‘Scrambling To Get Close To The Rail’ In Colorado
A pair of reports from the Denver Post. “The cooling housing market has homebuilders throughout the nation girding for fewer sales, larger inventories and stiffer competition for people in the market for new homes. Last week, Denver-based MDC Holdings, which operates as Richmond American, reported a 25 percent drop in quarterly profits, blaming fewer orders and a growing inventory of unsold homes.”
“A competitive market caused orders for new MDC homes in Colorado to decrease from 594 for the second quarter last year to 291 for the same period this year. ‘The magnitude of this drop-off is about as quick as we’ve seen in a long time,’ said Stephen East, a homebuilding analyst.”
“MDC plans to maintain just a two-year supply of lots. As a result, the company chose not to exercise some of its options on building lots. The two-year land supply is a strategy MDC has been following since the early 1990s, CFO Paris Reece said. ‘We saw, in a market where land values cannot be maintained, certain builders can be hurt by holding too much land,’ Reece said.”
“Most homebuilders try to keep a four- to five-year supply of land, but because home sales have slowed, many have as much as an eight-year supply, homebuilding analyst Alex Barron said. ‘A lot of them realize they bought too much land in the last couple of years,’ he said. ‘Now they’re trying to sell the land to somebody else.’”
“‘A lot of builders are..scrambling to get close to rail,’ said Rich Davis, at KB Home in Denver.”
“Homeowner Eric Elkins is struggling to avoid the real estate world’s dreaded F-word. Foreclosure may be his only way out. Elkins says he can no longer afford his payments. He owes $285,000 on his Highlands Ranch house. But it’s worth less than $250,000. ‘I just want to get out of the house and not be too screwed,’ he said.”
“He bought it for $252,000 in 2002. Last year, Elkins put the house on the market for $299,000. At that price, the home attracted only three showings. Increasingly unable to afford his payment, he contacted his lender, U.S. Bank. At first, the bank told him he couldn’t refinance again because he owed more on the house than it was worth, he said.”
“He inquired about selling, but to sell a house for less than it’s worth requires lender approval. Eventually, Elkins’ lender came up with a better idea. ‘He put me into two home-equity lines of credit,’ Elkins said. ‘It was all very creative.’”
“These new loans replaced his mortgages. One was interest-only. Both loans had adjustable interest rates. As for the value of the house versus the size of the loans needed to refinance it, well..no equity, no problem. ‘He got an appraisal for $285,000,’ said Elkins of his lender. ‘I don’t know how he did it. It was exactly the amount I needed.’”
“Unfortunately, Elkins’ financial situation is still disintegrating and his payments keep rising. He put his home up for sale again in May. In June, he got an offer for less than $250,000. His broker submitted it to U.S. Bank for approval. The bank had to decide what to do about the deficiency. One option would be to grant Elkins an unsecured loan for the balance. Another would be for the bank to take the loss. The loss on a short sale is typically smaller than the loss on a foreclosure.”
“The bank did not respond and Elkins’ bidder moved on. ‘This property will end up foreclosed on because the bank cannot respond quickly enough,’ said Elkins’ real estate broker, Gretchen Faber. ‘U.S. Bank is completely uninterested in cooperating with me or with the buyer’s agents. It isn’t just U.S. Bank,’ she said. ‘All banks do this.’”
“Most homebuilders try to keep a four- to five-year supply of land, but because home sales have slowed, many have as much as an eight-year supply, homebuilding analyst Alex Barron said. ‘A lot of them realize they bought too much land in the last couple of years,’ he said. ‘Now they’re trying to sell the land to somebody else.’”
Land prices going down. More and cheaper inventory going forward.
JMO
raw land for everybody!
I nominate Eric Elkins for Poster Boy for the whole bubble popping catastrophe.
‘He got an appraisal for $285,000,’ said Elkins of his lender. ‘I don’t know how he did it. It was exactly the amount I needed.’”
Amazing the way this worked out, he must have used a Pic-A-Praisal.
A guy sold me a new plasma TV for $100 off the back of his beat up pickup truck. I don’t know how he did it, but it was exactly what I was looking for.
Let’s see if we can guess. Robbery?
Burglary - There is a difference.
The third rail that is….
My impression from what others have said here is that it won’t be untill they have a full plate of foreclosures already that the banks will be willing to talk about short sales.
Either they’re dumb or numb. Too out to lunch to see what’s coming (very hard to believe) or simply scared witless that they let it get so out of hand. By the time the docket is full of foreclosures, the values will plummet. Buried in a pile of manure…but no pony.
