A Question For The Bankers

I read something in today's St. Petersburg Times about deficiency judgements that got me thinking.

First, let me explain what a deficiency judgement is. A deficiency is the difference between the selling price of a piece of real estate and it's mortgage amount at the time of the sale.

So, if you had a mortgage for $100,000 and sold the house for $75,000, the deficiency would be $25,000. If the bank wanted to, they could go to court and get a deficiency judgement for the $25,000 shortfall. They could then garner your wages, attach things of value that you own and do all manner of other things to collect the money from you.

Deficiency judgements are becoming more common in Florida and other states as lenders try to recoup as much as possible from short sales and foreclosures. It's perfectly legal and I have no real problem with financial institutions pursuing the money.

Recently, however, I've heard of deficiency judgements turning into investment instruments. I didn't actually think anybody would stoop to such a thing, but apparently I was wrong and the St. Petersburg Times mentioned it in an article in Monday's newspaper about deficiency judgements and foreclosures. I guess trying to make a profit from other people's misfortune is par for the course these days.

The paper reported that there is a growing resale market for deficiency judgements. The debt is being packaged and sold to investors in much the same way that mortgages once were. The paper reports that a collection agency bought some $18-million worth of deficiency claims from one lender for a mere $130,000. The buyers are hoping that they can collect on enough of these debts to turn a profit over time, and the bank seems to be willing to settle quickly for cents-on-the-dollar.

Here's the question that comes to my mind about this kind of procedure: If the bank is willing to accept pennies-on-the-dollar when selling the deficiency to the investor, why not do it much earlier in the process and offer to sell the deficiency to the original debtor for a few cents on the dollar? That way the debtor could clear his financial problems, the bank would have all the money they would have gotten from selling to some third party, and everybody could live happily ever after.

Of course, I'm not a financial genius so my grocery store arithmetic approach to solving complex financial and legal matters probably doesn't hold here. But I wish some banker could take the time to explain why it wouldn't. Seems to me like it's kind of a win-win for all parties -- except maybe the investors.

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What Makes A Good Offer On Distressed Property?

Let me get real direct with the central theme of this story: What constitutes a good offer on a distressed property?

Well, first of all, what is a distressed property? For the purposes of this blog, a distressed property is either a short sale or a bank foreclosure.

So, how much should you offer on such properties?

Fortunately, the Pinellas Board of Realtors (PRO) has a report every month called "Distressed Property Trends Monthly Market Activity Report". It's full of all kinds of charts and graphs that report on sales of short sales and foreclosures in this area, and that data holds the key to answering the question of how much to offer to make a successful offer on a distressed property.

One of the reports is called the "List Price to Sales Price Ratio". This is nothing more than a graph expressing the percentage of the asking price that properties sold for in that month. For example, if a house was listed at $100,000 and sold for $50,000, the ratio would be 50%.

In February of 2011, the sales price ratio for a short sale in this area was 92%, meaning that on average, short sales were selling for 92% of their asking price. In January, they were selling for 93% of asking price. Overall, the ratio for the past six to eight months or so has been hovering in the 91% to 93% range.

For foreclosure properties, the February ratio was 95%. In January it was 94%. Last October it was 100% and in June of 2010 it stood at 102%. Apparently foreclosures bring a higher percentage of asking price than do short sales, and I think buying them is a more competitive process than buying a short sale.

Just for the sake of comparison, non-distressed properties have been selling at a ratio of 91% to 93% for the past year or so.

So, if you're thinking about buying property in the distressed realm, it might be a good idea to keep these ratios in mind and use them as a guide when preparing your offer. The buyer who offers well below the asking price may occasionally get a property, but for the most part the bankers feel like they have already discounted these properties and want to get pretty close to their asking price. At least that's what the ratios seem to indicate.

Happy House Hunting!

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Is Stability Returning To Real Estate?

The sales figures for February in Pinellas County real estate show the continuation of similar numbers from the previous three months. Maybe the market is getting a bit more stable.

Let's take a look at the Absorption Rate (AR) for February. For single family homes, the AR for February was 10.2%. That's an improvement over January's 9.3% and just a bit less than December's 11.9% figure. Still, those numbers are pretty similar taken as a whole.

The same can be said for condominiums. The AR for February was 8.9%. In January it was 6.9% and in December the AR was 9.4%. Really, this shows some pretty similar market activity for the past three months.

Single Family Homes

There were 6,153 single family homes listed in the MLS for February. This is down somewhat from January's 6,414 listed properties. Some 629 single family homes were sold during February as compared to January's 595 sales. So, listings were down but sales were up.

The median price for a single family home in February was $100,000. In February 2010 it was $130,000, a drop in median price of 23.1%. I think that when you have a drop in median price like that, it is a sign that investors are very active and they are probably buying a lot of distress properties to be used as rental units or for other forms of real estate investment activity. I would like to know what the median price was if you took all the distressed properties out of the data and we looked at only arm's length transactions. I'll bet the median would be higher.

Condominiums

The number of condos listed in the MLS in February was 5,073. In January, 5,192 condos were in the MLS system. Of these, some 452 condos were sold in February, a nice increase in sales volume compared to January's 360 condo sales. Just as with single family homes, the number of listed condos is lower and the number of condos sold increased in February.

The median price of a condo in Pinellas County in February of this year was $78,800. This is down 28.4% from February of 2010 when the median price was $110,000.

When you look at all these numbers and compare them over a two or three month period, it seems to me like the real estate market has become kind of stable. I don't know about you, but after all these months of falling prices and reduced volume, it's kind of refreshing to see these figures beginning to show some kind of stability. I suspect we have to get stable before we can see any appreciable improvement.

Happy Selling!

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