Real Estate News & Commentary by Chris McLaughlin, July 1, 2009

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REITs have a fantastic second quarter

Real estate investment trusts (REITs), which were written off by analysts not so long ago, had a blockbuster second quarter this year. The Dow Jones Equity All REIT Total Return Index, which tracks 114 publicly traded REIT stocks, rose 28.9% in the April-June quarter, the biggest quarterly gain since the index debuted in 1989. Just 5 REITs posted losses while 7 firms posted returns in excess of 100%. The spectacular performance signals a change in investor sentiment. “The fear of REITs going to zero is clearly far less today,” said Alexander Goldfarb, an associate director at Sandler O’Neill + Partners LP. Since March this year, REITs have raised over $13 billion from investors. Jon Bortz, chief executive of LaSalle Hotel Properties, said, “We’d been through a pretty challenging period over the last 12 months. The recovery had to do with belief that the world was not going to come to an end.” REITs have restructured their capital structure by reducing debt in their balance sheet. Some analysts believe REITs have to reduce their debt further if they have to be viable in the long-term. Sectorally, hotel REITs rose 73.8% in the second quarter, regional mall REITs rose 59.3%, retail REITs rose 43.2%, and manufactured homes rose 4.9%.

Construction defects hit the housing sector

A large number of homeowners across the country are confronting defects in their homes largely on account of construction faults. As the housing sector expanded aggressively in the last couple of decades, the industry has been besieged with a shortage of skilled manpower and quality construction materials. In addition, tardiness of municipalities in inspecting and certifying homes contributed to the problem. Criterium Engineers, a building-inspection firm, has estimated that 17% of newly built houses in 2006 had at least two significant defects, up from 15% in 2003. Paul Amirata, vice president of claims at Axa Insurance, says construction-defect claims being filed are “pretty severe in terms of the total damage alleged.” The drop in real-estate values has exacerbated the problem. Those with faulty houses find that repairs often cost more than the value of the home. In addition, many do not have the equity to leverage in order to pay for repairs. In case of house defects what is the remedy for homeowners? The National Association of Home builders believes litigation is an inefficient way of resolving issue related to construction defects and says homebuyers should consider using “alternative dispute resolution including mandatory, binding arbitration in consumer contracts.”

Home loan modifications rise in the first quarter

homeloanmods According to a report released by the Office of the Comptroller of the Currency and the Office of Thrift Supervision, the number of loan modifications rose in the first quarter of this year. The report also said there was an increase in mortgage delinquencies and foreclosures in the first quarter. John Dugan, Comptroller of the Currency, said: “While I’m very concerned about the rise in delinquent mortgages and foreclosure actions, the shift in emphasis by servicers to more sustainable, payment-reducing modifications is a positive step that should show significant benefits in the coming months.” Servicers carried out 185,156 loan modifications in the first quarter; this is a rise of 55% from the previous quarter. Seriously delinquent mortgages – loans that are 60 days or more past due – rose 9% from the previous quarter. Delinquencies in prime loans increased by over 20% from the previous quarter and foreclosures stood at 2.5% of all serviced loans. Despite the bad news, analysts believe the loan modification program introduced by the Obama administration is gaining traction and will benefit a large number of homeowners in the coming months.

Consumer confidence drops in June

consumerconfidencedrops The Conference Board (TCB), an industry group, said consumer confidence dropped in June after rising in May. TCB’s index of consumer attitudes declined to 49.3 in June from a reading of 54.8 in May. The Present Situation Index, which measures overall consumer sentiments toward the present economic situation, dropped from 29.7 in May to 25.8 in June. Millan Mulraine, economics strategist with TD Securities, said: “On balance, this was a disappointing report as it has clearly bucked the trend of improving consumer sentiments in the past few months. Moreover, with the details of the report uniformly weak, we are left with the impression that this was an outright slump in consumer confidence.” Among the consumers who participated in the survey conducted to gather information on consumer sentiment in the current quarter, 4.6% said they had plans to buy an automobile within 6 months; in contrast to 5.7% in the previous quarter. Those with plans of buying a home dropped from 2.8% to 2.7% while those planning to buy a major appliance dropped to 26.5% from 29.2%. Inflation rate expectations for 12 months rose to 5.9% from 5.6% in May. “Consumers are making a more somber and accurate assessment of the economy and their own financial position,” said Mark Vitner, senior economist at Wachovia. “Consumers may be thinking less bad is not good enough.”

