Wednesday, February 22, 2012

The Price is Right! Or, Not.

The Price is Right! Or, Not.

Back in the old days it was easy to purchase real estate.

  1. An owner would list a property for sale.
  2. Buyers would evaluate the property and one or some might make an offer
  3. An inspector would come and identify any defects
  4. The buyer would be qualified for a loan
  5. An appraiser would evaluate / validate the transaction amounts
  6. The sales transaction would jump through basic escrow hoops
  7. The sale would be complete.
OK, so there are more steps, and certainly more hoops, but a real estate transaction used to have a pretty simple process to follow from start to finish and the actors all had clear roles to play.

Simple Transactions: Not Any More

Image a scenario where the owner falls behind on their payments and the bank repossesses the home, which then sits empty for several months. In addition to the "deferred maintenance" left by the uninterested owner, leaving a home empty for weeks and months is a truly bad idea.

Next: the bank decides that it is time to sell the property. They assign the listing to an agent, price it for multiple offers, then put it on the market -- un-repaired, with pages of disclaimers.

A qualified buyer comes along, sees the potential, makes an offer, then swallows hard as the inspection shows a laundry list of simple maintenance items that have grown into big repair bills. Example: if you have water leaking from under your toilet, you repair the problem (usually a $15 wax ring). Otherwise, over time, your floor collects moisture, then rots, then fails, then has to be replaced (always a lot more than $15).

The appraiser then comes to the property, sees the same outstanding items that the inspector sees, and concludes that some of the items must be fixed prior to close of escrow.

In the "old days" this worked just fine. The seller would fix a few things, a re-inspection is ordered, then signed off... everyone is happy, the deal closes. 

But, when a bank is the seller, and has already disclaimed everything about the house, the condition of the house, any express or implied warranties, and will not even confirm something as simple as the year built... the "fix before close of escrow" is a big problem. 

As the buyer, why would you invest money to fix a home that you do not own?

The Great Carsoni Predicts

Even though the NAR is reporting better sales in January 2012, and a slight reduction in inventory, there is plenty of bank owned inventory that is sitting, ageing, and falling into disrepair. These properties will be hard to sell, because both the selling bank and the buyers' bank are in unfamiliar roles. In a normal market the (human) owner shouldered loss or pocketed gain. In the new market, two banks are cautiously circling each other trying to decide if they trust each other and if the buyer cash-flow can allow a stale home to be revitalized - because they certainly don't want to make a loan on something as risky as (distressed) real estate. Passing money back and forth to the FED is so simple, easy and riskless.  

Until the banks come to terms with how they are going to manage the junk properties in their portfolio, the Real Estate market will continue to drift lower. An economic recovery will not occur fast enough to keep their property portfolio from crumbling. Current owners, especially those that are underwater, and potential buyers are frozen like deer in the headlights. 

Que Sais-Je?

Bottom Line

Read past the headlines and deep into the stories linked above and you will find that the experts all see the same issues - the Emperor has no Clothes. No, I'm not a real estate expert. I have bought and sold five properties in the last 12 years and am trying to sell one more and buy another this year. 

"A vain Emperor who cares for nothing but his appearance and attire hires two tailors who are really swindlers that promise him the finest, best suit of clothes from a fabric invisible to anyone who is unfit for his position or "just hopelessly stupid". The Emperor cannot see the cloth himself, but pretends that he can for fear of appearing unfit for his position; his ministers do the same. When the swindlers report that the suit is finished, they mime dressing him and the Emperor then marches in procession before his subjects, who play along with the pretense. Suddenly, a child in the crowd, too young to understand the desirability of keeping up the pretense, blurts out that the Emperor is wearing nothing at all and the cry is taken up by others. The Emperor cringes, suspecting the assertion is true, but holds himself up proudly and continues the procession, deciding never to be so vain again and to take his position more seriously."