Wednesday, October 14, 2009

I'm Back, Baby

It's been a long two months away from my "regular" posting duties, but my pace of work is slowing a bit, so it's time to pick up the blog once again.

Widely read Sacrealstats followers may have guessed at one reason for my long absence: my wife and I are now proud homeowners. Be sure, it was a long and grueling process, an emotional rollercoaster, and a ton of hard work to boot. But in the end, we got a great deal that made all these years of holding back and saving pay off in spades.

One thing that surprised us when we began our search in January was how little real inventory there actually met our requirements. It was clear from the outset that there was a new buying frenzy going on, with houses priced deliberately low in order to attract bids and set the floor. Many bank owned properties either sat vacant or were purchased without being listed at all. Many foreclosure auctions were postponed with the house reverting back to "preforeclosure" status. It was also clear that banks preferred all cash offers to financed ones, and although we had a strong cash position, an all cash offer was out of the question for us.

Admittedly, we were forced to adjust our expectations somewhat. The area of town we were initially interested in held up better than the foreclosure listings would have us believe. (The difference between looking at it on paper, and getting on the ground.) Our overriding concern was maintaining our current lifestyle, and that meant keeping our monthly spending roughly at the same level as when we were renting. We especially wanted to be able to survive on one income in case the economy got worse and one of us was out of work.

We finally settled on Elk Grove, both because of affordability, and also we had seen a mark├ęd improvement in the areas we were renting in since 2007. We quickly learned, however, that we were jumping into a strange kind of frenzy. There were four basic kinds of listings: high-quality REO, low-quality REO, short-sale, and regular owner.

Linoleum under tileREO agents were deliberately underpricing their high-quality listings in the hope of generating bids, but their preference for all cash offers meant that even an above market bid was no guarantee of success. (We also suspect, but can't prove, that a lot of collusion was taking place between the REO agents and certain "buyers".) We wrote a few unsuccessful offers that failed to even get courtesy replies, and basically gave up on the high-qualtiy REO scene. Even if these deals and the players were legit, we wanted no part of a bidding war.

Pipe supporting subfloorWe found an opposite problem with the low-quality REO. Most were imperfect houses that were perfectly priced. If the neighborhood was getting $100/SQFT, that's how they were marked, even when they needed extreme and expensive repair work. Missing air conditioning units, broken windows, roof leaks, gutted kitchens, broken fixtures, dead yards, and ruined floors were common. We actually preferred to buy a fixer anyway, but we needed an awesome deal to make it worthwhile, not just an adequate one.

Minor plumbing problemThe short-sale scene was even more flaky. First, we discovered early on that many short sales were not approved by the bank, even when the listing said differently. There was often a willing blindness on the part of the selling agents who simply took the word of their client that the short-sale was indeed "approved." The cure for that problem was to have our agent contact the selling agent, and ask some probing questions. (Fact-checking against the foreclosure data was also possible much of the time, since many short-sales were also in preforeclosure.) Secondly, logistically it was often very difficult to view a short-sale, since usually the people were still living there with their lives in disarray. Finding a home with junk piled up everywhere, or (even worse) looking as though the owner had no intention of moving at all, was a common occurrence. Thirdly, although we hadn't experienced it ourselves, we were hearing from several people we knew (agents and other prospective buyers) that banks were very hard to work with on the short-sale side. One couple we know had to wait 6 months before their offer was accepted. This made us reluctant to spend a lot of time writing offers.

Dog pee dissolves heat-exchangerThe "regular owner" listings were also a mirage of sorts, since many were simply future foreclosures trying for a Hail Mary. We walked through several, and they were for the most part immaculately staged, clean, and alas, overpriced. Checking the previous sales data, it was clear many of these sellers were trying to recoup their past purchase price, or simply pay off the loan and get away without any debt. They did have some pricing power in the market, since their competition was so flakey and their houses were in much better shape, but they were so far underwater that even a 20% premium to market wasn't enough to pay back their lender. These owners were often abused by their agents through open houses designed to promote the agent's other listings.

All-in-all, it was a difficult and depressing market to work in. We ended up buying a short-sale that was priced very well for its area, but needed a lot of TLC to make it livable. (Strangely, it was the reluctant owner, and not the bank, that was the biggest hurdle to buying the place.) Without revealing too many specific details, I'll just say that we came in at right around 50% of the average $/SQFT for our neighborhood from 2002-2008. We did have to put about 20% of our purchase price into repairs and upgrades, (much of which was "sweat equity" donated by friends and family!), but we met all of our financial and neighborhood criteria, stayed well within our budget, and our monthly payment is $2 more than our rent was.

One final blogging note: I originally started this blog as a tool to help myself understand the real estate market orgy that was happening at the peak of the bubble, but it evolved into a true hobby that I fully enjoy and plan on continuing. I plan on producing a few regular monthly data posts, like the California budget data, along with my weekly real estate market data and graphs. I'll also be jumping in with any state government gossip and market anecdotes I come across. If you think there's anything I should be posing about, let me know!

