It’s taken me a few days to absorb what happened Sunday and read the articles by the ‘experts’ as to there take on the bailout of Freddie Mac and Fannie Mae. The consensus seems to be that the bailout will help stimulate the real estate market, albeit minimally. They seem to think that lower interest rates will help buyers on the fence get in the game. Although this may help, I feel their train of thought is skewed because high interest rates are not what are keeping buyers away. Affordability and tighten lending criteria are the true obstacles (As was always before the banks’ self imposed boon). Fear about decreasing property values is another important factor. The bailout does nothing to address these issues.

The only ones thrown a life preserver are the investors (like they really need it). I understand why it’s important to keep the security aspect of package mortgages relatively stable, but what’s wrong with throwing a few hundred billion to aid those on the brink of foreclosure? After all, the banks are the ones who encouraged this whole mess. They knew exactly what was going to happen-they went through it just a few years ago-SNL scandal.

The real estate market is like any other market: There are only so many customers we are all vying for and there are only so many products to sell. When one of those is out of whack you have a problem-in this case they both are out of whack, no buyers & too many homes.

Neither of these will be solved by this bailout. Worse yet we are in store for a tsunami of foreclosures just around the corner and if nothing is done we may see property values down to what they were 20 years ago or lower.

Noel Padilla

"Doing Business Right"

When buying or selling real estate, it is important to understand the appraisal process, valuation and how they relate to the current market. Some times the value of at property will equal its appraisal but this more a rarity them a commonality.

Appraising a property is a process in which a certified appraiser determines the value of a property based upon strict criteria and variable factors such as subdivision amenities. Value is placed on things like bedrooms, bathrooms, square footage and any extras a property may have, a pool or great room for example.

There are many different ways a property can be appraised, but the most common is the comparable method. Properties that have sold, that are similar to the 'subject' property, are used to 'compare' value based on those factors I mentioned earlier. This appraised value is then used by lenders to determine maximum loan amounts.

Value of a property is determined by what the general public is willing to pay for the property. It can be more than the appraised value or less. The problem when selling a property for more than the appraised value is that the buyer will have to come out of pocket with the difference. For example, if a property is sold for $125,000 and it's appraisal came in at $100,000, the $25,000 difference would have to be paid at closing in addition to any closing costs and down payment. A buyer with limited funds would have a tough time buying this property. However in an all cash deal, this would be a mute point. Another thing to consider is resale. If you buy a property above its appraised value, you might have a difficult time selling it later on if the purchase price hasn't equaled its value over time.

Buying or selling a property below appraised value is probably the most common occurrence. This is because of the perception of a 'good deal' that makes a property more marketable. No one likes to pass up a good deal. It's also a more attractive risk to the lender, thus making it easier to finance. Imagine the feeling the buyer gets when the lender calls to tell them that the property they just purchased appraised for more than what they paid.

Nothing affects appraisals or value more than the market conditions. During a strong market, buyers often find it difficult to purchase a property below appraisal. Inversely sellers have to become more flexible and creative to market their property during a slower market. Before buying or selling a home you should know what the market conditions are so you know what to expect. Interestingly enough during slow markets more people seek out Realtors to help in the sale of their homes. During stronger markets they elect to try selling the homes themselves first, before seeking assistance.

A point to consider, a study from the National Association of Realtors. stated that 'for sale by owners' sold their homes for less money than when they listed it with a Realtor. Why? Because even though they may have valued their home correctly, the buyers know the sellers are not paying a Realtor commission so they figure they can discount the price by that amount and get a better deal. The seller winds up doing one of four things: sells for less money, doesn't budge on price and the house sits on the market, pulls the house from the market or yep you guessed it, they list it with a Realtor.

I have always told family and friends you should always try selling your home by yourself first, before listing it with a Realtor. I would give it 2 to 4 weeks, unless you really need it sold then contact a Realtor right away. You might be asking, why is a Realtor telling me to try to sell it myself? The answer is twofold. First, you might find someone who is willing, able and qualified to buy your home. Secondly the study from the National Association of Realtors also said that close to 80% of all 'for sale by owners' eventually listed their home with a Realtor. Knowing this, I am taking a risk that you would appreciate my honesty and I would be at the top of your list when you consider hiring a Realtor from the thousands that are out there.

Noel Padilla

Something I have been seeing more and more lately is sellers requiring the buyer to prequalify with their preferred lender as a condition to the offer, especially with REO (Bank Owned Properties) properties. The buyer is not required to use the lender but the seller wants the pre-qual letter to come from his lender.

This has caused some of my buyers to back out of a few deals because they thought the notion was ridiculous and a bit shady. No matter what you say to your buyers they will have heartache with this practice unless you can effectively convince them that this is not unusual and it is quite common when making an offer on an REO property.

