Defaults Down and Flipping Returns

By Gino Blefari, President & CEO, Intero Real Estate Services, Inc.

Here are two fun things to ponder this week:

Mortgage defaults are down – way down. First-time delinquent home loans fell to 0.84% of the 50.2 million mortgages in March, according to LPS.

It was monumental because it was the first month defaults fell below 1% since 2007, when the first defaults of the financial crisis reared their heads.

First-time delinquents are defined as loans that went from performing to at least 60 days delinquent when the report was created.

The days of problem loans aren't fully behind us – there will be some amount of that in the market for a while. But the days of massive waves of these loans are safely tucked in the background, for now it seems.

Flip: Real estate's four-letter word

Flipping made a media comeback this past week when RealtyTrac released a report highlighting the top 25 markets for flipping homes in 2012. The markets reflect those cities in which flipping produced the highest rate of return for flippers, i.e., gross profit.

Phoenix had the highest number of flips in 2012 with 10,589 property flips. Inland Empire, CA, Las Vegas, Miami, Denver and Detroit also topped the list by volume of flips.

The top five markets in terms of dollar amount profit in 2012 were San Jose ($103,241), San Diego ($85,714), San Francisco ($80,306), Las Vegas ($70,746), and Ventura County, CA ($70,426).

While flipping may conjure up bad memories of its TV glory days when everyone from waiters to hairdressers was a self-proclaimed real estate investment guru, it's not a bad thing.

Flipping implies property improvements and increasing values - two important factors in pushing a healthy, widespread recovery.

Something tells me it'll be less circus-like this time around. More seasoned investors and levelheaded borrowers. More lending restrictions. Less snap decisions and debt digging.

Lessons learned indeed. But it's something to keep an eye on. If we start to see insane rampant flipping by real estate hobbyists again, we may need to step back and reboot.

"Flip" by Another Name

Here's an article about "investors" buying foreclosured properties and selling them quickly - once repairs have been made and the property can qualify for government-sponsored guarantees or conventional financing. Team Patereau says this is not new - it's the very common practice of flipping. It happens in Gilroy and the surrounding area regularly.

We should all say a big "Thank You" to these investors who have the cash to take distressed properties off the market, more cash to fix them up, and the time to have their cash tied up until a new homeowner, oftentimes a first time buyer, can be found.

The OTHER Offer

As I mentioned Monday, Team Patereau received two offers on two different listings last week-end. The first one I bragged about on Monday. Now let me tell you about the OTHER offer.

The listing is a single family home in San Jose’s Eastside. It’s a 3 bedroom, 1½ bath, 49-year old home. In our promotional material we describe it as, “FIXER!” (That’s all capital letters, and an exclamation point added for emphasis.) It’s been on the market since February. From that you can assume that the property has been a challenge.

Finally, with two “Price Corrections” (reductions) we received an actual written offer. Phew! Team Patereau celebrates. Then we read the offer.

Offer Details:

• Offer Purchase Price is $450,000


• Good Faith Deposit is $4,500


• First Loan is $360,000


• Second Loan is $90,000


• Buyer gets Good Faith Deposit of $4,500 back at close of escrow


• Buyer wants Seller to credit Buyer at close of escrow $13,500.


• Buyer is one individual person


• Buyer intends to occupy the property as his personal residence


• Preliminary Loan Approval letter from lender enclosed with offer indicates Buyer approved for 100% loan.
  

Things we know from discussing the offer with the agent who wrote it and the lender who wrote the Preliminary Loan Approval letter:

• Buyer does not intend to occupy the property as his personal residence. He intends to “Flip” it.


• Buyer did not give a check for $4,500 to agent for the Good Faith Deposit.


• Real Estate Company that wrote the offer is tied closely with the Lender who wrote the Preliminary Loan Approval Letter (same broker).
  

Translation:
Buyer is a “Flipper,” probably a contractor who is not going to be out of pocket any money to acquire the property, found a lender to give him a “Preliminary Loan Approval” letter for a 100% loan package, and there is no copy of the check for the Good Faith Deposit enclosed with the offer, and the agent indicated (after several unreturned phone calls and a final call threatening to call his broker) that he never got a check from the buyer and the buyer has recently indicated he doesn’t intend to give a check.

The agent who wrote this offer is committing fraud, the potential buyer who signed this offer is also committing fraud, and the lender indicating that they will do a 100% financing package for a non-primary-residence fixer is almost committing fraud, but we’ll leave it at lying, shall we.

In the contract words, page one, INITIAL DEPOSIT, the words are: “Buyer has given a deposit in the amount of $4,500 to the agent submitting the offer…”
The buyer didn’t give it and the agent didn’t receive it. That’s fraud.

Same page, contract words are “Buyer intends… to occupy the property as Buyer’s primary residence.”
The buyer doesn’t. He told the agent he doesn’t, he told the lender he doesn’t, and the agent and the lender told Team Patereau that he doesn’t. That’s fraud.

I recently read about fraud in a blog entry written by Bryant Tutas, titled, “You Want My Sellers to do What?” Bryant’s sample of fraud was overt and obvious to even the least experienced real estate licensee.

The fraud in the offer on Team Patereau’s listing was a more covert, or subtle, form of fraud. It happens fairly regularly in a market like we have in this area, and it gets blamed on "hungry agents" and "starving realtor syndrome." This is the kind of thing that real estate licensees protect their clients from. This is why a real estate agent is a really good idea for every real estate transaction.

Needless to say, when Team Patereau went over the offer details with the Seller, the offer was rejected. So, if you know of anyone who wants to buy a fixer in East San Jose, California, Team Patereau can be reached at 408-981-2799. I’d put in a picture here, but my previous post indicated that if there isn’t anything good to show about the property, don’t show a picture. This property needs a buyer with VISION. Enough said.

SPECIAL NOTE TO AGENT WHO WROTE THIS OFFER:
Fraud is when you lie. Don’t lie, not even when you really, really, really need to get a deal going. Don’t lie to your client, don’t lie to other agents, and don’t put lies down in an offer.

SPECIAL NOTE TO LOAN OFFICER WHO WROTE THIS PRELIMINARY LOAN APPROVAL LETTER:
Fraud is when you lie. Don’t lie, not even when you really, really, really need to get a deal going. Don’t lie to your client, don’t lie to other agents, and don’t put lies down in a loan approval letter.