Remember when Alan Greenspan, former chair of the Federal Reserve, talked about the irrational exuberance in the stock market? You might not, because the quote is from a speech he gave all the way back in 1996! I see some of the same enthusiasm in the pricing of some houses on the market in our dear corner of Northeast Los Angeles. But the exuberance Greenspan referred to had to do with actual business being transacted. In today’s real estate market, I’m seeing irrational exuberance in some list prices, not in actual closed sales.
As I’ve said in recent blogs, I’m dedicated to attaining a fair market price for our real estate stock. But that doesn’t mean that sellers should be listing their homes at overly ambitious prices, because that does nothing to firm up actual sale prices.
Let’s imagine that you are in the market for a home. You are pre-approved for $500,000 and you want a 2 bedroom 1 bath home in Eagle Rock. You look on the computer every day to see if something new has come on, because although you think $500,000 is a lot of money to pay for a home, it is not easy to find a really good property in the right neighborhood for that price.
One day a property comes on that fits your criteria but it’s listed for $729,000. You wouldn’t even see it on the Internet because your search is limited to properties in the $450,000 to $525,000 range. But let’s say you are out one day and see an open house sign and stop in. Hmm. $729,000? Out of your league, you figure, and you leave.
Another day comes with a new listing for $525,000 that is pretty nice, but not quite big enough. Eh, you let that go because it’s at the top of your range and probably not worth it to you.
Another day you are looking and you see a perfect property for $475,000. Wow. You rush to call your agent and hurry over. There are already 5 other prospective buyers there with their agents and the buzz is loud. What’s the plan for multiple offers? How much do we need to offer to be in the running? Can we expect a counter if we offer enough over or are they going to take best and final? Do you think I can get the lender to pre-approve me for $530k? $550k?
Which property do you think might get the highest final sales price?

First, check out Sean O’Toole’s latest report http://files.foreclosureradar.com/foreclosure-report/May+2010+CA+Foreclosure+Report.pdf. Hmm, where is that “shadow inventory” we have heard about for so long? From several different sources I have heard that at most, 10% of scheduled trustee sales actually sell on any given day. The rest are postponed or cancelled. Most of these trustee sales have no bidders and they go back to the bank. This is what we call a foreclosure or REO, for Real Estate Owned.

The big challenge ordinary potential home buyers are unaware of (until they try to buy one of these incredible deals with a 3.5% down FHA loan) is that most of these deals are selling for cash to investors. And most of these investors are fairly large scale–that is, they may have anywhere from 10 to 200 properties they are rehabbing and flipping at any given time. They will buy a property for cash either on the courthouse steps, or from the foreclosing lender, ”as-is,” close in 10 days. Can your FHA deal compete with that? Or your 20% down conventional deal?

Is this a terrible thing, big investors snatching up these great deals so the poor first time buyer doesn’t have a chance?  There is no one clear answer.

Consider that most of these deals are real fixers with all kinds of problems. A first time buyer generally doesn’t have the money on hand to make the repairs that really need to be done. A first time buyer also doesn’t have the knowledge or experience to take care of these problems in the most “professional” way. During the last big downturn in the 1990’s, there were a number of people who did “flips” around Northeast Los Angeles and Pasadena/Altadena. They did the cheapest, ugliest jobs possible. They would stucco over sweet old bungalows, take out original hardware and fixtures, install the cheapest sink and kitchen cabinets, fixtures, vinyl and carpet, slap a coat of really cheap off-white paint on the interior and call it a remodel. Ugh! I can still smell the ammoniated stink of that nasty paint.

Today, there are teams of investors who are actually doing a tasteful, quality job. Look at Better Shelter as an example: http://www.bettershelter.com/. There are several groups doing this kind of work, and I applaud them. They are improving the housing stock in Los Angeles, making homes that real people can live in and enjoy for a relatively affordable price. They are actually making things better for the community as a whole and in some really forgotten depressing neighborhoods.

My dream is that I have a part in the transformation of blocks of stuccoed-over cottages with their ugly cement-block-and-wrought-iron-fencing into attractive modern easycare homes that present an attractive face to the neighborhood. Even if you don’t remove the stucco but you make it smooth and contemporary with good windows with frames that add dimension and character to the exterior, even if you leave the fences in place but you stucco over the cement block and change the iron bars into maybe Trex rails or bamboo inserts–you could have durable beauty and privacy without it looking like a little jail! I’m excited because I see these things actually happening.

