Even the most bearish economist is predicting that commercial real estate prices will fall up to 40 percent from peak to trough. However, the data released yesterday from Moody’s Investor Service shows that in April commercial property prices plummeted a record 8.6 percent. According to Moody’s data, commercial property prices fell a total of 29.5 percent from their highs in 2007. This leaves another 10 percent drop in prices if the most bearish economists are correct. In my opinion, much of this drop was due to a speculative credit bubble that caused commercial property buyers to purchase properties that would never produce a positive cash flow, even assuming a strong economy and strong demand for commercial real estate.

I believe that most of the declines in commercial property prices that can be attributed to the credit bubble have mostly taken their toll on prices. But, I surmise that we could experience an even greater decline in commercial property prices due the fact that the economy is fundamentally unsound. If one closely examines the fundamentals of supply and demand for the commercial property sector, the prospects for continued price declines becomes readily apparent, especially in the retail and office building sectors of commercial real estate.

Background to a Crisis

During the speculative credit bubble, developers built many more office buildings and retail stores than could possibly be sustained. Now that unemployment is in the double digits and major economic sectors like the automotive industries are going bankrupt there is less demand for commercial property. There have been many large, well known, retail brands either going bankrupt or severely cutting back growth projections. In a small city, near where I live, there are at least fifteen Starbucks. How many Starbucks stores can one small city support? Circuit city is out of business, Brandsmart may be next. Car dealerships are closing their doors around the country. These are all commercial real estate tenants whose absence can’t easily be filled. The list goes on and on. If so many large retailers are going out of business or curtailing operations then there will be even less demand for all of the vacant commercial retail space.

Commercial Real Estate Breakdown & Predictions

As local, state and federal governments go deeper into debt they will be increasing taxes even further on businesses and property owners. This means higher taxes for the owners of commercial real estate. If the costs to hold a property increase, then its intrinsic value must decrease.

I would challenge the 40 percent figure and would argue that prices could drop even more due to the dismal state of the economy at large. I would go the record to say that the commercial property sector could see real price declines of up to 70 percent from peak to trough. The worst might still be ahead of us.

Source: Reuters
Photo Credit: strangelv

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• ‘Wave of foreclosures’ to hit commercial sector, Insider Q&A; told (lansner.freedomblogging.com)

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Tags: Commercial, commercial property, commercial real estate buying, commercial real estate prices, commerical property investing, Retailing

Most people have heard of schemes in which a lender is defrauded by someone who uses an inflated appraisal to obtain a loan for much more than a house is worth. This type of scam generally requires the cooperation of several people. In addition to the person running the scam you need an appraiser who provides the inflated valuation, a real estate agent who goes along with it and, frequently, phony buyers. Sometimes the buyer is a victim in the scam but it is usually the lender that is left holding the bag when the other participants disappear.

However, in an unusual case of “man bites dog”, the usual victim becomes the scammer. Unlike most of these schemes, which involve small-scale criminals, this one involves some of the biggest names in the real estate industry.

The Particulars

A lawsuit has been filed in U.S. District Court in Arizona against Countrywide Financial, KB Homes and LandSafe Appraisal Services (article) accusing them of artificially inflating home prices. This is definitely a new twist. This allegedly took place in the Arizona and Nevada market. According to court documents the scheme netted $280 million between 2005 and 2008.

The lawsuit claims that KB Homes steered buyers to Countrywide Financial who, in turn, used LandSafe Appraisal Services to provide the incorrect valuations.  Some of the appraisals may have been inflated by more than $80,000. Talk about being upside down!

The article didn’t have a response from any of the defendants, nor could I find any elsewhere. If these allegations prove to be true it could cause a lot of problems for Bank of America since they purchased Countrywide.

Housing On Steroids

Manny Ramirez Suspended for 50 Games

It’s bad enough that we have been suffering from the collapse of a runaway housing market that came crashing down. Like a baseball player who was caught using steroids, we now see that some of the housing gains were “juiced” as well. It remains to be seen how widespread this is, perhaps it was just an isolated incident. Somehow I don’t think so.

This breach of trust could make it difficult for builders in the future. Will people begin to look at them they way they look at car dealers? The housing industry could learn a lot by watching what Major league Baseball is going through with the steroid scandal. The builders need to get out in front of this problem and make sure that it doesn’t happen again.

