I love doing lease options and subject-to’s. And with the properties that don’t go into my buy-and-hold portfolio, I sell almost all of them via lease option. However, the huge downturn in the real estate market has caused a problem for many landlords and their lease option tenants.

You see, since 2008 the market has dropped 30%-50% in many locations. If you gave a tenant/buyer an option to buy a house for $100,000 a few years ago, the house might now be worth only $70,000 and you’ve got a problem.

So what do you do?

Well… a lot of it depends on your tenants. Your tenants might decide they can buy a house down the street for a lot cheaper and they might move out when their lease is up. If a tenant can get a house for $70,000 and you can’t sell them your house for that price then there’s not much you can do.

In fact, this just happened to me on a property I have in Stafford, VA. I had an excellent tenant for the last several years that just moved out. She could buy a similar house in the area for $150,000 and the best price I could give her was around $200,000. I hated to lose her, but I certainly don’t blame her for moving out. In this case, I do have a good property so I’ll get it filled quickly.

However, if possible, I would encourage you to work with the tenant if you can. Let me give you another example from a property of mine.

I have a row house in Baltimore, MD. The tenants absolutely love the house and want to purchase it, but the appraisal came in a few thousand short below their option price. They didn’t want to move out so we extended the lease for another 6 months and will reevaluate things at that time.

Now, with the Baltimore property I could have dropped the price slightly, but it’s another good property and I am in no need or hurry to sell it. However, if it was a dump which I didn’t want any longer I would have dropped the price in a heartbeat to get rid of it.

What you have to remember is that every situation is different and everything is negotiable.

If you have quality tenants that truly want to buy the house and they’ve paid rent on time every month, I would definitely try and work with them. Much of the time this will be extending the lease every 6 months or so until the property is worth their option price. Or, if you have a ton of equity in the property you could always reduce the price if you wanted to.

On the other hand, if the tenants have been a pain in the butt and you’ve had to chase the rent every month then I would not extend the option and I would try and get new tenant/buyers in the property as soon as possible.

Just remember to remain flexible and take each property on a case by case basis.

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Over the last few years we’ve been predicting records were going to be broken for years to come and that it would be a uniquely incredible environment for real estate investors. Today RealtyTrac issued a press release for the month of August that illustrates the fulfillment of this prediction in no uncertain terms.

Here are the key numbers to note:

In August, 1 in 381 housing units received a foreclosure filing.RealtyTrac has seen 1.2 million repossessions so far in 2010.Before the housing bubble burst, in 2005 only 100,000 houses became REO’s.95,364 property foreclosures in August, a historic record.An increase of 25% since the start of the 2010.In August, 96,469 homeowners receive a notice of default.1% decline in the number of NOD’s filed in July.A 30% decline since August 2009 after a peak of 142,064 NOD’s issued in April 2009.

For a complete list of notable numbers you’ll find them all just above the comment section. Our initial prediction was that with the drastic turn in the economy. This would create a flood of opportunity for real estate investors based on the sheer volume of properties vulnerable to a declining economy. 

The numbers laid out in this release speaks volumes of what’s going on in the big picture. In understanding the big picture we have the opportunity to reverse engineer these trends in order shed light on our local markets. Being investors we always need to be mindful of market conditions themselves as they will dictate what we can and can’t offer.

There are some pretty telling numbers laid out by in this release, but Rick Sharga, Vice President of RealtyTrac, doesn’t mince words by saying,

“I don’t think it gets any better really until the end of 2013.”

It doesn’t take a rocket scientist to recognize that things are getting worse (unless you’re an investor, in which case is the exact opposite). But it does take some cajones to make a long term prediction to when things will get better.

However, the fact remains that we’re real estate investors and investors have their skills and understanding of the market, put them both to use, and generate a positive return.

Now let’s look at these numbers to get a sense of what’s going

Digging below the surface of the scale these records reflect there are two trends that stand out.

The rate of properties being taken back by the bank is increasing.The rate in which Notice of Defaults are being is declining.

This may suggest that we’re reaching the bottom and things maybe turning around as the number of NOD’s and foreclosure filings that indicate the rate of origination for these troubled properties is winding down. But this simply isn’t case as Rick Sharga laments… but rather only the making of another twist in the housing saga called our market…

The Antagonists of the Housing Market

In any saga there comes a time where the protagonist looks back on what’s happened and then wonders what could have been. But for every saga there must be an antagonist to make things interesting and there have been 3 significant acts that have muddied up the waters… perhaps you can identify the antagonist.

Troubled Assets Relief Program aka “TARP”Foreclosure MoratoriumFirst Time Homebuyer Tax Credit

We can only wonder what might have been, but in essence these were all nothing but short term stalling tactics used by the protagonist to buy them more time. TARP was meant to relieve pressure on the housing chunk of the finance market. The moratorium literally but a dam up in a river of foreclosures but was completely unsustainable, stall tactic?

Finally the First Time Home Owner Tax Credit comes in to shore up enough incentivized buyers to redirect the market upward. It only temporarily altered buying patterns and now that we find ourselves in record bank repossessions we can assume this isn’t what the antagonist had in mind.

But these are pretty much old news, except for the fact that the effects of these acts have been adjusted for by the market to create the current list of statistics. So what gives?

You Didn’t Think a Saga of this Magnitude had only 1 Antagonist did you?

When it comes to taking back a property it is up to the bank to file (unless there’s a moratorium) and even though the number of REO’s is breaking records time-and-again it sure doesn’t seem that way in the field. If you’ve noticed this when you’re checking the daily list of REO’s on the MLS and have experienced the same bewilderment you are not alone.