Have you seen any of these transformations around town?

Dear Tracy,
What does this Supplemental Property Tax notice mean to me? Won’t I pay the property tax I owe when escrow closes and then when the next regular tax bill comes?
Dear Buyer,
Supplemental Property Tax is just about the most confusing aspect of purchasing a home in Los Angeles County, and probably anywhere else, but this is the area that I know.
In the first place, property tax itself is confusing because you pay the tax in December for the first half of the fiscal year that began the previous July 1, and you pay the following April for the second half which runs to the next June 30.
But the valuation of your property that you are paying tax on in any given fiscal year is figured as of the previous January 1. If you think this is a bit confusing, add the supplemental tax payment in and you have a real lack of understanding going on.
The key to figuring all this out is threefold:
1. The Supplemental tax bill is based on the reassessed value of the property you just purchased.
2. The county tax assessment is paid in arrears. When you purchase a home, the property tax amount is reassessed, but not instantly. A Q and A flyer from Equity Title (https://www.equitytitle.com/metroportal/EquityTitle/pdf/Generic-S11-17_Supplemental%20Property%20Taxes%202009-equity.pdf) says that you might be reassessed and billed in as little as 3 weeks, or it could take 6 months. Remember, this is a one-time tax bill that “supplements” the regular tax bill. It is not going to be added in to the regular bill so if you buy a home between August 1 and March 1, you are probably going to have a large supplemental bill show up in your mail box. The Supplemental Tax is figured on the additional tax due until the next June 30, the end of the fiscal year. Because the tax you paid at the close of escrow was based on the value of the property as of the previous January 1, remember?

3. The county tax assessor’s office is run by human beings, not computers. This means that when you receive the bill is dependent on things like each county’s own procedures, even on the workloads of the various County Assessor, Auditor, and Tax Collector’s offices. Since we are currently in an economic downturn, you can bet these offices are understaffed. That means that the memory of your escrow closing will have become very distant and vague when this mysterious Supplemental Tax Bill shows up. I once bought and sold a home before the Supplemental Tax bill came. Imagine how painful that was when I figured out that I still actually owed that amount!

This is from the LA County Assessor’s Office:

Supplemental taxes are in addition to the regular annual tax bills. Like annual tax bills, payment may be made in two installments. Supplemental bills are mailed by the Treasurer and Tax Collector’s Office directly to the property owner and in general are not paid out of impound accounts. The property owner is responsible for the supplemental bill(s) and, in the event of an impound account, should verify with the lender regarding who should make the actual payment.
If a Homeowners’ Exemption or Veterans’ Exemption is applied to the supplemental, the actual taxes due may be less than the estimate provided.
If the supplemental tax estimate is a refund, the Auditor-Controller’s Office will generate a supplemental tax refund. Like the supplemental tax bill, the supplemental refund will be mailed directly to the new property owner.
To view a sample Supplemental Tax Bill or for additional information regarding Supplemental Tax Bills, please visit the Los Angeles County Property Tax Portal.
If you have additional questions about supplemental taxes, please email the Assessor’s Office at helpdesk@assessor.lacounty.gov

Here is what you must remember when you receive this bill:
1. You are not being billed for something that you don’t really owe (remember, your tax bills are based on past information).
2. If you impound your tax payments with your mortgage, your lender is not going to automatically pay this bill (they don’t receive this bill, only you do. They will receive regular tax bills).
3. If you do impound your tax payments with your mortgage, your payments should include the amount that the supplemental bills you, so you just have to send your lender the bill and they will pay it out of your escrowed account.
4. If you don’t pay your taxes monthly along with your mortgage, you are going to have more than one tax bill to pay. This is a really good reason to have your tax payments included in your monthly mortgage payment.

I want to emphasize that last point: many experts tell you to pay your taxes yourself because you are essentially giving the lender your money at no interest. I have found in the many years that I have owned property that receiving a hefty tax bill that is due in part right before Christmas and the rest is due right before income tax time is not the best way for me to deal with financial obligations. It’s painful, in fact. The interest I might make on the money that I would put in a savings account (would I really?) instead of sending it to the lender is infinitesimal. I prefer the same regular payment every month. When the supplemental tax bill comes, I send it to my lender and go on with my life. But it is your choice.