The problem here is two notes. The short sale probably covers the first (my guess, first is $228000, second is $57000). Holder of 2nd note gets a few thousand and is probably balking. And poster by Erci probably doesn’t realize and shortage is going to follow him, either as a personal judgement (welcome to the buy here-pay her used car lots) or as income via a 1099 from the lender for the shortage for which the IRS will try to collect taxes. Either way, he’s Screwed
I don’t understand this whole 1099 income and how you are liable for the tax. If you borrowed 250k for a new house, then sold it for 225 and the bank invoiced you for 25k, wouldn’t you also be able to deduct 25k from you income as depreciation or capital loss for a net income of 0 (thus no IRS liability) on the sale?
Losses on personal and investment Real Estate are not deductable! Depreciation is only allowed on income producing property. But that is recaputured ( I think ) upon sale.
Ohhhh yes (ouch), it most (ouch) surely is (ouch) recaptured upon sale. The exception is Starker (1031) like kind exchanges.
YUP….
Robert, you sound like someone in sore need of a lubricant.
Only if you had the foresight to buy the property under a S corp/ LLC etc. The downside of the 250K exemption for capital gains on houses is that losses are not deductible.
The details are buried in an IRS instruction book. Don’t have the ref handy,…
What they are talking about is if the bank forgives that debt. Debt forgiveness is income.
In some states, they have a single action rule (like CA), where the banks can either go after the real estate for payment, or the borrower, but not both. If the bank chooses to go after the real estate (via foreclosure), my understanding is that they cannot go after the borrower–since the loan deficiency is never paid, it is forgiven–thus, a loss on the books of the bank, and income to the borrower.
Any CPAs out there care to chime in?
In case you haven’t been made aware of this earlier, the IRS has a “Heads we win, tails you lose” policy with regard to all tax law. The fu*king assh*les running this country don’t give one rippity do dah about the average joe in this country. Now with that fact in mind, any law can be easily interpreted. In other words, you don’t need to bother consulting a CPA if you just interpret the tax law in question in the absolute worst case scenario for the taxpayer involved.
In other words, no, you don’t get to claim depreciation or claim a capital loss on a primary residence. The 1099 is considered income and taxed appropriately. How does that grab ya?
By the gonads for more than a few people I suspect.
Gonads for everyone!
Auger-in is exactly right. Its income. If it was property owned by an LLC the deduction of the loss would be limted to how much the investor had at risk.
Slow down. Are you telling me that this Eric Elkins is the “Average Joe”? If so, then this is scary. They didn’t mention how much Eric makes. I assume he made nowhere near enough money to afford a $285,000 home. It appears that he put zero down on the house. That’s really great. It doesn’t state why he decided to buy a house he obviously could not afford. I’m guessing greed took over and he saw dollar signs in his eyes. He never thought of the consequences.
Eric might be typical but let’s not start singing folk songs in his honor. It sounds like he might be getting what he deserves. It appears he is pissing and moaning about being held responsible. Too bad, Eric. Maybe next time you will think about your stupid actions and not soil the good name of “Average Joe”.
My comments were not meant to imply that the fellow in question is not a moron deserving of the sh*t storm he finds himself in. My disdain was mainly aimed at the IRS since they are quick to call certain transactions income and slow to call them deductible losses (or reduce the deduction). Perhaps in the future the IRS will publish a separate set of laws that pertain solely to morons (some would argue that is the practice now). In that event I will cease to invoke the term “average Joe” when discussing the subject.
It’s the STUPID buyer (borrowers) fault for believing that real estate ‘never goes down’, from LAY or DL or your friendly realtor and loan broker. Suzanne said it would be ok to refi and buy the new car as well as take that trip to Paris for your anniversary. F’d ignorant borrowers deserve to be F’d. I have no sympathy.Remember,’Believe nothing, no matter where you read it, or who has said it, not even if I have said it unless it agrees with your own reason and your own common sense’, Buddha.
Or more recently, “Trust No One,” from the X-Files.
This guy doesn’t seem to be one of the flipper or speculators that we all distain. His scenario is pretty common in any type of market (bubble or not). Remember, he was married. As a dual income couple they probably legitimately qualified for the loan. His stupidity is more demonstrated by financially comitting to something when you have a shitty marriage, as evidenced by his divorce the next year. That is the root cause of his current financial predicament. But hey, maybe the wife got sick of the not-to-steady “free-lance” writer income. Sounds like she made out o.k. though, since he bought out her equity in the home which sunk him even deeper into his current debt abyss….SUCKER!
