REOs rising in the O.C.
November 10th, 2007, 12:01 am · 16 Comments · posted by Mathew Padilla, Reporter
Folks looking for great deals on foreclosed homes probably won’t be encouraged by Harry Solomon, but they’ll likely learn something about how banks think.
Solomon, owner of Nova Real Estate Services in Laguna Hills, represents banks selling REOs, or ‘real estate owned’ properties. He flourished during the early ‘90s downturn, got out of the real estate game when the market rebounded, and now he’s back.
I quizzed him on how banks view REO sales and whether home shoppers can find good deals.
Q. How long does it take to sell an REO in O.C.?
A. That number is elusive these days. Earlier this year they were going right after they hit the market, in other words less than 30 days. But the lack of ‘easy’ financing has hurt all aspects of real estate with the exception of those greater than $1,000,000. (But I think that may just be a matter of time before the high end gets dragged into it.) It is taking anywhere from 30 to 90 days. The condo market is at the latter end of that time frame with single families in the former.
These are in the MLS statistics and county records that have been quoted in the Register, but they are lumped in with all of the sales. I’m not sure of the percentages of REO condos to single family, but in my personal inventory it’s now running about 75%/25% Condos/SFR. In the ‘90s my personal inventory ran about 85% condos. Again, this is a general overview.
Q. How low of a bid are banks willing to accept on REOs?
A. Each property is taken on its own. To try to come up with an average is very difficult because you have to look at what the property needed in way of making it livable. Was it cosmetic or structural? I have a friend that tells this joke all the time and I love repeating — ‘38.7 percent of all statistics are made up on the spot’ and I change that number every time I tell the joke. (So does he).
Here’s how it works: All REOs must have an appraisal and BPO (broker’s price opinion) completed prior to marketing. Those two opinions must be within 5% of each other or another opinion is ordered from another broker. Some of the time that could take 30 to 45 days to get to market and that could mean the info that the financial institution is using is dated. Even though I’m required to keep them updated that doesn’t include the time from first BPO to marketing.
As I always say, when was the last time you walked into a bank and they gave you money that wasn’t already in your account?
Q. Are there places in O.C. besides Santa Ana that are seeing a lot of REOs?
A. It’s pretty much spread throughout the county, but inland more than coastal. Very few in Laguna, Newport, etc. San Clemente has Talega in its stats, so that has a way of hurting their numbers. The high Mello Roos there and the speculation that went on are hurting Talega and Ladera Ranch as well. In the ‘90s, it was Aliso Viejo and Rancho Santa Margarita. What I’m seeing in South O.C. is that the condos are taking a beating and even when they get to REO they aren’t selling well.
Q. What percentage of homes sold at foreclosure auctions are going back to the bank as REOs because no one bid enough? Last month I visited an auction at the Santa Ana courthouse and watched as only one home sold out of 34, with all the rest going back to the banks…
A. What you saw was a typical scene. The guys that used to bid were flipping and now they can’t. They are playing the wait-and-see game. I would say that 99% ‘revert to the bank.’
Q. What’s your advice for someone seeking to buy an REO in O.C.?
A. REO purchases are much like regular real estate sales. The properties are listed with local agents and placed in the MLS. The offers are written on standard contracts, just like a regular sale. The bank may have addendums that are required.
Anyone purchasing real estate today should be pre-qualified by a reputable lender and have already had credit checks and pay stubs turned into their lender.
Don’t try to low ball. Look at the comparables and make an offer based on the comps. There is no such thing as 50 cents on the dollar, not in Orange County anyway.
Q. On Nov. 1, there were 3,059 short sales (when a bank agrees to accept less than mortgage debt owed) and REOs on the market in Orange County, or roughly 17.5% of total inventory, according to the math of Steve Thomas at Re/Max Real Estate Services in Aliso Viejo. Are we at the point where such distressed properties are dragging down local home prices? If not now, how about in the near future?
A. Just because someone puts ‘short sale’ in the listing doesn’t mean that it will qualify for a short sale. Did the bank actually agree, or is it wishful thinking on the part of the listing agent and the seller? Those statistics are off when you lump them all together.