Wall Street firms looking to sublet office space

During boom time, financial firms took office space as though there was no tomorrow. In the current slowdown many firms are giving up or looking at subletting excess space. According to real-estate brokerage Jones Lang LaSalle, 8.9 million square feet of high-quality, class “A” office space is available in midtown Manhattan for sublet. John Goodkind, a broker with Newmark Knight Frank, says about 10% of the high-end commercial space, amounting to 380,000 square feet, have been given up by financial firms in Greenwich. Analysts say it is a classic buy-high, sell-low situation.

officesublet New York private-equity firm Quadrangle Group has offered a three-year sublease for 10,000 square feet at $85 a square foot, a discount of 32% to the 2006 rate. Taconic Capital Advisors has offered 50,000 square feet near Central Park at $80 a square foot, denoting a 22% discount to the rate being paid by Taconic. Hedge funds and other firms, when they sublet space, are likely to lose millions of dollars over the life of the building lease. Buyers looking for space are getting great bargains. Brian Rance, U.S. managing partner of law firm Freshfields Bruckhaus Deringer, says, “It’s a complete buyer’s market.”

Now on to our real estate investor education section…

Sellers – Learn how to Sell Your Home Fast

Whether you are a short sale investor, broker or homeowner these tips for making your home sell fast are sure to streamline the process. Professionals in the field can create a checklist for potential sellers or homeowners can use the following steps to take matter into their own hands and attract legitimate short sale offers with quick closing times.

Begin preparing the paperwork as soon as possible. Your agent or short sale investor is often able to help. Typically you will need the following items:

Hardship letter

Tax Returns

Bank Records

HOA, Property Taxes and other pertinent outlays associated with the property.

Copy of Mortgage, liens or other monies owned on the property.

Put out the word. Let everyone know you need to sell the home – fast. Use works like ‘motivated seller’ or “distressed homeowner” to indicate a willingness to work with buyers able to provide a fast closing.

Contact the lender to let them know your situation.

Perform maintenance and upkeep as you are able. If finances are an issue, try to make the property appear as attractive and well maintained as possible.

Create a list of what you need the most from this deal. For example, if you need a fast closing avoid bankruptcy then say-so when speaking with the agent or potential short sale buyers. If you need a new place to live or rent after closing then mention that as well. Often these items can become part of the negotiation process to help make the deal work.

Identify personal property prior to accepting a final offer. If you intend to take the appliances be sure to specify this in advance. Likewise, it’s important to bring all items that will remain with the home (good and bad) as well as be removed from the home prior to entertaining offers.

Make a folder of all contact information and paperwork. Keep it accessible when speaking with real estate agents or potential buyers. Remember, everything must be in writing and never sign something you don’t fully understand.

Avoid entertaining multiple offers all at once. While this might seem like a good way to increase the odds of a successful sale, it often creates unnecessary delays that could result in your losing the home or growing farther into debt. Instead, ask to see proof of financing or other indication of a quick closing.

Keep it realistic. Even the most reputable short sale offer is likely to be somewhat slow given the large number of sales currently going through the system. A lot of sellers are searching for solid short sale offers so increase your odds by responding quickly to all inquiries and remaining patient throughout the process.

Start Early. The sooner you start the better the odds of selling your property before it becomes critical or urgent.

See you at the top!

Chris McLaughlin

http://www.shortsalesriches.com

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About the author:

Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.

* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,

running 4 different offices, supporting nearly

450 agents, uniquely positioning him to help

thousands of investors make money in the

biggest market opportunity ever!
* Highly sought-after speaker, consultant, and
seminar leader for current trends and hot topics
in Real Estate Investing, Entrepreneurship, and
Wealth Building
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You gotta love John Stewart regardless of your politics. He kinda summed it up best:

“Funny story. You know all that money that we’ve been giving to the banks. They don’t have it anymore.” – John Stewart, The Daily Show

Before we get started, I think it is important that we talk about real estate, Realtors, and investors. Frankly, we got into this business because of the freedom it gave us, the tremendous satisfaction of being our own bosses, and the fun of closing the deal. Most of us never really enjoyed doing HUDs and preliminary closing statements; we don’t particularly like math, right? Hey, I have a MBA from Georgetown, but even I don’t really like math that much.

So what I’m about to talk about doesn’t involve a bunch of math, but it involves some concepts that every single real estate professional needs to understand. Why? Everyone is going to be talking about this, and you need to understand it! You need to understand why there is a crisis in confidence, why capital markets are frozen, and how this all impacts housing and Main Street, not just Wall Street. Arguably the most powerful man in the world is not George Bush today, but rather US Treasury Secretary Henry Paulson. You’re going to start hearing him called “King Henry” and other terms indicating his power and the rise of big government … but you need to know why. It is time to get educated as a real estate investor on topics that really matter to your bottom line. He’s gone from relative obscurity to a name that will be as well known as Obama or McCain before this is all over.