I don’t know that I’d be happier about the IRS saying that any joe-blow can simply borrow more than my annual salary, live on it, pay no taxes, and then default on the loan, while those of us who work for a living pay not only taxes, but Social Security, etc. Of course it’s true the fat cats are often able to shelter their entire incomes, but the answer, in my book is to tax all income equally– not give yet more people an incentive to sneer at wage earners and ‘invest’ in crazy speculations using borrowed money.
The problem goes beyond that; capital gain and qualified dividend should be taxed at the same rate as ordinary income at least, if not more.
We are only seeing one side of this story. Lenders typically want to see a financial statement from the borrower lisiting assets, liabilities and income before approving a short sale. This is to prevent short sales for people who just get tired of making payments on houses with dropping values. Many short sales in the last down market in SoCalif in the early 90s were denied and people let their houses go into foreclosure because values dropped below their loan amount and they just did not want to pay the loan. With the huge amount of 100% financing, a significant drop in prices will result in much mailing-of-keys back to lenders.
Please continue the story. The lenders now have mailed back keys, then what?
2002 pricing ?
2005 here- 2004 prices by december
Got to go down to 2001 pricing for the SF Bay Area. When you run all the numbers… its 50% reduction from todays numbers.
Nope…..
Prices in many areas of Denver are the same or near 2001-2 pricing. I have done a fair amount of research by comparing public records for prices paid in 2001-2 and what the same properties are being listed for now.
The exceptions are single family homes within 3 miles of downtown (to the east) and then there’s the new highrise condos in LoDo that seem to be a market completely of their own. $400+/sq ft and they sell out. I don’t get that part of the market at all.
Barkeep, a couple of rounds of painful ass-pounding for my friend, Poster Boy Erik.
LOL!!!
the lender will not accept a shortsale of a property unless they are fairly certain that they cannot “squeeze blood out of stone”. alot of these 100% borrowers have other assets that the lender can attach if they so choose. in the foreclosure process, it’s called a deficiency judgment and you can be rest assured that if there is meat on the bone, they’ll collect on it. he can’t rack up 100% financing and then say “oops, guess i f&*ked up and i’ll just have to buy a new place someplace else, here’s the keys”.
USBank paid off their own loan by issuing two HELOC’s, one with zero interest. Obviously the zero rate was a teaser and probably went out six months, max.
Anyone else notice the kicker here? I’ll bet the original loan was non-recourse and US Bank got this poor dumb f*ck to trade it in for one that lets them come after everything he has when he defaults.
Welcome to the “very creative” US Bank.
recourse applies to california, here in colorado you’re on the hook no matter what. all of these borrowers want to borrower the money, let the house go up $100K and take the money and run. if it goes the opposite way, they hold themselves harmless to having to repay the money. leverage can be an ugly thing on the downside.
I’ll bet US Bank has “creatively” swapped this schmuck two recourse loans for a non-recourse loan.
Quick question - now that Elkins has replaced his mortgage with two HELOC’s, doesn’t the new bankruptcy laws prohibit Elkins from foreclosure. He is in bankruptcy territory. He is on the hook for the loan, and the bank will look to re-take possession of the house. I may be wrong in this observation?
Elkins doesn’t foreclose on his house. The lender, US Bank, forecloses. Then, assuming recourse loans, they sell the house at auction and come after him for the rest. He can declare bankruptcy but with the new law he’ll have to pay from future earnings.
When the bank takes possession of the house - that’s what foreclosure is.
With the new bankruptcy law, he’ll have to pay from future earnings *if* he was above median income for his state. He probably is, or was, with a house like that. But maybe not.
If he’s below that median income level, which might be possible given his income stream drying up (as the article mentions) then he won’t get stuck by these toughest parts of the new law. I think, however, that the bankrupcty court looks at your income for the previous calendar year.
here’s a cut and paste of a gal at the sdcia board giving her spin on the short sale process. it is consistent with ben’s text and our screwed colorado buddy’s story.
“——————————————————————————–
It is rare for a bank to discuss a short sale directly with a homeowner in distress, if it were that easy, no one would want to pay full price for their mortgage.
Your friend should find a short sale specialist who will help her put together a hardship package (if she truly has a hardship other than being over leveraged). This process can take 2-5 months depending on the lender. I worked a short sale from WAMU that took 5 months from contract to closing.
Many banks will want a full appraisal or at least a BPO, broker’s price opinion. She might consider a home inspection so that she will have a 16 page list of things to scare the heck out of the bank (they will most likely not want a property that needs lots of repairs AND is upside down). The job of the short sale specialist is to convince them that this house is HORRIBLE and needs tons of work and is only worth $450k if it were in perfect condition.
