The current sales environment seems to have come to a grinding halt in the outer lying areas of the Southland. There will always be exceptions, but those areas are not likely far behind what we are seeing.
Basically, Jim the Realtor dealt with the same issue recently in his post titled “State of Foreclosures“. Banks are not competitively priced as some people might assume.
Jim said:
Once the bank gets them back, they list them with a realtor, and in almost all cases, are looking for close to retail price (or more!). In the 1990s the banks figured it out at the end to install carpet and a coat of paint to help their chances, but I haven’t seen much of that yet this time around. If you’re looking to buy one of these you will definitely be underwhelmed at the value.
No Joke.
It doesn’t take much looking to find a some examples of this exact problem. The first one we’ll bring to you is a bank owned property in San Marcos. I love that area, the weather is great, traffic is excellent, and there’s a fantastic Fry’s Electronics Superstore there!
Unfortunately for many families, the local economy does not alway support the kind of housing valuations we have see in recent years. While these numbers may seem low to those currently living in LA or OC, there’s a reason, the employment options are not the same.
The first one is 517 Avenida Ortega, San Marcos, CA 92078. It’s a beautiful home comprising 2,585 sq feet of pure family living. This house is BANK OWNED. None of the others featured here are. You would think that you would get a better deal with this house, right?
Perhaps its most glaring fault is that it shares its driveway with the neighbor.
The kitchen is bone stock from the builder:
All in all, a decent bare-bones home. The Price: $593K
Remember that when we compare the neighborhood.
Nearly their neighbor, another house is for sale. This house is 523 Avenida Ortega, San Marcos. It’s a model match, and you’ll notice the resemblance right away:
But, this is where the similarities end. No shared Driveway, and look at the kitchen:
Granite no less, and wood (or at least faux wood) flooring through much of the downstairs.
What would you expect this listing to be at? Higher than the previous one… the previous was, after all, a foreclosure and bank owned property with some small cosmetic issues.
Not a chance. $575K. A full 18K lower than the bank-owned foreclosure.
Well, you say, this must be a motivated seller, the comps must at least support these prices, right?
Another house on the same street, same model match (514 Avenida Ortega, San Marcos) sold in November 2006 for $582K, and that’s not counting any incentives the seller might have given away.
While the second seller has figured out that the market is declining and willing to get out, the bank is still in denial or clueless. Either way, you’ll get a better deal, a better house, and have more bargaining power with normal sellers than you will with banks right now.
What will it take to change this? What will make banks want to get rid of properties? It’s all about volume. Until banks are holding enough nonperforming assets to awaken the ire of regulators, they will continue to sit on properties hoping that the market will come up to their wishing prices. While banks often have a prescribed formula for price reductions, they will eventually sell the homes. When regulators force banks to expedite the shedding of houses, then we’ll see some serious price reductions.
Until then, everyone’s still wishing, hoping, and praying.
****Update 4:45 PM****
After already publishing this one, I see that there is actually another property on the same street for sale that even drives the point home:
518 Avenida Ortega is also a model match, as you can see from below:
Man, these were stamped out like from some kind of cookie cutter:
Here’s the kitchen:
Anyone care to guess the price on this one?
This price blows both of them out of the water: $555K
This house is in slightly better shape than the bank owned property, and it’s nearly 40K lower priced. Foreclosures are not yet a good deal.
Banks are operating much like the numerous furniture stores you see that have “going out of business sales.” People show up thinking they’re getting a deal because the seller is distressed. I also remember a while back someone was selling cheap stereo speakers “his boss gave to him cheap.” The implication was that the speakers were stolen and you were getting a great deal. I notified the police thinking that these guys were selling stolen speakers, when in actuality they were really selling very poor quality speakers, hoping people would buy because they were getting a great deal.
I think you need a huge discount for a foreclosed property. Who knows what the previous “owners” did to the property in its last days since they no longer cared. Maybe they wanted to piss off the lenders who wouldn’t negotiate with them or maybe they took advantage of the free rent in the last days and had huge parties that destroyed various things within the property. People most often get what they pay for, or more than likely get ripped off by people who know their business better than amateur buyers do.
R.E.O.’s don’t become opportunities untill they have sat on the market at least 3 mo’s. That’s the secret most don’t know. If you go in right away snapping up an R.E.O. your going to lose. As far as the carpeting and paint only a few do that. Most would and do sell as is.
This is re: “Finally, Someone Says Something.” Chuck, my apologies for cross posting this, but closing comments after a couple hours and a handful of posts is rather unsporting. This will probably be the last time I post here if you’re going to continue to do that.
I don’t pretend to understand the details of short selling or the OTC BB markets, which is why I stay away from them. However, I think a claim of “trillions” in missing tax revenue deserves a bit more than some hand waving in a PR piece.
Incidentally, for every trillion in missing taxes, there’s $5 trillion in actual capital gains. Who’s making all THAT money? Are we supposed to believe that evil hedge funds are making all that on the backs of microcap stocks? Wouldn’t they need about a million different stocks for this to add up right?
Also, you never answered Drew’s question about how short sellers cause a company to fail. Other than intangible effects like customer perception, what does the stock price have to do with whether the company succeeds?