You can observe a lot by just watching. - Yogi Berra

Tags: Countrywide Financial Lawsuit, KB Homes, LandSafe Appraisal Services, Lawsuit against KB Home and Countrywide

Seems like an obvious statement to even the most casual observer. However, renters occupying properties in foreclosure seem to be looked at through a different lens. In Nevada where I live, for example, renters do not have to be told their rental home is in foreclosure. They don’t even have the right to a grace period to look for a new dwelling once the sale is final.

After the property has been sold, the tenant receives a 3 day notice (heck of a grace period, right?) telling them they are being evicted. This is probably the first they learn of the foreclosure action. After they receive their eviction notice, they are sometimes granted 20 days to answer the process. If the new owner, however, decides to shorten the time period through a court order, the 20 days could melt into 10 or less.

Imagine how you’d react to this joyous news. One of our insurance clients had such an experience.

Two years ago he bought a home via a three year lease option. During the two year period the seller stopped making his mortgage payments. He didn’t stop accepting the monthly checks, he just stopped paying for the home.

Any and all mail regarding the subject property were mailed to the seller’s home address so our client never saw a notice of default or any other type of document that may have alerted him. Not only did our client lose his up-front money but all of the payments he had made.

Ouch, That Kick Hurt

The real kicker came when he received his 3 day notice on a Friday. He had to scramble like a mad man to find a new home, get moved, go to work, keep the kids in their school, etc. The lender that foreclosed was one of those that took the 3 day wording seriously and enforced it.

I fully understand the process may be more lenient in other jurisdictions. However, I’d bet most mirror Nevada to a close degree. It is immaterial the legislators are just now looking at helping renters because the proposed legislation may never see the light of day.

I am no bleeding heart liberal but fair is fair. If you are at least one level above a slum lord I would think you’d care enough about your tenant(s) to tell them when the NOD has been filed. This gives them almost 4 full months to find another home.

Yes, that is four months of rent down the drain instead of in your pocket and the argument can be made that their rent money might help you out of your hole. Reality says it won’t but some would argue it may be the key to turning around a bad scenario. To that I say, come on.

The renter, in most cases, also loses any deposit he or she may have made. This is another ouch type of kick. Compounding those ouch kicks is the fact the renter can’t sue the landlord for fraud since the landlord actually owned the home up to the time of sale. However, some jurisdictions are starting to turn the fraud microscope up a notch or two in these cases. Again, immaterial because that street may close before it becomes paved with case law.

Renter Tips

Since BiggerPockets enjoys a wide readership, I thought I’d include renter tips. I know if I already wasn’t a home owner, I’d read this type of site to learn about real estate investing. Hence, to all the renters out there, take heed.

We are lucky in our county in that the County Recorder website is an easily navigable site and anyone looking for a Notice of Default on a particular property can find it in 3 clicks. I don’t know about the rest of the country but I would guess the same is true. If it isn’t, it would be worth a trip to the Recorder’s office BEFORE you plunk down rent and deposits.

If you don’t know how to access the records, ask one of the clerks. Unfortunately, the Recorder’s site won’t tell you if the property owner is behind in their mortgage payments. They only record after the fact.

However, you can still look for another document that may give you a tip. If the property owner is behind in their property tax, the county assessor will file a lien against the property. The lien is filed with the Recorder. If such a lien exists, you can surmise other problems exist.

You also may want to avoid the online classified home rental sites like the plague. I like Craigslist but it has been getting a bad rap lately because of the number of rental scams being offered through this great free service.

Another reason to avoid online rental offers is you want to meet the owners/landlords in person. These online “opportunities” sometimes don’t produce face to face meetings. The reason, the person doesn’t own the home.

One more tip that a problem may be afoot is if the owner tells you he is moving into a smaller property and just recently listed the home as a rental. Some call this downsizing. Nothing wrong with downsizing except the general scenario is a property owner doesn’t go from big to small just to go from big to small. Yes, it’s happened it in the past and will happen in the future but in this day of real estate carnage, that may be a huge warning sign.

A Free Way To Get Legal Advice

Our county has a Legal Services office available to the public. It is manned by real live lawyers who answer legal questions. If you have any questions about your lease, how to get info on the proposed rental, etc, call and make an appointment. This is a free service in our county and it may be free where you live. If not, it’ll be quite inexpensive. Truth is, even if it costs $50, $50 is cheaper than paying the first and last monthly payment plus deposit only to find out a month or two later you are being evicted.

