Time suckers:
Thomas Edison once said “Being busy does not always mean real work. The object of all work is production or accomplishment and to either of these ends there must be forethought, system, planning, intelligence, and honest purpose, as well as perspiration. Seeming to do is not doing.”
You see, time suckers can be highly deceptive. You think that you are making productive use of your time towards your real estate business, but in reality you’re not doing anything to push the ball forward. At the end of the day you look back, baffled, thinking to yourself “Where did the time go? I didn’t really accomplish anything on my list today!” Time suckers can be things like: spending too much time responding to e-mails, having long conversations with people who call you unexpectedly, sitting through pointless meetings, getting caught up in heated online forum discussions, reading way too many blogs in one day.
Sometimes the time suckers are not deceptive at all — they are simply addicting, like television (for some) and social media websites (for others like me)!

Energy vampires
Energy vampires are some of the absolute worst type of people to surround yourself with. These are people who suck all of the positive energy out of you and leave you feeling completely drained and unable to carry out the goals you’ve set. Energy vampires constantly blame others for their circumstances, complain about life (or family or business or everything), and are rather self-centered with little regard for others time or feelings. While some energy vampires may have ill intentions, many are completely oblivious of their persistent negative attitude and its effects on others around them.
So how do you slay the energy vampires and wipe out the time suckers? Here’s a few tips, many of which are obvious but still ignored:

• Take inventory: First you need to know what your time suckers are and who your energy vampires. Really think about them and write them down. At the end of a day, write down everything that you did during that day. It can be eye opening! Then think about who in your life leaves you feeling exhausted when you around him or her.

• Get on schedule: Set a specific time (or times) during the day to handle phone calls and emails and stick with the schedule as much as possible.

• Space it out: You can learn a lot from blogs and online forums, but you don’t have to read everything at once. Space it out — take a few at a time each day!

• Just say no: If the call is unexpected, let it go to voicemail. If the forum discussion is getting heated, don’t jump in (or if you do, resist the urge to go back and forth). If the offer for free real estate training is on a topic that is not directly related to what you’re doing right now or within the plans for the next 3 months, don’t opt in! If you’re invited to a meeting with no agenda (and can’t get one), skip it!

• Be intentional: Interact with social media sites with the intention to connect with people (but briefly). Forget the Facebook games or the temptation to watch the list of related videos on YouTube

• Put vampires in a box: If energy vampires leave you feeling wiped out, take responsibility for this because its your fault and you have the power to change it! End conversations with energy vampires quickly and do not join the vampire’s pity party or complaint circus. Remember that energy vampires can also surround you virtually so if you’re reading your facebook newstream or twitter stream and someone consistently sounds like a negative Nelly or leaves you feeling irritated, remove them.

Hopefully these tips have you thinking about what your detractors are. The sooner you begin to remove them, the sooner success arrives.
Shae Bynes

And while you may think that the skills required to negotiate small purchases are much different than the skills required to negotiate the purchase of big-ticket items (like cars, real estate and companies), in reality, the basics are the same.

While you can spend your entire lifetime trying to perfect the art of negotiation, learning a few key negotiation strategies can put you far ahead of most of your competition, and can help navigate those times when you’re up against an unmotivated seller, a savvy buyer or a head-strong contractor.

This article will offer seven powerful negotiating tips that you will likely find very useful while pursuing future real estate deals (or any other deals, for that matter):

Tip #1: Let the Other Party Speak First
You’ll often hear people say, “Never make the first offer…let the other party do it.” This is great advice, but do you know why that will help your negotiating position?

There are two reasons:

1. First, it allows you to define a mid-point. Many inexperienced negotiators will find themselves “splitting the difference” in their negotiations; for example, if one inexperienced negotiator starts by asking $200 in the negotiation and another inexperienced negotiator starts by offering $100 in the negotiation, the negotiation result generally will end up somewhere around $150 (the mid-point). This is human nature not to want to give more or less than you’re getting, so people tend to increase or decrease their offers by the same amount as the other party.

But, when the other party states their position first, you have the ability to define the mid-point of the negotiation!

