Daily Market Observations April 16-22, 2012
Daily Observations Published by Cromford Report April 16-22
Daily Observations Published by Cromford Report April 16-22
April 22 – Average $/SF for pending listings is at $93.51 today, the highest since February 2009. This is 21% higher than the low point reached on August 20 2011. We infer that an annual appreciation rate of at least 25% looks a very safe bet for August 20, 2012.
April 21 – After a frenetic March in which average $/SF for monthly sales rose nearly 7%, April is settling down a little. Average $/SF is still rising but at a more sedate pace of about 3 to 4% per month because we no longer have normal sales gaining market share as swiftly. The increased pricing is bringing out a few more sellers, so the number of active listings is showing a little more stability instead of falling like a rock.
April 20 – Another chart which tells a clear story is the Monthly Sales Percentage by Transaction Type. Notice that normal transactions have gained market share significantly over the last 6 months from 35% to 55%, with an especially large movement during March. This is big reason for the advance in average price per sq ft between February and March. REOs have lost half their market share in 6 months while short sales peaked in January and have faded from around 30% to 25%.
April 19 – You can see evidence of the growing preference for short sales over trustee sales in the pending foreclosure chart. Properties pending foreclosure have been at roughly the same level for several months. One of the reasons is that we are seeing a growing disparity between the number of foreclosure starts and the number of foreclosure completions, with a much bigger drop in completions than in starts. The leads me to suspect lenders are holding off on a higher proportion of trustee sales to allow short sales more time to successfully complete. Completed trustee deeds are falling to levels not seen since 2007 and less than half are returning to the lender, so, as you would expect, REOs are disappearing from the supply chain faster than any other type of home.
April 18 – Maybe I spoke too soon two days ago, as active listings have started declining significantly once again. The number of normal listings (excluding AWC) within Greater Phoenix has fallen below 10,000 which has not happened since July 2005. Single family homes in normal listings priced at $150,000 or less are down to 1,161 from 2,221 on January 22.
April 17 – The monthly volume of normal sales is now over 4,500. The last time it was this high was July 2007.
April 16 – Active listings have been only drifting slightly lower over the last two weeks, so it appears that increased pricing has succeeded in attracting a few more sellers onto the market. This is good news for buyers – their choice of homes is still meager but at least it is not getting any smaller.
Monthly Sales Percentage by Transaction Type.
Pending Foreclosure Chart
Immaculate Lakefront Property Chandler Arizona
| 4842 S Jojoba Way, Chandler, AZ 85248 |
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| Beds/Baths: 4 / 3Approx SqFt: 3,889 / Builder
Year Built: 2002 Pool: Private, 35,000 gallon Salt Water Negative Edge Pool overlooking Lake Views w/ separate SPA Encoded Features: 43FRXPSO3G Approx Lot SqFt: 12,110 / County Assessor Apx Lot Size Range: 10,001 – 12,500 Exterior Stories: 1# of Interior Levels: 1Dwelling Type: Single Family – Detached |
Subdivision: Ocotillo Municipality: Chandler
Marketing Name: The Retreat Planned Cmty Name: Ocotillo Lakes Model: Builder Name: Custom Hun Block: 4000 E Map Code/Grid: V38
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| Ele Sch Dist: 080 – Chandler Unified District Elementary School: Basha Jr. High School: Bogle | High School Dist #: 080 – Chandler Unified District High School: Hamilton |
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Immaculate Lakefront Property in Chandler Arizona! 4842 S Jojoba Way, Chandler Arizona
4 bedroom + Huge Bonus Room To Be Used As An Office, Game Room, Media Room Or Guest Suite!
The Home’s Wood Will Catch Your Eye As It Was Custom Built For An Owner of a Window & Door Manufacturer.
Custom Cabinetry & Flagstone Floors Throughout.
35,000+ Gallon Negative Edge Pool And Separate Beautifully Landscaped Jacuzzi That Overlooks The Lake.
This Home Is Built On The Prime Lot In The Subdivision With The Widest Lake View.
Fire Pit and 3 Fire Pots Adorn the Back Landscape.
Misters Cool Off The Large Entertaining Patio.
Incredible Views Of The Water, Wildlife & Sun Sets from Large Picturesque Windows & Doors!
Large Kitchen w/Stainless Steal Appliances & Gorgeous Granite Counter Tops.
