I could only imagine myself in a casual buyer’s shoes in Orange County: The news has been using words like, “Terrible,” or even “awful,” to describe today’s Real Estate market. Every time I attend a party or social gathering, people describe the market in a similar manner.   If I were a buyer reading some of these articles and hearing these stories, I’d probably visualize seeing a ton of homes for sale where I can just go out there and low ball one home I like and close escrow 30 days later.

This is what happens in a buyer’s market, right?

Rarely. Just like any other market outside of Real Estate, supply and demand determines what type of market you have. Let ‘s look at the numbers in North Orange County:

The numbers show that there were more homes for sale in January 2011 compared to January 2010. (“Months of supply” simply means that this is how long it would take to sell all of the homes on the market — without placing additional homes for sale.) If we are to follow the same trend as 2010, the inventory would peak in February and enter the “selling season” of Spring and early summer.

Without getting too technical, 6 months of inventory is a buyer’s market. So, why do our eyes tell us differently?

Let’s examine a few factors:

1. Short Sale Listings – According to the Multiple Listing service, only 56% of today’s active listings are standard equity sales (non-distressed).  32% of those homes are “short sale” listings, where the owner is asking the lender to accept less than what they owe on the home. Ask any frustrated buyer about their experience with short sales — their complexity ends up driving buyers and their agents nuts. As seen in the photo caption, several of my own short sale listings have resulted in foreclosure due to a homeowner’s reluctance to cooperate for whatever reason. Just from my observations, I estimate that 50% of these listings have already sold or have no chance as a successful sale.   That means that half of these short sales are not for sale!

[youtube=http://www.youtube.com/watch?v=Q-wwRsvZKhQ&w=560&h=345]2. Using incorrect listing resources – Ever wonder why every listing you find online has already sold? It’s probably no secret — Real Estate websites make their revenue from Realtors — not buyers or sellers. Since us agents are their “bread winners,” they need to appease us. Some of them do so by keeping our listings active long after they have sold. Make sure you are using correct buyers resources such as an IDX or Listingbook that show almost the same exact data as the MLS.

3. Volume “REO Teams” – although their numbers have diminished greatly since 2008, there are still listing agents out there who carry over 20 bank-owned listings at any given moment (more common in the Inland Empire). With the volume these teams crank out, attention to detail is often missed. Ever wonder why the bank owned home priced 20% below the market is still showing active after 30 days on the market? Use common sense: there’s either something wrong with the home or the home sold long ago and the status was never updated to “pending.”

4. Looking at the market from a “macro” perspective – Real Estate should never be viewed at the national level or even local level. There are market segments, or “the market within the market.”

5. “Subject to interior inspection” properties – their numbers seem to be increasing: A seller or tenant who either refuses to cooperate with showings. Most of them are short sales. If you watch these listings closely, they have a higher fallout rate than the other listings. If the seller is motivated to sell, why not show the home to get a good offer? If the tenant plans on moving before the home is sold, why can’t arrangements be made for 1-2 days per week for showings? Or have the tenant move out?

After you remove these “time wasters” from the market and focus on really what’s for sale, how many homes are out there? This why hiring a competant buyer’s agent in this market should be part of your strategy. Unlike most Real Estate agents, I refuse to simply “open doors” to strangers. I require a 15 minute consultation to best understand what the buyer wants and make it clear how I can help them prior to showing any home.  After understanding what the buyer wants, it usually reduces their shopping list to only 5 homes at most. We’ll go out and view the homes in one day and after that it’s usually just “market watching” and previewing on my part.

 So, where are the best values?

Non-FHA approved condominiums – Buyers who are “cash rich” are still hard to come by. This increases the dependability of FHA loans that allow as little as 3.5% down with not-so-good credit scores. Unfortunately, this type of loan comes with its restrictions. One of the restrictions require the condominium complex to be “FHA Approved.” I’ve seen these types of properties sit on the market for long periods of time. Sellers are forced to lower their prices in order to sell until FHA gets this fixed.

Large lot homes – for many reasons, the good ol’ fashioned equestrian-style property has lost its luster lately to newer-built, small lot homes. Their architectural style and perceived need for upkeep eliminates most asian buyers who are usually the ones willing to pay top dollar. — I’m allowed to say this because I’m asian 😉

“Non-Feng Shui” compliant homes – I’m not only referring to Feng Shui, but similar cultural preferences in the characteristics of a home. My wife and I were able to buy a home for more than $50,000 below similar homes in the area because it was at the “T” of an intersection, faced west, and had a backyard sliding door directly inline with the front door — all Feng Shui violations.

If there’s one word I can use to describe today’s market, it would be confusing. Buyers and sellers are really confused from everything they’re hearing and reading about Real Estate and it results in frustration for those who actually want to buy or sell.

It’s pretty often that I’ll run across a buyer either stopping by one of my Open Houses or calling one of my listings with an odd line of questions or comments:

“I just need info about the home because I’m going to deal directly with the bank.”

“I see that the listing price is set at $499,000. Since this is a buyer’s market, I can offer $200,000, right?”

Here’s my favorite: “Do you think we should wait until prices go down more?”