Personally, I’d do a little sleuthing before I gave up rental dollars. Talk to the neighbors, ask the local police about the frequency of calls to that house or that neighborhood. Drive through the neighborhood early in the morning and around 8 or 9 at night. I know this isn’t legal advice but it is free.

In the meantime, get familiar with your local tenant’s rights laws. Some office in your county hierarchy will have a copy and they are probably posted online as well. This means you never have to leave your home to become an informed tenant.

What caught my eye about this issue was an article in our local paper that said about 40 percent of renting families in the U.S. will face eviction because of the foreclosure on their rental home. The statistic is a product of the National Law Center on Homelessness and Poverty. If it is anywhere near accurate, the above advice may just come in handy.

Photo Credit: tanakawho

Tags: foreclosure, landlord, rental-property, renters rights, renting, tenant rights

Have you heard of Scott Mintz? The LA chiropractor bought four houses, leveraging heavily in the expectation that real estate values would rise forever. Shockingly, they didn’t. Now, every one of his houses is underwater.

Mintz not only wants his loans refinanced, he’d like the lenders to reduce his loan principal to reflect their current market value. Of course, this isn’t just about saving Mintz’s bacon. He explains it as a vital move to save the national economy.

I’m sure many Arizona flippers would like to reduce their principal for free as well, considering how many of their properties are now worth 60% of the purchase price. Take a look at some of these listings and you’ll see what I mean.

When I was young, I thought investing in real estate meant first earning money, then buying property. Later, I read Donald Trump’s “The Art of the Deal,” and learned that you didn’t have to have a lot of cash – you could take a risk, and be an artist. A few years after that, everybody wanted to be an artist.

Flash forward to 2009 and a lot of these artists are in big trouble, including Trump himself. They took risks that didn’t work out. And some of these folks are asking for a federal bailout.

Having read the title, you know how I feel about this. I have many major problems with a bailout of this type.

It’s Unfair

Every penny that has been, or is being spent as part of the myriad bailout programs is coming from the American taxpayer, which means you and me. And if an investor bailout comes from the banks and lenders, in the form of reducing principal on loans… that money will eventually come from the taxpayers as well, because those reductions are not part of a sustainable business model. They will further hurt the banks, which are already in trouble.

It’s unfair because I didn’t do highly leveraged investments of properties that couldn’t possibly be worth their asking prices, unlike the whining whiz kids. Why should I pay for their mistakes?

It’s Fundamentally Unserious

Part of being a grownup is that you have to invest something to get rewarded. For most people, that something is work and education. Work pays and education allows the work to pay more. Flipping and similar methods of real estate investing don’t require that much work and education relative to the potential reward. Admit it, flippers! This is why you did flips in the first place. It seemed like pretty easy money.

But of course, the flippers were investing something – they were investing a huge risk. There was always a chance that a particular flip wouldn’t work out, particularly if significant rehab work was involved. And of course, there was the chance that the overall real estate market would decline.

I have friends on the West Coast of Florida. For years, they made a large part of their annual income by selling the house they had bought the year before. They’d buy a house for $400,000 with $80,000 down, sell it for $600,000, and buy another one for $650,000 with $130,000 down. Their gross income was about $150,000. Now they are sitting on several properties they can’t afford to sell, and can’t rent for anything close to their mortgage payments.

Now people like Scott Mintz don’t want to live with the consequences of the risks they took – they want to socialize them instead. No doubt Mintz would have been happy to share any profits he made with the rest of us as well.

It Takes Away Opportunities for Others

Consider someone who might want to buy a house in Phoenix right now. He couldn’t afford a home for a long time, but now that prices have fallen, he can finally make his move. But his job will get a lot harder if the Phoenix flippers get bailed out. After an investor bailout, many of those homes are no longer for sale, and others have higher prices reflecting reduced inventory.

It Sticks the Government’s Nose Further into Our Business

Government never really gives away money. It uses it to pay for power. Investor bailout funds will come with strings that the recipients will not like – just ask GM and Chrysler.

There are a million things government could do that would strengthen the housing market and make our lives as real estate investors easier. What are the chances that any of those things will be accomplished?

Tags: bailout, bailouts, housing, obama, scott mintz, trillion

Wall Street, banks, even car companies got faster help from the government in the form of one bailout or another, than did the average homeowner in this country. And, now that “help” is at hand, the real question to ask is: will it do any good?