In the example above, if the seller had stated the $200 ask first, the buyer could easily have offered $60, thereby reducing the mid-point of the negotiation (where they expect to end up) down to $130. On the other hand, had the buyer offered $100 to open the negotiation, the seller could have increased his ask to, say, $260, thereby increasing the midpoint to $180. As you can see, the person who states the first position is at a disadvantage to the person who waits, as the person who waits can define the mid-point.

2. Second, it’s quite possible that the other party’s first offer will be better than the first offer you would make. For example, let’s say you want to hire a plumber, and your budget is $500 for a particular project. While you could state upfront that you have $500 to spend on the plumbing work (in the hopes that the plumber doesn’t ask for more than that), what if the plumber was only planning to charge $300? You’ve now told him that you’re willing to pay $500, so he has little reason to quote you anything less than that. By stating your position first, you’ve given away valuable information to the other party (you maximum price), and he will use that information to extract the most money possible from you.

Tip #2: Stop Talking and Start Listening
One of the strongest maneuvers when negotiating is to keep your mouth shut. Unfortunately, it’s also one of the most difficult. People are naturally uncomfortable during a negotiating silence, but this is exactly why you should work to ensure those silent periods occur. If you’re uncomfortable, you can be sure that the person you’re negotiating with is uncomfortable as well. And the common result of this uncomfortable situation is that one party will make a concession to break the awkward silence.

Next time you are negotiating and the person on the other side of the table throws out an offer, make a point to say nothing. Whether it be 10 seconds or 10 minutes, make the other person break the silence. You’ll be surprised to find that he or she will often interpret your silence as anger or disappointment, and will break the silence by revising their offer or offering a concession. Master negotiators will use this tactic to get less experienced negotiators to make successively lower offers without ever having to throw out a counter-offer themselves.

This may be the most basic — but most useful — negotiating tactic you’ll ever employ.

Tip #3: Information is Power
I’d estimate that in 95% of all negotiations between experienced negotiators, the one with the most information (pertaining to the negotiation) will walk away with the better outcome. When negotiating, it’s important to know as much as possible, not just about the object of the negotiation, but also about the party you’re negotiating with and their motives.

Most people tend to assume that negotiation is always about money, but often it is not. Smart negotiators realize that in many cases, it’s more important to solve a problem than to offer the most money.

For example, let’s say two buyers show up at an open house and both want the house. The first buyer assumes that the seller wants the most money possible, and offers full asking price, but needs two months to close in order to get financing in order, get inspections, etc. The second buyer asks the seller why he is selling, and the seller says that he has received a job offer in another state, and needs to move in the next two weeks; the second buyer makes an offer for $10,000 less than asking, but agrees to close in two weeks, and has no financing or inspection contingencies. While the first buyer offered more money, the second buyer likely solved a problem that was more important than the difference in the offers. All because he gathered some information from the seller before making an offer.

Tip #4: Always Get the Last Concession
Part of being a good negotiator is “training” the other party to do what you want, without them even realizing it. Here is one way to do that with someone you will be negotiating with multiple times: Always make sure you ask for and get the last concession in the negotiation (a concession is something the other party gives in a negotiation — a price drop, better terms, etc). By always asking for — and getting — the final concession, the other party will, over time, learn to stop asking for things once he essentially has what he wants/needs from the negotiation.

If the other party realizes that every time he asks for something, he will need to give something, he will naturally shy away from asking for more than what he needs in fear that he will be asked to give up something important in return for additional (non-essential) demands on his part.

For example, when negotiating with a contractor, let’s say that he throws out a final price that you both agree on. Instead of saying, “I agree with that price, we have a deal,” instead try saying, “I agree with that price, if you can start first thing tomorrow morning.”

Maybe he’ll come back with, “I can’t start tomorrow, how about the following day?” Your response could be, “That works, but I’ll need you to finish in three days instead of four.”

As long as he counters your request, continue to ask for additional concessions. Eventually, you will train the other party that by “resisting,” they are encouraging you to ask for more and more; they also learn that by just giving in, they end up giving up less in the end. It should be obvious how this will help in future negotiations with this person.