I follow trustee sales (foreclosure auctions) daily. I have a client who makes a living flipping properties (yes — in TODAY’s market).  More than half the homes I sell are either Short Sales or Foreclosures. From this working knowledge “in the trenches”, I feel obligated to share my side of these myths:



1. “I can buy a foreclosed home directly through the bank.” FALSE – unless you plan on buying a “pool” of properties or notes (which you’ll need connections anyway) the last thing the bank wants to deal with is babysitting an escrow. Can you imagine someone at Bank of America 3,000 miles away (or overseas) handling buyer showings, termite inspections, coordinating appraisals, etc ??? Visit ANY of the major banks’ websites or call them to see for yourself. They’ll instruct you to call the assigned Listing Agent.

2. “You should always offer significantly below the list price.” FALSE – Of course, “always” is a giveaway. When done correctly, list prices on Bank Owned homes are set at what local Real Estate agents think buyers are willing to pay. There’s the dillema: if a buyer offers more than you, why should the bank accept your low-ball offer?

3. “I can offer as much as 20% below other offers because my offer is cash.” IT DEPENDS. I’m seeing a trend where some asset managers are preferring buyers with a loan over an investor with cash. Many inexperienced Real Estate agents will make the mistake of assuming a cash transaction is a safe transaction. My experience with cash buyers has been that they’ve had high cancellation rates when they can’t focus on one property. On the flip side, a cash offer can result in a significant savings when the home requires repairs that will not allow conventional financing. Another opportunity can be a listing that has fell out of escrow numerous times and the asset manager and agent just want it sold.

4. “Working directly with the listing agent will result in the best deal.” FALSE. I’ve met some REO Agents that have over 20 listings and the last thing they want is a call from a buyer. Many of them have teams of assistants and buyer’s agents. When you call the agent’s number directly, you’ll be transferred to a “buyers agent” on the team. Buyer’s agents are usually junior licensees that are either part time or just starting in the business. Additionally, some banks such as Indymac do not allow an agent to represent both sides of a transaction. The one instance where you can expect the best deal is if the agent breeches their fiduciary duty to their seller and witholds higher offers. In this case, do you really want a shady agent handling your most important investment?

5. “I’ve seen on lots of websites that you can buy a home in Orange County for $20,000. Is this correct?” FALSE. Many of the popular foreclosure websites such as RealyTrac and ForeclosureRadar occasionally show a junior lien loan amount. This is often the “opening bid” amount at the trustee sale when the 2nd or junior mortgage decides to foreclose. Unfortunately, any senior loan and taxes must be accounted for as well. After you sum it up, the price is often higher than the market value of the home.

6. “I can just attend the foreclosure auction and get a huge discount.” FALSE. First of all, there are (2) types of auctions: 1) The Trustee Sale and 2) Advertised Auctions for the general public. Let’s talk about the trustee sale: Most of the buying public does not possess the skill and savvy needed to stomach the Trustee Sale. You’ll need to show up with a cashier’s check with at least the opening bid amount and additional cashier’s checks for the increments you’ll be bidding. Beyond that, you’ll need to know everything on the title on the property and the occupancy status. Even if you have those bases covered, keep in mind that you’ll be bidding against some fierce competition. There will be investors present (usually in gym clothes or pajamas) that have been doing this for a living for years. The Advertised Auctions usually consist of homes that failed to sell through traditional means (Multiple Listing Service with Realtors). While discounts are possible at these ballroom-style events, they are far from a sure thing.

7. “In today’s market, the buyer is in total command.” FALSE. While this may hold true in parts of the country and homes priced over $800,000, Orange County’s inventory levels are never high enough where you can shop for a home and see 10 properties that suit your needs. Buyers usually only find 1 or 2 homes that come close to what they want only to find out there are multiple offers.  This video I made on YouTube hits the nail on the head why buyers are frustrated in this market.

8. “In this market, waiting for prices to come down is the best strategy.” FALSE. Take it from the experts who are savvy enough to flip for a profit in this market: The best strategy is to find a deal — not wait. I’ve never heard an investor say “I’m waiting for a deal.” Waiting is perfectly fine while watching the market — just as long as you have a defined, measurable indicator when to re-enter (i.e. – inventory levels, months of supply, etc). Unfortunately, most “waiting buyers” don’t have a signal when to re-enter and will end up waiting for a “good” market when the prices are higher.

9. “Most of the banks will favor offers where the buyer’s loan is with their company.” TRUE. Not only do some favor these offers, but it’s often a requirement to obtain a pre-approval with their bank. I’ve experienced offers getting ignored when my buyer had an approval with another lender or mortgage broker.

10. “There are more risks involved in buying a bank owned home compared to a traditional equity sale.” TRUE. While a buyer can minimize their risk by hiring the right agent and inspector(s), the buyer won’t get the benefit of a Transfer Disclosure Statement (TDS), Seller Property Questionaire (SPQ), or a listing agent/asset manager willing to match your motivation and work into the deal. My experience with high volume Listing Agents of Bank-Owned homes is that they’ll often take “the path of least resistance” (i.e. – less work is better) when solving escrow problems. When encountering issues during escrow, I’ve realized there is only ONE agent working to get the deal done: The Buyer’s Agent. I’ve witnessed transactions where the listing agent would rather cancel the deal and accept a lower offer if it meant “less maintenance” in the eyes of the asset manager that holds their prized REO account. Of course, there are some truly GREAT REO agents who are worth their weight in gold — it’s just extremely rare.

Overall, it’s true that you can obtain a pretty good deal buying a Bank-Owned home. Just don’t expect it to be easy.