Short Sales and the Economy.

A good indicator of how the economic recovery is proceeding is to keep tabs on the number of short sales that are taking place.  As long as prices are dropping or remaining at depressed levels, you’ll see more short sales as people choose to sell their home for less than what they owe on their mortgage.    In San Mateo County, that rate varies widely between the various cities that comprise the County.

San Mateo County Rates.

Here’s a quick snapshot of the short sale rate of some of the communities on the Peninsula.  The percentage is determined by the number of short sale listings compared to the total number of listings (for single family residences.)

• Daly City:  42.1% (24 short sales out of 57 total listings)
• San Bruno: 33.3% (11 out of 33)
• Belmont: 11.4% (5 out of 34)
• Menlo Park: 10.9% (10 out of 92)
• Redwood City:  10.9% (14 out of 129)
• Foster City: 9.5% (2 out of 21)
• San Carlos:  9.3% (5 out of 54)
• Pacifica: 7.5% (3 out of 40)
• Burlingame: 5.9% (4 out of 68)
• Millbrae: 5.1% (2 out of 39)

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Buy Low, Sell High…

Flipping homes hasn’t been a topic that has been discussed much lately because the practice has all but dried up in recent years. Why?  There are two elements that have to be present simultaneously for a flipper to be successful:

1. Supply of low-priced homes to purchase (buy low.)
2. Strong buying market (sell high.)

In the past few years, one or both of these elements have been missing, and consequently folks who were trying to flip homes often got left holding the bag at the end of the day.   But that’s all starting to change, and the driving force behind it is coming from an unlikely source: the economy.

Auctions

Smart investors and contractors are finding that they can often get an incredible deal on foreclosed homes that are being sold at auction, often at steep discounts.  And if you see the list of homes scheduled to be auctioned in San Mateo County every week, it’s clear there will be an ample supply of homes for flippers to choose from for quite some time.

Not all foreclosed homes are good candidates for flipping.   After all, the normal requirements stiill apply when it comes time to sell the home: Location, condition, and price.   If the home is in a bad location, or if it’s in a dilapidated neighborhood surrounded by other foreclosed properties, it’s going to be a tough sell, regardless of how nice the home looks after it has been refurbished.   But with mortgages failing at record rates in all price ranges, inventory is coming up constantly in the better neighborhoods.

Turn and Burn

Depending on the scope of work to be done, a home bought at auction can be refurbished in as little as a few weeks.   I saw one stunning example recently in Redwood City where the kitchen and bathroom were completely remodeled, new paint applied throughout the house, and the hardwood floors refinished — all in 3 weeks.  The new house was stunning, and re-sold in less than a week with 3 offers.

Where’s the Demand?

As I have written about before, the sub $1M segment is red-hot right in many communities right now.  With the conforming loan limits temporarily extended to $729,950 in most areas,  money is much easier to obtain than it was when the limit was $417,000.   Consequently,  there’s a big supply of buyers already pre-approved in ranges between $500k and $1M, and they’re ready to buy.    And the better the condition of the home, the more buyers will compete for it.

Good for the neighborhood.

The net result for the surrounding neighborhood is often positive when a home is flipped.  Granted, it sucks in this situation for the person whose home was foreclosed.  But when an neglected home is replaced with one that’s in much better condition and will likely sell at a higher price, it’s good for those homes that are nearby.     Improving the appearance and value of a neighborhood is good for everyone.

Keep Your Eyes Open

If you’re looking for a starter home that’s in move-in condition, keep your eyes open because there are deals out there.   I know of several contractors in the mid-peninsula area who are solely focused on flipping homes in this segment right now, and they’re putting some incredible 2 and 3 bedroom homes back on the market in the upcoming months.

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The most recent budget proposal out of Sacramento relies heavily on the State Government borrowing property tax revenue from local cities to close the $26B gap that exists today.   Cities that have already laid off staff and cut expenses to the bone will now their coffers raided (whatever’s left over) to bail out the state of California.

The Daily News published an article that outlines the impact by city:

Prop. 1A estimates borrowing from state (estimated).