Come see at night too! Gorgeous! 4842 S Jojoba Way, Chandler, AZ, Courtesy of the Shanna Day Team, Keller Williams Realty East Valley – 480-415-7616
The truth about the 3.8% real estate tax
The following Q&A’s are from the National Association of Realtors website. I found it very enlightening.
Q-1: Is there a 3.8% real estate “sales tax” or a transfer tax created in the health care bill?
A: No. There is neither a real estate “sales tax” nor a real estate transfer tax under any federal law. The Internet has generated several viral items describing such a tax. Those Internet postings are totally false. The 2010 health care legislation did create a new 3.8% tax, but it applies only to a limited group of taxpayers.
Q-2: So who will be subject to the new tax? When is it effective?
A: The new 3.8% tax will apply to the “unearned” income of “High Income” taxpayers. The new Medicare tax on unearned income will take effect January 1, 2013. Proceeds from the tax will be allocated to shoring up the Medicare fund.
Q-3: Who is a “High Income” Taxpayer?
A: Those whose tax filing status is “single” will be subject to the new unearned income taxes if they have Adjusted Gross Income (AGI) of more than $200,000. Married couples filing a joint return with AGI of more than $250,000 will also be subject to the new tax. (The AGI threshold for married filing separate returns is $125,000.)
Q-4: Are the $200,000 and $250,000 thresholds indexed for inflation?
A: No.Thus, over time, more individuals may become subject to this tax.
Q-5: What is “unearned” net investment income?
A. Unearned income is the income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses if the investor is not an active participant in the business. The portion of unearned income that is subject both to income tax and the new Medicare tax is the amount of income derived from these sources, reduced by any expenses associated with earning that income. (Hence the term “net” investment income.)
Q-6: So the new tax will apply to rents from investment properties that I own?
A: Maybe. Remember that net investment income includes only net rental income. Thus, gross rents would not be subject to the tax. Rather, gross rents would be reduced (as they are under the income tax) by all allowable expenses, including depreciation, cost of repairs, property taxes and interest expense associated with debt service. AGI includes net income from rent, so if your AGI is above the $200,000/$250,000 thresholds, then the rental income might be subject to the tax.
For many investment real estate owners, the net rents will be the same as or similar to the amounts reported on their Schedule E, filed with their Form 1040 Income Tax Return. (For calculations, see Q-7, below. See also Q-8 through Q-12 related to capital gain from sale of principal residence, losses on sale and to vacation homes, below.)
Q-7: Does the tax apply to the yearly appreciation of an asset?
No. Capital gains are subject to this new tax only in the year when the asset is sold. The amount of the gain will be measured in the same way that it is for income tax purposes. This rule applies to real estate and all other appreciating capital assets. Net capital gains are taxable only in the year of sale.
Q-8: How is the new 3.8% Medicare tax calculated?
A: The new 3.8% Medicare tax is assessed only when Adjusted Gross Income (AGI) is more than $200,000/$250,000. (See Q-2 above.) AGI includes net income from interest, dividends, rents and capital gains, as well as earned compensation and several additional forms of income presented on a Form 1040 Income Tax Return.
The tax is NOT imposed on the total AGI, nor is it imposed solely on the investment income. Rather, the taxable amount will depend on the operation of a formula. The taxpayer will determine the LESSER of (1) net investment income OR (2) the excess of AGI over the $200,000/$250,000 AGI thresholds. Thus, if net investment income is the smaller amount, then the 3.8% tax is applied onlyto the net investment income amount. If the excess over the thresholds is the smaller amount, then the 3.8% tax would apply only to the excess amount.
Q-9: Give me an example.
If AGI for a single individual is $275,000, then the excess over $200,000 would be $75,000 ($275,000 minus $200,000). Assume that this individual’s net investment income is $60,000. The new 3.8% tax applies to the smaller amount. In this example, $60,000 of net investment income is less than the $75,000 excess over the threshold. Thus, in this example, the 3.8% tax is applied to the $60,000.
If this single individual had AGI if $275,000 and net investment income of $90,000, then the new tax would be imposed on the smaller amount: the $75,000 of excess over $200,000.
Rules of thumb for predicting the application of this tax year to year are not readily determinable, largely because the proportion of net investment income compared to AGI will vary from year to year and from individual to individual.
Q-10: Will the $250,000/$500,000 exclusion on the sale of a principal residence continue to apply?
A: Yes. Any gain from the sale of a principal residence that is less than $250,000 (individual) or $500,000 (joint return) will continue to be excluded from the income tax. The new 3.8% tax will NOT apply to this excluded amount of the gain.