Depending on how she financed the deal, the banks may accept as little as 82% of the appraisal value - at least that has been our experience on shorts here in Texas, but we still have a lot of FHA loans here - probably not the case in CA.
Your friend also should come to terms with the fact that if the bank does the short 1). She cannot make any money on the sale, side deals are considered fraud and should be avoided 2). The bank can come after her for the deficiency - the amount they sold short. She can get a 1099 or worse yet have the short amount show up as a bad debt…most banks don’t 1099 people in distress, but know that they CAN if they choose to.
The process is time consuming and frustrating sometimes on all sides. If you choose a short sale specialist, do some research to make sure they can deliver so that she doesn’t end up at the foreclosure auction in the end after all - get some proof that the sale has been postponed.
Many banks will also require that home to be list in the MLS and a valiant effort made to sell it prior to the short being considered.
A short sale specialist should - in my opinion - never be paid a fee up front. They will make plenty of money on the back end of the short is a success, their reward should be based on the results.
I’ll bet there are some short sale wizards who can assist your friend on this board.
Good luck,
Angelique Naylor – Investments
AnTex InvestmentGroup, Inc.
http://www.antexgroup.com
512-441-1593 office
775-206-5709 fax
anaylor@antexgroup.com
Agent – eExecutive Realty, SW, LLC”
Banks make their money loaning money. It is in their best interest and income to keep values in the neighborhoods they loan as high as possible. When short sales get recorded, the new value sets the value for the neighborhood and sets a new low in prices. The ten loans in a neighborhood are worth a whole lot more than 1 short sale. My experience from REO’s in 1991 era is that banks will carry their foreclosed homes asa far as the Fed Agencies will let them. I am tracking Las Vegas 120 New Notices of Defaults every day, and no short sales being completed. Banks are covering this up.
Why would a bank NOT issue a 1099? Debt forgiveness is debt forgiveness. Are they going to start playing favorites? Everyone needs to take the 1099 ass-pounding.
Just a guess, but if a borrower owes $X for a short sale, it shows up as a receivable on the balance sheet. If the bank writes it off and issues a 1099, they have to recognize the loss on the income statement. With the new bankruptcy laws, I imagine there is a chance the bank can actually collect the amount from the borrower.
” borrowers will do well to keep in mind that “non-recourse” does not always mean “non-recourse,” and that even non-recourse borrowers may, through no fault of their own, find themselves on the hook for much more than they thought they had bargained for”
Why not be specific here instead of just spreading FUD? My understanding is they can ruin your credit rating but they can’t come after your other assets. Something wrong with my understanding? The point here is that a non-recourse loan is far preferable to a recourse loan. Do you agree?
Boy, it seems to me that repaying the amount borrowed with interest is EXACTLY what they had bargained for.
The article says Wilkin’s misfortunes stem from his income from free-lance writing drying up, as well as the closure of his other paying gig at Bias Magazine, a startup “incubator” project. Not surprizing that it folded — what I don’t understand is how such an appallingly bad idea ever got financed in the first place:
The conventional tenor of this last event points to Bias’s essential, and ultimately fatal, contradiction. MediaNews and Scripps wanted to reach club-goers and trendies who’d rather perform deviant acts with a Dodge Charger’s exhaust pipe than read a daily newspaper. That’s why the sample issue of Bias magazine shown to business reps in early 2005 featured self-consciously outré material such as a Denver murder map that directed readers to the spot where talk-show host Alan Berg was assassinated, not to mention a pledge to help advertisers “carve up your market like Jeff Dahmer at a Rohypnol party.”
Real smart staking your financial future on such a dubious venture, Elkins.
Well folks don’t go and price that Colorado home just yet. I was talking to a builder today in Woodland Hills (west of Colorado Springs) and he said that the price for a cubic yard of concrete is $140. That’s about twice what it was two years ago. We ain’t nearly at the bottom yet.
Is US Bank publicly listed? Hoo boy, if management at that bank really has their head in the sand on an issue like this, then this is a bank surely going to zero. Looks like an outstanding short-sale candidate.
I am not surprised by the bank’s failure to grok what is going on.
There is a whole generation of 35 year old MBAs operating our banks who have abosulutely no idea what is going on out there - they have not lived it, but they are about to. They do not know what has to be done _now_ to salvage their books, and they are all about to get fired in six months or so when the banks find themselves in serious trouble.
I don’t understand the metaphor. “Close to the rail?” What rail? The third rail??
I believe its a horse racing metaphor. In this case the inside rail of the track, meaning the shortest distance to run.