REOs are easier to locate and separate out. I don’t have a handle for the hard numbers for the entire county, but I would say that of the 17.5% that was quoted in his survey that the real numbers of saleable properties, ones that can actually close escrow, is more like 10% of the entire inventory. There are properties in the MLS that are listed as short sales that can’t possibly close as they don’t have a hardship or the owners have too many assets to qualify. Or the sellers have taken their equity out to use for whatever and now don’t want to repay the money. These aren’t valid reasons for a short sale. Banks’ definition, not mine.
There are always exceptions, but we are talking generalities here. Raw numbers never tell the entire story. The real number is very elusive, but if the old figure of 1 in 5 short sales actually close escrow is still valid then my assessment is more accurate. You can call it a short sale, but if the bank doesn’t cooperate, it’s not a sale of any kind. What I’m trying to say is that the actual amount of saleable ‘distressed’ homes is much less than the total number that are on the market.
I don’t think that REOs really bring down the market. We are not seeing wholesale price reductions for the sake of reductions. Are there reductions? Yes, where list prices are too high as banks tried to recoup their entire losses.
In the first quarter of this year, a large percentage of REOs reverted to the bank because of some kind of fraud (loans that were over 110%+ of the actual value of the home). The ones that I’m seeing now are just people that couldn’t afford the property.
Could that be called fraud as well? Yes, but not the gross fraud that I saw early on. One comes to mind where a family let their million-dollar home go to sale, only to drive down the street to purchase another one for $2 million. They had their home on the market previous to the foreclosure sale and it was listed as a short sale. Privacy laws keep me from getting into current things that I’ve seen recently under short sales.
Remember, before the bank agrees to a short sale they get an opinion of value from either an appraiser or one of the Realtors that they trust. In other words a neutral third party. The short sale offer better be in line with that value or the bank will say no to the short sale. What they do is say something like ‘That offer is too low, if the buyer wants to re-adjust, closer to market value, we may consider reducing our loan pay off.’ ‘By the way Mr./Ms. Seller, what other assets do you have to add to this, 401-K, IRA, cash, etc. We want that too.’ And my all time favorite, ‘How much commission is on the table here, let’s carve it up too.’
REOs in the ‘80s were different; bank owned properties were being given away, but rates were near 18% for a 1st trust deed. In the ‘90s the banks learned from their mistakes and realized that by dumping a property they were not only hurting the neighborhood around, but jeopardizing other loans that they may have in their portfolio. They also fixed the homes up and gave favorable rates to new purchasers as an inducement to buy these at market value. Also in the ‘90s, we did have the defense industry leave town and at that time we were not as diverse of an economy. Today the mortgage industry left town, but what affect that will have won’t be seen for six months or so.
There are so many statistics being thrown about these days that I question all of them. Are there more REOs than in 2006? Yes. Are we seeing numbers that we saw at the beginning of the ‘90s? No. When you have zero REO and then all of a sudden you have 50 it looks bad, but when you consider that less than 10% of the standing inventory is REO how bad are those numbers. The REO portfolios are growing, but what I’ve seen is that it’s not at an astronomical rate. And this from someone that makes his living selling REOs. The market is slow, but rates are down and prices are generally lower than last year. Real estate has always been a long-term hold. Will it come back? Of course. Will it roar back like the past 10 years? Probably not. Will it go down before it goes up? Maybe. But if you buy now, you’ll thank me in 10 years.
November 10th, 2007 at 5:14 am
Matt:
Your guest should read Jon Lansner’s blog on Walter Hahn today.
Since he will be issuing a similar mea culpa in 2-3 years time.
It is different this time are the 5 most expensive words in the english language.
In his last long answer, your guest seems to have fully internalized his earlier joke, 99.9% of this guys statistics are made up on the spot.
BTW, Leo Nordine a real REO agent also disagrees with your guest.
November 10th, 2007 at 7:09 am
Gee, I wonder what incentive he has to insisit that REO’s should be treated like any other home and use recent comps to determine the value? Oh wait, he’s the guy selling the house!
How about we use recent comps and then an average rate of price depreciation from the past 30 days times the delay between the comps and the offer? Then, stack on a 20% discount because most REO’s have hidden and not so hidden problems due to neglect?
November 10th, 2007 at 11:18 am
Matt,
All realtors have the right to their opinion and because they are salespersons they can even do some “puffing” (a legal term that lets them exaggerate for the benefit of argument). Henry can’t wait 2 years for the market to correct. He’s got to sell something now. He’s have his choice of the few remaining buyers so he’ll be OK. But that doesn’t mean his advice is good.