Tip #5: Implement a Penalty for Asking for Concessions
Have you ever been on the phone with a customer services representative from some company negotiating some point (for example, your on the phone with your cable company trying to get your monthly fee reduced by $20), and find that every time you ask for something, the rep puts you on hold for 10 minutes while they “check to see if they can do that.”

You can bet that it doesn’t really take them 10 minutes to determine whether they can give you $20 off your bill. But, they realize that when you ask for $20 off, then wait for 10 minutes, and then they come back and counter-offer you $5 off your bill, you’re going to be less likely to go another negotiating round (“How about $15 off?) if it means you’ll have to wait another 10 minutes to get the response. What they’ve done is implemented a “penalty” for each time you ask for a concession; while you’re sitting on hold, you’re powerless — you have the option to wait for some unknown amount of time, or hang up and get nothing.

If you want to discourage others from asking for concessions in your negotiations, do the same thing — implement a penalty each time they ask (though don’t let them know you’re doing it on purpose). And the penalty doesn’t need to be same for each “offense.”

Making them wait (like the example above) is a great example of a penalty. Perhaps you say, “I’ll have to think about that, I’ll give you a call tomorrow and we can discuss further.” Or perhaps the penalty is that they have to fill out a bunch of forms to get their desired concession. Or perhaps they’ll have to drive somewhere to pick up that extra thing that they want.

If you make the penalty for asking more cumbersome than what they asked for, it’s quite possible they’ll decide it’s not worth the effort — like having to wait 10 minutes to find out if you can save $10 extra.

Tip #6: Friction is Your Friend
On the surface, a negotiation that ends quickly and smoothly without too much back-and-forth appears to be a good one. But this isn’t necessarily the case.

Can you remember the last time you went into a negotiation, and the other person quickly accepted your offer without too much protest or countering? How did it make you feel? If you’re like most people, you probably felt like you didn’t get as good a deal as you could have. You probably felt that, because the other party didn’t put up too much resistance, they were likely very happy with the deal, and therefore, you got the worse end.

Oftentimes, though, the other party feels the same way! There wasn’t enough friction in the negotiation to make both parties feel like they earned a great deal. And because of this, what you will often find in negotiations that go quickly and smoothly is that one or both parties will want to back out of the deal. So, if you really want to ensure that the other side doesn’t back out after the negotiation is finished, make them work hard to get to a common agreement; this hard work will often translate into feelings of successful outcome for the other side.

This is especially important in Real Estate Investing, when the other party often has several days (if not weeks) to back out of an agreed-upon deal.

Tip #7: Check Your Ego at the Door
Oftentimes, we assume that the other side is looking for something tangible in the outcome of a negotiation: more money, better terms, etc. But, a lot of people who pride themselves on their negotiating skills are more interested in having their ego stroked than they are in any real tangible outcome. While some people are going to be all about getting every extra penny in the deal, there are those who will happily give a discounted price (assuming they are still above their minimum threshold) in return for some solid ego stroking.

In Real Estate negotiation, this might mean telling a contractor how highly recommended he comes; it might mean reminding a potential investor/buyer how good he is at rehabbing on a shoestring budget; or it might mean “confessing” to your wholesaler how much you hate buying from him because he is such a good negotiator. You’d be very surprised how far some sincere flattery will go in getting you a better negotiating outcome. Not only will it encourage the other party to put their defenses down, but they will feel an obligation to “return the favor” in some way — make sure you give them a way to return it right then in terms of a lower price (or whatever else you might want).

Remember the last time you negotiated with someone who was really nice? How about the last time you negotiated with a complete a**hole? Which one did you feel better about “sticking it to them?” And which one were you happy to give a break to?

by J Scott

In fact, a closer look at the industry and its scandals reveals a “Godfather”-like underbelly, complete with death threats on public officials and sting operations.

The conflicts have led to the increasing use of appraisal management companies — middlemen that are supposed to act as a firewall between lenders and appraisers. But for millions of homeowners, the issues still linger.

Just ask the owners of the quaint, but extremely moldy Denver home that apparently appraised for about $370,000, despite comps suggesting a value at least $100,000 less. The 2-bedroom home ultimately sold last summer for $237,000.

How did that happen?

