When you, the buyer, purchase a condo in a multi-unit/hi-rise building, you may not be aware of the unintended consequences that can arise due to your neighbor(s) defaulting on their mortgage(s) and/or condo/association fees.

Depending upon how many homeowners in your condominium building are in default–those of whom have stopped paying their mortgages and association dues–will directly impact the condominiums reserves and the funds necessary to operate and maintain the integrity of the building. As a result, the HOA (Homeowner’s Association) may have to vote to increase the association dues/and or propose a special assessment for each and every homeowner in the building to cover the short fall resulting from your neighbors’ defaulting on their loans and/or dues. This problem can be compounded depending upon how many of the condos in the building are in default.

You may be faced with having to cover the shortfall along with the remaining homeowners who continue to pay their obligations or be left with a building that cannot provide the basic services such as water, electricity, maintenance that you expected would be there without question when you first purchased your condo. This is not a pretty scenario, but it is one of which you should be aware.

If you are considering a purchase in a multi-unit building, you should review the Homeowner’s Association documents, such as C,C,& R’s (Covenants, Conditions, and Restrictions), Articles of Incorporation, the last 12-months of minutes, and the annual budget and audit to make sure that the association has adequate reserves which should give you an idea of the financial well-being of the building.

Moreover, you should consult with a Realtor who can give you valuable information on the number of active listings in the building that are in the process of foreclosure (short sales, notices of default), or REO’s (real estate/bank owned properties). This should send up a red flag as to the health of a particular condominium building.

Remember that what appears to be today’s good deal or “steal” may wind up being tomorrow’s bank owned property. It is wise to consult a real estate professional who is active in the local neighborhood before you jump in and become collateral damage in the future wave of further defaults.

Photo Courtesy of NBC.com
The buzz in home purchases/sales revolves around distressed properties these days–namely, REO’s or bank-owned homes. If there is one story that peaks a buyer’s interest, it is the REO home market. The reason is simple enough: the buyer believes that REO’s equal great deal or steal. But are bank-owned homes the real deal? Let’s take a closer look:

If you happen to be a first-time homebuyer or a novice in terms of the homebuying process, an REO (Real Estate Owned) home or bank foreclosure requires seeking the assistance of a knowledgable real estate professional. At first blush, the pricing may look enticingly attractive.

In her article entitled “Foreclosure Sales And Pretend Pricing,” Kris Berg of The San Diego Home Blog writes that the “pretend pricing method or (PPM) is an entirely different and oft-mysterious approach to the whole conundrum of determining what the market value really is for a home. Once a lender has foreclosed on a home, the PPM comes into play.”

Foreclosures are often priced 20-30% below a “regular sale”–that is a home that actually has equity in it and is not over encumbered or “under water”, so to speak. That said are REO homes real deals or not? Most home foreclosures are priced way under the market just to create hype. Welcome to the wild west side of the home pricing market. These properties will garner multiple offers with the final sales price often thousands of dollars above the original asking price. Not only does this breed disappointment, disillusionment and frustration among buyers who are looking to own and occupy the property, but these homes typically will sell to the highest bidder who also has a large cash down payment.

As a first-time home buyer, you should factor in whether you will have the time and money to fix up a bank-owned property. These properties more often than not have deferred maintenance issues, missing appliances, fixtures, or have been trashed by disgruntled owners or renters. Remember that bank-owned properties are sold in “as is” condition. The bank need not provide the buyer with many of the disclosures that are normally completed by a seller in the normal course of a home purchase/sale. The buyer is on his or her own to pay for inspections to ensure that the home’s condition is reviewed and verified by licensed and bonded home inspection companies.

It is also prudent to check out the neighborhood thoroughly; how many homes/condos have “for sale” signs. Too many homes up for sale may be an indication that there could be further erosion of prices in the community. Since prices have declined in many of the newly built communities, most of these homes or condos will have fallen back to or below the original prices offered by the builders. Look in neighborhoods that have limited supplies of housing inventory. Also check out the neighborhood’s schools for their ratings. Even if you do not have children or are not be planning to start a family, there is a correlation between high school ratings and housing values. Neighborhoods that are known for their excellent schools will have less price erosion and will see prices stabilize sooner than school districts that are poorly rated.

Remember the old axiom, “Let the Buyer Beware.” Sellers have an obligation to disclose defects, history, and the condition of the property, while with bank owned properties, they do not have any responsibility at all to the buyer except to try to recapture as much of the assets or limit the loss for their investor. Therefore, when searching for a home use caution, utilize due diligence, and do not be rushed into a quick decision or your home purchase may become tomorrow’s REO property.

Below is a current list of foreclosures in the city of Irvine and surrounding cities in south Orange County.

If you would like a updated list of bank owned properties that are not included on this list, please contact me, and I will send it along to you.

Photo courtesy of The Truth About Mortgage
With the financial markets in turmoil, and with the luster lost in the real estate market, one wonders where the savvy buyer/investor is placing his/her dollars. If you remove gold bullion, and/or stashing your money under the mattress from the safe haven equation, I would say that the REO (real estate or bank-owned) market is currently vying for the home buyer’s/investor’s cash.