22 comments :

Max said...

PS: None of those pics were of the house we bought.

Alek Davis said...

Congrats, Max. Regarding your story and analysis, they sound very familiar. I came to pretty much the same conclusion, so I signed a contract for a new construction a couple of months ago. It was not the best deal (I suspect that I may have overpaid about $20K), but I got really tired of searching, and due to a combination of factors (growing family, etc), I decided to bite the bullet. Anyway, hope you will continue posting.

Lander said...

Congratulations Max. It's been a long and strange trip hasn't it?

Max said...

Thanks, guys. Indeed, it's been a weird few years. Here's to hoping the next few are normal and boring. :)

Phil said...

I have a feeling the next few years will be anything but "normal".

Anonymous said...

Very cool Max. Good post. We are starting to look again. This was good information.

nova

David said...

Congrats. We've been looking for two years now and could write a book. Tried an REO, tried a normal owner sale, tried a short sale. Now we expect to close on a probate sale next week. I'll give the gory details if anyone is interested -- yes, the old man died in the house.

Anonymous said...

Congratulations!

And look forward to the upcoming commentary again.

FreedomCM

Anonymous said...

What do you mean the owner was a hurdle? Without giving away personal detail, why would the owner who's losing the house be difficult?

Max said...

Without giving away personal detail, why would the owner who's losing the house be difficult?

We think they were on the verge of foreclosure anyway, and their bank was pressuring them to sell short. It was very messy, and we had no idea until we were under contract.

Water under the bridge at this point.

husmanen said...

Congrats! I like the strategy you used. Personally I believe I am getting fatigued at this point.

Also, your market description is spot on. Enjoy!

PeonInChief said...

husmanen--

You sent me a question a while back and I lost the email. Can you resend it?

Also congratulations to Max, although the story makes me happy that I rent.

Rachel said...

Congrats! I just found your blog a couple weeks ago and subscribed to your RSS. I am searching in the Sacramento area too and have found exactly the same situations as you. And, it seems that the inventory is drying up faster and faster. I look forward to reading more of your posts.

husmanen said...

PeonInChief: Sure, I submitted it through your blog:

http://tenantsforeclosure.blogspot.com/

Should I resubmit through the blog or use the PM alternative identified on your blog?

Nooge said...

Congrats Max - glad to see one of the good guys get what they want out of this...

Buying Time said...

A belated and hearty congratulations!! (have been on travel in the D.C. area)

Very exciting news. Especially glad to hear you plan to keep blogging. Now that the house search is over, I guess that means you and Mrs. Max can concentrate on filling all the bedrooms ;)

Max said...

Yeah, let's not get to hasty!

patient renter said...

Congrats! It sounds like a hell of a market right now, one that I'm still in no hurry to wade through :)

patient renter said...

BTW - I think your goal of being able to carry the home on one income is admirable, and is something that I'll be shooting for as well.

Wadin' In said...

Max, I wish you a hearty belated congratulations. I have been away from your blog but am pleased to see you Wadin' In! Ha!
Patience is a virtue. As you know, I bought a foreclosure in Nov. 2007 for $390k, which is now worth about $300k! I have always been a bit ahead of my time, sometimes lucky, sometimes not.
I keep buying more houses trying to dollar cost average. It worked with B of A stock, which I last bought at $5.50 and sold at $17. Did you ever put your IRA $s back into the market?

BTW, I keep waiting for the IRS lawsuit against Countrywide/B of A to pay off the whisteblower reward. When it does you get 10% for all your comradery through the unbelievable disfunction these last few years.

Have you spent and evening sitting in a tree in the back yard, sipping a glass of wine, realizing you own some terra firma? It is so fun!

Max said...

Wadin', here's hoping you get a million!

Yeah, it's pretty sweet finally taking a bite at the apple. When I get overwhelmed with remodel, I just look at my monthly mortgage statement and it calms me down. :) We still have a lot to do, but it's a different kind of stress than before. Change is good!

On the IRA side, I totally missed the bottom, and I've gone in and out a bit since May. Made money each time, but not 60%. I personally don't think we'll see a true bottom for the economy until all the unwarranted optimism is wrung out, but what do I know?

Anonymous said...

Hi Max,
I used to read all the local RE blogs compulsively on a daily basis, but I've succumbed to "bad news fatigue" so only check everyone out occasionally these days.

Congrats to you and Mrs. Max! I'm so happy you got a good deal and that you're happy with your decision.

Thanks (I don't say it enough) to you,agentbubble, BT and Lander for all the time and effort you guys put into this and thank you for sharing it with all of your fans. : )

I hope things turn around and there can be more good news stories but I don't see any reason to believe that will happen.

Thank you and congrats again!
-curious (not logged in)