President Obama has now revealed his much anticipated “lifeline” to those facing foreclosure…a $75 billion one at that.

Obama made it a point to say that his plan will not help every homeowner–which may end up being one of the bigger understatements from his young administration to date.

A lot depends on the willingness of various lending institutions to agree to mortgage adjustments and some of it depends on the hope –Obama’s that is–that bankruptcy laws will be changed to allow judges to modify mortgages on the brink of disaster.

To a large degree, the plan is aimed at those who owe more than their houses are actually worth. Moody’s Economy says of the 52 million some odd homemakers with mortgages, some 27 percent now fall into this category–roughly 14 million!–this according to an Associated Press dispatch.

But what about those who played by the rules, are paying their mortgages and yet feel it only fair that they, too, be allowed to trade downward, if you will? The picture is far less clear what will happen to these folks?

And, without a change in the bankruptcy laws, not a sure thing by any measure, there may be no way to force investors who actually own many mortgages nowadays to relax their grip on the homeowners’ pocketbook.

Some critics argue that 75 billion isn’t even nearly enough, especially when you consider how much, much more the government (taxpayers) has already given to help Wall Street fat cats and car company CEOs.

The worse part is, it is likely to take the various agencies and potential participants weeks…maybe months…of study before they really have a clue what is now expected of them. And, as we all by now know, time is not on our side anymore.

Photo Credit: Mike Licht

Tags: bankruptcy, barack obama, foreclosure, housing bailout, housing rescue, obama, rescue

So far, we’ve tackled the subprime lending crisis (and failed), the credit crisis (and failed), we’ve got a TARP, a Stimulus Package, Trillions of dollars in borrowed debt repayments as a result, and from what the Wall Street Journal tells us, we’ll learn about the President’s Housing Bailout Package - aka. Foreclosures R US, on Wednesday:

One likely element of the plan would reduce Americans’ payments on troubled mortgages, people familiar with the discussions said late last week, possibly through a cut in the interest rate, the costs of which would be shared by the government and mortgage servicers. Government officials would make the reduction available to people who are at risk of defaulting. A loan-modification program at government-backed Fannie Mae and Freddie Mac currently calls for holding monthly housing-related payments to 38% of pretax income. The new formula is likely to be as low as about 31%, according to some people.

In addition, the administration is expected to endorse a plan to allow judges to modify mortgages during bankruptcy proceedings in some circumstances, a move long opposed by the mortgage industry. And it could push measures that would remove some contractual obstacles that hinder mortgage servicers from modifying troubled loans. Pending any announcement, the country’s three largest mortgage lenders are putting a temporary halt on foreclosures.

Additionally, “David Axelrod said the plan that President Barack Obama plans to announce on Wednesday will aim to stem foreclosures, provide immediate help to homeowners who are ‘right on the edge’ of foreclosure, and ultimately help in ‘raising home values that have been plummeting.’”

Praised as a “good plan” from senior White House aides, Axelrod said that the plan’s foreclosure prevention aspects would cost somewhere on the level of $50 to $100 billion.

Will this become yet another in the line of failed attempts to stop the bleeding?
Only time will tell. Hopefully this Foreclosures ‘R Us plan at least makes a dent instead of bleeding taxpayers dry for generations to come.

Surprise me Mr. President, please!

Tags: axelrod, bailout, billions, Foreclosures, housing, obama, TARP

According to the AP, Treasury Secretary Timothy Geithner is set to give a major speech on Monday to outline the $700 billion rescue plan.

As a part of any bailout package we’ll see, the government will certainly make some major moves in the real estate and banking space.

Meanwhile, real estate lobbyists were pressing the government to spend billions to temporarily subsidize lower mortgage rates. They were looking to Geithner’s announcement Monday in hopes that some of the financial rescue money would be used to reduce mortgage rates and prevent foreclosures.

The Federal Reserve has been buying up mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae for a month. Before rising a bit in recent weeks, mortgage rates had plunged since the Fed announced the creation of the $500 billion program late last year . . . Geithner said the overhaul of the rescue program was aimed at improving the effort to get credit flowing again and to support the Obama stimulus plan being debated in Congress.

Some Questions:

• What will happen to the lending environment if private lenders are forced to set rates according to government regulations?
• How will they “convince” banks to loosen credit and lend in the current environment?

Tags: $700 billion, bailout, Credit, Geithner, lending