Q-11: Will the 3.8% tax apply to any part of the gain on the sale of a principal residence?
A: Maybe. The new Medicare tax would apply only to any gain realized that is more than the $250K/$500K existing primary home exclusion (known as the “taxable gain”), and only if the seller has AGI above the $200K/$250K AGI thresholds.
So, for example, if the taxable gain was $30,000 and a married couple had AGI (which would include the taxable gain) of $180,000, the 3.8% tax would not apply because AGI is less than $250,000. If that same couple had AGI of $290,000, then the application of the 3.8% tax would be subject to the same formula described above. The $30,000 taxable gain on the sale would be less than the $40,000 excess above $250,000 AGI, so the $30,000 gain would be subject to the new 3.8% tax.
Q-12: Is rent from a vacation home subject to the 3.8% tax? And what about the gain on sale of a vacation or rental property?
A: The application of the tax will depend on whether the vacation home has been rented out, the period for which it has been rented and whether the property is solely for the enjoyment of the owner. If the owner has rented the home out to others, then the 14-day rent exclusion will continue to apply. Thus, if the owner rents the property to others (including family members) for 14 or fewer days, there would be no net investment tax. (Note that no deductions for expenses would be available, as under current law.)
If the home has been rented to others (including family members) for more than 14 days, then the rents (minus related expenses) would be considered as part of net investment income and could, depending on AGI and the calculations described above, be subject to the new tax.
If the vacation home has been used solely for personal enjoyment (i.e., there is no rental income and no associated expenses), then a gain on sale would be treated as net investment income and could be subject to the tax, depending on AGI. Similarly, if the property had generated rents, any net gain on sale could also be included in net investment income. The amount of the tax (if any) would depend on the calculation formula, above in Q-8 and Q-9.
Q-13: My rental property generates a net loss each year. How will those losses be factored into the new tax? And what if I have net capital losses when I sell?
A: Net losses from rents and net capital losses reduce AGI. Thus, the losses themselves would not be subject to the tax. If, after losses, AGI still exceeds the High Income thresholds, the 3.8% tax would still apply to any net rental, interest or dividends income.
Q-14: I earn all of my income from real estate investments that I own and operate myself. Will my rents and gains be subject to the new tax?
A: No.If the ownership and operation of real estate you own is your sole occupation, then those activities are what’s called your “trade or business.” Income derived from a trade or business is not subject to the new 3.8% tax. If the owner of rental properties has a “day job,” however, real estate investments are not considered as a trade or business, but are rather considered as investments, even if they are a major source of income.
Many Realtors engage in business activities are that are the “typical” selling, leasing and brokerage endeavors usually associated with the term “Realtor.” If they also own rental real estate assets as part of their own personal investment portfolio, the net rents from that portfolio could become subject to the new 3.8% tax on net investment income, depending on AGI.
Q-15: Will “High Income Filers” lose any portion of the Mortgage Interest Deduction?
A: No. The mortgage interest deduction is unchanged. No cap was imposed on any itemized deductions.
Q-16: Why is this new tax called a “Medicare tax?”
A: The revenues generated from this tax will be allocated to the Medicare Trust Fund that is part of the Social Security System. That fund is currently on shaky financial footing. These additional revenues are intended to shore up the Medicare Trust Fund.
Q-17: How will this new tax affect marginal (the highest) tax rates when it is combined with existing law and with the possible expiration of the Bush tax cuts enacted in 2001?
A: Marginal tax rates are the tax rates assessed on the “last” dollars included in taxable income. If the Bush tax cuts are allowed to expire, then the marginal rates for upper income individuals will increase, particularly for capital gains income. The chart below reflects the impact of those changes, presented based on implementation of current law effective dates.
Real Estate Recovery
-from AzCentral.com
A Contractor Spills His Secrets
A builder of Luxury Homes shares how he built his weekend retreat on a Budget.
By Nancy Keate
As a top contractor in Silicon Valley, Dick Breaux is in a rare position: Amid a national housing slump, he continues to build big and elaborate houses. Projects have included a renovation of a 65,000-square-foot mansion and a 22,300-square-foot redo that required a crew of artisans from England, and he’s currently working on a 14,000-square-foot compound with an amphitheater on 12 acres in Hillsborough.
Dick Breaux, a top Silicon Valley builder of luxury homes, uses his experience to create his weekend retreat for less. Nancy Keates has details on Lunch Break.
