Realty Investors

In recent weeks volumes have been written regarding state of the real estate market and its impact and cause of the financial crisis. The purpose of this article is not to explain in detail or dissect the cause of whose is responsible however it is to open a discussion on one very important aspect that few are talking about.

Due to my education and business experience I have said many times that the real estate market is an economic market and as such the laws of economics apply. Excess supply and low demand drives prices down.  In general buyers worry that the prices will continue to fall and they are reluctant to make commitments to purchase. The continuing lack of demand exacerbates the over supply problem and it is a downward spiral. This raises the question what is the market value for property, defined as what a buyer is ready and willing to pay.

In the absence of buyer’s confidence and sales, the question of how to value any property is extremely difficult. That creates the liquidity the problem that banks and financial institutions are experiencing. What is the value of the bundles of mortgages they are holding? Without a clear way to value these holdings investors are reluctant to purchase these bulk packages of mortgages again causing a downward spiral.

My opinion of what is causing the over supply is as follows:

First, the cost of home ownership has risen dramatically due to rise in energy and insurance costs. Owners that purchased based on marginal affordability put their homes on the market in an effort to stem the financial bleeding.

Second, the number of rising completed foreclosures dump bank owned properties on the market at sacrificial prices that undermine the value of other properties in the area.

Third, the number of “Possible Short Sale” listings has exploded.

I find this last reason as the most disturbing. The definition of a short sale is when a property owner has a buyer ready, willing and able buyer to pay a price less then what the lender is owed. Short sales are not new to this market. They have always existed but to a much lesser percentage of the total homes for sale. If a borrower has a life changing hardship such as a death of the primary income earner, or a serious and sudden health issue, or a change in family status such as multi births of divorce, personal bankruptcy or even a business failure, it is prudent to the lender to consider accepting less than what they are owed to avoid a lengthy and expensive foreclosure process to clear the loan from their books. However there is no language or implication in a mortgage document that if the real estate market prices fall that the lender should share the risk and the pain.

Yet I continually experience intelligent owners saying that the property is now worth less than I owe so I will list the property as a possible short sale and ask the bank to be my partner in the loss of equity. This thinking is so immature and ridiculous that it is almost funny. In fact, I sat in front of one owner the other day explaining the short sale process and the fact that he has income and assets and just because the market dropped does not make him a good candidate for a short sale. The CNBC news was on the television in the back ground and he asked me my opinion of the United States of America government bailout of financial institutions. That is when a light bulb went off in my head and I came to the conclusion that owners who did not read or understand their mortgage document to know that the loan was not predicated on the value of the property staying stable or continuing to rise, who have no legitimate hardship are artificially increasing the supply of property in the market. While this is not the sole reason for the increase of supply it adds a very dangerous incremental component to the total  inventory available and drags the market further down making the situation worse.

I strongly recommend that property not be listed or advertised as a short sale unless the lender has been contacted, presented with a short sale package, has agreed that no other restructuring of the loan is possible and is willing to entertain offers on the property.

I am not naïve enough to be suggesting that this will solve the entire Financial Crisis and collapse of the real estate market, but I do believe it is a first step and an important element of stabilizing the excess inventory.

About the author

Business Management Degree from Fairleigh Dickinson University. Over twenty five years of Senior Sales and corporate management in the Consumer Electronics Industry. Real estate license in California for eight years and a real estate sales  license for 3 years and a brokers license for the past year in Florida.