Despite the best intentions at assisting distressed homeowners, bad mortgage debt continues to rise with little hope of reigning it in.  The tough job market and high unemployment rates serve to add fuel to the economic firestorm.  After all, it’s difficult to pay the mortgage without any income.

The current shadow inventory estimate is about half of the entire market of homes for sale, according to Housing Watch.  Additionally, there are many other homeowners who have hesitated putting their home on the market due to market uncertainty.  In essence, this only clouds the housing market’s supply and demand picture.  Our local Fredericksburg, Virginia area isn’t any different than the rest of the nation.  We’ve got plenty of foreclosures on the market, and many others waiting for the market to turn.

Current estimates indicate that existing foreclosures , and the additional shadow inventory, will take nearly three years to sell at normal market absorption rates.  Can you imagine what will happen to home prices once the shadow inventory, and other would be sellers put their homes on the market?  Normally, I’m not an advocate of predicting the future.  But, in this case, with an overabundance of homes, and current economic conditions, something has to give.

When that time comes, do you think the sound we’ll hear is the shattering of the price floor for homes?  If so, let’s hope we’re not caught unawares.  We’ve certainly had plenty of warnings.

Does a home sell itself, or is smart marketing the key?  Or, is it a little of both? 

While most of us realize that targeted marketing is a sound sales strategy, it is tough to sell a lemon in any market.  But most would agree, rarely is a buyer willing to pay more than an item is worth, unless of course, there’s more to the item than meets the eye.  But, that is seldom, if ever the case.  Wouldn’t you agree?

Attempting to accurately price homes requires consideration of various factors including:

1.  Home Inventory

2.  Current Market Conditions

3.  Recent Comparable Property Sales

4.  Condition of the Property

As many who provide valuations of property will tell you, any good Comparative Market Analysis (CMA) will provide a property owner with an accurate price window for his/her property.  If we’re comparing like properties, it is hard to go wrong with a CMA.  But, if you’re expecting an apple to be the same as an orange, you could be in trouble!  So, where do those inflated listing prices come from?  The owner?  Yes, at times.  But, unfortunately, often, the blame lies with the Realtor.

An article in a recent Business Week reviewed William Poundstone’s new book, Priceless: The Myth of Fair Value (and How to Take Advantage of It).   In it, Poundstone examines both the psychology of buyers and sellers, and the logic used when placing a value on a product or service.  The author argues that pricing is anything but an exact science.  In his words, ”In the new psychology of price, values are slippery and contingent….”  According to the article, many “clueless” consumers are vulnerable to the marketing or sales practice of anchoring.  Anchoring, in its purest form, is the act of using of a high priced item that may never sell, in order to make a lesser priced similar item much more attractive.  Often, the same manufacturer may sell two like products, one tagged with a designer name and price, the other, a “great deal” at almost half price.  The “cheap” one sells like gangbusters!

Since it’s hard to ask twice as much for a similar home, overpricing occurs far too frequently.  The good news is, that high price tag makes all the rest of the homes look lots better!  The bad news is, the anchor model is probably going nowhere.  

While pricing or valuing a home isn’t quite as easy as 1-2-3, accuracy is a result of using the proper comparable properties when determining the listing price of a home.  But, if instead, you believe your property to be priceless, and list it accordingly, don’t be disappointed if you find the price you’re offered is only what the educated buyer thinks it is worth.

“The real risk to the banks and investors is that the people in those homes might just decide to walk away. And that’s what we must do. Doesn’t have to be everybody, of course; but anyone who finds themselves seriously underwater with no hope of ever recouping their investment….just walk away Renee. Morality has nothing to do with it. You are a cog in the wheel of a machine that is killing this country and if you remain a cog you enable it. Remove your cog and the machine will not keep running. Remove millions of cogs and the machine gets replaced.”

In other words, the Kos is advocating mortgage debt anarchy; a revolution of sorts.  It then cites Realtors from across the U.S. who seemingly justify the action.  Why?  In the words of one agent, since the economic and housing recovery is projected to take perhaps as long as a decade, “Isn’t it better to just cut the losses up front”? 

