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TheSheep

Beach Fanatic
Jan 30, 2007
360
27
Farms
tinyurl.com
Perhaps the solution is for lenders to adjust loan interest rates or something. It's the interest and late charges that are putting so many people into forclosure that might otherwise be able to hang on. I understand they're in business to make money but when lenders forclose, they not only lose their profit but often lose their investment so why not forget the greed right now, forgive interest for a year or so and let people that qualify pay only principal and escrow. I'm not a financial analyst but wouldn't this be a better scenario than billions in bad debts they've got right now? :dunno:
Lender write-offs are often waaaaaaaay more financially advantageous than slow, low or non-perfomring loins, er, loans. Accounting rulez. :blink:
 

scooterbug44

SoWal Expert
May 8, 2007
16,736
3,327
Sowal
IMO a lot of the problems the banks are having they created - it isn't that rates readjusted or a fee is hurting folks, there are a lot of people who flat out couldn't afford to make the payments, but still got the loans.

Then the banks did a little financial razzle dazzle and guaranteed all those bad loans and plugged them into the economy. :angry:
 

fisher

Beach Fanatic
Sep 19, 2005
822
76
I've been thinking about your answer for a few while I was reading mail and posts. Isn't it instant equity if a person buys a home, there bank appraises it at 150,000 more than the purchase and someone offers to purchase it for 50,000 above their purchase price?

Is it only instant equity if you sell it to someone else? I'm not sure it would be called equity if you don't own it anymore. I think equity is when you own something and it is encumbered for less than it's worth. That difference is equity. I think what you were describing as equity is actually called profit.

What do you think?

The definition of equity is as you describe above.

What I am saying is that I don't believe in instant equity in real estate (outside the frenzy years where some folks really walked away with some nice change, BUT in many cases left the next buyer with a major dog on their hands). Equity becomes real money when you cash in on it. I believe the paper equity/paper gain/instant increase in market value you and Cork are talking about does not exist in a normal real estate market. Saying you have an appraisal for more than the recent purchase price in your home does not imply to me that you have any real equity in the asset. Appraisals are even worth the paper they are written on--they are useful, if prepared properly, for banks to determine how much to lend on a property. But, why do you think banks require a pretty big down payment and you pay PMI on loans of greater than 80% LTV? Because the bank isn't going to lend on 100% of an appraisal because the appraisal is only an educated guess at the real market value of a property.

With a stock, I pretty much know how much equity I have at any given time. Stocks trade 24 hours a day. With real estate, you don't really know what your home is worth until you sell it, and RE is not a liquid asset contrary to the opinion of many investors that bought during the frenzy.

In a falling market like the one we are now experiencing, I don't believe any buyer is buying below market (or walking into "significant" instant equity).

Hope that explained what I was getting at in rebutting the instant equity theory.
 

fisher

Beach Fanatic
Sep 19, 2005
822
76
Seacrest Beach is a fascinating case study in all this. I've generated the same graph and have been watching the pp/sf there as well. 200-225 might be a floor, assuming the number of reo doesn't get any worse. There's about 2 years of inventory overhang in that community alone though and sales have tapered off. It'll come down to how long the current owners can tread water.

Can you also graph the number of homes sold each month? The sample size is likely very, very small on a month to month basis making it very difficult to draw any conclusions regarding trends.

Also, does your graph include all sales including foreclosure sales, short sales, etc?

It would be interesting to see the same graph for all of walton county and one for sowal from inlet beach to sandestin. Larger sample size lending a bit more credibility to looking at trends.

Finally, I get skewered by folks (especially Joe) anytime I speak to price per square foot. Not sure why he isn't jumping on you??:dunno:
 
Can you sic the law on him? Buttheads like that trying to work the system are part of the reason we're in this mess for a long time! :angry:

I really will do so if I see it happen and it's a property of interest to me so I'll be watching.

Another case study: We had a customer a while back get a loan with a built in interest reserve to make the payments for 6 months or so. The interest reserve runs out and the customer decides to make no payments with his own cash. Meanwhile we continue construction with no word from anyone of the impending default. We obtain the C.O. and submit for our final draw and the lender tells us, "Sorry that mortgage is in default, because the borrower has made no payments." further "We can't fund a loan that is in default."

Faced with this we put the lien, which is behind a huge first mortgage. It turns out it is better for us to make all the back payments for the borrower and bring the mortgage out of default. Than we purchase homeowners insurance as well for the borrower to finalize good standing with his lender.