Yet for most of his 35 years in the area, Mr. Breaux and his wife remained in their 3,000-square-foot ranch house in the less-pricey town of San Mateo. It was like the cobbler who never has time to make his own kids’ shoes, said his wife, Kate.
The couple still live in San Mateo, but they have built a new house for themselves: a 6,000-square-foot, four-bedroom weekend home, in a golf community just outside Sacramento. Finished in late 2010, the house includes many of the techniques Mr. Breaux gleaned from the Bay Area’s better-known architects and designers. It also cost him $340 a square foot to build, compared with the $600-and-up cost of the houses he usually builds for others. Though some of the savings came from lower labor costs, more came from choices Mr. Breaux made to maximize a luxurious look for less, from selecting standard window sizes and less-pricey patio materials to deciding to use off-the-shelf closets instead of a custom made alternative.
Standing almost isolated on a wooded road, in a development mostly populated by French- and Mediterranean-style houses, the Breauxs’s three-story Tudor-influenced house resembles something out of a Grimm’s fairy tale, with a slate roof, gingerbread brown wood columns, a pale yellow stucco exterior, light-green window frames and two stone fountains out front. Inside, the first floor is mostly open—”75% of the houses I do now are all open,” Mr. Breaux said—with windows and glass doors that overlook the golf course.
Photos: A Contractor Spills His Secrets
![[SB10001424052970203806504577183382656529066]](http://s.wsj.net/public/resources/images/WK-BA678_HOME_F_D_20120126193626.jpg)
To make the exterior look classic and more imposing, Mr. Breaux picked slate for the roof, with copper flashing instead of galvanized metal. Inside, the flooring on the entire first level is radiantly heated limestone. To also convey a sense of luxury, he built very large bathrooms, rooms with slanted corners so they don’t resemble boxes and stairways lighted from underneath that give a more flattering glow to the house.
He chose solid cherry cabinets in the bedrooms, kitchens and bathrooms; he said cabinets aren’t the place to cut corners because they’re highly visible. The quality of a house also shows in its doors; the home’s doors are solid mahogany and 1¾ inches thick, instead of the standard 1 3/8 inches. He made the ceilings higher than standard—12½ feet in some places. Walls are rounded at the door openings to achieve a more finished look. Other little touches he learned from his jobs include a towel warmer in the bathroom, niches in the walls for sculptures and toilets about 2 inches higher than normal (more comfortable).
To keep costs down, Mr. Breaux used an architect only to draw rough plans and he didn’t hire an interior designer. He avoided certain materials like wrought iron and bronze work and steel windows. He kept his windows to less than $100,000 by getting the largest standard size possible. He used concrete instead of stone for the patio, and made the patio walls out of faux stone topped with real bluestone.
The fireplace mantles in the master bedroom and great room are made from “cultured” stone that’s hand-colored to resemble the real thing, saving over $150,000. The walls are made of Sheetrock that’s designed to look like plaster, saving some $75,000. He used off-the-shelf moldings, saving tens of thousands of dollars more than if he’d had moldings custom made. He also built his patio’s fire pit instead of buying it—something he said pretty much anyone can do.
The master walk-in closet is another place to cut corners where people don’t really notice, he said. Instead of custom-made closets, he used off-the-shelf, saving about $30,000. “You rarely see a decorator at Home Depot,” he said, estimating that at least 40% of the cost of a house is spent on interior surfaces.
Mr. Breaux grew up in a $15,000 ranch house in Indianapolis. He started his career as a high school English teacher and football coach, building spec houses on the side in the summer. An architect friend recommended him to a client in Silicon Valley, and he founded Peninsula Custom Homes in 1978.
Back then, there were few houses larger than 4,000 square feet. It was mainly in the dot-com boom of the 1990s when homes got massive. Mr. Breaux’s break came when he built a house in Hillsborough for Kirk Raab, then CEO of Genentech. He has become known for his work with Bay Area architects like Andrew Skurman and Taylor Lombardo, who tend to build lavish, traditional-style homes.
In 2004 the Breauxs were driving back and forth to Lake Tahoe, where they had an old vacation house and where Mr. Breaux’s company was building two houses for the daughters of a previous client. They wound up selling their Tahoe house—it needed major repairs, and Mr. Breaux wanted to move—and bought the 1.4-acre plot in 2005 for $340,000. A six-bedroom, five-bathroom house in the same golf community is for sale for $1.9 million.