Here is my question for appraisers: If last week the highest sale in, say, the 90041 zip code was $695,000 and this week the highest sale is $748,000—does that mean that the value of my house just went up $40,000? And what does that mean about the house just across the line in the 90042 zip code that just closed escrow at $801,000? How does that sale affect the value of my house? Is my house now worth $801,000?

Let’s see what Zillow says: Oh, how completely wrong! It says that the value of my home has gone down by 3% in the last month! How does it figure that? Because it’s a computer model that takes numbers and mashes them up to spit out statistical probabilities, that’s how.
That is also what a “desktop” appraisal does. This is what a lot of lenders use to establish the basis for the value they give a particular property. All it does is take all the numbers within the range that includes your square footage, bedrooms, baths, general location, and mash them together into an estimate of value. Does that have anything to do with what a willing buyer and a willing seller might agree upon to consummate a deal? Not really!
Recently, a buyer had an opportunity to buy a house at what the seller wanted for it before it went on the market. The seller wanted $500,000. This was close to what it had been worth at around the peak of the market say 3 years ago. The buyer consulted 3 appraisers who all said no way was it worth any more than $450,000. And get this, the appraisers figured this out without ever even seeing the property! They looked online, looked at some photos, and made their determination.
Fine, so the sellers went on the market, had literally hundreds of people through the house in about ten days time, had multiple offers and sold the house for $500,000—with no appraisal contingency!
So what is the value? When it actually closes escrow, the value will be the $500,000, right? And if the sellers had accepted the $450,000, it would have been worth $450,000, right? So answer me a couple more questions:
If this Seller had been desperate or badly advised, he might have taken the $450,000 and that would have confirmed the value of that house in the neighborhood. This affects more than just that house, doesn’t it. The house next door is now compared to the $450,000 price, not $500,000. This is what has driven down the market prices in our neighborhoods.
I am on a mission to raise the market value in our neighborhoods to a more reasonable level. I know buyers think values should stay right where they are or even go down—but only until they buy, and then they want the values to go up, too. Just like all the other homeowners around here. Like you and me. I’d love to hear your comments.

Dear Tracy
I’m currently looking at getting FHA financing for any house that I make offers on. In theory, I could get a traditional loan if I found my “dream home,” but for the most part, an FHA loan makes more sense for me because it gives me more flexibility to have money left over to do some work on whatever property I buy.

Given that, do I ever even stand a chance on your listings? Obviously, you have many of the best listings in the areas in which I’m looking, and I’d like to try to find a way to be more competitive. I loved the one I saw last week and was planning on coming back to see it again today in preparation for an offer, but I was quite disappointed when my agent relayed the details of your conversation (where he was told I probably couldn’t compete) with me.

Any advice or suggestions that you could give to me would be greatly appreciated. Thanks for your time!

Buyer

Dear Buyer
As much as I wish I were, I am not in charge of what the market does or which buyers make offers on my listings. I do my best to position my sellers’ properties (with their cooperation and consent) to the most appealing spot in the price and market range to attract the best and most likely buyers for my listings.
What happens after that is partly dependent upon which buyers are out there. If there is a buyer who has all cash and is willing to pay $520,000 for Property X which is listed for $469,000, what can you possibly do to compete? If there is a buyer who has 20% down and is willing to offer a high price with no appraisal contingency and has more cash to make up any shortfall, what can you do to compete? On the other hand, if you were the only buyer, willing to pay an attractive price with good terms, you would stand a really good chance to buy Property X with an FHA loan. Or if there were several other offers that also had FHA loans and couldn’t qualify for more than, say, asking price.
Since I already have an offer and I know of at least one other coming in, I’m afraid that last scenario is not likely on this property. But it might be likely on some other property. Buying a home in a market like this is a frustrating process, I know. It takes persistence and an openness to properties that don’t on the surface seem ideal, but as you get to know the market more, maybe you learn more about yourself and what is really important to you. And in the end, perhaps you find the place that offers the most value to you at a price you can afford.
I wish you the best of luck. I hope you do end up being able to purchase one of my listings.
Warm regards,
Tracy

