January 15, 2009

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Going Once…Going Twice…

Red-hot Real Estate is Up for Grabs

Larry Warren

January 15, 2009

It’s not new news that Utah housing starts are down and foreclosures are up. Residential real estate prices that peaked in 2007 are dropping by the month. Lenders are tightening loan requirements and demanding higher down payments. But, it’s not doom and gloom if you have cash, good credit and the fortitude to run into a burning building when others are fleeing. “The smart investors are picking up incredible deals,” says Urban Utah Homes and Estates broker Babs De Lay. And Scott Moyes, a Utah real estate investor who runs the Wasatch Area Real Estate Investor’s Association, agrees. “Now is a great time to get a great deal on a house,” he says. Real estate agents tend to say any time is a good time to buy, but now it appears true. While it’s rough to be on the selling side, those on the buying side are all smiles as they’re picking up properties that 18 months ago were red-hot. “We’re seeing more cash offers and bottom feeders, people making multiple offers,” says De Lay, adding that the buyers are local people who have cash through other sales and see an opportunity. For example, De Lay recently re-presented buyers who bought a Federal Heights home formerly appraised at $800,000 for $525,000. The buyers will use it as a rental for three to five years, then resell it when the market recovers. The opportunities, brokers say, appear to be mostly in single family homes purchased in the past few years with little or no money down, and little documentation and income verification—the “toxic” combination at the heart of today’s financial crisis. Not everyone can jump into the market now, Moyes says, but those who can, can do well. “You can make a ton of money in foreclosures and short sales, but you have to have cash and credit. There are still great loan programs, but now those loans require down payments.” There are different ways to find good deals through foreclosures, short sales, auctions and independent sleuthing through Websites and for-sale-by-owner classifieds. But in today’s market, finding a knowledgeable real estate agent might help. Short sale purchases offer some of the best deals, but require some special expertise. In the typical short sale, a borrower in trouble declares to the lender a need to get out from under a mortgage. The lender then lists the property as a short sale and negotiates directly with potential buyers. The sellers lose their equity, but by avoiding foreclosure, preserve their credit standing. The seller’s loss of equity is the buyer’s gain. The motivation is to get the deal done fast and many close in a month or less. Foreclosures end up becoming lender-owned properties. Without the urgency of a pending short sale, lenders may look at the real estate differently. “Banks are in a funny position,” says real estate auctioneer Eric Nelson, who periodically holds mass auctions of bank-owned properties. “You may offer a full price offer of what you think is fair market value and they won’t take it because they can’t take the loss on their books.” De Lay has worked a number of short sale purchases for her clients. “If the property is heading to foreclosure, we’ll work directly with banks. We’ll offer 60 to 70 cents on the dollar—take it or leave it.” The bank then analyzes its costs to carry the home as an asset versus the up-front loan loss it may suffer, and come back with an up or down answer. While single-family homes represent the best investment opportunities, residential building lots are another opportunity, as builders try to pare down their inventory to get through the construction slowdown. “We see opportunities out there in undeveloped land,” says Internet Properties owner and broker Vasilios Priskos. “We think banks will be taking some back, but you need an investor who’s patient for five or 10 years to get their money back out.” Utah’s commercial real estate is sitting this bottom feeding frenzy out. “People are hanging in there and there isn’t a panic in this [commercial] market,” says Priskos, adding that he has investors who tell him they have money and are waiting for a distressed situation. “I haven’t been able to call them,” he says. Predicting the bottom of the Utah real estate market is no different than predicting the bottom of the stock market. Are investors bottom feeding now or do better opportunities lie ahead? The fundamentals of Utah’s economy remain stronger than most regions of the country. Utah unemployment is still relatively low, the cost of living is slightly below the national average and the Utah birth rate continually assures growth regardless of economic circumstances. Many Utah real estate investors aren’t on the sidelines when it comes to buying single-family homes; they’re in the market now, looking for the next deal. Sweet Deal Land a Home in a Real Estate Auction Real estate auctions are a new, high profile phenomenon in the current financial crisis. Banks and other lenders with portfolios of foreclosed properties sometimes find it advantageous to move all their properties quickly, rather than sustain the carrying costs and risk damage to vacant homes. In July, on the 23rd floor of the Wells Fargo Building in Salt Lake, a large crowd gathered to bid on 52 bank-owned properties at an auction hosted by Las Vegas-based Eric Nelson Auctions. The first property sold for 55 percent of its estimated value and the crowd cheered, expecting those kinds of deals all night. To become a qualified bidder, Nelson required people to register and show up with a $10,000 cashier’s check or cash. Lenders aren’t required to accept the highest bid and will generally wait three to five days to notify the winning bidder that the bid was accepted. In July’s auction, most bids were accepted, but at a later Utah auction held one day after the first bailout law passed, none of the high bids were accepted. Open houses are held at properties prior to the auction, so potential buyers can do some due diligence. Some rookie bidders fear that they’ll get caught up in the excitement of an auction and pay too much. But Nelson points out other bidders validate the price. “You’re only the high bidder by $10,000 or so—that’s what the guy behind you was going to pay,” he says. Expect more auctions as the bailout progresses. As the FDIC liquidates failed banks, Nelson expects large blocks of homes to be offered in bulk at auction.
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