Mrs. Breaux, who doesn’t golf, uses the house for quiet weekends of reading. And at least it has diverted her husband’s attention from their house in San Mateo, where he had already renovated the kitchen four times.
Write to Nancy Keates at nancy.keates@wsj.com
So, now you are in contract, what’s next?
So, now you are in contract, what’s next?
Dear Buyer -
Be glad you have a good agent (or at least you should), because there are many things that take place, documents to sign and many deadlines that occur between the time a contract is signed and when keys are turned over to you.
CONTRACT
Arizona Residential Purchase Contract
As soon as we have a contract where both buyer and seller have agreed to terms and have signed, dated and initialed all the appropriate lines on the contract; the agents then submits the offer to their respective brokers for review, to the lender for funding and to the title company to start researching the title history to make sure that the seller can deliver the property with clear title (to make sure that no liens or encumbrances are on the property).
EARNEST MONEY
Earnest Money Deposit
It is required that the buyer take their earnest money to the title company within 1-2 business days after the contract is signed.
APPRAISAL & LOAN UNDERWRITING
Arizona Real Estate Appraisals
The lender will order the appraisal and will give you, the buyer, a list of items that the underwriter will need to approve your loan. These items include: bank statements, tax returns, pay-stubs & perhaps a gift letter if you are receiving money from a family member for the down payment. The lender will also need to pull your credit history to determine what type of loan package you may qualify for. Cash buyers skip this step.
INSPECTION PROCESS
Arizona Home Inspection or Home Inspection
Your realtor will guide you through the inspection process -which begins the day following contract signing. He/she may recommend and perhaps schedule for you necessary inspectors – a general inspector for sure, and then perhaps a termite inspection, and if necessary other qualified and licensed professionals may need to examine the property and give estimates and opinions on the condition of the property. Some additional inspectors that may be needed may include: electricians, plumbers, roofers, pool & or septic inspectors, A/C & Heating technicians and perhaps even a structural engineer. You may want to determine the cost of new paint, new fixtures, new flooring, cabinetry etc. during this time if so desired. There are very strict timelines that must be adhered to during this inspection period and at the conclusion of the inspection period, the buyer may give the seller an opportunity to correct certain items if necessary. Keep in mind that lender owned properties (foreclosures) and short sales very rarely will agree to fix items for a buyer – buyers almost always have to purchase those properties in “AS IS” condition and there is an AS IS Addendum that the parties sign in those circumstances.
Buyer Inspection Notice Seller Response
Once the inspections and appraisal are complete, the buyer, with guidance from the real estate professional, will determine whether to a) move forward with the purchase as is, or b) move forward if the seller will make some repairs, or c) whether to cancel the contract so that you (the buyer) can get your earnest money refunded.
CLOSING COSTS
Calculating Closing Costs in Arizona
The lender will give you a “good faith estimate of your closing costs. Usually, although negotiable, the seller pays for the Owners Title Policy and 1/2 of the Escrow fee. Seller also pays property taxes prorated to date of close of escrow. Seller usually pays commissions, recording fees, back HOA fees, any assessments or mechanics liens etc.
You, the buyer, customarily (but negotiable) pay for your loan costs i.e., origination fees, discount fees, lender’s title insurance (required by lender), 1/2 the escrow fee, appraisal fees, inspection fees, pre-paid property taxes, pre-paid mortgage insurance, pre-paid HOA fees, recording fees, and endorsement(s) which is a fancy way of saying – miscellaneous (which usually include courier service fee, flood certificate etc).
HOMEOWNERS INSURANCE & UTILITIES
Utility Costs in Arizona
- Arizona Homeowners Insurance
You will need to speak with a homeowners insurance company and determine what your costs will be for homeowners insurance. Your lender &/or real estate agent can recommend some great agents/companies if necessary.
You will also need to arrange to have all the utilities turned on & other services transferred (Electricity, Water, Sewer, Gas, Cable TV, Internet, Postal Service, Lawn Service, Pool Service etc).
SETTLEMENT OR CLOSE OF ESCROW
Estimating Closing Costs in Arizona
Your lender will also send the good faith estimate to the title company and they will work up the exact numbers based on a “Close Of Escrow” (COE) date. The title company will put all the numbers on a “Settlement Statement” with buyer’s costs on one side and seller’s costs & receipts on the other side. You will get a draft copy to review with your agent but it probably won’t be until your loan docs have been approved by underwriting and delivered to the title company.
Loan fees, which may or may not include discount points and origination fees, are negotiable with your lender depending on what interest rate you pay.