I have often said that to be good Realtors, we should buy or sell property ourselves every now and then so we truly understand what our clients go through. Well, I now see that we should definitely undergo the loan process in some manner right now, because no matter how excruciating we find the process to be when we represent our clients, it is about 100 times more excruciating when we have to go through it ourselves.
I started about a month ago to accomplish a refinance on my own home to see if I could lower my interest rate and consolidate a fairly crummy equity line and a perfectly nice first mortgage into a bearable 30-year fixed loan. The equity line people were offering to reduce the balance by 10%, up to $10,000, if I could pull this off by April 30, 2010. Oh, wait a minute, that’s past!  
Of course I would have refinanced a long time ago if my house could have appraised for enough to do it. Here’s the little Catch-22 about the lending world: they like for you to owe less on your home than it is worth by at least 20% before they give you a new loan. No matter that your interest rate is high, your payment is high and it is due to adjust higher in about 6 months, making it even more unaffordable. Even if you want to refinance with the same company to lower your payment so you can still make the payment, they don’t want to lower your payment until they see that you are good for the dough. I can understand part of this thinking. And I am not trying to do a loan modification or a short sale! But they are very reluctant to change the terms of my loan because they want to make sure I’m a good risk!
So here we are today, April, 2010, and the big hurdle about the value of my home is resolved. The appraisal came in high enough to justify the value of my home in relation to the amount I owe. No matter that I have never missed a payment nor even been late on a payment, but it’s still good news.
But now that the appraisal is ok, the underwriter is still not so sure I/we are okay. Mind you, we have FICO scores in the high 700s and have had throughout the years including even the last 2 years when my income dropped and business was not what it was, though not so terrible compared to many others. We have supplied our 2007 and 2008 tax returns, verifications of our bank accounts and investment accounts, proof of our income for 2009 and so far in 2010. Bank statements. Credit reports. Investment statements. Now we are down to the brass tacks. Last week they asked for a copy of the extension we filed for the 2009 taxes. This week they want a Profit & Loss statement for 2009. Why didn’t they ask for this last week?                     
Omigosh, I am in the business and I am getting really upset about all this. I can only imagine what my clients are going through. ( Except for the seller who keeps telling me that his lender got his loan on his purchase in the Valley completely approved and loan docs ordered in 6 days! My goodness, I must be tied up with a bunch of incompetents)!
I think one of the big issues is the self-employed person. If you are on a salary, it’s not difficult to verify what your income is and how long you have made it. We entrepreneurial folks are the ones who have 1099s from one or more places, “business expenses” noted on our tax returns, many items to “question.” That’s why “stated income” loans were so popular when they were possible, because they just looked at your credit score and your bank account and decided if you were good to go. They did cost a slightly higher interest rate, however, so I never have personally gone with a stated income loan. I’ve always gone full documentation—so I am comparing apples to apples about this process. And let me say very clearly, getting a loan in 2000, 2003, and in 2007 was a lot easier than getting one in 2010!
My mortgage broker tells me this: “I understand your frustrations. Believe me I try to be as thorough as possible with all of our clients, but just when you think you have everything they come back with something else. Requirements change so much due to the all the buy backs that Fannie and Freddie are putting on all of us lenders to be responsible for, and no one wants to get stuck with buying a loan back. As crazy as this sounds, I just received a call from FHA Santa Ana a few days ago on a transaction that we closed and funded in October that they are requesting a copy of the business license for the client who was self employed. This is almost 8 months later. Crazy, and there are many stories like this, unfortunately.”
So there you are. If you work for wages and have a fairly simple financial picture, it’s one thing. If you are anything else, you are going on the financial disclosure roller coaster ride if you want to buy or refinance a house with a lender today. This is why cash is king.    

First Quarter Update for Eagle Rock
First, let’s look at how far we’ve come from the best times which were 3 years ago:

