When people think of foreclosures they typically think of hitting the jackpot and getting a good buy, but is that really the case?  To answer that you first have to understand the process of how you buy a foreclosed property.  There are several types, but lets focus on the “Non-Judicial Foreclosure“. 

Non-Judicial Foreclosures: The foreclosing party must either be a condominium association, timeshare association or a mortgagee with a power of sale provision in the mortgage. The mortgagee or the association handles the duties of the commission including publishing notices of the auction, taking bids, and payment of the proceeds.

So you see in the newspaper that a house you are interested in is going to be auctioned off for sale at the court house “Flag Pole” and you want to buy it.  First things first, you want to make sure the home you are going to attempt to buy is all that you expect it to be.  So what needs to be done prior to going to bid on the home?

1. You need to know what the terms of the sale are? 

Typically, a 10% deposit of your maximum bid price is required in the form of a cashiers check at the time of the bidding.  The property is sold in “As-Is” condition and with a quitclaim deed, with no guarantees of any kind.  You, the buyer, pay all escrow and attorney fees to convey the property.  Most properties I have seen are sold without holding an “Open House”.  You typically have between 20-30 days to get the money together to complete the transaction.  If you don’t you lose your 10% down payment.  You also are responsible for removing any occupant from the property.

2. Since the ad in the newspaper only gives you a TMK number and address for the property, you will want to pull the TMK info on the property (county tax records). 

How big is the property? How many bedrooms, baths?  What is the zoning?  Is it in a floodzone? 

3. You will want to drive by the home and see what condition the home is in from an exterior visual drive-by look. 

What kind of neighbors are there?  Keep in mind you can’t go on the property, esp if the foreclosed owner is still living there, so you can’t do a home inspection, termite inspection, have a survey performed. You really have to expect the worst.  Is their termite damage,? Does the roof leak? How is the foundation? How is the electrical? Are the kitchen cabinets still there? (You may laugh but when someone loses their home, they typically trash the place and leave with whatever they can, so even if the cabinets were there when you peaked in the window, they may not be when you buy the home) You don’t know.

4. Since the home is being sold via a Quitclaim Deed with no warranties or guarantees, you will need to purchase a preliminary title report for between $200-300 to make sure the title will be clear, and that their aren’t any problems or surprises when the title passes. 

The preliminary title report will show any liens, encumbrances, etc and will show what the CC&R’s are. Is there a recorded encroachment agreement or Party Wall Agreement? What are the CC&R’s? If there is an association, you would need to purchase Association Documents ($350-500).  What is the status of the association? Are there any up coming assessments or current assessments? Are their restrictions on use?

5. With a home you will want to buy a building permit packet. 

This runs about $40 per permit.  You would have a minimum of plumbing, electrical, and general building.  The county tax records are often wrong, so a building permit packet is very important to know how big the home exactly.  This will not tell you if an addition or an enclosure was done, adding to the square footage.  You may say that it is a bonus if there was an unpermitted area because it would give you more home, but if you get a loan, you better hope the lender doesn’t have a problem with it and only excludes the unpermitted area from the value of the property.

6. Now that you have most of your information together, you need to determine the value of the home in it’s estimated condition and what repairs might need to be done and their cost.

At this point you are either working with a Realtor to help you determine the value or you are accessing the information of comparable solds from the county records.

7. Once you have determined the value of the home and added in your costs for repairs you will need to decide how much you are willing to pay for the home.

This will be your risk/reward value.  Since you don’t know the exact condition of the home due to not being able to inspect it, I would assume you want to buy the home at a price, that if you did the estimated repairs, the value would still be under market value.  

8. Now you have to make sure you get your money together to be able to buy the property should you become the winning bidder.

Can you even get a loan on the home and if so do you qualify.  If so, can you close within the specified time-frame as stated in the foreclosure terms.  My questions, which I don’t have an answer for yet, is, “Will a lender give you a loan on the property where a quitclaim deed is being used or do they require a Warranty Deed?” (A quitclaim deed doesn’t guaranty that the propertytitle is clear.  Is the lender willing to take that kind of risk?  Can the appraiser get into the property to do an appraisal?  If you can’t come up with the money to close on time you will lose the deposit (10%) and are their any penalties? You may need to come up with cash to buy the home.

 9. Now, with everything in line, you bid on the property.

You have spent potentially up to $1,000 for the necessary info to limit the risk of a problem and you haven’t even become the winning bidder yet.  If you get to your maximum bid and someone outbids you, you will walk away from $1,000.  If the home is in a good area of town, the home will be a desirable property and most likely have multiple bidders.  By the way….most foreclosure homes sell for 5% below market value.  Is that enough of a deal to offset the risks?

