

Some–certainly not all–people don’t like being told what they should think, and like to figure it all out with the help of expertise. That’s where we come in.

Anyone following market predictions knows one thing for sure: Nobody agrees.

Ask a real estate broker if now is a good time to buy a home, and she’ll say…Nevermind. We all know the answer to that, since real estate agents always say now is a good time to buy, whether it’s 2005 or 2009. But still. In their defense, interest rates can’t get much lower (my prediction: yes they will) and house prices look cheap. Why try to time the absolute market bottom if Warren Buffet can’t even do it?

Fact is, no one knows for sure. Who can make predictions when something like an earthquake in Japan or Greek bond default could happen anytime? But here’s a data point I haven’t seen anyone talk about: price convergence of foreclosures, short sales and traditional sales.

When this whole mess started, there was a pricing hierarchy. Traditional sales were the highest, followed by short sales, followed by REO (real estate owned, or bank-owned properties). What I’m seeing now, though, is a lessening of the spread. Bank-owned homes, unless they’re really trashed, sell for pretty close to what owner-occupied homes sell for. Same for short sale homes.

If that’s the case, then we’re gonna see a lender rush to get their properties into the marketplace. Right now, as I understand it, it takes fourteen months (and up) for the foreclosure process to complete itself.  That is, it takes more than a year from the time the loan goes into default to the moment the lender reclaims it at auction. And lenders have been holding back their proerties, not wanting to flood a downward pricing spiral with more inventory.

But if you’re trying to find a home for a willing buyer, which I do for a living, it’s getting hard. There’s not much out there.

If I’m right about the end of the pricing hierarchy, 2012 could well see a beginning of market stability and a lot more foreclosed homes coming on the market.

Oh by the way…don’t forget to visit Habitation Station. The site is going through daily upgrades, and your feedback will help make it as usefull as possible.

This space has been silent. Golden? Hmm, maybe. Maybe not.

In the first part of December, I was in Dallas at a mortgage bankers’ conference sponsored by the Five Star Institute. The purpose was to earn the institute’s coveted REO certification. And I’ve been hyper busy ever since, leaving town on Dec. 23.

Which led to development of a new website dedicated to helping people find the home they want to buy at the price they want to pay.  This search begins, quite often, with bank-owned properties and short sales. The new site–HabitationStation–has special search tools to help people with this kind of search.

Sellers–those who are contemplating a short sale especially–will find it equally as useful.

Warning: It’s still undergoing changes. Moreover, I’m in Turkey right now, and my ability to create these upgrades is limited. The server has blocked access from this part of the world!

We’ll be up to speed in January.

Those who know me know I love to rag on other real estate brokers. But sometimes, you run into a competitor who does something that’s not only innovative, but competent. Today I tip my hat to M Realty and its marsupial child, Homequest for their marketing approach.

Homequest is a web platform that integrates residential property search, agent advertising and WordPress, to give the Cliff’s Notes description. I used Homequest for a bit in 2006, when most agent websites were afterthoughts, and showed it. At the time, Homequest could be framed into a website and people looking for homes could do so by neighborhood and register on the agent’s website for updates. I dropped it after a while. My (admittedly few) clients found it clunky and difficult to manipulate. And in those days, Homequest was just figuring out how to do searches by neighborhood, with mixed success, through feeds (I’m guessing) from RMLS, which itself was pretty clunky.

Fast forward to 2011, and Homequest not only has a new look and feel, but–when properly used–takes marketing to a higher and more useful level. WordPress itself has evolved into an incredibly useful and custom-designable (if there’s such a word) product that it now puts most websites to shame. A good WordPress blogsite almost feels three-dimensional. And for its part, Homequest really does an outstanding job of property search by any area–neighborhood, zip code, school zone, whatever.

I’d say 99.9% of real estate brokers use the term “marketing” when they mean advertising. In my pre-license days, I can’t count how many times some broker or other would want to “market” my house or my subdivision, when they meant list it in MLS and advertise it in the paper and hope like hell something happened. Marketing requires two critical elements: A focused strategy, which is often just identifying the demographic to be targeted, and accountability for the usefulness of the media used.

Which is what M Realty does, at least in the instance I saw today of a single property. The home was a new listing of a very special house. Where most of us would have done our thing and taken photos, made flyers, syndicated the listing and hoped like hell something would happen, this M Realty broker used her blogsite to do everything in the preceding paragraph.  Instead of an e-flyer being blasted out to several hundred agents who deleted it if their spam filters didn’t catch it, she targeted her advertising to a selected group and followed up with both print and electronic media, with tracked the results with a service similar to Google Analytics.