Some of the cases working their way through the courts give a glimpse of the back-door dealing that went on. Landmark Equities Group, the family-owned appraisal firm being charged by the California DA, for example, brazenly had an on-site office at a mortgage broker’s facility. The appraisers, James Merritt Eaton, 60, and his son Brian Chandler Eaton, 28, secretly changed data on staff appraisers’ reports, allegedly to deliver the outcome the loan officers wanted.

In the case of eAppraiseIT LLC, a division of title company First American Corp., New York State Attorney General Andrew Cuomo charged that the unit gave in to demands for higher appraisals to secure more of Washington Mutual’s business. In 2006 and 2007, the appraiser did 262,000 valuations for Washington Mutual over an 18-month period, and had a total $50 million in earnings, Bloomberg News reported.

Now, that’s not to say all appraisers are corrupt. In fact, 11,000 of them signed a petition protesting the pressure and unethical practices. But the bad apples have given the whole profession a black eye.

Thanks in large part to Cuomo, Freddie Mac and Fannie Mae last year adopted the “Home Valuation Code of Conduct” to counter such abuse. The code says that appraisal management companies, which are paid by the lender out of the appraisal fees collected, must act as a liaison to keep appraisers and lenders from having direct contact on Fannie and Freddie-backed loans.

Needless to say, not everyone is pleased. In one extreme case, an appraiser was arrested and held on $500 million bail in December after allegedly threatening to shoot New York AG Cuomo. The man was “apparently upset over some of the actions [Cuomo's] office has taken regarding cracking down on mortgage-related fraud,” the New York Post reported.

(It should be noted that some believe that Cuomo, former HUD secretary under President Clinton, was largely responsible for the subprime mortgage crisis. And in 2004, he joined the board of AMCO, a Cleveland-based appraisal management company).

Some say the appraisal management companies (AMCs) may only make things worse, after all, some of them are owned by banks. (Landsafe, an AMC, is a subsidiary of Bank of America). The well-known New York appraiser Jonathan Miller, CEO of Miller Samuel, calls it all “an accident waiting to happen.”

Although the HVCC is intended to ward against improprieties, it is not fail safe. In fact, the code still allows banks to be involved in the appraisal process. For one, lenders can still use in-house appraisers, and are “responsible for selecting, retaining, and providing for payment of all compensation to appraisers.” It’s right in the guidelines on Freddie Mac’s website, with the caveat that the loan production staff is not to have direct involvement in the selection of an appraiser or discuss valuation with the appraiser or AMC.

The biggest concern is that the use of AMCs opens the door to appraisals being conducted by far-flung appraisers unfamiliar with the local market, which in turn will cause more erratic valuations.

“The problem is that anybody with a state-issued appraisal license has the exact same level of qualification to appraise here, whether they live in New York or Buffalo or Albany or Rockland County,” Jeffrey Jackson, co-founder of New York-based appraisal firm Mitchell, Maxwell & Jackson, told The Real Deal after the code was passed last spring.

“The appraiser is just the first step in the process, yet we are taking all the blame,” Portland-area appraiser Burr Robson told HousingWatch. “I had the same clients for literally 15 years until HVCC. I now have to fight for appraisal work from AMCs, and my income has fallen 67%. I am worried that I’m going to have to sell my house.”

And there’s a new concern for some homeowners and lenders: low-ball appraisals.

Walt Molony, spokesman for The National Association of Realtors, one of the most vocal critics of the code, said out-of-area appraisers often lead to “apples to oranges” comparisons, resulting in many valuations coming in below the price agreed upon between the buyer and seller. “In an environment where prices have declined over the past three years, this is absurd,” huffs Molony. “It has caused a rise in contract cancellations — not exactly the best way to solve the problem, particularly when homes are selling for less than replacement construction costs in much of the country.”

In the end, there will always be the temptation to give in to pressure to win repeat appraisal business — even if the pressure may not come in the form of a severed horse’s head under the bed sheets. It might be something as simple as the boss of a New York appraisal management company — let’s name him “Don CordeLoan” — saying, “I’m gonna make him an offer he can’t refuse.” In essence, work for us, our way, or don’t work at all.