Finally, I stand by my claim of “ax to grind”:
Universal Express Sues First Call and Thompson Financial
For: “First Call’s removal last month of a posted recommendation and target price.”
Watch the Bloomberg special on Youtube. You’ll have a better understanding then.
I explained it once, but maybe my answers didn’t get read or were ignored. Either way, here it is in a nutshell:
You can wash away the fears if you assume that a company never has to do additional offerings. companies can fail to raise sufficient capital through equity markets. Small Caps often need to do that because bond offerings can be difficult with smaller companies. I know, I have done some with my current employer which is over 10B, and that’s considered mid-cap. That is part of corporate finance. Companies shouldn’t always use bond issuances to raise capital, equity can often be more efficient. Naked shorting can make that near to impossible by increasing the number of shares available on the open market. The fact that the SEC has come out with REG SHO shows that they are aware of the problem, but powerless under the current structures to fix it. The SEC, by the way, is an SRO (self-regulating org.), not a government entity, so it can’t legislate requirements, it can only attempt to enforce the group’s wishes.
It would seem by your measure, that people like The Center for Responsible Lending has an “axe to grind” over relaxed regulation of loans. True, but it’s a valid concern that everyone should be aware of.
Patrick Byrne picked up the torch on Naked Short Selling, not just because his stock was a victim of it (I don’t and never have owned shares), but because it is unethical.
The fact that there is no mandatory buy in of shares (even at par, which should be mandatory in my opinion), after the company fails and goes under, there is no requirement to “return” those shares to the market. That’s tax evasion, plain and simple.
So yes, they get away with murder.
BTW, the post has been up more than 24 hours, and drew a carpetbomb of comments from someone who didn’t even bother to look up what the term was in the dictionary. While I do not censor the site for other than profanity and personal attacks, I reserve the right to remove discussions somewhere else.
Feel free to open a topic in the Forums. I’d be happy to comment several times on it.
Chuck,
Can you explain what the regulations are on banks owning real estate? There has been some discussion at Irvine Housing Blog about banks keeping these properties as rentals. I don’t think they would for many reasons, but being forced to sell the property due to regulator oversight was not a reason I listed. I did not realize they were prohibited from owning large amounts of real estate. Can you explain further?
Thanks,
IrvineRenter
Banks that have a governing body are required to remove non performing assets from their balance sheets to protect shareholders. Houses without payments constitute “non performing assets”. However, most banks do not directly own the paper, they have been sold off on MBS’s to spread risk.
There are some caveats here under current structures that should be carefully considered:
1. Many MBS’s are actually managed by a “mortgage servicer”. This means that in past busts, banks owned mortgages directly, now they own them indirectly as a bondholder, and a servicer handles payments. However, these MBS’s are required to cycle through homes similar to a bank… they are governed by rules to protect bondholders, so they don’t hold them very long either.
2. Banks think they are insulated from this because they don’t hold them “directly”. I have heard of some cases where banks/servicers were selling the properties to a closely-related group which would rent them out waiting for the market to return (I read about this on california housing forecast), but I have a couple of big questions about this that I’m not sure anyone could answer. I’m not even confident that these have ever existed since there are a myriad of conflicts-of-interest that would need to be sorted out. If you believe in big-business croyism, this would be the perfect conspiracy theory.
There is another line of thinking that needs to be considered. If a particular bond has enough foreclosures to impact its underlying ability to pay coupon rates, it might be considered a “non performing asset” by bank regulators. This would be disastrous if bondholders were no longer able to hold the bonds they have because they are now in default. Their regulators may require them to sell their bond on the open market, causing a bond crash, and subsequent write-down of the bond value. That could cause the dreaded cross defaults that would be most worrisome. Previously, banks held mortgage insurance to protect against losses. These premiums were basically guaranteed for the life of the loan. I don’t know of a single “bond insurance” (unless you count CDOs) that would handle a bond default, but the premiums are not fixed. It could get very expensive for banks to insure against defaults. Either way, banks are still subject to risk. Before, it was immediate and specific. Now it is delayed and generalized (and much, much larger if it happens).
sorry, no short answer here
I am suspect of anything I read at California Housing Forecast. She is starting to look like the Gary Watts of bubble bloggers…
I have a hard time imagining banks entering into off-balance-sheet transactions to avoid recognizing losses in the feeble hope that the market will turn and save them. That would be a recipe for huge lawsuits once the market really tanks. Where is that allowed in the bond documents?
On that line of thinking, I wonder what the bond documents in these MBSs say about REO? Even the unregulated banks or lenders must be subject to the provisions of the MBSs into which their loans were sold.
I hadn’t thought about the cascading effect of default on the broader bond market. It would not surprise me to find some MBS insurers are unable to meet their obligations since this is a completely unregulated market, but I hadn’t considered the impact of this on the larger bond market. Talk about a credit crunch. That would be a nuclear meltdown. We would be right back where we started with banks doing all the lending.
Anyway, thank you for answering my question.
Fascinating info. Thanks for doing the research. Please post stuff like this more often.
What a cold looking home. Talk about an uninviting entry…