In the end we get our payment, the lender quickly packages and portfolios the loan which is sold off to a fund securitized by mortgages. Of course it returns to default and eventual foreclosure. Now it seems the government is going to perform a bail out and we again pay the bill.
 

fisher

Beach Fanatic
Sep 19, 2005
822
76


I'm assuming that you realize that the buyer pays for the appraisal and it's not public knowledge but I've asked the selling agent to see if she can get the appraised price on our most recent sale in Carillon. The sale price was $860 Cash. I know that the appraiser told her that the sales price was well below what it will come in at and that a comparable property just appraised at $895 and didn't have a pool which our sale did.





Oh, I see, the instant equity is based on an appraisal. Whew, glad you cleared that one up for me. :lolabove: I think appraisals serve a very valid purpose and appraisers do a great service for banks, etc. However, to think you have instant equity based on the educated guess of one individual is a bit of a stretch, especially given the real estate experience of the last two to three years.

The only way to truly know if you have ANY equity whatsoever, is to sell the asset.
 
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Cork On the Ocean

directionally challenged
Oh, I see, the instant equity is based on an appraisal. Whew, glad you cleared that one up for me. :lolabove: I think appraisals serve a very valid purpose and appraisers do a great service for banks, etc. However, to think you have instant equity based on the educated guess of one individual is a bit of a stretch, especially given the real estate experience of the last two to three years.

The only way to truly know if you have ANY equity whatsoever, is to sell the asset.

I think we're all in agreement regarding and "instant" equity. What we saw between 2003 and 2005 is not normal activity. I don't think any of us would disagree that real estate is a long term investment.

I was the one who did the graph Fisher. Yes, it does include short sales and foreclosures. I have the number of sales in the database and they have increasing a lot this year for Seacrest Beach. I'm working on Rosemary Beach but would be happy to do all of 30A. In creating it, I knew that some areas are performing better than others and I wanted to get a feel for the areas that are leveling out and the ones that are still dropping but for a feel on the overall status of the emerald coast area, certainly all of 30A would be appropriate.

In my opinion, sq ft calculations are the best way to account for the different size homes in a community such as Seacrest. In looking at Rosemary Beach, I've separated North of 30A homes from South of 30A homes because there's a significant difference in square foot prices and since the drop in the market, we've had proportionately more south side homes selling than normal because they've become more affordable. There's lots of ways to review the info and I do it to get a "general" feel for where the market's going which is all we really can do. I try to get a chart done on all DSF on 30A and create both the number of sales trend and the price per square foot.
 
Cork and Fisher, I am pretty sure that you can research and calculate till you have carpal tunnel and you'll come to the same conclusion I have found. Values will bottom at the rate that a home can cash flow off rental income. They won't go lower, but you can't be safe with a mortgage that deviates substantially from this standard. Look to recent rental rates for the true answer.
 

DuneAHH

Beach Fanatic
Cork and Fisher, I am pretty sure that you can research and calculate till you have carpal tunnel and you'll come to the same conclusion I have found. Values will bottom at the rate that a home can cash flow off rental income. They won't go lower, but you can't be safe with a mortgage that deviates substantially from this standard. Look to recent rental rates for the true answer.

AA -- Please further explain your definition of this value bottom / safe standard you speak of. Do you mean that the rental income covers ALL costs + some (mortgage, maintenance, tax, insurance, etc.)?

If so... in 15 years of owning/living in SoWal, I've only ever heard of "cash flow off rental income" actually occurring on those little studio condos north of 30-A in Seagrove... and then, only IF they were purchased prior to 1995 for under $60.0.

Is that the kind of bottom you're talking about?
 
When talking about a bottom only, I don't see how it's possible for properties to be valued for less than their rental cash flow potential.

On the other hand, generally speaking, I've always believed that a property should be worth the sum of:

1. Put 20% down.
2. Determine its 80% mortgage payment. ( No tax or insurance )
3. Can you regain that payment through aggressive rental program?
4. The negotiation range for final sale price is your thoughtful consideration of whether the values of homes in the community will adjust up or down over the immediate following 3 to 4 years.

I know my thinking is not common. It's my simple guide. It is conservative and gets me in trouble with my neighbors and peers all the time. I just don't feel comfortable deviating from it. I have seen properties that met this criteria a number of times. I have bought and sold about 35 times as a business, but don't consider my business a flipper. I don't have the guts for that.
 
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