My valuation for a max condo price bid taking into consideration the unknown repair risks (assuming the worst) came out to around a 80% market value.  In other words, I would have to buy the unit at roughly 80% of what the market value was, and after I spent the money on the worst case scenario repairs, it would be worth market value. 

That seems like a pretty risky investment.   In a market with stable real estate prices, and a stable economy it doesn’t appear worth it.  In a market where the economy is depressed and property prices are decreasing, such as in Michigan, it may make more since, but you always have the added risk.  Right now in Hawaii, I have gone to several foreclosures, and the banks have set a minimum bid price that no one has wanted to meet or beat.  This tells me the lenders aren’t ready to give the properties away because the market is healthy enough to put it on the market as an REO and they will be able to re-coop their money.  Here is Hawaii’s Foreclosure Report.

Any thoughts? 

I should have more data for you later.

I don’t normally post about anything that doesn’t have something to do with real estate, but today is an exception.  The state of Hawaii has never experienced a game such as the University of Hawaii vs Boise State game last night at Aloha Stadium, so in rememberance of last night and the amazing season that has all lead up to this point, I have attached the highlights from local newspapers and from the postgame video I posted. 

Highlights

Post Game Video

Fan-Tastic
Victory! Warriors Win WAC Title
Warriors Are WAC Champs
Crowd Goes Wild Over Hawaii Victory
Crowning Moment
Fast Finish For Colt

Waiting for the bus at Murphy’s.

Pregame Aloha Stadium Photo

During Game Action

Postgame Celebration

Honolulu leads U.S. in home price growth

Pacific Business News (Honolulu)
Honolulu had the highest rate of home price appreciation in the nation over the past year, according to new data. Home prices rose 14.79 percent in the Honolulu market, according to the September 2007 LoanPerformance Home Price Index released Monday by First American LoanPerformance.

Home prices fell in 17 states tracked by the index, with the Riverside-San Bernardino-Ontario market in California seeing the greatest drop, 13.59 percent. Although five states saw price appreciation of between 5 percent and 10 percent, Hawaii was the only market to experience double-digit growth. The company’s price index covers a total of 956 Core Based Statistical Areas and 659 counties in 50 states and the District of Columbia.

Ok…so I am a little late with this one, but there is very informative news in this issue.  Feel free to visit, Keri Shepherd’s Mortgage Market Newsletter for the Almost latest news on the mortgage market.  It would have been the latest news if not for me.  Sorry.

I am in the middle of planning for two remodels right now, and came across this website.  If you are planning on doing a remodel and want ideas for ANYTHING interior or exterior, Home Decorating Photos is the site to use.  It cost money, but it is well worth it.  It is also a great resource for getting design and decorating ideas.

The Oahu housing market has been remarkably stable price-wise in the third quarter and again in October, while the number of sales in the Oahu housing market continued their cooling trend. Our market continues to be strong compared to many sectors on the mainland. 

You can view the full statistical report and all previous reports at The Resource Center.

There were several newspaper articles that came out with the stats as well.  Feel free to read: October Oahu Home Sales, Prices Flat from the Pacific Business News and also, Oahu Median Home Price Edges Up from the Honolulu Advertiser.

“The housing market on Oahu appears to be in a general slowdown, similar to the mainland markets, although we’ve not experienced the price declines,” added Harvey Shapiro, research economist at the Board of REALTORS. “Our market is most likely not suffering from a lack of consumer demand, but rather a shift of buyers to the new properties that are available on Oahu, which are not included in our statistics. This shift, however, is a short term event that will end after the new projects have sold.” While the original sales of new properties are excluded from the Honolulu Board of REALTORS databases, all subsequent resales are transactions that are captured.

Page 4 of 20 of the report shows the number of sales for SFH’s and Condos.  Both were relatively flat in comparison to last month.  We are definitely into the slow season and for buyers this brings about opportunities to negotiate with sellers who need to sell now.  The number of SFH homes sold in October was 265.  The number of condos that sold in October was 423.

Page 6 of 20 shows the median home price for SFH’s and Condos.  The median SFH price was up slightly to $655,000 and appear to be very stable since the beginning of the year.  The median condo price down to $322,500, but also appears to be very stable since the beginning of 2007.  Overall for 2007, SFH’s are up 2.2% from 2006 and Condos are up 4.8% from 2006.

