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Posts Tagged ‘Orlando Foreclosures’
A strategic default is when a person decides to stop repaying their mortgage even when they can afford to continue doing so. Why would somebody do that? You´ll lose your home and your good credit history will be badly damaged.
If you dig a little deeper, the logic becomes apparent.
Let me illustrate by way of an example. Mr Smith bought a 3 bed condo in a nice residential area of Orlando in 2006 for $260,000 and he took out a $230,000 mortgage which is costing $1500 per month to service. He has a nice job and has no problem paying $1500 per month.
However, he knows that half a dozen identical 3 bed condos in his community, which weren´t sold in 2006 have recently been purchased by cash buyers for $99,900 each and they´re renting out for $1000 per month. When you take the interest into account, his mortgage is probably 4 times the size of the current market rates for that property. So he decides to stop paying his mortgage and instead saves $1500 per month.
It takes the bank 9 months to get round to kicking him out, during which time he lives rent free. After he gets kicked out, he simply rents one of the identical condos around the corner and pays $1000 per month to his landlord. He won´t get a mortgage or a car loan for 3-7 years, but he doesn´t particularly care as he´s done nothing illegal, he´s free of that huge 20 year debt and he doesn´t mind renting for a while.
The moral hazard that traditionally prevented people from doing this is disappearing fast. Ten years ago, a person who got kicked out of his house for not paying a mortgage would feel huge shame and embarrassment. His friends and family would pity him and quietly shake their heads at how bad things had turned out in his life. Not anymore. In 2011 an increasing amount of these neighbours will be wondering how they can do it too.
In the USA, in Ireland, in the UK and lots of other countries, it is becoming socially acceptable to stop paying your mortgage. People will understand and won´t think much worse of you. In the US, they might even admire the way you got yourself out of a huge debt. There are now lots of websites offering casual and professional advice to people that want to default on their loans and declare bankruptcy.
What are the consequences of these defaulters?
As you might expect, lenders in the USA hate the fact that a person can choose to walk away from their mortgage. There is no law against doing it. These lenders are lobbying HARD to get the rules changed so that people don´t have an incentive to walk away. For example, they´d like it if a strategic defaulter couldn´t get another loan for 20-30 years instead of 3-7 years. That would prevent a lot of them from doing it.
It´s not easy to prove strategic default though - you´d need to show beyond a reasonable doubt that the person wasn´t suffering financial hardship when they stopped paying their mortgage. Imagine a bank trying to do that to 5000 customers. Better still, imagine a state court system trying to handle 10 banks doing it to 50,000 customers.
Additionally, nobody knows what percentage of people are defaulting because they´re broke versus people defaulting because they don´t feel like repaying a debt bigger than the value of their home. Come to think of it, there isn´t even an official definition for a strategic defaulter.
One thing is for certain though. With the previous chaos in the market abating and the supply of distressed stock dwindling (see graphs above), they represent one of the few ways which will continue to generate discounted houses that investors can pounce on. The flip side is that if it becomes too big a problem, I think loop holes will be closed and people will no longer be incentivised to do it.
Don´t expect the authorities to announce a date for closing these loopholes either - they´ll just do it and tell you afterwards. Otherwise, people would simply rush to default before a deadline.
So, I think I can safely predict that when banks finally restructure their property portfolios and the levels of foreclosures slow to a manageable trickle, they´ll start lending to normal people again. That´s when property prices in the popular areas will start increasing and that could conceivably happen this year.
Regards
Colin
In 2006, the property market in Florida all but collapsed. Investors who were expected to continue their property buying binge left the market en masse. A depressed economy and rising unemployment also ensured that local first time buyer demand took a nose dive.
When this demand dried up, the builders who couldn´t service their loans to the banks had their assets seized. The banks packaged these up and mostly sold them to pension funds, hedge funds, big corporations and high net worth individuals. The banks that couldn´t sell quickly enough became insolvent and were put out of business by big insurance companies and the FDIC. Big insurance companies who insured too many banks with a high property exposure also went bust. From 2006-2008 it was bloody mayhem.
Things have been somewhat calmer since then. With prices discounted by 60-70%, demand picked up rapidly and the existing housing stock fell dramatically. New foreclosed properties were still coming into the market in significant numbers in 2009 and 2010, but they were very quickly absorbed by the market. The two graphs below for the Orlando housing market illustrate this quite clearly.
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What about 2011? There will not be another round of Florida based banks and builders going bust in record numbers - it has already happened. Demand and supply are closer to equilibrium again. A recovering economy is also helping to steady the domestic market and should result in fewer foreclosures from homeowners struggling to service their mortgages.
In other words, the supply of the type of product Torcana sources is not currently in abundance. Finding high quality, pre tenanted, developer owned and highly discounted stock in nice neighbourhoods is very hard work. Siesta Lago is one of these deals. It took a lot of effort to find, but they´re selling fast (3-4 units per day) and mostly to regular investors who agree with our analysis of the market. If you click on the link above and complete a short enquiry form, a full information pack will automatically be sent to you within 10 minutes.