I’ve been tracking the REO market here in Irvine for my buyers and sellers. Buyers want to know that if they decide to purchase a home now that their investment is protected from a further market decline. They feel that if they focus on foreclosed properties, then they have, to some extent, a built-in cushion just in case the real estate market experiences further declines. Whether or not this perception proves to be true is still debatable. However, this is the buyer’s/investor’s view of the current state of the real estate market.

On the other hand, sellers want to know how the foreclosure market is impacting their ability to sell their home in a declining and credit-tight real estate market. Equity rich sellers (and there are still some of those out there) who need to sell their home in the current real estate market, are finding that they have to price their property as aggressively as the REOs if they hope to be able to compete for today’s buyers. Even if sellers were to postpone selling their property in the immediate future, foreclosed properties in individual neighborhoods will certainly impact the comparable values of those future sales.

That said there is only about 20 to 40 real estate owned properties on the market at any given time in the city of Irvine–a relatively small number as compared to other south county cities. Those bank-owned properties that are aggressively priced and in an “interior” location (not backing to a busy street/freeway) are selling quickly and on multiple offers–many of which are all cash rather than lender financed.

Personal experience has demonstrated that unless you prepare your buyer for the REO experience, your buyer/investor may be disappointed, and may not be the successful/”winning bidder.” All REOs require that any offer be backed by high credit (FICO) scores, i.e., those 729 and above (and rising) if lender financing is applicable, and verified funds for the down payment and closing costs related to the purchase. Most will require that buyers be pre-approved by the individual bank’s lender of choice. Bank-owned properties are sold in “as is condition,” subject to the buyer’s inspection rights. What you see or what the inspectors find is what you get or choose not to get. If the costs of repair are prohibitive, the buyer need not continue with the purchase.

However, be aware that some of these foreclosed properties have deferred maintenance or are in need of repairs–the cost of which should be taken into account by buyers who are not contractors or who may not have easy access to one (i.e., a family member who can help refurbish). Also understand that the bank, who has already taken a huge loss, is not interested in the buyer’s list of repairs/requirements.

The REO properties in which I have personally been tracking have been sold at or above the asking price with little or no repairs being made. This may also include termite damage. A bank may provide a Termite Report, but may require the buyer/investor to cover the cost of any or all of the repairs. Other items for which buyers may have to pay include Association transfer and or document fees, and any other fees the bank chooses not to cover. These may show up in a lengthy addendum that the bank furnishes to the prospective buyer(s). Be aware that the bank/seller does not sign on any documents until there is full agreement by the buyer(s) with initials/signatures on all the paperwork including the bank’s addenda.

A striking example is one in which my partner and I previewed on a Sunday evening a week ago. It was a 3 bedroom, 2 bath single family residence on an interior corner lot of over 5,000 square feet in an established Irvine neighborhood. Upon entering, we discovered that the home had been vandalized to the extent that windows were broken, appliances were smashed, and holes were put through walls throughout the homes. We immediately phoned the bank’s agent to advise him of the state of the home. A return phone call the following day revealed that the listing agents were well aware of the vandalism (sadly it turns out that the irate homeowner who lost the home had unleashed a blind rage resulting in the destruction throughout this one-time upgraded and cared for home). The bank, however, we were told, would not be making any repairs except for the broken windows and would not be responsible for approximately $7,000 in termite damage that a recent report had revealed. However, no worries, there were already several offers, a few of which were all cash, and the property was going to be placed in “back-up” status that very day. Why would there be multiple offers on a home that someone had taken a sledge hammer to? One reason might have something to do with the fact that it was a single family home on a large lot in a good location within an established Irvine neighborhood that the bank had priced under $500,000! The other reason might have to do with the REO fascination factor: namely, buyers perceive properties that are tagged as “bank-owned” to be where the “great deals,” are whether they ultimately cost the buyer more in the long run in out-of-pocket fix-up costs.

On Saturday, I previewed a 3 bedroom, 2 bath single family residence in an adjacent neighborhood which was also in need of some repairs. However, it was in a good, interior location on a large lot. Yesterday, I brought back a potential buyer. Within minutes of my arrival, several more real estate agents some of whom had brought their prospective buyers with them arrived. By the time I left the property with the buyer to whom I had showed the property, there were agents and buyers lined up outside the front door waiting to go in! Today, Monday, upon checking the availability of the property, the agent representing the bank already had two offers in hand, one of which was all cash over the asking price and offers were still coming in! Why all the activity? Again, simply stated an apparent strong demand for a single family home in Irvine on a large interior lot aggressively priced at under $500,000, and a plethora of ready, willing, and able buyers–some of whom have ready cash.

A similar multiple offer situation occurred on an Irvine four bedroom former model home price in the upper $600,000 range in which there were four all cash offers in addition to several others structured with lender financing. The listing agent for the bank came back to only the four all cash offers (they didn’t even consider the ones that required financing), with a “best and final price.” The home ultimately sold above the asking price to the highest and best bidder.

What about the higher end properties–above $1,000,000? These too are receiving multiple offers, and the successful buyers are the ones that are either purchasing with all cash or those who are financing only a small portion of the overall price of the home. Buyers who are trying to negotiate off the listed price, and/or those who need conventional financing seem to be considered if the all cash buyers do not show up. But show up they do, and they are the ones that are the successful buyers/investors–at least for now.