90041 Graph 2007-2010

Our average prices went down about 30% in the last 3 years. That does not necessarily mean your property is worth 30% less today than it was worth in March, 2007, but we can safely say that you would have a serious challenge expecting to sell your house for the same amount you might have sold it for 3 years ago.
The good news is that we are moving upward as you can see over the last month and the last year. In our market area, sales and prices bottomed out about a year ago. Currently on the market (April 25, 2010) in the 90041 zip code, we have 21 properties, 5 of which are short sales and 2 are foreclosures. Today, we have 15 in escrow that are short sales, 1 that is a foreclosure. Closed so far this year are 10 short sales and 6 foreclosures. That’s 6% of the sales are foreclosures and 22% are short sales. Compared to the figures for last year, we can see definite improvement. At the end of 2009, 42% of the year’s sales had been foreclosures and 17% were short sales.
Several regular sales are on the market and in escrow as people have adjusted their expectations and are selling at prices lower than they might have gotten in 2007, but higher than they would have made in 2009. Available inventory in Eagle Rock and surrounding areas is very low. Good, well-priced properties are selling in multiple offers for higher than asking prices. There is pent-up demand right now, both for people to sell and for people to buy. Did you know that my “niche market” is regular sales?
What about the Shadow Inventory? This is the “tidal wave of foreclosures that are going to be dumped on the market, further reducing prices” that we keep hearing about. I subscribe to Foreclosure Radar and there are definitely 80 properties in the 90041 zip code that are scheduled to go to Trustee’s Sale. But the truth is, most of these sales have been rescheduled over and over again. The banks are not planning to “dump” these properties. One foreclosure that sold through the MLS this year, 2051 Ridgeview, had been in arrears in payments for over a year before they finally foreclosed, then the foreclosed owner was allowed to continue living in the property for another year, then the house was listed for $598,000 and eventually sold for cash for $625,000! Considering the fact that the house had settlement, foundation, and water intrusion issues, that was a darn good price for it! Also, having had only 6 foreclosures sell in the first quarter of the year is quite low compared to the past year.
What about refinancing to lower my interest rate? For the last couple of years, it has been almost impossible for many of us to refinance because our loan to value (LTV) ratios were too high. That is, appraisals on these refinances were shockingly low and the lender wouldn’t redo the loan unless you had at least 20% equity (LTV). This has been forcing some homeowners into foreclosure because they bought or refinanced in 2004-2007, have had job layoffs or life changes (i.e. divorce) that caused them to need to lower their housing expenses yet they couldn’t qualify for a short sale or a refinance. Today, they might qualify for one or the other. You may not get an interest rate below 5%, but if your current rate is 6% or more, you might find it a reasonable time to try refinancing. Or you might consider selling. Call me.
One challenge today is with lenders and appraisals. Even though the market has improved and values are higher, lenders are very slow to approve purchase loans and are requiring seemingly endless reams of documentation. They seem to be fearful of approving a loan without having at least 6 inches of verifications. I think they do judge them by the inch. While the mortgage broker might have a stake in how close the loan process stays within the contingency period, the eventual underwriter who signs off on the approval seems to be unwilling or unable to do it in a timely fashion. Are they overworked? Underpaid? Hostile? You tell me.
Appraisers sometimes are coming in at values that seem completely unrelated to actual closed sales that are higher. Also, they are relating “distress sales” equivalent to “regular sales.” In other words, they evaluate a foreclosure or a short sale price equally to a regular sale. They are also overlooking condition as a component of value. In other words, a foreclosure that has been stripped of its fixtures might be used as the best value compared to a good home that has been well-cared for but is similar square footage.
Real stories: An appraiser took it upon himself to downgrade the value of a midcentury modern compared to a Craftsman by $35,000 based on its style. Come on! Who can make that kind of value judgment? This same appraiser gave no value to an additional parcel of land that was a “buildable” 6,000 square foot lot. The buyer’s agent filed a rebuttal to this appraisal (which had come in $50,000 below the sales price) and was able to have the appraisal reviewed and upgraded to the sales price. This is one way professional Realtors are dealing with these issues.
Many properties are not appraising for sales price, but the buyer and seller work it out. Each case is different and resolved in various creative ways. But the days when multiple offers guarantee a good sales price and subsequent closed escrow are not with us. It takes a team effort between agents, buyers and sellers to negotiate transactions today. This is why you should work with full-service professionals to represent you in the purchase or sale of your property.

This table is from the California Association of Realtors and is the best explanation I’ve seen of the two income tax credits that are now available to homebuyers in our grand state of California. A couple of notes: although the deadline  to enter escrow to purchase a home to qualify for the state tax credit is December 31, 2010, state officials expect the money allocated for this credit to be gone by this June. Last year’s similar tax credit was gone by June, 2009.
Note for those of you who made too much money to qualify for the Federal tax credit: there is no income limit for California’s credit! Nor is there a maximum price to be paid for the home!
http___www.cartable

 My current listings:

5320 Rock View Terrace, Eagle Rock

5320 Rock View Terrace, $699,000. 3 bedrooms, 1.5 baths, guest quarters, wonderful landscaped yard, great location near Hill Drive in Eagle Rock.         