Let me be very clear. This is the worst financial crisis our nation has ever faced since the Great Depression. We’re talking about a lot of things in jeopardy. Home loans, retirement accounts, 401(k)s, pension funds, credit card debt, and job creation. So please forward this e-mail on to your colleagues at your real estate firm. As long as you provide attribution to www.shortsalesriches.com/blog you can post this anywhere and everywhere. My goal is real estate investor education … and hey, if I sell a few more courses of our short sale system courses, all the better.

Now, let’s get busy talking shop…

I received an interesting question from a reader over the weekend:

“Chris, you are a lawyer, so can you tell me what the difference between the RTC that helped bail out the S&L and with this proposed huge $700 billion bailout. How will it affect me as a real estate investor doing short sales? How will it affect the realtors that I use to help re-sell my properties? Will we have less inventory?”

First, let’s make sure folks understand the difference between the RTC and the proposed bailout. When the RTC was formed, it actually took possession of the assets and sold them. They would hold auctions and if you can recall, they had some nice fire sale prices for them.

Have you ever done a short sale and the loss mitigator says “Well, I have to check with the investor and I’ll get back with you…” You see, the mortgage that Countrywide might be negotiating isn’t necessarily owned by Countrywide Home Loans. It could very well be Mortgage Backed Security #122433542 owned by a Singapore or Hong Kong investment bank for all we know.

In this case, the government isn’t going to own real estate. It will own the actual derivatives or securities that own the real estate. They will then give this mortgage backed-security to another lender to run on their behalf. So perhaps the government will say, “Ok Goldman Sachs, you run this $60 billion dollars worth of mortgage back securities on our behalf.” So who wins? A lot of people. The bank or investor that is saddled with securities that aren’t liquid will now have a purchaser – the government. Then they can turn around and get hired by the government to sell these. They then continue to hire realtors to perform REOs and continue to hire loss mitigators to get the pre-foreclosures off the books, too.

But let’s add up our spending related to bad home loans, ok?

$700 billion for mortgage assets
$85 billion for AIG
$300 billion for Fannie Mae & Freddie Mac
$300 billion for FHA insurance for loans
$29 billion for Bear Stearns

For a total of approximately $1.3 TRILLION dollars. Wow, that’s a lot of cash huh?

But before you start thinking we’re all spending this money, let’s remember that King Henry used to be the CEO of Goldman Sachs, the venerable real estate investment firm. He doesn’t like to leave money on the table or lose it. So the $700 billion for mortgage back securities isn’t a total loss of $700 billion. The government will buy them cheap, then try to resell them at least for what they bought them for. The government is buying illiquid assets which are clogging up the financial system.

The taxpayer isn’t necessarily on the hook for $700 billion. This is money purchasing illiquid assets. The assets will be held and resold. The ultimate cost will be well below $700 billion. The effort is to stabilize the market, not to solve the crisis right away.

How will this impact us as realtors and real estate investors?

Folks, we just received another gift of the market shift. Why? Now you’re going to start seeing banks actually lend again. Within the year you’ll see banks come out with loan products that compete against FHA. Why? Now that their balance sheets will be improved, and the financial system will get unclogged, the banks will begin to lend again and take some amount of risk. So that person with a 700 credit score, who can’t obtain 100% financing but has a track record of making her payments, will get that loan again.

So financing is going to become more available … but guess what else is going to happen? In my opinion, more and more Americans are going to fall victim to this economy. Oil just spiked with a record $25 to $130 increase today over all the anxiety surrounding this bailout. The Dow Jones Industrial Average tanked 372 points today (Monday). Consumers just don’t feel “wealthy” anymore as the equity in their home … as well as the equity in their 401(k) has vanished. So get ready for a lot more short sales … and a lot more REOs. We’re in this for the next few years at minimum. That’s great news for Realtors who are focused on this market and great news for real estate investors. For others … well, we won’t go there.

More tomorrow …

Chris McLaughlin, J.D., M.B.A.
Attorney at Law, Licensed Real Estate Broker
http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com
phone: (800) 452-7627

P.S.: The best way to get ahead of the curve in this economy is to master the market of the moment. That market is short sales and REOs. If you’ve been sitting on the sidelines and want the competitive edge to get your business back up the speed and start making serious money, check out http://www.shortsalesriches.com/welcome.html

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