I frequently get asked to explain the difference between a short sale and a foreclosure / Real Estate Owned (REO) property. Buyers in today?s market who are cash heavy and have a flexible time frame may be in the best position to purchase one of these foreclosed properties.

A Quick Comparison: Short Sales

A short sale means that a property owner who wishes to sell owes more money on their loan than the actual market value of their property. Some characterize this seller as “distressed” but the lender and/or bank has not started the foreclosure process or taken title from the owner. Therefore, in a short sale situation:

· The homeowner still owns the property

· The owner usually occupies the home (or has tenants)

· The property will be sold “as is,” meaning there will be no property disclosures, surveys, repairs or credits for any inspection items.

· The buyer enters into a contract to purchase with the homeowner, but needs lender approval to forgive the difference between the sale price and the balance on the mortgage.

· The bank will often wait on signing off on the agreement until they receive more than one offer.

· The time frame from contract to close is generally between 3 -6 months.

Foreclosed Properties

A Foreclosed / REO property is owned by the lender, usually a bank. The lender usually hires a company to oversee the management and sale of the property.

· The bank owns the property.

· The home is usually vacant, and unfortunately, may be missing appliances, is damaged, or in need of repair.

· Utilities are generally disconnected which can make previewing the home in the evening or in cold weather difficult.

· Property usually sold “as is.” The bank does not provide any property disclosures or guarantees any information.

· Buyer enters into a contract with the bank/lender.

· Cash offers generally win out, even when other offers are more. The banks generally don?t want to risk selling to a buyer who may be unable to secure financing.

· Response time from a bank can be as quick as 30 days or as long as six months. It can vary drastically depending on which bank it is.

We would like to thank thetruthabout for sharing today?s photo via the Creative Commons License.

As prospective buyers are sitting back, waiting, and speculating about when to take advantage of the bottom, it appears we have hit a plateau. One of the most effective ways for pricing to stabilize and then see appreciation is depleting inventory.

Signs Home Prices in Chicago Are Stabilizing

Sun Rise Over Belmont Ave...Maybe Over the Chicago Real Estate Market Too?

According to the Illinois Association of Realtors, May marked the fourth consecutive month-to-month increase in home sales for the Illinois housing market and the third monthly increase in the statewide median home sale price. Locally, IAR reports home sales were up 18.7 percent to 5,634 homes sold in May 2009 compared to 4,747 home sales in April 2009. The Chicago median price increased 2.3 percent to $225,000 in May compared to $220,000 in April 2009.

Properties Not Hitting the Market

With the average time people who are remaining in their homes on the rise, the number of market-rate units coming into the marketplace is decreasing. Although the banks are carrying a large inventory of REO (bank owned) properties, some are using other vehicles besides putting them on the open market working with local and state agencies to help stabilize communities hardest hit by foreclosures. Many new developments originally marketed as condominiums are being converted to rentals.

Where are the Buyers Coming From?

Traditionally, we have been able to identify which parts of the market where strongest for potential purchasers. Over the last year or so it has been a roller coaster. One of the largest segments that have always driven the market is first-time home buyers. They fell out of the market when it became almost impossible to buy with less than 10% down. However, they are now back. Lenders have now found options for these home buyers such as FHA. The $8,000 first-time home buyer tax credit seems to have stimulated this segment of the market as well.

This is also one of the greatest opportunities for current homeowners to buy up. Although the seller might be seeing the downside on what they get on the sell-side, they are able to take advantage of the pricing on the buy-side, which keeps the scale tipped toward the good.

For the last year, I have seen so many buyers trying to find that dream home, only focusing on short sales and foreclosures. After losing out on a variety of properties for one reason or another, real home buyers are now looking for a home that works for their needs and negotiating to get a good value for the marketplace.

Although the numbers are not what they once were, we still are seeing a significant number of people relocating and buying homes. Chicago is also still a strong market for second homes. There are some investors in the market taking advantage of pricing as well.

The Key to Getting to the Closing Table

Although many contracts had been written over the last year, many did not come together. It now seems that real estate agents, attorneys, and lenders are working at finding solutions to getting properties under contract and the mortgage brokers and bankers are problem solving the ever changing lending guidelines. Professionals who have faced the challenges of the market and educated themselves through seminars and out there working are taking their newly learned skills to achieve the goal: getting the property closed.

We would like to thank John Picken for generously sharing today’s photo via the Creative Commons License.