Mortgage Lender or Mortgage Loan Consultant
There will be a lot of documents for you to sign – from the lender, from the real estate broker and from the title company. All of these professionals will correspond with each other and make sure everyone is completing the tasks on time to close escrow.
Closing escrow means that your loan has been approved and the lender has submitted the lender’s loan documents to the title company to prepare the closing docs which would include a “Deed of Trust” giving you clear title to the property and a “Title Insurance Policy” which guarantees clear title.
DOWN PAYMENT, LOAN AND CLOSING COSTS
Mortgage Loan Calculator
You will deliver to the title company the remainder of your down payment and closing costs (numbers that the title company will provide for you on the settlement statement); and the lender sends the funds for the loan to the title company as well. After the buyer, seller and real estate agents have signed all necessary paperwork, the title company will notarize some of the most important documents and then will deliver the Deed of Trust to the county recorder for “recording”. Under normal circumstances, once the Deed has been publically recorded, then closing is complete.
Your agent can then hand you the keys
Closing on a new home
to your new home and the title company will disburse the funds to the appropriate parties.
I hope that this explanation helps you to understand the process so you can anticipate the steps involved.
Congratulations – I hope you and your loved ones enjoy your new home!
Kindest regards,
Shanna Day, Your Real Estate Agent
Keller Williams Realty East Valley (AZ)
http://www.FindAZhomesFAST.com
Keller Williams Realty Salt Lake City (UT)
http://www.FindUThomesFAST.com
Licensed in both UTAH & ARIZONA (Teams in both States)
Banks paying Homeowners a Bonus…
…to avoid Foreclosures: Mortgages.
by Prashant Gopal
Feb. 7 (Bloomberg) — Banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.
Lenders have routinely delayed or blocked such transactions, known as short sales, in which they accept less from a buyer than the seller’s outstanding loan. Now banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives, said Bill Fricke, senior credit officer for Moody’s Investors Service in New York.
Losses for lenders are about 15 percent lower on the sales than on foreclosures, which can take years to complete while taxes and legal, maintenance and other costs accumulate, according to Moody’s. The deals accounted for 33 percent of financially distressed transactions in November, up from 24 percent a year earlier, said CoreLogic Inc., a Santa Ana, California-based real estate information company.
Karen Farley hadn’t made a mortgage payment in a year when she got what looked like a form letter from her lender.
“You could sell your home, owe nothing more on your mortgage and get $30,000,” JPMorgan Chase & Co. said in the Aug. 17 letter obtained by Bloomberg News.
$200,000 Short
Farley, whose home construction lending business dried up after the housing crash, said the New York-based bank agreed to let her sell her San Marcos, California, home for $592,000 — about $200,000 less than what she owes. The $30,000 will cover moving costs and the rental deposit for her next home. Farley, who is also approved for an additional $3,000 through a federal incentive program, is scheduled to close the deal Feb. 10.
“I wondered, why would they offer me something, and why wouldn’t they just give me the boot?” Farley, 65, said in a telephone interview. “Instead, I’m getting money.”
Tom Kelly, a JPMorgan spokesman, declined to comment on the company’s incentives.
“When a modification is not possible, a short sale produces a better and faster result for the homeowner, the investor and the community than a foreclosure,” he said in an e-mail.
A mountain of pending repossessions is holding back a recovery in the housing market, where prices have fallen for six straight years, and damping economic growth. Owners of more than 14 million homes are in foreclosure, behind on their mortgages or owe more than their properties are worth, said RealtyTrac Inc., a property-data company in Irvine, California.
Foreclosure Holdouts
Short sales represented 9 percent of all U.S. residential transactions in November, the most recent month for which data is available, up from 2 percent in January 2008, according to Corelogic. Bank-owned foreclosures and short sales sold at a discount of 34 percent to non-distressed properties in the third quarter, according to RealtyTrac.
As lenders shift their focus to sales, they are finding that some borrowers would rather risk repossession while they wait for a loan modification, according to Guy Cecala, publisher of Inside Mortgage Finance, a trade journal. In a loan modification, the monthly payment, and sometimes principal, is reduced to help prevent seizure. Homeowners facing foreclosure may live rent-free for years before they are forced out.
“That’s why the banks have got to pay the big bucks,” Cecala said. “The real question is why is the bribe so big? Is that what it takes to get somebody out of their home?”
Multiple Banks
Banks also pay a few thousand dollars to the owners of second liens, whose loans can be wiped out by a short sale, to encourage them not to block the deals.
