To List Or Not To List

An excellent broker (and irreplaceable friend), asked me to address the alternatives available when a Realtor is asked to market distressed property. This article is the result of my struggle to derive from the circumstances some rules that might be useful. To the extent these comments assist, please receive them with the understanding that my effort is to help, not hinder. If you find the comments elementary or offensive, please ascribe them to the analytical shortcomings of the author, and not to a lack of good will.

I received a call before Thanksgiving from a woman out of state who can’t handle her mortgages. She had purchased a one bedroom investment condominium for $380,000. She financed 95% of the purchase price with two mortgages, and in response to my questions she told me the unit has about $20,000 in gross income, and after management and condo fees its net income is less than $10,000 per year.

The problem is obvious. This unit was over-purchased and over-financed. It had no chance to be a decent investment from the beginning. She did not tell me, and I didn’t ask, but I feel certain the unit was marketed it to her as a flip. That is to say, the unit was not purchased for its intrinsic value, but solely because someone else would soon pay more. The traditional elements of value- location, uniqueness, and cost to construct or, for investment property, its income, were ignored.

Realtors, lenders, appraisers, closing agents, all felt pressure to believe that a flip transaction could establish value for appraisals. The industry pushed the appraisers to return appraisal values based upon these flips to support new deals. Some appraisers resisted, and some lead the way by equating all recent sale prices to value. Those appraisals bled over into single-family investment properties, and even then single-family residences. The gut reaction now is that most of us knew better.

Across the country many owners used appraisals driven up by real estate flips to value their own homes; through home equity loans many owners have now bloated the amount borrowed against even non investment residential real estate. The result is that we are over-purchased, like the woman in my example above, and over-mortgaged in ways that five years ago we would not have believed was impossible.

In order to deal constructively with where we are we must admit and deal realistically with the financial desperation faced by the woman in my example above, and countless others. Realtors need to know how real estate is financed before property is listed. Property in or near foreclosure presents special problems for a Realtor.

There are two possibilities for such property. The first is that the property is properly mortgaged, which is to say, there is equity in the property (the property is not so highly leveraged that the mortgages exceed the value of the property). The second possibility is that the mortgages are so high that there is no probability of sale in a reasonable period of time for an amount that will pay off the mortgages, commissions, and expenses of foreclosure.

That the above alternatives exist make it clear that the days are gone when a Realtor does not need to be aware of the motives and abilities of the owner. The first alternative, where the property is not over-mortgaged, gives the Realtor something to work with; the owner can sell for less than value and still pay commissions, costs of sale, and the existing mortgages. (In the event of foreclosure while such property is listed, the first thing the owner must do is find a lawyer who knows about mortgages. The Realtor will find life easier if he or she makes sure the owner does that. There may be defenses available to the owner that will at least give to owner time to sell the property.)

The second alternative stated above, that the property is seriously over mortgaged, is a far greater concern to the Realtor, and possibly should not even be listed. The owners of such properties often do not understand that their property will likely sell for only a fraction of its real value in a forced sale, and most have no understanding that a mortgagee may not cooperate with any proposal to sell property without paying off its mortgages. One of the first things a mortgagee should do when faced with the fact they cannot continue to make payments is to talk with someone at the mortgage company. “Short sales”, deeds in lieu of foreclosure, and equity workouts are some options that some mortgage companies will entertain in this market. But, the further behind the mortgagor becomes, the harder it is to work out any compromises.

I do not recommend listing the property for an amount clearly above its likely sale price. To do so may make the owner feel better temporarily, but that feeling will disappear, and will be destructive if it prevents the owner from dealing realistically with the situation.

There are many owners in serious need of experienced, professional, real estate marketing. We have to be truthful with the client before we can be any help at all, and we do no service to let them believe it is likely that someone will buy overpriced property and thereby relieve them of financial collision. Bottom line, if you cannot price the property for likely sale in today’s market, and still pay all mortgages, commissions, and expenses of sale, you may safely list the property only if the Seller is prepared to pay the difference in cash at closing.

As a caution to those interested in buying property in foreclosure, remember that a lawyer who forecloses real estate is obligated to deliver to his client only the quality of title that was mortgaged, not more. For instance, if the mortgage being foreclosed is a second mortgage, there is no requirement to join a first mortgagee in the foreclosure, and there is no assurance that the first mortgagee even knows of the foreclosure. One who buys such property after or during foreclosure is likely to buy it subject to an existing first mortgage.

2007 will be better. Please assume the love and best wishes of those of us who close real estate.