We've seen a dramatic increase in short sales and foreclosures this year. What's next??
WAIT!! We're not yet in the "FLAPPING IN THE WIND" market. THERE'S HOPE! Most major builders are holding out and I suspect that the recent leak by builders that the government, with their Geppetto psyche, is thinking of subsidizing interest rates for 30 year fixed loans to 4.5%. That would help builders more than home owners who need to sell because builders can build to contract. Home owners have homes that are valued at about 2/3 of what they owe. 1% interest rates won't help a home owner who owes $450,000 on a home that is appraising for $350,000. Unless they bring a LOT OF CASH to the table, that home owner is a hostage to their home mortgage.
If the interest rate subsidy doesn't get approved, more builders will go under. The questions is, what will they leave behind?
The good news is that most of the major builders are not building many "spec" homes. THEY CLAIM TO HAVE SPECS. However, most are not spec homes. They are homes that were constructed for an actual home buyers who defaults when it's time to close.
~~~~~~~~~~~~~~~~ POST FROM JANUARY 2008 ~~~~~~~~~~~~~~~~~
THINK SHORT SALES ARE A TOUGH MARKET? MORE RAIN COULD BE COMING. ACTIVE RAIN FOLKS, GET READY. We could be selling half finished homes "flapping in the wind".
It's Deja vu all over again.
SHORT SALES ARE TOUGH, BUT IT COULD BE TOUGHER. Reading posts about short sales today brings back memories. Some of us can remember the Savings & Loan disaster and the creation of the RTC back in the early 1990s. They weren't short sales but foreclosures were on every corner. We listed and sold properties for banks, mortgage companies, FDIC, Fannie Mae, Freddie Mac and many investors.
WHAT HAPPENS IF BUILDERS CAN GET CONSTRUCTION FINANCING? If the market continues on the present track, following the million or so home owner foreclosures or short sales, we just could have entire communities sitting with half finished homes, "flapping in the wind", as we used to call them, waiting to be finished, one house at a time, or as a community. Once the financial underpenning of the construction market fails, as it's close to doing now, projects that have been permitted but not completed could go to foreclosure with homes in many stages of completions. If the builders go under, buyers earnest money could be converted to a "priority claim" in bankruptcy court. Fortunately, buyers earnest money is not at risk as it was in the early 1990, when most agreements permitted buyer deposits to be used for "general operating funds" by the builder. Many states now require that buyers deposit money be held by escrow companies or in real estate broker accounts where the builders can touch the money unless the buyer defaults and releases it or the sale closes.
HOW WELL FINANCED IS YOUR BUILDER? The only safe builder is a builder with strong financials. But, how is a buyer or agent to know the difference? From my experience in the 1990s, I have not sold niche builders' product in Maryland. These builders have no investment in construction. They option the land. The buyer obtains construction financing. If the builder goes out of business midway throught the building process, the buyer is left with a half finished home. This is rare, but it does happen.
IT'S HARD TO SELL A HALF FINISHED PROPERTY. With short sales today, at least we're dealing with existing homes. Back then, we were often dealing with builder bankruptcies, foreclosures on half finished properties, "flapping in the wind". Many unfinished communities looked like war zones. The short sale processes can be frustrating because the banks and mortgage companies were not prepared and still are not prepared to deal with the work load of thousands of short sale and foreclosure asset disposal or loss mitigation cases. The bank staff lack training and they do not have sufficient numbers of personnel to handle the crunch of applications.
I listed them for several banks. The properties would be listed for sale and we usually dealt directly with buyers who contacted us directly. A buyer with an agent in those days was a rarity. So, we wrote the contracts for the buyers to make an offer to the bank, negotiated and managed the contracts through to settlement. Most agents wouldn't even show the properties. We listed, showed, sold and then managed the construction through to settlement. In many ways, real estate sales were much easier then. I believe our contract of sale was only about 3-4 pages. Today, the basic contract of sale is 12 page plus a stack of disclosures and addenda.
New homes abandoned.
MANY ABANDONED BUILDING SITES AND COMMUNITIES LOOKED LIKE WAR ZONES.
HOMES WERE IN ALL STATES OF CONSTRUCTION. We were selling homes where the builder had abandoned the home sites leaving homes in foundation, homes that were framed out, homes with rain pouring through the roof, homes with unsecured interiors. It was a nightmare. We not only sold the properties, we hired subcontractors to complete the work, got the pemits and got the homes finished. Once we had a contract of sale for one of the half finished properties, they were financed through construction financing. The buyers needed 10-20% down or the banks wouldn't even talk to them. Quite often with a well qualified buyer, the bank owners would pay to have the homes completed.
THE FUTURE LOOKS BLEAK FOR THE BANKS AND MORTGAGE COMPANIES. As the housing market continues to deteriorate, builders who paid premium prices for the land or home sites, may not be able to complete the homes. Builders who purchased lots in the 2004-2005 period just before the market stalled, paid upwards of 1/3 of the total end price for the lots. With prices reduced by up to 25% in many areas, the builders cannot complete the sites, construct homes, sell them and still profit. In areas where prices have fallen severely such as Florida, some major builders have already put the properties in Chapter 11. Small builders are simply abandoning the properties and any bonds they have posted. This will lead to higher prices eventually because the insurance companies that issue the bonds will want more to issue the bonds. Without the bonds, developers can get development permits. Without the development permits, builders have no lots on which to build their product. If that situation occurs, it will reduce the number of new home permits and might help reduce the inventory of resale homes. However, putting the construction industry out of business and out of jobs isn't a good solution to this quagmore, irrespective of what Alan Greenspan says.
This gets very complicated but, for those of us who have "been there, seen that", we can only shake our heads and say, it's Deja vu all over again. Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988, E-Mail.
Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988.
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