Some industry watchers say appraisers should be better regulated, but setting up appraisal management companies as the intermediary has the potential of re-creating the same problem we’re trying to escape. As Michael Corleone once mulled: “If history has taught us anything…”
By Sheree R Curry

If you love the sport of basketball, I highly recommend you come to Vegas one year for March Madness. There’s nothing like it.

This place is a complete madhouse where everybody is going crazy.

People are drunk as can be, throwing hundreds of dollars down on the craps table and common sense has completely gone out the window.

In a nutshell, it reminds me of the housing crisis, where people went nuts and threw caution to the wind. The good thing about Vegas is that tomorrow morning people will only wake up hung over and a few hundred dollars poorer… but the real estate investors who went crazy have ended up bankrupt, losing their life’s savings and, ruining marriages and families.

I’m very thankful I’m not one of them. It’s because I’m very conservative and because I follow my 3-step formula.

Here’s what my 3-Step Real Estate Investing formula is all about:
■Step one is wholesaling.
■Step two is lease options and sub-2 deals that I sell on a rent to own basis
■Step 3 is my buy and hold properties that give me cash flow.
Step one is my cash-now strategy. That way, I always have cash coming in the door. But, I don’t want to be wholesaling when I’m 80 years old so the whole purpose of step one is to give me cash to live on and to pay down my rental properties.

Step two is for larger paydays. I get a small option fee upfront but I get the $30,000 paydays on the back-end. Step two is used when I don’t want to hold a property for the next 30 years and to help me pay day my properties quicker.

Step 3 is the “holy grail” of real estate investing. In my opinion this is what we should all strive to achieve — $10,000 a month in passive income and ten or more properties owned free and clear. But to achieve step three you have to do steps 1 and 2 and pay down the mortgages on the properties over time.

Most importantly, you will be doing all three steps at the same time. Because, if you’re a conservative investor who properly evaluates all of your deals to make sure the numbers work… if you never speculate and always make your money going in… then a few years from now you can have a large passive income stream for the rest of your life.

In fact, I just worked with an investor who now has $9,000 a month of passive income. He doesn’t have a “job” and he doesn’t even do that much investing anymore. He’s content taking it easy, and thanks to his smart planning, that’s exactly what he can do.

Alright, it’s time to go watch basketball. Remember not to go “crazy” with investing and use smart and conservative planning. Save the craziness for Vegas…

Jason Hanson

While fixing up a home to sell can be costly, there are some ways to reduce the damage to your wallet. Cheryl Reed from Angie’s List spoke to me about important repairs that shouldn’t be overlooked. They are: changing your furnace air filters regularly, fixing leaky faucets/toilets, repairing caulking issues in the bathroom and defective electrical outlets/wiring.

“Our experts in the heating ventilation air conditioning industry tell us that 60 percent of all their service calls start because it’s a dirty filter issue. If you have a dirty filter, it affects the efficiency of your furnace,” says Reed. She says that it’s a simple and easy repair that improves the air quality and saves you money.
“You can save about $100 a year if you just change those filters when you should.” She recommends checking your air filter every time you get your energy bill. “If it’s dirty and you can tell, you can see it; just switch it out. You can buy a number of air filters ranging from moderately good to really expensive and high efficiency, in terms of cleaning the air. You have a number of different options, depending on your budget,” says Reed. She also says, depending on health conditions of those living in the home, changing filters more frequently might be necessary.

The second repair is annoying and easy to spot. “If you’ve got a leaky faucet or running toilet, that’s going to cost you,” says Reed. “If you don’t get it fixed you’re going to be paying more and more. It can also lead to mold damage. It can lead to a loss of your cabinetry—the flooring in your cabinetry can be rotted away and that can affect your floor underneath and the walls. So you can have a big issue if it’s not fixed soon,” says Reed.

If there are problems with your home when you begin to show it, buyers will spot them. Reed says, “People who come to your house to check out whether they’re going to buy it or not are looking really closely and they’re listening really closely too.” With plenty of housing inventory on the market, buyers are likely to move on if they feel the house needs a lot of repairs.

“You have to put forth your best impression. These small relatively inexpensive fixes are really important,” says Reed.