While JPMorgan is giving the largest incentive payments, other banks and mortgage investors are also offering them, according to interviews with 12 real estate agents in Arizona, California, Florida, New York and Washington. Lenders also provide incentives on loans they service and don’t own when the mortgage investor, such as a hedge fund, requests it.
JPMorgan, the biggest U.S. bank, approves about 5,000 short sales a month. It generally offers $10,000 to $35,000 in cash payments at settlement, real estate agents said. Not all of the sales include incentives.
Borrowers also can receive payments from the federal government’s Home Affordable Foreclosure Alternatives program, which in 2010 began offering as much as $1,500 to servicers, $2,000 to investors and $3,000 to homeowners who complete short sales.
Quicker Resolution
For banks, approving a sale for less than is owned on the home can cut a year or more off the time it takes to unload a property. From listing to sale, the transactions took about 123 days on average at the end of last year, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.
Lenders spend an average of 348 days to foreclose in the U.S. and an additional 175 days to sell the property, according to RealtyTrac. In New York, a state that requires court approval for repossessions, it takes about four years to foreclose on a home and then resell it, the company said.
Lenders can often afford to forgive debt, offer the incentive and still make a profit because they purchased the loan from another bank at a discount, said Trent Chapman, a Realtor who trains brokers and attorneys to negotiate with banks for short sales.
Chapman, who also writes a blog on TheShortSaleGenius.com, said he’s heard about 50 homeowners who have received incentives from lenders including JPMorgan, Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc.
Wells Fargo
“My guess is they want to get rid of bad loans,” Chapman said. “If they short sale these types of loans, they have less of a headache and have some goodwill with the homeowner.”
Wells Fargo, based in San Francisco, offers relocation assistance of as much as $20,000 for borrowers who complete short sales or agree to transfer title through a deed in lieu of foreclosure “in certain states with extended foreclosure timelines, including Florida,” Veronica Clemons, a spokeswoman, said in an e-mail.
Bank of America Corp. sent letters to 20,000 Florida homeowners as part of a pilot program, offering incentives of as much as $20,000, or 5 percent of the unpaid loan balance, Jumana Bauwens, a spokeswoman, said in an e-mail. The program expired in December and the Charlotte, North Carolina-based bank hasn’t decided whether to introduce it in other states, she said. About 15 percent of the homeowners agreed to participate in the program, she said.
Citigroup Offers
“The bank is pleased with the response,” Bauwens wrote. “The state is experiencing higher foreclosure rates than other parts of the country and is therefore seen as a viable market to gauge incremental short-sale response and completion rates when presenting homeowners with relocation assistance at closing.”
Citigroup offers $3,000 to most borrowers who qualify for its program, but the “amount may increase based on the circumstances of each individual case,” Mark Rodgers, a spokesman for the New York-based bank, said in an e-mail. “Investor programs have different guidelines for relocation incentives, which we honor.”
Susan Fitzpatrick, a spokeswoman for Detroit-based Ally, didn’t comment specifically on incentives when asked about them.
Borrowers typically can’t negotiate the incentives, which arrive by mail, Chapman, the Realtor, said.
Tap on Shoulder
“It’s not really easy to identify the guidelines because Chase doesn’t tell you, they kind of tap you on the shoulder,” he said. “When I first saw it in January 2011, I thought it was a joke or a typo. I was convinced it must say $3,000, not $30,000.”
Offering enough for the homeowner to put down a deposit on a rental apartment is reasonable, said Sean O’Toole, chief executive officer of ForeclosureRadar.com, which tracks sales of foreclosed properties. Giving tens of thousands of dollars to delinquent homeowners sends the wrong message, particularly if they got into trouble by running up home-equity loans during the housing boom, he said.
“It may make sense for people to walk away, it doesn’t make sense for them to get rewarded for doing it,” O’Toole said. “It’s not the homeowner’s fault that house prices dropped so dramatically, but they have already received months of free rent, if not cash out.”
Cecala of Inside Mortgage Finance said he wonders whether lenders are making big payments on properties with underlying title problems. Evan Berlin, managing partner of Berlin Patten, a real estate law firm in Sarasota, Florida, said representatives of a large bank told him the incentives are primarily given to borrowers when it doesn’t have the proper paperwork needed to win its foreclosure case. He declined to name the bank for publication.
Incentive Disconnect
State attorneys general across the U.S. began investigating foreclosure practices in October 2010 following allegations that the nation’s top mortgage servicers were using faulty documents to repossess homes.