1132 Wotkyns, Pasadena

1132 Wotkyns Drive, Pasadena, $1,095,000. Stunning Mediterranean adjacent to Arroyo and Prospect Park. 4 bedrooms, 3 bathrooms, family room, 3 fireplaces, street to street lot. Open Sunday, April 12, 2-5 pm.

Here is some interesting news for California buyers from the California Association of Realtors REALEGAL(R):
$18,000 IN COMBINED HOMEBUYER TAX CREDITS FOR A LIMITED TIME
Californians have a brief window of opportunity to receive up to $18,000 in combined federal and state homebuyer tax credits. To take advantage of both tax credits, a first-time homebuyer must enter into a purchase contract for a principal residence before May 1, 2010, and close escrow between May 1, 2010 and June 30, 2010, inclusive. Buyers who are not first-time homebuyers may use the same timeframes to receive up to $16,500 in combined tax credits if they are long-time residents of their existing homes as permitted under federal law, and they purchase properties that have never been previously occupied as provided under California law.
Under the federal law slated to soon expire, a first-time homebuyer may receive up to $8,000 in tax credits, and a long-time resident may receive up to $6,500, for certain purchase contracts entered into by April 30, 2010 that close escrow by June 30, 2010. Additionally, under a newly enacted California law, a homebuyer may receive up to $10,000 in tax credits as a first-time homebuyer or buyer of a property that has never been occupied. The new California law applies to certain purchases that close escrow on or after May 1, 2010 (see Cal. Rev. & Tax Code section 17059.1(a)(4)). California law generally allows buyers of never-occupied properties to reserve their credits before closing escrow, but buyers seeking to combine the federal and state tax credits will not be able to satisfy the timing requirements for such reservations (see Cal. Rev. & Tax Code section 17059.1(c)(1)(A)). Other terms and restrictions apply to both tax credits.
Wow. If you are a first time buyer or if you can find a never-occupied property that you want to buy, this is a huge incentive. According to Redfin CEO Glenn Kelman in his latest blog at http://blog.redfin.com/ , state officials expect the funds for the tax credit to run out by June 30. Since the funds for the 2010 tax credit is twice the amount it was for last year’s credit, the state is expecting a land rush of activity.
So Sellers, wake up! You have an opportunity to expose your home to an unprecedented number of motivated buyers in the next 30 days. Check out this article from the Los Angeles Times at http://www.latimes.com/business/la-fi-home-sales31-2010mar31,0,6735242.story.

Remember, the news is encouraging, but we are not back at 2006 prices. However, I do have an insight into the market right now that is not apparent from the published numbers. Call me.

If you are 55 or older, you can qualify for a once-in-a-lifetime chance to take your current property tax base and transfer it to your next home purchase. The purpose is to help make it possible for a senior citizen to move down from his/her large home to a more manageable one without incurring a raise in the property tax.
These two California Propositions, 60 and 90, comprise the Senior Citizen’s Replacement Dwelling Benefit. For all the details, go to the Los Angeles County Tax Assessor’s website, http://assessor.lacounty.gov/extranet/guides/prop6090.aspx.
The latest information about which counties participate in the reciprocal Proposition 90 is now current as of February 15, 2010. The counties are: Alameda, Orange, San Mateo, Ventura, Los Angeles, San Diego, Santa Clara, and El Dorado. These can change, so always check before you make the move.
High points of the rules are:
• This has to be your principal residence.
• The replacement property has to be of equal or lower price. There are some exceptions, all described on the website.
• The property must be purchased within 2 years (before or after) of selling your property, but you have 3 years to file the claim.
• You can’t give the house to your son or daughter and get the tax benefit.
• Only one person can take the tax benefit. If there are multiple owners, only one gets the benefit. If you divorce after selling the house, only one of you gets the benefit.
This can be a huge savings to the people who qualify. Combine this with the long-term owner $6500 tax credit if you buy the replacement property by April 30, and you could double-dip your tax savings!