The fact of the matter is that no bank wants to sell a large portion of their inventory right now because it would create a market price that would force them to “mark” the remainder of their assets down. Unfortunately, someone is going to blink and it will probably be a German or Wall street Bank.
November 10th, 2007 at 11:29 am
If you are a value investor, there is no reason to buy because you will have serious negative cashflow (or as owner-occupant you will pay way more than rent).
If you are a momentum investor, there is no reason to buy because prices are trending down, more teaser rates will reset and more defaults will occur.
Basically unless you can get 50 cent on the dollar or less there is no reason to buy now. But deals at 50 cents on the dollar are still so rare there is no reason to even waste time looking right now. Time is money. Just wait and let the inventory pile up.
November 10th, 2007 at 11:45 am
All this guy is doing is marketing himself to the bankers reading your paper. He knows it, you know it, and your readers should know it too!
Housing is already crap, with the economy still doing reasonably well. A recession is coming. How will housing do when the economy turns? The aerospace recession will be nothing compared to what’s coming when all is said and done.
Let me make a bold prediction: Housing will be worse next year than it was this year, and prices will be lower tomorrow than they are today. Until that changes there is no danger in waiting to buy.
All these salesmen predicting only an X percent chance of recession… We’re coming down from the greatest real estate bubble in history and people are talking as if recessions or even down turns have been outlawed. We’ll all be better off if we all start talking and thinking logically by accepting the true magnitude of the problems we face so that we can deal with them.
Here’s a clue: If a so-called expert complains about a typical home selling “below market value,” that is your cue to run away or turn the channel.
November 10th, 2007 at 10:21 pm
Selling REO’s is vastly different from selling traditional seller owned properties. I would be willing to bet this guy has at least 100+ properties and could care less about highest and best price and has little motivation to worry about “above or below market market value”. REO brokers just act as an intermediary and submit offers to the bank good or bad. I’ll bet this guy like us is buried in BPO’s, evictions, lock outs, rehab, status updates and escrows.
The thought that this guy gave this interview to market himself to bankers is laughable. The REO segment is an old boys network as this guy appears to be dialed in and there are very few big bank guys in OC.
Regarding “market value” banks make price adjustments pretty regularly until a property sells. We have properties that have sold in the 1st week but most likely they will experience multiple price adjustments until they sell. This guys point on “comping” is spot on in that despite how you feel about the current market if you are someone who is currently looking check and see how many price adjustments the property has had and how it compares with other properties in the area.
November 10th, 2007 at 11:36 pm
I agree with a lot of what this guy says.
The only difference is that in the late 80’s, people qualified with full documentation (some with fraud of course) and a minimu of 10% down (Rule was usually 3 times your income with 20% down). Than prices tanked big time.
This time around, all underwriting standards were thrown out, do down requirement, and even though rates were historically low, people still needed the subprime loan.
He is right about low balling a bank though. (I know, I have made an offer about a month ago about 25% below asking, and bank came down 15%.(House still on the parket though)
Banks are competing with homeowners instead of the other way aroound.
Also, banks are keeping foreclosures off the market to not add to the glut.
This is not good.
November 11th, 2007 at 6:48 am
These REO’s just sit on the MLS like ornaments.
Let’s be honest here, the banks have not adjusted to this market yet. When they do (not if), we’ll see more declines in price. Until then, the number of REO’s will continue to rise.
By the way, I love this quote from Mr. Solomon, “There is no such thing as 50 cents on the dollar, not in Orange County anyway.”
We’ll see about that. LoL
November 11th, 2007 at 9:11 am
I’ve known Harry Solomon for many years, he’s been through several downturns in the market. and he knows what he’s talking about.
Is the market down? Absolutely, the number of sales is down approx. 45% compared to last year and approx. 60% compared to 2005. And average (mean) price per square foot is down somewhat. For the Sept 1 to Oct. 31 time period, average price per sf for 2007 was $398.84 per MLS and for 2006 $418.22. Through Sept 30 of this year, quarterly average price per square foot ranged from $408.76 to $428.47, so the dip below $400 per sf has been recent.
So far the downturn in prices hasn’t been too bad. But that’s because there’s a standoff between buyers and sellers. If sellers don’t need to sell, prices probably won’t collapse, and we’ll probably have a slow bleed in prices over the next several years. If more and more sellers need to sell (job loss/loan adjustment/REO sales or whatever), prices will probably begin to decline at a greater rate.