Dirty tiles and damaged caulking can send a message to buyers that the house may be in need of even bigger repairs. “You’re first going to have an aesthetic issue and second that’s an indication that you’ve got a problem that could lead to mold and nobody wants mold in their house anywhere at all—it will grow if you don’t have proper seals in your bathroom,” says Reed.

“Those are things that you can see every day—sometimes we get so used to seeing them that we forget about them,” says Reed. However, buyers don’t.

Reed offers this advice, “Pretend you’re going to try to buy your own home; what do you see that you wouldn’t tolerate?” She says it’s worth it to take the steps to fix the problems. Buyers don’t want to fix those problems any more than sellers do. Check for defective outlets. Electrical problems are not only irritating but also can be very hazardous. “An electrical fire can destroy your home,” says Reed.

Who should do the job? Of course, saving money is always key. Reed says some of these repairs might be suitable for a handyman but she cautions homeowners to be sure that the level of the repair matches the expertise of the person you hire.

“You’re going to pay more in the end if you don’t check out the person you hire to help you. Make sure that person has a good reputation and if it’s required for him or her to be licensed in your area, you really should [use] a licensed person, even if it’s more expensive,” says Reed. Reed says, you may pay more but you’ll get the job done right the first time.

by Phoebe Chongchua

In case you’re in a similar boat, I thought I would share a few tips that I’m putting into practice that I’ve received from my mentor as well as fellow investors with several more years of experience under their belts working directly with home owners:

#1: Always provide a written offer

It’s easy to think that you’re saving time by giving sellers verbal offers, but frankly everyone likes to “see it in writing.” Regardless of whether you think your offer will be accepted or not, put the offer in writing and allow the seller a chance to review it and give it due consideration.

#2: Remember cash isn’t always king – give options!

In the beginning, all I would make are low cash offers thinking “Cash is king, right?” Well, yes and no. It can be king for some sellers, but not for others because it really depends on the seller’s situation. Be sure to give the sellers options. If you ask the seller some key questions (e.g. how much is owed on the property, why they are looking to sell, what they plan to do with the money after they sell) you will be able to determine what types of deal structures could possibly work. For example, your written offer can include a few different options:

■Cash
■“Subject to” (liens remain in place and you take over the payments)
■Seller financing
■Combination of “Subject to” and seller financing

#3 Consider an option contract

If your intent is to assign the contract and the seller just doesn’t seem to want to meet you at a number you’re 100% confident with, consider an option contract at the sellers price and just go out there and see if you can find a buyer within the option period (get at least 90 days). There’s no risk! If the seller’s price is completely unreasonable, you don’t need to waste your time….but if its just a little bit too high for your comfort level, go ahead and get that option agreement signed and see what you can do with it.

#4 Consider a partnership

My mentor gave me an example of a deal he did where there was substantial equity in the property but the home needed a lot of work. After a rehab, it was going to be an excellent home to sell to a retail buyer. What he did was set up a contract with the seller and they agreed to rehab the property, market it, sell it, and split the profits. The seller paid the mortgage and carrying costs while the rehab was completed and they both made a nice profit when the property was sold. A win-win for everyone.

#5 Always follow up

Persistence pays. Even if the offer is rejected now, the seller may have a change of heart later. Be sure to follow up a few months after you’ve made the offer and check in to see how things are going. I’m currently working on a deal with a seller I made an offer to back in November! This is more common than you’d think. Don’t miss out on deals because of a lack of follow up.

by Shae Bynes

Condominium owners are typically required to have an insurance policy that only reimburses them for loss of their belongings. The condo association should provide structural insurance, which covers the roof, outside and adjoining walls.

There are two primary types of home insurance:
1. Actual cash value coverage pays the value of property or belongings at the time they were lost, taking into account their age and depreciation.

2. Replacement cost coverage provides enough money to replace lost or damaged property or belongings with new items at cost.
Usually there are replacement-cost limits for certain expensive items, such as jewelry, artwork, antiques and home office equipment. Consult your insurance agent about taking out individual riders for additional coverage on these possessions.

It’s wise to keep an itemized record of household contents, noting their value, date of purchase and description. Valuables should also be photographed or video taped. This will help determine their replacement cost.