The seller is trying to ensure that once an offer is made that it won't fall apart because of financing issues. We all know agents out there who will allow their clients to back out of deals with fictitious "no longer qualifies" letters because they found another property or the warm and fuzzies are over and they don't want to move forward anymore. These agents actually think they are doing a great service to their clients by allowing them to beat the system this way. This practice ruins the integrity of every transaction and is the reason why so many deals fall apart. Hence you wind up with sellers who want buyers to prequalify with their preferred lender.

There is really no harm in prequalifing your buyers with the sellers' preferred lender as long as a new credit report is not pulled. What I usually do is have the buyer take his prequal letter to the preferred lender along with any other documents they may request. Make it clear to your buyers not to allow the preferred lender to pull new credit. I also give the preferred lender a call to ensure this.

I hope I cleared some things up. I would hope that some lenders chime in to give their two cents.

Noel Padilla

I like to use my preferred title company so I can maintain some sort of control over the transaction. After all guess who invest the most time in a transaction? That's right the agent. The agent may have driven these folks around for months before they found something they like or spend tons of money on marketing. Only to have the transaction in the hands of a stranger who really has no incentive than a pay day is nerve wracking. It's a bit different when you have developed a personal relationship with someone and they don't want to let you down. That's where you really work as a team and most of those transactions go smoothly.

Noel Padilla

I chose to carve out my niche in distressed properties and the fruits of my labor over the past two years is finally paying off. People thought (and still do) I was crazy to "limit" myself to such a market. Now those people are calling up and begging me for information on how to handle a short sale listing they took on that they have no idea how to close.

It never ceases to amaze me that everyday I talk to agents who are broke and sitting on the sidelines waiting for good times to roll around again. I ask them how they are handling their short sales and I get the standard reply: "I don't take those listings" or "They cut your commission, I don't bother with them." Oh yeah, then give them to me because for the foreseeable future it's going to be the only game in town.

I don't want to brag but I have it down to a science. So much so I hired a team to help me handle the short sales. I have turned the negotiation process into a minor inconvenience. Typically after an offer is received and forwarded to the bank for approval, there is a 30-45 day waiting period. During this time I take advantage and get all the ducks in a row to be ready to close within two weeks of approval. So the sales cycle is only extended by a few weeks if you do this right.

The only thing I can say is I hope everyone else keeps turning away distressed listings, heck if you send me any I might even pay a referral fee. Did I mention that the agents sending me their business aren't even asking for referral fees. They feel sorry for me.

Noel Padilla

I have been coming across more and more homeowners who are in a quandary. They are not behind in their mortgage nor in any stage of foreclosure, yet they want to sell their home which has dropped in value and would end up being a short sale. Although more and more banks are accepting short sales that are not in default, it is hit or miss. An impending foreclosure really motivates the bank. The thought of yet another non-performing asset does not bode well with the balance sheet so the bank really doesn't want to become a homeowner.

So as a homeowner in this situation what are your options? Well for one keep paying as agreed and wait for the market to turn around. If that isn't an option because of an upcoming ARM reset, forced relocation, or other outside circumstance out of your control, then you have some tough choices to make. You have to look at your monthly expenses and arrange them according to priority and see if paying your mortgage makes logical and economical sense. For example if your refrigerator is empty and you have 1/4 tank of gas and your choice is pay your mortgage or eat and be able to get to work then the answer should be obvious.

I would never advise anyone to miss mortgage payments for the sole purpose of gaining leverage for negotiating a short sale.  This is the same type of thinking that got us in this mess to begin with. There is nothing wrong with not paying your bills if you can't, it's using it as a strategy for some other reason is what I have a problem with. 

Owners of investment property may have a tougher time but it really depends on the individuals financials. If he has a portfolio of investment properties and wants to short sell one because it is under performing, good luck. On the other hand, the small time investor with one or two properties may have a fighting chance if you present a good case.

Of course there are people in our business advising this type of behavior my only response to those who are thinking of it to speak with a competent attorney and/or accountant.

Noel Padilla

Example: A 3 bed 2 bath home generally rents for between $1500 to $1800 per month in my area. That means a loan amount in the neighborhood of between $240,000 & $290,000. That's just for the loan now you have to factor in taxes, insurance and HOA fees. These three combined can cost close to $1,000 per month in my area, effectively lowering the buying power to between $80,000 and $120,000 in order to rent the property at market value and break even on a monthly basis. If you are putting 20% down then that would mean a sales price of between $100,000 & $150,000 would be required to make this deal work.