22 June 2009 ? Signs are appearing that both inventory and pricing in the housing market are starting to level. Banks modifying existing mortgages are keeping people in their homes who thought they would have to sell. A large number of foreclosure units will not be hitting the open market as reported in Friday?s Chicago Tribune. Bank of America’s REO (bank owned property) department  will be working with City of Chicago?s Department of Community Development through the Neighborhood Stabilization Program grants from the U.S. Department of Housing and Urban Development. (Bank of America recently acquired Countrywide Bank.) Developers are renting rather than selling new construction and conversion buildings. This trend is expected to continue which will remove hundreds, eventually thousands of units from the area marketplace.  The decrease in number of market priced, short sale, and foreclosure units will contribute the stabilization of housing prices.

Boarded Up Buildings Are the Target of HUD's Program

The City of Chicago Department of Community Development put on an informational meeting last Friday for residential developers to learn more about the city’s strategy to acquire and rehab vacant and foreclosed properties to get them back into productive use.

Here is a little background:  In July, Congress approved a new Housing and Urban Development (HUD) initiative entitled the Neighborhood Stabilization Program or NSP for short.  Through NSP, states and cities will receive $3.92 billion to acquire and rehab vacant, foreclosed properties. The city submitted a plan to HUD in late November, 2008 outlining how it intended to use these funds and received preliminary approval on its plan in January, 2009.  The City of Chicago’s NSP allocation amount is $55.2 million. This allocation was based on the number and percentage of:

• completed foreclosures
• subprime mortgages
• defaults and delinquencies

Eligible Uses of NSP Funds in Chicago

There are, of course, regulations that will go along with this program. Among them are the eligible uses. NSP funds can be used to:

• Establish financing mechanisms for purchase and redevelopment of foreclosed homes and residential properties.
• Purchase and rehabilitate homes and residential properties that have been abandoned or foreclosed.
• Establish land banks for foreclosed homes.
• Demolish blighted structures.
• Redevelop demolished or vacant properties.

Requirements for NSP Funds in Chicago

HUD is requiring that NSP funds be used in the following ways:

• The funds have to serve households at or below 120% area median income (AMI), with 25% of the funds targeted at households at or below 50% AMI.
• The city must commit (spend) the entire $55.2 million within 18-months of signing the grant agreement.
• There must be restrictions in place to avoid over-improvements.
• Single-family homes cannot be sold at a profit, but at a reasonable developer fee is an eligible cost.

Each NSP grantee receiving an allocation of NSP funds must submit an action plan amendment describing the intended use of the funds and all funds must be used within the statutory deadline of 18 months from receipt of the funds.

NSP-Eligible Chicago Communities

The NSP has identified 25 Chicago communities in the greatest need of the HUD application:

1. Auburn Gresham
2. Austin
3. Burnside
4. Chatham
5. Chicago Lawn
6. East Garfield Park
7. Englewood
8. Fuller Park
9. Grand Boulevard
10. Greater Grant Crossing
11. Humbolt Park
12. New City
13. North Lawndale
14. Oakland
15. Pulman
16. Riverdale
17. Roseland
18. South Chicago
19. South Deering
20. South Shore
21. Washington Park
22. West Englewood
23. West Garfield Park
24. West Pullman
25. Woodlawn

Who Is in Charge of Chicago’s NSP Funds

Katie Ludwig with the Chicago Department of Community Development and Bill Goldsmith and Will Towns with Mercy Portfolio Services are working closely together on this project.  Their strategy is to be responsible for negotiating discounted property purchases with the lending institutions that hold those properties. (Properties owned by lending institutions are called  for short.) This agency will hold and maintain the property for the short term and coordinate and oversee a broad network of pre-approved development partners on property disposition, which means sale to owner-occupants, lease-purchases, rentals, or demolition.

They have put out a call to action to the developers around the city.  There will be an application process to become an NSP approved developer and the extent of participation will be based on criteria such as:

• Previous development experience
• Financial feasibility
• Property management capacity (for rentals)

The city and CNSC will help to identify eligible buyers and facilitate connections to end-financing.  They will market support through a citywide campaign with home-ownership counseling.  This counseling will include an eight hour required course which will be coordinated with a range of housing counseling agencies.

My Reaction to Chicago’s NSP Program?Not Good

After attending the meeting I walked away thinking…this is not as organized as I would like to see.  I am worried that due to the 18-month guideline, that the city will spend money needlessly in order to ensure the ability to obtain more funds from HUD in the future. 

Most of the developers that were in attendance, not surprisingly, are interested in making a profit for their time and effort.  This is a neighborhood re-investment program.  It is not set up for large profitability.  There will be cap on the developer fee. When asked if the city will be working closely with the neighborhood aldermen and the Department of Zoning the representatives really did not have an answer casting doubt on how easily improvements will be to make in properties. The idea behind the program is honestly a great idea. But the bureaucratic red tape that goes along with this idea is going to make it a disaster.