DEAN GRAZIOSI: DEAN GRAZIOSI REAL ESTATE

As a real estate investor, you will be sticking to the script, or business, plan that you developed.  You will have a very good idea of your budget and of the criteria that will compose a workable short sale for your inventory. 

If you are working with one or more short sale agents, you must be careful that they do not waste your time.  Many agents just subscribe to the theory that you throw everything against the wall and maybe something will stick.  These agents can cost you time and money.

Being able to clearly describe the characteristics of a property that might interest you is essential as well as a good exercise for you.  When you converse with an agent about a property, these are some of the guidelines you may set:

·                     You are only interested in properties with one or two liens.

·                     You are not interested in properties that are in the midst of a divorce.

·                     You are not interested in properties that have Fannie Mae or Freddie Mac backed loans

·                     If there is a homeowners association, you want to make sure the property you are considering does not have outstanding liabilities.

·                     If there is a homeowners association you will want the name and contact instructions for the bookkeeper or accountant

·                     If there is a homeowners association, you will want to see a copy of the by-laws or prospectus.

·                     Is the potential property in the geographic area or neighborhood that you want?

·                     What repairs will definitely be needed to make the house livable?  You will have a contractor inspect the house but you most likely are not interested in a property that requires more than 20% improvement costs.

·                     What are the asking price and the amount of the mortgage?

If the agent can answer these questions to your satisfaction, you have a serious short sale agent working for you.  If you reject this property, make sure to explain why, so that the agent is not discouraged and knows what to concentrate on in the future.

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The unemployment crises in the United States has hit every economic level.  A new report form Trulia.com, a comprehensive real estate website, suggests that homeowners with jumbo mortgages, once the most credit worthy buyers in the country, are now failing at unprecedented levels.Borrowers with prime conforming loans are now experiencing the highest rate of foreclosure in history.  Since January 2008, foreclosure on prime conforming jumbo loans has increased by 420 percent.  Foreclosures on non-conforming loans have increased by a staggering 600 percent.

Jumbo loans are any mortgage loan that exceeds $729,750.  Conforming loans are eligible for purchase by Freddie Mac or Fannie Mae.  The original limit on comforming loans was $417,000 in the U.S.  In February 2008, President Bush increased the limit to $729,750.

Fannie Mae and Freddie Mac are not liable for any amount of a mortgage that exceeds the limit.  When the economy was running on all cylinders, Americans were qualified for large mortgages and with the high prices commanded by the market, jumbo loans were a way of life for high income families.

Trulia.com suggests that many of the foreclosures in this price range are strategic defaults.  Homeowners now realize that the home they spent $1 million to acquire has been discounted by as much as 30 percent.  Many high income homeowners are stunned that the amount of their jumbo mortgage now exceeds their property value.  These homeowners have determined not to put more good money into a bad situation and are allowing their mortgage to default.

Ironically foreclosures in some of the areas hit hardest by the recession are showing signs that they have peaked.  However, foreclosure in many of the nation’s metropolitan areas have continued to rise.

RealtyTrac confirms that in 154 or 206 metropolitan areas with populations of 200,000 or more, foreclosure filings continue to post year-over-year gains.  The Fort Lauderdale-Miami-Pompano Beach area leads the country with 94,466 foreclosure filings in the first half of 2010.  Investors have been hesitant to attempt short sales on jumbo mortgages but Fannie and Freddie have enacted legislation to halt strategic defaults.

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The media has focused on the housing sector of the troubled real estate market because it is up close and personal.  While the decline of the commercial real estate market is not as personal as the decline in housing, it is just as devastating and likely to be around for a long time.

When you visit an office complex, or drive by a local strip mall or shop at a retail mall, you cannot help but wonder where all the tenants have gone.  These malls and empty offices are by-products of the tragic employment situation.

The commercial real estate market is dismal and not getting any better.  Investors had hoped for assistance in the financial reform package but instead feel betrayed.  For the commercial sector to gain any momentum, the residential crisis needs to improve.  The new reform package is well intended but very short sighted as the new credit scrutiny will make it even less appealing for lenders to open the credit doors and more difficult for borrowers to qualify.

Commercial property is driven by occupancy rates.  As big corporations and retailers have cut back, vacant space has erupted everywhere.  According to the National Association of Realtors (NAR):

·                     Property development has a 38% vacancy rate.

·                     Hotels are running at a 26% vacancy rate.

·                     21% of office space is vacant.

·                     21% of retail space is vacant.

·                     Industrial vacancy is 19%

·                     Multi-family properties have a 12% vacancy rate.

The NAR projects that peak vacancy rates will occur in the spring of 2011.  Moody’s reported that commercial real estate values rose 3.6 percent in May but the market is down 38 percent since its peak in 2007. 

Defaults on commercial apartment loans are at 4.6% despite the fact that tenants are plentiful because of the number of residential foreclosures.  Real Capital Analytics reports that commercial defaults will continue to rise until employment gains momentum.

Investors in commercial short sales are on the rise. Commercial short sale buyers must be prepared to carry vacant space for a minimum of two to three years.  Buyers need to understand the cost of all necessary repairs and fully understand the existing lease arrangements with tenants.  Usually the buyer can obtain permission to speak with the tenants prior to making an offer.  Investors who find tenants first are ahead of the game

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