FINDING GEMS IN THE LUXURY REAL ESTATE MARKET

FINDING GEMS IN THE LUXURY RESIDENTIAL
REAL ESTATE MARKET
by Carl Agard

article in Moves Magazine Winter 2007 Edition

It has been a great run for over a decade, but the real estate market has just changed. The sub prime mortgage collapse has lenders tightening their criteria more than ever. Many areas across the nation are experiencing record highs in foreclosures. What was a frenzied seller’s market has quickly changed into a buyer’s market. The high-end residential real estate market is no different. As interest rates rise, mortgage rates will also, especially those that have an adjustable interest rate. This increase in monthly payment will put pressure on financially exhausted homeowners that are barely making ends meet already. Some will see their monthly payment double.

A high-end property foreclosure can happen to the best of people, in the best neighborhood, in any price range. Many people have been taking out loans that are more than they can afford. Some people simply just fell on hard times ranging from a job layoff, sickness, or divorce. A high-end foreclosure can include such properties as a mansion, high rise condo, or a luxury townhouse. It can be anywhere from the beaches in Orange County California to the Towers of Trump Plaza.

Now is the time for a savvy real estate investor or a homebuyer to get into the market and find bargain deals. Inventory on homes for sale are at an all time high. Sellers are sitting on properties for sale longer, and have to make huge cuts in prices to get a sale. Lending criteria are a lot tougher now. Banks are requiring prospective buyers to fully document income and assets. Credit scores have to be at a higher level than before to get the best rates. A lot of prospective buyers are eliminated from the market, so gone are the days of bidding with several people for a home.

In the high-end market, sellers are giving huge concessions such as paying all closing costs and paying a year worth of home association fees. Builders in the high-end market are giving deep discounts on prices of new homes so as not to sit on inventory. Custom mansions are being sold with well over $100,000 in equity. Some builders in some areas are offering free upgrades in kitchen and bathrooms, free installation of pools and customized home theaters.

In the high end foreclosure market, the discounted deals are even more lucrative. Foreclosures make up to 2-3% of all loans, according to the Mortgage Bankers Association. Over 110,000 homes for over a million came into the foreclosure market this year. That is a 40% increase over the previous year, and it is projected to get worse. There are many ways to purchase a foreclosed property.

Pre-foreclosure Home
Before the actual foreclosure procedure begins the homeowner is notified by the lender/bank and is given a time period to rectify the situation, usually after a period of two to three months of consecutive non-payments. Depending on the state you live in it can take a bank from three months to a year to fully foreclose on a property. As a buyer, you have to be ready to make an offer and close quickly. When buying a pre-foreclosure, you are on the clock since the bank is looking to foreclose on that seller. You can get a steal purchasing a high-end foreclosure because you have a motivated seller who is trying to save their credit and avoid defaulting on a huge mortgage.

Auction
You can get a steal at the auction. Before a bank includes a property in its bank-owned portfolio, it will put the property up for public auction at the local courthouse steps. You can check with your local municipality to find out where and when the next foreclosure property auction will take place. The banks also list public notices of properties for sale in local newspapers and public records. Some auctions can be a madhouse, but if you do your research before you bid, you can come away with a steal.

Make sure you check out the value of the property you want to bid on and compare it to the price that the bank is asking. You don’t want to overpay for a property. Next, check out the condition of the property. In some cases you may be unable to see the property prior to purchase because the owner may still occupy the home. So allow your bid to make room for some repairs. You must be able to close within 30 days. Most banks will take 10% of purchase price in certified funds the day of the auction. But you still have to close with the remaining balance by the end of the month. If you do not close in this time period, the bank keeps the property and will lose your 10% deposit. Make sure you are prepared to buy a property on the courthouse steps. Have your financing in place in advance.

Finally, make sure that you do some sort of title search on the property. You can access the public records on the property to make sure there are no tax or mechanic liens, violations, or outside claims against the property. These things can be a nightmare to clear, and can give you problems transferring title to a future buyer.

REO (Real Estate Owned properties)
These are properties that were considered in default when the home owner failed to pay the mortgage loan or note after a designated period of time, usually within a three months to a year period. The lender goes through a legal process to repossess the property. They first move to vacate the property if anyone is still living there. After the bank goes through their legal process to repossess the property, the bank announces a sale to the public and buyers can bid on the property at an auction. The bank determines the price they want for the property which is usually to cover the cost of the mortgage note, or as close to market value as possible, whichever is higher. Whoever wins the bid on the property has up to 30 days to close on the house, or the property goes back up for auction. If not, the property becomes a Real Estate-owned property (REO) of the bank. The bank then lists the house with a real estate service or management company to sell the property in order to recoup its losses.

These properties are usually listed at below market value because the bank is merely looking to recoup the loan amount originated by the person who took out the loan, not the market value of the house. For a person who is looking to buy these types of homes it is possible to find a steal in this market, with the proper research—knowing the value of the property, and the future outlook of the area in which the property is located.

Banks do not want to own or manage properties. Mortgage companies are in the business of making loans and collecting payments, not collecting rents. The banks do not want to deal with this headache. Therefore they are also very motivated to sell at huge discounted prices.

Besides residential real estate, there are also bargains in the commercial real estate market as well. Depressed owners are selling apartment complexes and strip malls below market value as well. Before you go shopping for your next piece of property, follow these tips.

· Get your finances in order first. Talk to a mortgage professional to find out the best option to use to purchase a home. Shop around for a lender that will give you the best rate. Any difference in interest rate in the million dollar range can cost you thousands of dollars over a long period of time. You also want to have your mortgage professional ready to close quickly when you find that killer deal because it may not last long. Cash is also king!! The more you put down in cash, the quicker you will get a contract accepted.
· Use a professional negotiator. Sellers and Banks hire listing agents to get them the highest offer. You, as the buyer, want to pay the least and get the most for your dollar. Work with a licensed Realtor that can represent you as the buyer’s agent. They will locate the best deal for you, do the necessary research, and help to negotiate the best terms in your contract.
· Do your own homework. Even though you may have a Mortgage and/or Real Estate Professional representing you, still do your own due diligence before closing a transaction or signing a sales contract. There are many websites that can give you public information on properties and market trends. Knowledge is key when navigating around the crazy world of Real Estate. But the more you empower yourself with information, the more lucrative it gets.