According to a recent report by First American CoreLogic, nearly one in four are underwater or upside down with their home mortgage.  In other words, they owe more for the property than it is worth.  According to the N.Y. Times, the housing collapse left 10.7 million families owing more than their homes are worth.  Is that a problem?  Of course it is.  Will walking away from a mortgage solve that problem?  Not hardly.  Have the Administration’s loan modification measures worked as fast or as well as hoped?  No, they haven’t.  Nonetheless, the programs were enacted for the affected homeowners to use.  I have yet to hear of a homeowner not being able to remain in their home as they attempt to modify their payments.

How about you?  If you know of a friend, relative, or client that has been forced out of their property despite the fact they’ve continued to make a payment, or partial payment, please let me know.

Is walking away from a mortgage debt justified?  While its track record isn’t perfect, the short sale is getting its act together.  Perhaps, for both the lender and the those upside down, it is a better alternative than burning the mortgage.

The change to appraisal periods involved decreasing the validity time for FHA appraisals from six to four months for both existing homes and those under construction.  Since the first of this calendar year, 2010, the new standard has been in effect.  Why does the change matter?

For those of us that have faced selling properties, only to encounter difficulties with the appraisal, this reduced turn around time, or reduction of validity time, couldn’t have come sooner.  Because, no matter the soundness of an agent’s estimation of a property’s value, it is the appraiser’s that matters most.

Did you see the news?  Yesterday’s New York Times carried an article detailing the results of recent federal mandated licensing exams for loan officers around the country.  The results thus far are anything but encouraging.  According the Times article,  ”31 percent of the roughly 10,000 people who took the national test from July 30 to Nov 30 failed it, and about 27 percent did not pass the state-specific component.” 

While there are those (you can trust that the dissenters aren’t those depending on the expertise of their lender) who question the industry’s testing, many others appreciate the attempt at accountability.  Is it odd to expect those who provide you a service, especially one you pay for, to know what they’re doing?  One would hope not.

In the effort to clean up the mortgage industry and answer critics’ claims of of its ”poorly qualified” loans officers, the testing mandate includes both a federal and state national exam that covers federal laws, general mortgage knowledge, the loan-origination process and ethics.  While I have to applaud the “after the fact” efforts to ”fix” a disfunctional mortgage loan process, why did it take a crisis to prompt such measures?

The question that leadership in any industry or profession needs to ask itself, is, what are the minimal acceptable standards required by those licensed to perform or practice?  Would I want them (the practitioner) to provide that service for me?  What if had to pay them for their service?  Would I trust them to provide me, or a relative or friend, advice?  As we’ve all heard, “many people will only do what’s required.”  Let’s hope, when it comes to your trusted advisor, you’re getting at least what you’ve paid for.  And, if not, who will pay for their neglect?

During the past year or so, I’ve had the opportunity to teach a reoccurring Real Estate Technology class.  The class briefly reviews the shift we’ve seen in the methods, tools and practices in our profession during the past few years, and examines how Realtors, by leveraging these recent tools, and social media platforms, can improve productivity and their business.  One point of emphasis we touch on during the class is the use of Real Estate blogs as a means of learning the business.  Blogs, and their collaborative structure, are a free classroom.  And an interactive one at that.  And there are loads of them.  Whether it’s foreclosures, luxury homes, mortgage issues, best ways to showcase a property, or just about any other subject related to the business of real estate, or homes, there’s a blog for it.  Best of all, as I say again and again during class, they are FREE.  Classes we used to pay for are now on the web, and at our fingertips, for FREE.  So, we really have no excuse for being uninformed, right?  But, having said that, what about the content?  How much substance is there in the information we’re taking in.  What credibility does the particular author, and real estate subject “expert” have?

When absorbing information, it’s a good idea to check your sources, don’t you think?  Have you ever wondered why the Federal Drug Administration (FDA) requires certain labels or notices on food and drug containers?  Do you think it’s important to know a drug is poisonous BEFORE you take it?  Have you ever looked on the label to see what’s in that jar of jelly you’re about to open?  Well, what about Real Estate information you’re consuming?  Is that article on Short Sales written by a practitioner who is a qualified expert in that transaction?  Does that individual teaching you Ethics actually have any background in the practice, or is their “expertise” a matter of having been convicted in court of lying or something worse?  Who knew? 

One the painful truths of growing up is that most of us have to learn from our own mistakes since we fail to learn from the mistakes of others.  Another is that, the older we get, the smarter our parents seem to be.  I don’t know about you, but my parents tugged on my ear a few times in my youth telling me not to believe everything I hear.  And, you know what, they were right.  With today’s abundance of online information, let’s try and be as discriminating with what we read, as well.