Page 7 of 20 shows the median number of days on market (DOM), or the median number of days a home or condo is on the market before entering into contract.  The median number of DOM for SFH’s declined to 41 days while the DOM for Condos is down to 37 days.  Very good numbers.

Page 14 of 20 shows that the inventory (homes and condos currently available on the market) for SFH’s and Condos increased slightly in both areas.  SFH inventory was at 1,973, and Condo inventory was at 2,444.  SInce demand has cooled off now that we are into the slow season, I am not surprised to see an increase in inventory.

Page 18 of 20 shows the months of inventory remaining. (meaning, if we didn’t bring anymore homes or condos onto the market, how long would it take to sell all of the current inventory.  These numbers jumped a little (due to last months weak sales numbers).  For SFH’s the months of inventory remaining was at 7.7 months.  Up from 5.1 months in September.  For Condos, the months of inventory remaining was at 5.9 months.  Up from 4.9 months in September.

Page 19 of 20 shows the Months of Inventory Remaining breakdown based on type of property, price, and location on the island.  The ones that stand out are the $1.0 million plus SFH’s, and North Shore properties (both Condos and SFH’s). North Shore properties really appear to be struggling right now.  Also, the condo price range of $100,000-$149,000 have 22 months of inventory.  This would be your low-end condo-tel, but mostly your Leasehold Condo with a very unfavorable lease term (probably going to expire within 10 years).

If there are any questions, feel free to contact me: scott@kahalaassociates.com

Here is a bonus report for you: Third Quarter Market Stats For Oahu.
 

News galore.  What in the world is going on?  Happy Halloween from the Fed.  The Fed Reserve performed as expected and cut the Fed Funds rate by a quarter point.

The move comes as oil prices near $100 a barrel. That’s viewed as a deterrent to consumer spending, which drives two-thirds of the economy. With oil at a record high, consumers will have to shell out more for gasoline, home-heating fuels and other products.

Fed Chairman Ben Bernanke and his colleagues on the board made the decision to cut the rate after a two-day meeting and in spite of a report Wednesday indicating that the overall economy has some resilience. The gross domestic product rose 3.9 percent during the July-September quarter.

(FYI, if it wasn’t for the national housing sector the GDP would have grown 4.9%)

“The economy is facing a perfect storm right now of a crisis-related tightening of credit, higher oil prices and lower house prices,” said David Jones, chief economist at DMJ Advisors, a Denver forecasting firm. “We are going to see a significant slowing in growth.”

Which coincides with the markets reaction the following day of the Feds rate cut as the DOW dropped more than 360 points.

The bad news.

Oil prices were broaching $100 a barrel. Consumer spending slowed drastically in September. Foreclosures doubled for the last quarter.

The flip side article to that outlook shows solid economic growth. (I am not followingthis one, but the one thing that is apparent is that most people are having a hard time trying to figure out where the economy is headed, and what effect exactly the Fed rate cuts will have on the economy. 

As if the traffic issues in Ewa aren’t bad enough, it could be spreading to Waipio, Mililani, and most of Central Oahu, along with other important service problems if planning isn’t done properly.

“On one extreme, it’s the notion that schools and all infrastructure should be in place before the first house is built,” Arakawa said. “But I think the more practical approach is understanding where the growth is going to occur, what the infrastructure needs are, and then planning for that infrastructure in a timely manner given practical realities.

Most of the growth for the area designated as Central O’ahu centers on two projects — Castle & Cooke Homes’ Koa Ridge and Waiawa Ridge Development’s Waiawa Ridge. The neighboring projects, north of Pearl City and east of Waipi’o, could one day see as many as 17,500 homes.

For now, Waiawa Ridge has approval for 5,000 homes on 1,700 acres and expects to break ground next year.

Thinking of moving to the area? Check out this article on growth and planning.

When big investment companies look to invest in real estate in other areas they typically look at the make-up of an economy to see if there is stability. 

When I say stability, I mean, you don’t want to have an economy that is too heavily dependent on one particular sector, i.e. Las Vegas and tourism.   Think of Jim Cramer on CNBC when he analyzes stock portfolios to see if they are “Diversified”.   The same thought process goes with investing in real estate.  You want to make sure the economy is “Diversified”.  If not, then if that particular sector takes a dive, usually the economy as a hole takes a big hit that could take years to recover from.

One would think that Hawaii’s economy is heavily dependent on tourism.  Think again.  Over the past decade, Hawaii’s economic make-up has changed significantly.  The local government has gone to great lengths to change Hawaii’s dependency on tourism.

Check out this recent article regarding Hawaii’s Economic Make-Up.