In South Florida I bought my 3/2 for $124,000 in 2001. I have said it in the past and i will go out on a limb to say it again, we will not see a rcovery until prices go back to 2001-2002 levels. Right now a 3/2 is still in the $190,000 to $220,000 range. So I expect price declines through the 3rd quarter of next year then a possible recovery will start to take place.

Another factor compounding this situation is that foreclosures have driven up HOA fees thus squeezing the profit margins even greater. When homeowners stop paying their mortgage, they also stop paying HOA fees and the rest of the community gets to foot the bill. The problem is not as prevalant in communities built and occupied before 2003, go figure.

Noel Padilla

The National Association of Realtors concluded a survey in which people looking for real estate services were asked if they had a choice, would they prefer to have all their services under one roof. Amazingly the response was in favor of having all their services handled at the same location by some of the same companies.

Being one to react to the demands of my clients, here is a list of my preferred business partners; my one stop shop so to speak. Be sure to mention me when you contact them.

Mortgage Consultation Services-State Lending Corporation
Benny Garcia
9835 Sunset Drive, Suite 108
Miami, FL. 33172

Usually when clients call me regarding my services, they have missed a few payments and they are in various states of the foreclosure process. I will try to explain what can be done to avoid foreclosure.

They are only a few options and here is a quick list:

1. Reinstatement-This where the homeowner reinstates the mortgage by paying up all missed payments and
    fees and becomes current with the mortgage. After all the fees have been payed up then the homeowner can 
    continue to pay the mortgage payments as they had.
2. Forbearance-More commonly known as a re-payment plan. Allows the homeowner to negotiate a re-payment
    of missed payments and fees to reinstate the mortgage.
3. Sell The Property-If there is equity in the property then the home can be sold and the foreclosure can be 
   "cured" thus avoiding the foreclosure.
4. Rent The Property-The property can be rented however the mortgage must be made current. A rental
    agreement will not stop the foreclosure process.
5. Refinance-If the credit rating hasn't been too badly damaged, a refinance may help especially if the monthly
    payments can be reduced.
6. Deed-in-Lieu of Foreclosure-Commonly known as the friendly foreclosure. This involves for the bank to agree
    to foreclose and take the property back without the lengthy process. This is not recommended for properties
    with equity because the owner gives up the right to the property and any equity. This option is technically still a
    foreclosure and will show up as such on your credit report. Sometimes the bank will forgo any other recourse
    but that will also have to be negotiated.
7. Bankruptcy-Can not avoid the foreclosure but may allow the owner to reorganize debt. It rarely stops a
    foreclosure it usually only stalls it. Another drawback is that it makes it difficult to sell the property and almost
    impossible to negotiate with any third parties.
8. Short Sale-When the homeowner owes more than the property is worth, a sale can be negotiated and
    an approval obtained from the bank to accept an amount less than is owed.

Most of these options involve negotiation with the bank and a decent credit rating. If the credit has been affected already, then the only real option that can help is the short sale. In my experience when homeowners use the other options available, they wind up in the same predicament a fews months down the road because the underlying cause of their situation was never resolved.

Also important to note-they are only two things that follow you for the rest of your life, a felony conviction and a foreclosure. True after 10 years it will drop off your credit report, however almost every lending institution has the magic question-Have you ever had a foreclosure? If you've had one you must answer yes, answering no could be considered fraud and that would open you up to a host of other legal problems.

Noel Padilla

The amount of money owed to a bank after a short sale can attempt to be recovered through a suit known as a deficiency judgment. Equally important to note, if the bank sells the property for less than what was owed or the foreclosure auction nets them less than what was owed they can also file a deficiency judgment against the former owner.

In terms of a deficiency judgment after foreclosure or short sale, the bank may be able to go after other assets, but any retirement funds the former homeowners have are generally protected. Especially if they invest their retirement savings in an IRA or through work in a 401(k), 403(b), then the bank can not try to seize any of these savings. However, if their retirement funds are "invested" in a second home or a other assets, then the bank may be able to to go after those assets. That is because specifically designated retirement accounts are protected from creditors, while assets simply invested in for the purpose of saving for retirement without the special designation are not protected.

In most cases, the lender rarely pursues the deficiency judgment. They may file suit so it appears on the former homeowners credit report, but little else after that. Mortgage companies know that people in foreclosure do not have the money to pay the monthly mortgage payment, let alone pay the entire foreclosure judgment or a deficiency judgment after foreclosure. Thus, it is just not worth the lenders' time to keep suing homeowners with no expectation of ever collecting anything from the lawsuits.

A CDPE can negotiate with the bank to forgive the balance owed as the result of a short sale. Yet another reason to hire a competent Realtor with the CDPE designation.

Noel Padilla