Using the Web and social media to sell real estate

The Florida Association of Realtors recently published a study on the type of foreclosures existing in the State and the characteristics of the people involved in them. The study covers a three year period going from March 2006 to February 2009. It is somewhat dated information, but it helps to shed some light on trends that better explain also the condition of the Florida real estate market today (here is the site that is being used to collect the information http://www.floridafaceofforeclosure.com/).

The research revolves around three types of indicators, all used to monitor the growth of foreclosures:

1) Lis Pendens which is a document recorded in the court house that signals the beginning of the foreclosure process after the owner stopped making payments on his loan (mortgage). When the lis pendes is recorded there are still chances that the situation is rectified and that the owner pays what is due to avoid foreclosure (it seldom happens, though). In the foreclosure phase that follows a lis pendens, which can be fairly long, we can also have an attempt by the owner to renegotiate the loan or we can have a short sale, that is a sale to a new owner for less money than what was owed on the loan by the current owner.

Lis Pendens are growing much more than actual foreclosed properties in Florida according to a research published by the Florida Association of Realtors.

2) Notice of Sale is the second indicator that communicates the end of the foreclosure process and the fact that the property is ready to be sold at a foreclosure auction on a certain date.

3) REO (Real Estate Owned) are the property that have gone back to the bank after the auction and that the bank is placing back on the market for sale.

The three indications have been shifting very differently: Lis Pendens have been going up steadily until July 2008 and then they started to decline, in Florida. Their quantity has been more than three times bigger than the other two indicators, which shows that probably two properties out of three don’t terminate the foreclosure process, but stop much before the notice of sale. It is fairly well known that banks are withholding from the market properties that are ready to complete the foreclosure process so not to glut the market with bank owned houses (here you can read the full report).

So the trend of Notices of Sale has been pretty flat and also REO’s are running kind of scarce. Just to give you some rough figures: in January 2009, Lis Pendens arrived at approx 190,000, while REO and notices of sale where hovering respectively at about 6,000 and 8,000.

This trend, combined with the recent action taken by most banks that are halting foreclosure proceeds, is giving us an abundance of Lis Pendens that are not resulting into a formal foreclosure and an overall stalling or decreasing number of property being offered at auction or as bank owned homes. Prices are kind of stabilizing waiting for the next wave of REO’s and this can be a good time to invest provided you get do your research done as to the soundness of the title of the house you are about to purchase.

Roberto Mazzoni

The special tax exemption for first time home buyers is over and this has slowed down house sales in July as compared to the previous year (see the statistics information provided by the Florida Realtors organization). There  has been a national recovery in August, according to the National Association of Realtors, but we are still below the sales figures we had in summer 2009. The market is moving ahead slower now that the effect of the tax break is ended and the researchers at NAR estimate it is going to be a long recovery.

Nice house in Florida.

Yet the general affordability of houses and the cost of borrowing money have never been better so the market has now the opportunity to stabilize in its own right without support or intervention by the federal government. Getting loans is still somewhat difficult, but people with good credit and a solid economical situation can still do it.

Changes have also been introduced in the foreclosure negotiation process in Florida in order to slow down the flow of foreclosures, on the other hand the national government has provided additional $208,437,144 in funding to Florida communities to reverse the effect of the foreclosure crisis through neighborhoods stabilization programs (see here the full article).

Roberto Mazzoni

A research published by CNBC shows that Florida has become in 2010 the number one state in the US for hiring qualified workforce (see the report data here). Florida has still to improve its economy and its access to capital that worsened since 2009, but has the potential of attracting companies that wish to develop their activities under the sun.

Quality of workforce is top in Florida according to CNBC.

The “workforce” indicator measures the educational level of the workforce as well as the number of available workers and the success of the state’s worker training program in placing their participants in job positions. Arizona is number #2 for workforce and Georgia is #3.

Florida now ranks in position #28 in the general assessment of States for business (the same as 2009), with Texas being in the leading position for 2010 and Virginia being #2.  Florida is now just above Wisconsin and just below Maryland and shows a positive trend for the cost of doing business (in which is gained two positions but is

Banks today aren’t lending based on the value of the real estate any more, but they base their decision on the “existing relationship2 which means the potential global income of the sponsor asking the loan. If you want a loan from a bank, it’s relationship driven, that means they want you to be local and to have all of your checking accounts with them. Basically, they want to have your money at hand before they lend any of theirs.

Restructuring commercial loans often now requires that the bank fails in the first place.

The majority of the commercial real estate developers are in dire straights, trying to hang on with their nails, to restructure their debt on anything they built from 2005 and 2007, but many local banks won’t even talk to them. So how does the relationship play in this case? Many banks know very well that the minute they begin a short sale or loan restructuring process, which means discounting the amount owed and negotiating new terms, their own balance sheet will start to suffer greatly and they will see a domino effect of a number of their commercial borrowers doing the same. They don’t want to foreclose because they can’t take the capital hit.
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Therefore they sit tight, insisting that developers and owners in general continue paying a loan that they can’t pay and hoping the problem will go away without actively tackling it. When this happens, the best thing that the developer or the owner of commercial real estate can hope for is that their bank goes under. Once the bank fails, it goes to the FDIC (Federal Deposit Insurance Corporation) and then the FDIC reduces the value of the asset and brokers it off to another bank which will be in the position now to negotiate.

Listen from an expert in the field about some real life stories that are happening right now.

Roberto Mazzoni

Commercial Real Estate sales in Florida are down about 80% and in general the commercial investment market is off completely, this is the summary given to us by George Hurst a real estate broker with Coldwell Banker that is specialized in troubled assets during and that delivered the opening speech at seminar we organized recently.

Massive amount of commercial foreclosure coming up.

Transactions of commercial properties that are still occurring are mostly owner occupied or REO’s (bank owned), rents are falling and vacancy rates are increasing considerably; therefore we are going to be suffering from the explosion of bubble that took place in 2005, 2006 and 2007, primarily in 2006.

We are getting into a six year term of increasing foreclosures due to the peculiarities of commercial lending which is usually just for five years, and then you need to renegotiate based on the current performance. Therefore if we simply project from 2006 we see that in 2011 many properties will go in default because unemployment and the consequent decrease of rental income will not allow them to renegotiate their loan effectively.

There are two types of risk that get into play in a situation like the one we are going to experience: credit risk, which means that the reduction of cash flow makes it difficult to service the debt (make the loan payments) and credit contraction associated to an economic downturn which is what we are in right now.

Up to about four years ago, both bankers and developers where caught up in a dream a nobody believed there was going to be an end to the continued increase in prices, but it was just all artificial inflation and it reached an end due to a number of things:

Very lax underwriting standards by banks. In 2007 almost 60% of commercial loans granted were interest-only, so you paid only the interest without repaying the principal.

Faulty appraisals just like in residential.

Now these loans are coming for review in a few months and it is very likely that the bank will refinance only 60% of the new value which means much less than the currently outstanding balance. Do you think that the owners will bring cash to the table just to keep the loan going on a property that continues to devaluate: very unlikely.

So a major wave of foreclosures is likely to happen, but it will follow patterns that will be quite different from the residential world and will find out more about that in the next articles inspired by this special seminar.

Roberto Mazzoni