Experts suggest that a home be insured for at least 80% of what it would cost to replace at its current value. Finally, a homeowner policy should be reviewed every year. If you have made any improvements, or the home value has increased, more insurance may be required.

Always consult with a licensed insurance provider before making any changes to your home insurance policy.

First the definition of shadow inventory is up for debate. Depending on who you’re listening to it can mean many different things. The different definitions are some of what’s causing people to debate the subject.

What is Shadow Inventory?
Definition 1 – Foreclosed but not listed. Some analysts say the “shadow inventory” is the homes which the has bank foreclosed on but not sold. These are homes that are not on the market but owned by the bank (REOs not listed on the market).

Definition 2 – Homes in the foreclosure process as well as delinquent mortgages where foreclosure proceedings are imminent.

Definition 3 – All homes delinquent, short sales not on the market, REOs not on the market, and anything in the foreclosure process.

Definition 4 – All of the above plus modified loans (as they have a large percentage of failing anyway, pay option-arms about to be reset, and lots sitting idle with builders in trouble.

I’m going to go with Standards & Poor’s definition which most similar to Definition 3, all delinquent loans, not just REO’s.

If you go with this definition, then naturally your focus is to look at delinquency rates which are widely published. So to say we have no way of knowing the true size of the shadow inventory is false. The mortgage banker’s recent survey with data ending in the 4th quarter shows that 9.47% of all loans are delinquent. Yikes! That’s a scary number; however the number was down slightly when seasonally adjusted. Also according to this recent survey 50% of all past –due mortgages were 90 days or further past due. This is the highest number in the history of the mortgage banker survey. Usually you’d see a large glut of 30-day past-due balances, which becomes smaller at the 60-day mark, and there would be smaller yet number of 90-day balances (assuming homes were being liquidated with efficiency).

With fewer loans at the 30-day mark, it seems the glut of sub-prime loans is being flushed through the system but only so slowly that it is creating the large inventory (the 90-day past due loans). The government and banks are trying loan modifications, short sales, and foreclosure work outs to reduce these properties flooding the market. Unfortunately distressed assets are distressed assets, especially when they have negative equity.

Standard & Poors sees this shift in lender strategy as temporary as lenders will realize that these toxic assets are unredeemable in most cases. Therefore these homes, estimated at 33 month’s supply or 5-7 million, will eventually hit the market. If they do, home prices could head lower because of increased inventories. The saving grace for the market could the limited new home construction, recent loss in builder confidence, a growing economy, and continued political pressure on banks to keep foreclosure as a tool of last resort.

Nothing to Worry About?
Some believe the shadow inventory isn’t a big concern. Steve Cook of Real Estate Economy Watch points out that total housing inventory is at a 7.8-month supply, slightly up, but overall way down over 1 year ago. “The huge shadow inventory of 1.7 to 7million properties first forecast more than a year ago has yet to materialize-and may be a myth,” said Cook recently in blog post challenging the shadow inventory concerns. I tend to agree. Although my credentials aren’t as serious as Standard & Poor’s rating system, there is great pressure on the banks to work with owners to work out, modify, short sell, or salvage these loans in some way. Side note; a friend of mine recently modified his loan from 7% to 2% for the next 5 years and had his payment sliced in half. The odds of him paying this back are good. Market absorption is continuing to happen as well. In my market, Memphis, inventories are down 30% from the peak, so it’s hard to comprehend prices dropping much further.

I think inventories are set to rise in the upcoming months because foreclosures are expected to peak this winter . I’m looking closely at mortgages headed into delinquency for the first time to gage how much time the crisis has left. Those and past-due loans headed into serious delinquency are in decline. This summer will be critical for the market as the government intervention is nearly over. If the builders continue to hold off building, the market should absorb much of the shadow. Some markets have further to correct of course, but I think we’re unlikely to see home prices drop more than another 5% nationally. My last caveat is this; banks are getting smarter. They were dumping properties for next to nothing a year ago and now that they’ve used their free passes for Wall Street, they’ll be making more prudent pricing decisions for the homes they’re marketing. Shadow inventory yes. Should we dig bomb shelters and buy survival seeds? NO. Continue to accumulate real estate (today) at or near the bottom.

Ryan Hinricher