There is one intriguing trend in Florida (and elsewhere) that is worth close consideration and is causing lenders to pull their hair out. I´m referring to strategic defaults. I think they are going to be a big influence on the market this year and will soon enter the political mainstream.
Regards
Colin
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One of my main challenges as Torcana.com Director is communicating the furious pace of the distressed USA property market to clients. With property activity moving at a snail’s pace in Ireland and the UK, there is an understandable but hugely misleading feeling on this side of the pond that there is plenty of time to invest in distressed assets and that it is a “buyers market”. As the monthly statistics have been showing, the reality is completely different.
For starters, the blind fear and panic of late 2008 and early 2009 are now distant memories. Regular investors are back and like all smart investors, they are ruthlessly snapping up the best properties in the best locations at the best prices.
Secondly, regular Americans with good credit ratings have been availing of large housing grants (up to $8000) and high LTV mortgages (up to 97%) to purchase their own homes at 10 year lows. This is having a profound effect on the market.
Thirdly, capital has been flowing back to private equity investors, pension funds and hedge funds. These are the silent whales of the market and they are literally hovering up thousands of foreclosure properties before they even register on a normal investor’s radar.
Total housing inventory is 40% down on last year and real bargains on high end foreclosure properties are like hens teeth. I have seen seasoned operators bidding cash on 5 or 6 deals before getting one of them accepted.
Kind Regards
David Shaw
Sales & US Sourcing Manager
Torcana.com
There are a lot of misconceptions out there, and much of it is caused by internet misinformation. The internet is crammed with old, out of date and random opinions. Using the internet as an investment guide makes complete sense but relying completely on the internet can be a little like “self diagnosing”. You start with a pain in your thumb and end up with a terminal disease. This is a complex market and I think it is important to seek advice from people (not necessarily ourselves) who deal with it on a daily basis.
With so many properties listed on the internet, it can seem that there is no shortage of great deals out there, but it’s quite difficult to find a bargain.
At least once a week a client will call me to say they have spotted a deal on the internet or through a US agent that seems too good to be true and they are either wondering if there is a catch or if I could help them secure it. Sometimes I’ll have a closer look and within 20 minutes or so it’s usually apparent why it is being advertised at such a low price.
With countless millions of dollars lost to poor investment strategies over the past 15 years, it is more important than ever to consider the fundamentals of property investment before committing. I would never buy a property because it is cheap because value is very relative. I look at the location, the running costs, HOA dues, property taxes, insurance issues, crime statistics and the local rental market. Among other things, I will find out if it is new or recently converted, if it is timber frame or solid concrete build, if the HOA is solvent and the percentage of foreclosures in the community.
I dedicate a lot of time to locating investments that do not carry these risks.
Kind Regards
David Shaw
Sales & US Sourcing Manager
Torcana.com
At the beginning of 2009, Florida seemed to have an unimaginably large supply of property: 23.6 months worth. It is now 8.4 months and because new construction activity is still minimal, it is set to fall further. A market with 6 months supply is considered by economists to be balanced between buyers and sellers.
Let’s look at it another way - the last nine months in Florida has been a little bit like one huge Brown Thomas or Selfridges sale. While there’ll still be products discounted at 60-70% in six months time, the best quality merchandise and the best deals will always be snapped up by those queuing to get in at the start. We know this because Torcana.com have been right in the thick of it all year and can see it happening everyday.
Kind Regards
Colin Murphy
Torcana.com
Most of you know that we’ve been selling foreclosed properties in Orlando since last autumn, and it is an excellent way of purchasing an undervalued buy to let asset. However it can be a frustrating experience as well, as clients are often bidding against several people for the same property, and once an offer is made, you usually have to wait 2-3 weeks to receive an answer. If the bid was unsuccessful we need to start again. Once a successful bid is accepted and processed, the management company process starts, with the lucky landlords finding new tenants within 4-6 weeks.
Torcana.com manages this whole process (and much more) from start to finish and we do our best to minimize the work a client needs to do. However, once we’d processed a lot of these units and established a very robust network of local contacts, it became evident that there was a much better way of doing this, both the agents and the buyer point of view.
As has happened in Ireland & the UK, when the credit crunch was causing misery for local Orlando developers quite a few decided to try and ride out the storm by furnishing and renting out the remaining units themselves while waiting for the market to turn. Makes sense right? But what if we could find a developer who owned and rented high quality units and was about to be foreclosed by a bank? Let’s say we find one who needs to raise $5 million in 30 days or the bank will seize his assets. Would he be willing to sell 100 of his properties to investors with tenants in place at a foreclosed price level (say $50,000) in order to avoid the excruciating foreclosure process? If you can convince him that you’ll be able to sell them, then yes, he certainly will, which is what our Tradewinds development is all about.
This ticks all the boxes in terms of location, quality, price and rental yield. It has all of the benefits of a foreclosed property (highly discounted price, v high rental yield) with none of the headaches (bidding process, red tape, finding tenants). Please contact us directly if you’d like to learn more.
Colin Murphy
Director