In What is the Real Estate Shadow Inventory I covered a topic that continues to gain attention, and rightfully so! Shadow inventory is the perpetration of antagonist #2 and this is their concern:

The buyer pool is too soft.Softer the buyer pool then longer it takes to clear “distressed inventory.”Longer it takes to clear the greater price pressure there is on the overall market.An increase in price pressure increases the number of underwater properties in the market.The more homes that are underwater correlates directly to the number of homes in danger of foreclosure.

To add one more point based on the Notice of Default trend is that there they are attempting to stem the tide into the pre-foreclosure pool. So not only are banks unsustainably holding REO shadow inventory, but now they are now widening the schism by shadowing the foreclosure process which is cuts into our pool of motivated sellers.

Point here is that the efforts of the antagonists to the housing saga will continue and the plot can only thicken as their unsustainable efforts erode. A knot has been created and we, as the protagonists, are the only ones micro enough with the skill sets to solve these problems. Locally we invest and work to remove all of the pins, one-by-one, that continue to hold down our big picture.

Appendx: Key Indicators

In August, 1 in 381 housing units received a foreclosure filing.RealtyTrac has seen 1.2 million repossessions so far in 2010.2009 saw just under 1 million repossessions.Before the housing bubble burst, in 2005 only 100,000 houses became REO’s.95,364 property foreclosures in August, a historic record.2% increase over May’s record of foreclosures.As well as a 3% increase over July foreclosures.An increase of 25% since the start of the 2010.In August, 96,469 homeowners receive a notice of default.1% decline in the number of NOD’s filed in July.A 30% decline since August 2009 after a peak of 142,064 NOD’s issued in April 2009.Total foreclosure actions totaled 338,836 in August.An increase of 4% from July.Down 5% from August 2009.Auctions that were newly scheduled numbered 147,000 properties in August.Up 9% from July and the 2nd highest total since April 2005.http://www.mikejacka.com/Blog/post/2010/01/29/Real-Estate-Investors-Need-To-Start-With-Back-Page-An-Online-Classified-Site-Primer.aspx

Let’s discuss this because it is only the tip of the iceberg…

“What do these numbers tell you?“ “What’s your REO market like?” “What do you see happening next?”

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Just When Things Were Bad, It Got Much, Much Worse

Property Values and Housing trades will be knocked from their knees to the ground April 22 by EPA.

Our nation’s pivotal economic engine, the home building trades, who have already been knocked out of the business of building new homes in this economy, have struggled to eek out some flagging work in renovations. That consolation market now will be decimated by a government initiative to remedy a faulty product that was discontinued for use before many of these builders ever picked up a hammer for hire.

The new EPA Lead Rule places all of the burden of compliance and financial consequence for the remediation of the long-prohibited product on the individual building tradesmen. If they fail to obtain the EPA training and also conform their practices to those procedures on all work on pre-1978 homes starting April 22, they will bear fines of $32,500 per day, an amount that is twice the annual salary for many of these folks. In addition to the burdensome training, the required procedures include wrapping the work area and wearing of special suits, like the isolation scene of the ET film. They also must follow prescribed cleaning, disposal of all materials, posting signs, inspecting, testing, as well as paperwork. Why is it that during the worst economic conditions of many of our lifetimes – why is it now that the government must place the burden of ameliorating a long un-used product upon the shoulders of the sector of the economy that is most uniformly hit by the economic crash? Why must these individuals bear this economic responsibility for a product that has been out of use for 32 years? Why now and why on their shoulders?

Who knew? A large number of affected trades people have not known of the Rule and its deadlines. The EPA did no wide-spread announcements to reach affected housing professionals. In practicality, the compliance for this Rule is impossible, since there are not even enough trainings to allow full compliance by April 22 for all of the trades affected. You might wonder, how about more trainers? Not possible either, since there is not enough trainer-training to multiply class availability, as local home builder associations have discovered. It is estimated by a local homebuilder group that only about 25% of the affected trades people will be trained in time. The remainder must turn away work on older homes, which for them is the only work that is available in this housing market.

What happens to energy efficiency makeovers? What about those government incentives to add insulation and better windows? Those programs were just starting to catch on in the pre-recovery economy, as the contractors adjusted their marketing and tooled up in those areas, and as consumers saw the payback in savings for those renovations. But with these new procedures in the EPA Lead Rule, the savings are gone, as the window job that was $350 now will cost $1,000 due to the burdensome additional labor and materials to address the requirements of the Rule. The EPA has even eliminated the opt-out for homes that do not house pregnant women and children. Thus, elderly who reside in homes they have owned for half a century, and to whom the offending products pose no danger, must also be subject to the expensive prescriptions of the EPA Rule. Those homeowners will skip the needed energy renovations and continue to struggle to pay their high energy bills.

Those same houses, with elderly owners, holding the investment of their lifetime, which were already deflated by one-third in the housing bust, now will lose even more value as those homes become un-sellable, due to this Rule. The majority of homes on the market in many areas, are homes older than 1978. Those inventories will deflate in value very quickly after April 22, as new buyers avoid the exorbitant costs of any repairs on those homes. The nation’s flagging economy that teeters on the value of homes, their sale, and the robustness of the housing market, will languish with this Rule in place. It has grave consequences for the entire economy.

What can be done? All Senators and Congress people should write to the Office of Management and Budget to delay the EPA Lead Rule, to study its consequences, and amend it before instituting it. They should petition the White House to do the same. Get them to do that. The bodies of Congress and Senate can also vote to suspend the rule altogether, in order for proper revisions to occur. Those revisions must include making training available, publicizing the requirements and deadlines to all affected trades, allowing opt-out for homes without children and pregnant women, and financial offset for the costs involved in ameliorating a toxic product that was discontinued in the trades 32 years ago.

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