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Bank owned condo in Lake Forest listed at $95,000

The condo pictured above just came on the MLS this morning with a list price of $95,000.  It is a bank-owned foreclosure, with one bedroom, approximately 685 square feet and described as “needs work.”   For an owner-occupant, with a 3% down payment and an FHA loan, the payments on this could be under $1000 per month, including the mortgage, taxes and current HOA dues of $260/month.  This is priced $20,000 less than the next cheapest unit in the city, which is also bank-owned in the same development.   This may be another example of a lender pricing agressively to generate quick activity and multiple offers, so it may end up selling for more than the asking price. 

This condo was previously purchased in August 2005 for $260,000 using 100% financing.  According to the records in the tax database (not totally up-to-date, but all I have to go on), there are 392 units total in this condo association, and at this time 32 of them are in some stage of foreclosure.  There are also 17 foreclosed units that have sold this year, 4 that are in escrow, and 14 others available today on the MLS.   

Potential buyers need to know that when the level of foreclosure activity is this high in an association, there is a very real probability of HOA dues increasing to the maximum allowable (20%) limit, and possibly additional “special assessments” to make up for all the dues that went un-paid while the property was in the foreclosure process. 

Once a lender forecloses on a property, they become responsible for paying the HOA dues and fees until it is re-sold, but the many months of dues payments that the prior owner didn’t pay, were wiped out in the foreclosure sale, and the HOA simply lost that revenue.  The budget of a condo HOA usually includes all the maintenance and taxes for the common areas, trash service, as well as funding the reserves to replace roofs, resurface the streets, the insurance and maintenance of all the buildings.  These costs aren’t expected to decline, and most aren’t optional that could be eliminated.   

Before buying a unit in an HOA where there has been a lot of foreclosure activity, take a good look at the HOA budget along with the latest financial statements so that you know what you are taking on!

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Now that half the year is over, it’s time to take a look at how close to (or far from) reality my predictions were that I made in my December post about 2008 real estate activity.  You can go back to read my justifications for each prediction, but this analysis will only address the basic predictions:

The Volume of Sales will increase above the level of 2007.  (Wrong!)

• For the period of Jan 1 through June 30 2007 : 11,532 properties closed
• For the period of Jan 1 through June 30 2008 :  9,732 properties closed

Year-to-date volume is down by almost 16%.  Much of this is the result of the lack of financing due to so many major lenders dropping lending programs, or going out of business. 

Lending standards have also continued to tighten even for solid borrowers.  Appraisals are routinely questioned, or the values discounted (even though the appraiser already discounted from the last comp) and borrowers are burdened with much more documentation that we have seen for a long time. 

Prices will decrease – both listing price and sale price (Correct!)

The average price for homes sold fell from $768,931 to $632,638, a decline of 18%.   (Some price ranges are down by 30% and some are off by only 2%.)  I will review the average price declines by price range in another post in the near future  

The mortgage market will settle down.  (Wrong!)

Fannie Mae & Freddie Mac need to be bailed out, IndyMac just tanked this week, BofA took over Countrywide, many other institutions are hanging on by a thread.  Underwriting standards are tightening, or overtightened in some cases, appraisals are being reduced due to “declining market” conditions even though the appraiser already included that fact in his calculations!  Congress has not yet approved the final FHA reform bill, or extended the increased loan limits that are currently set to expire on 12/31/08.  We have a long way to go before the mortgage market will be stable! 

A lot of real estate agents will leave the business.  (True!)

The actual statistics won’t show until next year when annual dues get collected, but there are a lot of agents getting 2nd jobs, or leaving the business altogether now. 

The real estate industry will continue to become more “transparent.”  (True)

(“Transparent” is a current buzz word!  I interpret it to really mean “open and honest”.)  Consumers are more knowledgeable and demanding the answers to lots of the “hard questions.”   There is more information available every day for buyers and sellers to do their own research of listings, including pricing history, past sales, average values, advice about buying, selling, financing, staging and the merits of different marketing programs.  Delivering notepads, refrigerator magnets and calendars is no longer the way for agents to market themselves to consumers.  They need to prove that they have something of value to provide to their clients, instead of pointing to a “I’m #1 Agent of the WeekTrophy”

Conclusion : Ok, so I already said my crystal ball is cracked.  I am an optomist, or I couldn’t stay in this business.  I believe that there are a lot of very cautious people who would really like to buy a home, but they keep getting mixed signals.  We have come a long way in a short time compared to the market declines of the 1990’s.  There is no doubt that prices got totally out-of-control and unreasonables due to the easy financing of recent years, but once we get back to something resembling fundamental values (for California!), we should begin to see pricing stabilize.  It may take some more time to get there, but I believe that it will happen.

If you have any questions, or need any help with real estate decisions, please call me (or choose a button below!)

In Orange County today, as well as many other places, there are home owners who are going through the difficult decision process of whether to sell their current home, or lease it and wait for a better time to sell.  Some of these people have taken a job out of the area and will not be able to commute from their current home.  Others have reasons to move such as not being able to go up and down stairs any more, or not having the energy or strength to clean and maintain the house anymore. 

While nobody knows exactly what will happen in the future, it is generally expected right now that the current real estate downturn will continue for another year or two at least.  When trying to make this decision, it is a well worth your time to dig in to all the details and possibly consult with a tax expert to fully consider all of your choices. 

These are the steps that I recommend to my “maybe sell, maybe lease” clients:

1. Look at what it really costs to own the house.  Add all of your costs, such as monthly mortgage interest, property taxes, HOA dues, insurance, gardener, pool service, etc. 
2. Find out what amount of rent can reasonably be expected for a house like yours.   Ask a Realtor to run the lease comps for you, call around to apartment leasing offices, check on Craig’s List to see what others are offering at what monthly rate.   (If you are in Orange County, call me and I’ll help!) 
3. Check with your favorite tax expert about depreciation or any capital gains tax issues.  If moving out of a primary residence, you usually have up to 3 years to close a sale and still have the capital gains exclusion of $250K for single, or $500K for married home sellers.  (Who knows if this will stay in place with a new Congress and President?) 
4. Consider the hassle or cost of selling later, either with a tenant in place, or the cost of carrying it with no tenant income while marketing it for a few months until it closes.  There may also be costs to paint or replace carpet prior to being able to market the property after a tenant vacates.
5. Take a look at your current loan for both rate and terms.  If it was set up as a short term fixed rate that will reset to a higher rate later, find out exactly what that rate and payment could be in a “worst case” scenario.  If you are planning to refinance it prior to it resetting, it would be wise to try to do it while still occupying it yourself.  Non-owner occupant rates are always higher than for owner occupied!
6. Consider offering a lease-option.  There are many pros and cons to doing this, but sometimes it can work well for all parties.  

Other posts you may like :
Lease Options Explained�
Over Pricing Your Home

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