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This morning’s Boston Globe ran a story of a real estate investment venture gone bad.  Sound familiar?

In this case, a young Virginia Beach couple, among others, were sold “a bill of goods”, left high and dry, broke, and are facing a lengthy legal battle to simply try and reclaim their good name.   If there ever was a real estate swindle that exemplifies the worst aspects of the buying and selling of real estate, for profit or not, it’s this one.  It has all the necessary elements:

1.  The Promise of Easy Money

2.  The Smooth Talker

3.  Fraudulent Loans

4.  Fabricated Appraisal Figures

5.  A Gross Lack of Due Diligence

This is but one of the many tragedies left as a result of the housing market run amok.  Kind of like teenage boy on steriods driving a school bus without a governor (you know, the device that restricts their speed).  Before you invest your time, effort, and your money into any venture – especially one that sounds too good to be true – please take the time to do a risk analysis, and ensure that the road ahead isn’t full of quicksand!  

Most of us have realized, usually through trial and error, that success depends a great deal upon building a firm foundation to begin with.  And, in Social Media, it’s no different.  It begins by understanding who you audience is and what they want.   In Social Media “speak”, it starts with the 5 W’s.

1.   WHO

Who is saying things about your products and service?

2.  WHAT

What are they saying about you and the product you provide?  Is it good?  Bad?

3.  WHEN

When are they talking about you?  If your business is cyclical, are you only being mentioned during the busy season?  If you specialize in one area of your profession, does the discussion occur only when your specialty is hot?

4.  WHERE

Where are these conversations taking place?  On blogs related to your business?  On other popular discussion platforms? 

5.  WHY

Why is anyone commenting, discussing, or examining you and what you have to offer.

There are a number of variations of the 5 Ws.  Many, recently, have focused on web sites and blogs.  Earlier this week, Inman News’ featured an article “The 5 W’s and your Web site“, by Robert Hahn.  Other informative articles on the 5 Ws include, “Knowing What’s What and What’s Not the 5 W’s (and 1 H) of Cyberspace“, and The Five W’s of Web Site Evaluation.   

Social Media platforms are useful marketing tools, and today, they’re all the rage.  A careful analysis of any marketing devices and means is is not only useful, but a necessary factor in identifying what works and what doesn’t.  The 5 W’s is another, and value added, method way of determining what we need to pay attention to, by identifying who may be listening, and what they’re interested in.  And, if that’s the case, do you think it might be helpful for Realtors to pay attention?

Robert Louis Stevenson

Is a Federal Housing Administration(FHA) crisis on the horizon?  With FHA’s insurance reserve ratio falling to the lowest level in history, at 0.53 percent, there are some who believe the FHA is the next subprime crisis waiting to happen.  One of those is homebuilder, Toll Brothers Inc., CEO, Robert Toll.   Toll predicts that just like the failed bank bailouts, the FHA will be next in the handout line.  And, with the reserve ratio as low as it is, he may be on to something.  According to a Congressional mandate, the ratio should be no lower than 2.0 

In addition to the alarming FHA news, this week’s Wall Street Journal reported that nearly 25 percent of all homeowners are upside down with their home mortgage.  In other words, they owe more on the mortgage than their home is worth.  Well, considering how values have fallen since ‘05, that isn’t too surprising. 

While the recent encouraging national home sales figures provided us a glimmer of hope amidst the current economic downturn, today’s sobering news concerning the viability of FHA home loans, and the depressed values of properties, bring us back to reality.  So, what are we to believe?  Are things getting better?  Is the First Time Homebuyer’s Tax Credit frenzy skewing sales numbers, or, are increased home sales “genuine”?   Are these numbers more akin to a mirage?  Instead, are we stuck in an economic tailspin for months, or years to come?  

In the competition to provide us the latest and greatest updates on where the economy is heading, we see indications that are both promising and discouraging.  Where the housing market may be going, we don’t exactly know.  But, fortunately, one thing is for sure, there will be homes both bought and sold.  So, perhaps we’d best stick to the present, and as they say, the future will take care of itself.  After all, as someone once said, “Predicting the future is easy.  It’s trying to figure out what’s going on now that’s hard.”  