The home received multiple offers and sold for more than the asking price in, as I recall, eight days.

Now, not all properties will see this kind of success. The quality of the property has a role in all  this, after all. But they deserve something better than what the traditional practices deliver. M Realty certainly makes me want to do a better job.

The other thing I liked was how M Realty got it’s name.

According to Realtytrac,  Oregon foreclosures were up 44% in August over July. Multnomah County reported 412 properties with foreclosure filings for  the month, making it the highest in the state. Clackamas County followed with 342 filings., while Washington County came in third, at 305 properties.

This is not great news for sellers, since foreclosures tend to negatively impact pricing. But wait–Cashe-Schiller reported that Portland was one of the few metro areas that actually witnessed a slight pricing gain in the third quarter.

It’s hard to say for sure what this all means.  A recent article in DS News says that while the shadow inventory is getting smaller, there’s still a 45-month supply of foreclosed homes, which means it would take nearly four years to sell what’s out there right now.

But that’s the national picture. For Portland real estate, there’s not a lot of traditional inventory out there that’s listed for sale. Buyers don’t have a lot to choose from if they don’t want to mess with a short sale or foreclosure, and sellers are keeping their homes off the market in the hope pricing will increase. That means the data is not as reliable as it could be, because the ratio of distressed homes/traditional homes is off.

You don’t make your money when you sell a home, you make it when you buy one. This little axiom is even more true with buying foreclosures, since the buyers tend to be investors.

Comparable sales are very important when establishing a pricing baseline for buying a foreclosure. So is replacement value. But an income approach is extremely important, and it often isn’t used enough.

With an income approach, the buyer determines how much the house will rent for, not just immediately, but out into the future. Next, she or he applies a capitalization rate (cap rate) to the net rental amount. A cap rate is the income divided by the value of the property. Warning: Cap rates assume an all-cash purchase.

So, one might ask, how can you apply a cap rate to projected income to get the value? Don’t you ave to know the value to determine the cap rate?  Yes, in theory.  But given cap rates tend to be generally accepted in certain areas. As a general statement, the higher the cap rate, the theory goes, the less risk the investment. And if you know any two of the three values of the formula C = I/V, where C is the cap rate, I the income and V the value, you can determine the one you don’t know.

What’s the cap rate for a house? It would depend on the neighborhood and the overall rental activity, but my guess is that they’re low.  Somewhere in Portland Metro, a three-bedroom, 1,500 square-foot home might rent for $1,500 per month, or $18,000 annually, or a net operating income of $14,400 (adjusting for vacancy and operating expenses). If the cap rate were 6%–a fair theoretical starting point–the house would be worth $240,000.

Which is about the median price of a home in Portland Metro.  So we’re sort of in there for a starting point.

The problem with cap rates is that there’s “the” cap rate and there’s “your” cap rate. The home you want may need a new roof, or you may be leveraging it and the interest costs are a factor. Or whatever. If you’re going to use a cap rate, you’ll need to modify it with your unique factors.

And if you come up with a house value and average it with comparable sales and replacement value, you’ll have a good working number when making an offer or bidding at auction.

In a word, home sellers, don’t be pressured into underpricing your home when you put it on the market.

At a West Side broker’s sales meeting today, another broker and I were talking about pricing issues after the meeting. Turned out we both felt the same way: Too many sellers are getting pressured into underpricing their homes. Why? It’s mostly because of pressure points pressing in from a weak housing market and bad economy.

First, people are still used to normal market times.  Sure, their homes won’t be on the market for as short a time as was the case a few years ago.  But two or three months was the norm before that, so why not now?

Second, real estate brokers have gotten knocked around pretty badly by this market, and tend to press sellers into starting at a low price. They point to comps. The point to short sales and foreclosures. They point to bad news. After all, brokers don’t get paid unless and until a house sells.

Understand this: The reason a house doesn’t sell isn’t always price.  Sure, we can give our homes away, or take a huge hit and make the sale. But who wants to do that? We’re in a weird market right now with not a lot of supply and not many buyers.  To restate: It’s not always price.

I’m advising most of my sellers to get their homes in move-in condition, price it at the high end of the comps, and then sit back and wait. Why price it at the high end? Because they’re likely to get a lowball offer anyway, so they might as well start high.  Moreover, if a home is in a good location and is move-in ready, it’s being priced at $369,900 won’t scare off buyers who want to be in the $350,000 range, especially with the current interest rates.

The tradeoff is market time.  Sellers may have to steel themselves for a longer wait. A reent client told me, “I don’t care if it’s on the market a year, I’m not giving it away.” Fine by me.

Whether you list with Terradigm or any other firm, feel free to contact us to discuss pricing.