Berlin said his office negotiated about 400 short sales in the past year and about a quarter included an incentive, ranging from $3,000 to $48,000. In some cases, the payments aren’t incentives at all because they’re offered after the borrower has almost completed the short sale, he said.
“The idea is that this is relocation assistance,” Berlin said. “But when you’re offering $48,000, obviously it doesn’t cost $48,000 to relocate.”
Cooperation Sought
The size of the payment may have little to do with sales price. JPMorgan gave one Phoenix homeowner $20,000 after she sold her property in June for $32,000, according to Royce Hauger, the real estate agent who represented the seller and shared a copy of the settlement sheet with Bloomberg News. The bank also agreed to forgive more than $70,000 in debt, she said.
Kelly, the JPMorgan spokesman, declined to comment on the payment.
The homeowners are getting the money in exchange for their cooperation, said Kris Pilles, a Riverhead, New York-based real estate broker who represents banks, servicers and hedge funds that own distressed housing debt.
Pilles is frequently dispatched to the homes of delinquent borrowers to explain the benefits of avoiding foreclosure, he said. His clients have paid as much as $92,500. In return, the lenders expect the seller to clean the house before showings, and trim the grass.
“Money talks,” Pilles said. “From the bank side, it’s anything to initiate a conversation with someone who may not be listening to them.”
–With assistance from Pierre Paulden in New York. Editors: Christine Maurus, Larry Edelman
To contact the reporter on this story: Prashant Gopal in New York at pgopal2@bloomberg.net
To contact the editors responsible for this story: Daniel Taub at dtaub@bloomberg.net; Rob Urban at robprag@bloomberg.net.
Why can I not get my offer accepted?
It’s amazing how many offers are going in on homes these days. I have found that since January 1, that there are anywhere from 3-18 offers on every single new listing out there (in AZ at least). Buyers are now having to offer more than full price and until buyers have had several offers rejected, they don’t believe you when you say, “A full price offer won’t get you this home”.
There are other reasons too that buyers and sellers need to come into sync with before a deal will get accepted. Buyers need to understand:
1) Getting an offer submitted to the listing agent timely is utmost important. Buyers need to be prepared (with Pre-qualification form or Proof of Funds in hand) to write an offer within hours after a home its the market. You snooze you lose! Offers are coming in by the droves in Arizona and you must have an agent that can act quickly, precisely and knowledgeably.
2) A cash offer almost always trumps a financed offer, and a conventional financed offer almost always trumps a VA or FHA financed offer. Of course, the dollar amount of all those offers have to be weighed against each other, but cash seems to win every time – even if lower.
3 ) Seller Concessions – The new Arizona Real Estate Contract has a paragraph for seller concessions – which invites buyers to ask for seller concessions. Even a month ago, it was customary that the seller pay most if not all of the buyer’s closing costs, home warranty (on regular sales) and appraisals, inspections, transfer fees and up to a year of prepaid property taxes, homeowners insurance & HOA fees, but since January 1, 2012, this paragraph almost always has to be left blank – meaning that the buyer will pay for these costs themselves. They may try to offer more to then include these, but the seller realizes that the appraisal probably won’t come in higher to cover them so the seller more often than not these days, chooses an offer that does not include seller concessions.
4) The days of asking for repairs is almost over. In Arizona, a contract with an “AS IS” addendum is almost as common as the contract itself. I’ve sold more homes than not that have included the AS IS addendum and it doesn’t even have to be a bank owned or short sale! AS IS is the new norm in Arizona.
5) Closing dates are important. Short sales are dictated by the short sale addendum (30 days after written approval), but even then, the buyers who have cash are asked to close immediately following the inspection period.
6) No Contingencies. If you are a buyer looking to purchase something, but you have a contingency (ie., you must rent or sell your home first, forget it! No seller in his/her right mind would sign a contract with contingencies when there are so many other buyers w/o contingencies standing in line. Buyers, a word of advise…. get your ducks in a row and then make offers. Otherwise you are wasting every ones time – especially yours.
7) Use a realtor who is in the trenches. The market changes daily, and if you are using a family friend or relative who is not accustomed to the every day changing market, you will not be a lucky buyer (or seller). There is too much to know and with the market shifting directions daily, you cannot afford to make a mistake choosing a realtor.
Buy or Sell Your Home FAST with the Shanna Day Team. http://www.FindAZhomesFAST.com 602-345-0393