And right now it looks like we may be seeing a few more sellers having to sell. Per the MLS approx. 30% of the current listings are identified as being vacant, but approx. 45% of the closed sales during Sept and October are identified as being vacant. Owners of vacant properties are probably more motivated to sell than owners of occupied properties, which probably explains the recent dip in avg. price per sf.
It’s definitely going to be interesting to see how this plays out. Personally, I think a slow bleed in prices over a number of years will be much worse than a quick (and probably steep) correction in prices and return to sane lending policies.
November 11th, 2007 at 5:45 pm
“I don’t think that REOs really bring down the market.” In the parts that I come from thats called Baloney or Malarkey-Exaggerated or foolish talk, usually intended to deceive.
November 12th, 2007 at 3:40 am
“REOs in the ‘80s were different…In the ‘90s the banks learned from their mistakes”
He can spell REO but can he spell CDO? I agree that it is different this time in that the lending institutions margined their fiscal well being in a gamble called a CDO. Countrywide sits on the verge of collapse and over 182 lending institutions have closed their doors in the past 12 months.
The REOs are a sympton of a failed financial craps game. The real problems will come from the lenders themselves. It is something that no one has ever experienced so there is no way this salesman can know the outcome. The most similar financial event occured in Japan and over 17 years they had depreciating/collapsing asset prices.
These problems will arise when the federal reserve stops the fruadulent use of tax dollars to bailout the failed lending institutions.
November 12th, 2007 at 5:06 am
Those who borrowed the most and bought in Laguna, Newport, CoronaDelMar are in the money. Those that borrowed what they could afford and bought in an inland city are loosing big time. There is a lesson in here. When you buy real estate, borrow all you can and only buy the wealthy cities. You will never loose. This is an old wise tale that I used to by my bayshores home. Paid 700 in 96. Purchased with a prime first and subprime second with a 10% interest rate. I only put 35K down. My friends told me I should buy a condo in Irvine. A smaller home near mine recently closed in the very high 2 million. Once again, BUY ONLY IN WEALTHY CITY BY BORROWING EVERY LAST NICKEL YOU CAN GET YOUR HANDS ON.
November 12th, 2007 at 9:05 am
A few years ago the story was real estate always goes up. Then it became the inland empire was going to drop a bit but OC would go up in price. The next step is OC is holding it’s own price wise, until it became the coast always holds its price, the better areas.
A few months from now the story will be one coastal town holds it’s price,but not the other one. Will the story be heading west to Catalina, or just out to sea?
November 12th, 2007 at 9:18 am
YES!!! I have been saying all this and more for months. This man knows his stuff and he is 100% right. I have been doing this for nearly 30 years and I know my stuff as well. The majority of the comments posted that disagree relate to a difference in the reader’s perception o what the interviewee is saying. Knowing this subject well, I can see that most of the difference of opinion comes from interpretation of words…always a clumsy way to communicate at best as they rely on the knowledge of the receiver to interpret to the best their experience will allow. Argue all you want… he has a very solid handle on the entire situation.
November 13th, 2007 at 5:25 pm
From the article:
“Don’t try to low ball. Look at the comparables and make an offer based on the comps. There is no such thing as 50 cents on the dollar, not in Orange County anyway.”
and…
“Each property is taken on its own. To try to come up with an average is very difficult because you have to look at what the property needed in way of making it livable. Was it cosmetic or structural? I have a friend that tells this joke all the time and I love repeating — ‘38.7 percent of all statistics are made up on the spot’ and I change that number every time I tell the joke. (So does he).”
Again, no mention of the local economy or jobs (aka incomes) to support current price levels. What this person thinks is low balling may actually be prices based on local area incomes and now tighter credit standards. It seems like this guy is reliving his glory years but this down market is not your typical housing downturn. Take a look at the number of sub-prime mortgages in the last bubble…hint, you won’t find many. Also, we had a job loss led recession which led to housing prices going down. This time we are having housing lead the way and as you aptly highlight, Countrywide, WaMu, New Century Financial, and all these other housing boom stores are going bust and leaving folks without jobs. It is a self indulgent cycle.
What this guy is telling you is 38.7 percent right.
November 14th, 2007 at 8:37 am
Every property on the market has an effect, even REO properties.