Governmental Intervention in the Housing Market

Yesterday, President Bush discussed his plan to aid homeowners at risk of losing their homes. Most of the plan focused on assisting borrowers to refinance their adjustable-rate loans to more conventional loans provided by the Federal Housing Authority.

I took a look at his recommendations and of particular interest to me was his proposal to temporarily suspend the tax liability that is owed by homeowners when performing a short-sale. As of now, the IRS has the right to tax the loan amount that is forgiven by the lender. It is considered a forgiveness of debt.

Short-sales have become very popular, as of late, because home prices have dropped in recent years and adjustable-rate mortgages have begun to reset. It has become more common for the value of a home to be less than what is owed to the bank. For example, let’s say that you purchased a 2 bedroom condo in 2005 for $500,000 and financed 90 percent of the purchase price. Two years later the value of your home has dropped and you have fallen two months behind on your payments. In the past, when homeowners were in this situation they would tap into the equity on their home by refinancing to take cash out. This is no longer an option, however, to most, because home prices have fallen. Oftentimes, two possibilities exist: lose your home through foreclosure or sell your home through a short-sale.

In the example above, let’s say that the price of your 2 bedroom condo has fallen to $400,000. You owe the bank roughly $450,000. You’ve talked to some knowledgeable acquaintances and they’ve advised you to do a short-sale. Basically, a short-sale means that the bank is willing to accept a pay-off amount that is short of what is owed to them. You contact a local real estate agent to list your property and within a few weeks an offer of $380,000 is submitted.

What is important to note is that two parties need to accept the offer: the seller and the bank. The reason why the seller has to sign off on the offer is because the IRS has the right to tax them on the amount of the loan that is forgiven. In this case, a tax on the $70,000 forgiveness of debt will be due the following April.

The bank also has to approve the offer because they are the ones who are accepting the shortfall in the original amount owed. The banks will ask the homeowner to have an appraisal performed at their expense. Banks are not stupid. They realize that the market has declined but they aren’t going to accept just any offer.

Recently, I’ve come across a few short-sales in the MLS that just don’t make any sense. For example, there’s a 2 bedroom/2 bath listed for $295,000 at Vue at Brickell. There’s also a 1 bedroom/1 bath listed for $217,000 at The Club at Brickell Bay. I’ve written about both buildings in the past and how prices in each building are inflated due to the mortgage fraud that has occurred. However, these prices are a step in the wrong direction and are unjustified. The 2 bedroom at Vue at Brickell is the best priced unit in the entire building, including the 1 bedroom units. The 1 bedroom condo at The Club at Brickell Bay is better priced than even the studios.

Listings like these are a waste of time for everyone involved in the transaction: the seller, the buyer, the bank and the two real estate agents. Just because it is a short-sale doesn’t mean that you can list a property at a price that will get you an offer within a week. As of right now, it is also doing a great disservice to the seller who will have a large tax bill come next April should the offer get accepted by the lender.

As I mentioned earlier, however, President Bush has proposed to temporarily suspend the tax that is owed to the IRS on the amount that is forgiven when a distressed homeowner performs a short-sale. If this becomes a reality it will alleviate a lot of problems for distressed property owners. Short-sales will become more common.

It wouldn’t surprise me, however, if we start seeing mortgage fraud occur in reverse. Appraisals will start coming in very low to justify the offers that are submitted to the banks. It’ll be a nightmare for banks. Accredited local appraisers need to be in place for these banks to be able to cleanly wash themselves from the mortgage mess at hand.

Short-Sales – Short of Spectacular

Everyone has heard that short-sale and foreclosure listings have increased dramatically in the past 12 months. I’ve found that, as of late, two to four new short-sale listings will appear in the MLS for each neighborhood in Miami per week.

I’m a huge fan of foreclosures but not such a big fan of short-sales, as of right now. I think in about six months things may change, however. I’ve found that the big banks just aren’t ready to play ball yet. Maybe they are just too optimistic about the state of the real estate market. Within the past two months I presented two offers on short-sale condos that were about 15 percent under the lowest comparable sold sale in the building. Both were rejected and the banks countered with figures that were very close to what they were owed. In both cases, what they were owed was much more than what had recently sold in those two buildings.

Banks need to realize that lending practices were lousy, at best, in recent years, and that what is owed to them is a pipe dream. Prices have already come down 20-30 percent from the height of the market here in Miami and Miami Beach. Many project that prices will come down even more. Yesterday, someone emailed me that “Your first loss is often your best loss”. I feel that more banks need to think along these lines. The banks ready to play ball now will be much better off than those holding out for greener pastures. As the saying goes, “Greedy pigs get slaughtered”.

From my experience, however, it does seem that the smaller banks do understand the state of the market and are more willing to negotiate terms. Perhaps, it is not their understanding but rather their eagerness to stay afloat. I think in the next six months, as pressure is added by stockholders, big banks will be much more favorable in their attitude towards short-sales.

The Fate of Prices at Vue at Brickell and The Club at Brickell Bay

For months I’ve been writing about the rampant mortgage fraud that has occurred in certain buildings located in Brickell such as Vue at Brickell and The Club at Brickell Bay.

The August Brickell Condo Index revealed that over the last six months Vue at Brickell had closed sales with an average price per square foot of $522.37 while The Club at Brickell Bay sold at an average price per square foot of $723.35. Both averages have been inflated as a result of the mortgage fraud that has occurred in these two buildings. Both figures seem outrageous to me since both are non-waterfront buildings and, by most, would not be considered top buildings in Brickell.

It is inevitable that in upcoming months both figures will come down drastically. Both have a lot of short-sale and foreclosure units that are currently listed. For example, Vue at Brickell currently has 8 condos that are marked as either short-sale or foreclosures. The Club at Brickell Bay currently has only three but I suspect that many more will arise in upcoming months.

One bank-owned property at Vue at Brickell is listed at $325 per square foot while another is listed at $343 per square foot. These represent an almost $200 per square foot reduction compared to what has sold at Vue at Brickell over the last six months. That is a difference of over 35 percent. Keep in mind also that these are the list prices. They will ultimately sell for less. These transactions will bring the averages down to a more realistic figure. Anyone who purchased a condo in Vue at Brickell about a year ago won’t be able to refinance for many, many years. This will lead to more foreclosures which will bring down the average even more.

The best price per square foot currently offered of the foreclosure or short-sale units at The Club at Brickell Bay is $471. That is a difference of $252 per square foot when compared to what has sold in the past six months, or a little over 34 percent. I feel that there is a lot more room for this figure to drop. There are just too many other brand new non-waterfront units that will be coming onto the market in Brickell within the next 12 months that offer much better prices than those offered by some of the existing Brickell condo buildings that were riddled with mortgage fraud.

My prediction is that a year from now Vue at Brickell will have an average price per square foot of around $325 for units sold over the preceding six months while this figure for The Club at Brickell Bay will be around $375. Of course, this is just an average, so some will sell for less while some will sell for more. I don’t think this will be the bottom though for condos at The Club at Brickell Bay. They will likely plateau around $350 per square foot. The latest foreclosure and short-sale listings shed new light as to the fate of prices at Vue at Brickell and The Club at Brickell Bay.

I feel that other non-waterfront condo developments in Brickell are in jeopardy as well. A lot of people are talking about the thousands of new units that will be coming onto the market in Brickell within the next couple of years but many fail to mention that only two, Epic and Icon Brickell, are bayfront. The rest are either riverfront or non-waterfront buildings. The bayfront buildings will have a slight downward adjustment in prices but will fare well overall. Once those two developments are completed there will only be one bayfront parcel of land left for development.