Let’s be honest, the “Short Sale” isn’t going anywhere.  I know what you’re thinking, “Of course it isn’t going anywhere(in other words, no action by the lender!)”, but, what I mean to say is, they’ll be here for a while.  In other words, we’ll be seeing plenty more of them in the the next few years.  As long as the economic downturn is with us, there will be homeowners in states of distress who are unable to pay their mortgages.  So, how do we turn this lemon into lemonade?  (And, believe it or not, it takes more than a lot of sugar!)

Earlier this week, a few local Brokers and Instructors had the opportunity to sit down with Lem Marshall, the Special Counsel to the Virginia Association of Realtors(VAR), to discuss ways the Realtor community can improve the short sale process.  By improve, we mean, enhance the chances of a successful short sale.  During his presentation, Lem volunteered some helpful hints at how Realtors can maximize their chances of succeeding in dealing with Short Sales.

He began by reminding us that on average, about one in four short sales transactions, nationwide, are successful.  While the real estate community doesn’t control all the variables involved in the process, there are a couple of items we do influence.  It is those items or factors, if handled and executed properly, that can sometimes mean the difference between success and failure.  While Lem conceded that lenders are the main short sale players doing most of the transaction decision making, Realtor’s decisions and actions, if done incorrectly, doom the transaction.

The starting point for Realtors in any transaction, but especially in Short Sales, is competence, according to Mr. Marshall.  Understanding the process involves an appreciation for all the moving parts.  To begin with, the agent must know what they are doing, and what they’re dealing with.  Agents will consider and interact with four main participants in this transaction; the other agent, the property, the client, and, most importantly, the third party, or lender.  Let’s begin by looking at the importance of understanding the first two.

THE OTHER AGENT 

Since a short sale is a special type of real estate transaction, understanding what’s required takes more than a license to sell real estate.  Being aware of what the agent on the other side (especially the Listing agent) of the transaction knows about short sales is important in considering the likelihood of success.  If they know what they’re doing (proper valuation of the property, good communication with the lender’s representatives, etc), then chances for success – all things being equal – are probably fairly decent.  If they don’t know what they’re doing and are unfamiliar with what’s required, then watch out!  You’ll be doing a lot of hand holding (with the other agent, as well as your client), but may be doomed from the beginning. 

It’s unfortunate, but until specialized training in short sale procedures is mandatory for all agents handling these transactions, many agents will be unprepared to properly handle what’s necessary.  The Certified Short Sale Professional (CSP) course provides agents a comprehensive examination of the requirements of the entire process, and what is required for success.  Other than actually handling a short sale transaction, it’s about as good as it gets in preparing agents for dealing with the short sale of a home.

But, as mentioned earlier, if you’re dealing with an inexperienced agent, and that simply means, in this case, one that is inexperienced with short sales, that’s not been trained, then the chances of success are minimal.  Why?  Because, it is imperative that the Realtor is aware of the specific ins and outs of this unique process.  To begin with, the listing agent must be able to properly price the property to be sold.

PROPERLY PRICING THE PROPERTY

Absent a proper valuation of the short sale property, the lender has little incentive to consider any proximate offers on the property by prospective buyers.  Real property is worth what someone is willing to pay, nothing more…or less.  Believe it or not, lenders are aware of this.  

Determining what price a home should be marketed for, whether a regular home sale, or a short sale, depends upon the use of accurate comparables.  In other words, what are like or similar properties in the area selling for?  Successful Short Sale Specialists advise that these properties be priced just below ($10,000-$15,000 below) the lower price range of similar homes on the market.  Remember, lenders WILL be appraising these homes, or ordering a Broker Price Opinion (BPO), at the least.  Lenders aren’t going to give these homes away, they’re trying to limit their losses while getting the property out of inventory.  So, accurate pricing by the listing agent is a must.  Banks, like any normal home reseller, will be asking for market value, or maybe, a little less.  That doesn’t mean 20-50% below market value, despite what you might hear from uninformed experts.

Improving the success rate of short sales involves an understanding of what’s required, and the successful completion of the necessary steps by all the parties involved in the operation.  For Realtors, not only must they know what’s needed in order to succeed, but it also helps to know what the other side of the transaction knows, as well.   With a good idea of what the other agent and their listing have to offer, agents will be better able to communicate effectively and accurately with their client(s) and the third party that’s involved.  Those are just the initial steps on the path towards completion of a winning short sale.