• Atherton    $435,469

• Belmont    $431,256

• Brisbane    $366,109

• Burlingame $1,146,343

• Colma     $179,234

• Daly City    $2,083,109

• East Palo Alto    $708,803

• Foster City    $1,206,702

• Half Moon Bay    $220,885

• Hillsborough    $850,335

• Menlo Park    $981,087

• Millbrae        $476,223

• Pacifica        $964,058

• Portola Valley    $93,796

• Redwood City    $2,892,572

• San Bruno    $829,615

• San Carlos     $833,661

• San Mateo    $2,808,517

• South San Francisco    $2,045,007

• Woodside    $178,635

It’s ironic how the most affluent community on the Peninsula will end up paying less than the least affluent…

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Tough Threshold

Various communities on the Peninsula have tried to get special parcel taxes passed to help prop up the dire financial situations of their respective school districts.   Some have been successful (San Carlos), while others have gone down to defeat (Redwood City.)   In every situation, achieving the required 2/3 “yes” votes has proved to be quite a challenge.  San Carlos had to hold a second election after the first try only yielded a 65% yes vote.

Lowering the Bar?

If a new bill that Senator Joe Simitian is pushing becomes law, the threshold for passing a parcel tax initiative to benefit schools would drop from 66.7% to 55%.  Here’s an article in today’s Daily Journal with more details:  Bill to Ease Tax Passage

This lower threshold would have meant the difference between success and failure for a number of parcel tax votes that happened this year.  Perhaps it will encourage these communities to go back to the well for another try?

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Trader Joes moving to the Mall?

According to the article, the location in question is the old Tower/Good Guys building that’s adjacent to the mall and right next to Barnes and Noble.  If this happens, this will be a home-run for Trader Joes.  Great location, big building, and plenty of parking.   The latter two seem to be an ongoing challenge for many TJ stores, especially the one in San Carlos.

Should be interesting.  Love Trader Joes!

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The Clock Begins Ticking Again…

The Washington Independent posted an alarming article this past week that states that Fannie Mae and Freddie Mac have quietly lifted the moratorium that was in place on foreclosures.   The agencies put this moratorium in place in late 2008 as a way to slow the potential tidal wave of  foreclosure filings,  and to allow the new Administration time to implement their economic recovery plan.   Here’s the complete article from the Washington Independent –> Fannie, Freddie Quietly Lift Moratorium on Foreclosures.

What does this mean for the Peninsula?

If this is indeed true, the clock begins ticking again for those homeowners in the pre-foreclosure phase.  In time, if these mortgages aren’t reworked to keep the owners in their homes, another wave of foreclosed and REO properties may hit parts of the Peninsula that was just recovering from the last wave.    Considering how tough the job market currently is, I think in this round you may see some foreclosures in areas you’d least expect.

For investors, this means there may be more bargains coming on the market later in the year when this wave flushes through.

Action is better than inaction…

If you are unfortunate enough to be a homeowner in a very tough situation, the worst thing to do is to do nothing… The sooner you get conversation started with your lender, the better the chance you’ll have of hammering out a deal to stay in your home.   With all of the pressure being applied on lending institutions to work out deals with borrowers who are in trouble, one would hope this would translate into some flexibility for troubled homeowners.

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The San Mateo County Tax Assessor’s Office recently announced that it will review the assessed value on nearly 40,000 homes in San Mateo County.   That’s a lot of homes…  Considering the condition of the economy and the recent drop in home values on the Peninsula, this may spell good news to many homeowners in the form of a reduction in their property taxes.   So far, the County has reviewed nearly 9,000 cases and over half qualify for some sort of reduction.

While this will be welcome news for homeowners, the loss in property tax revenue will put a pinch on many Peninsula communities that rely heavily on property tax revenue to run their cities.  The impact is only starting to be fully understood, but clearly those communities that rely more heavily on property tax revenue will take the brunt.

The Daily Journal interviewed several City Managers to assess the impact of the property tax reductions on their respective communities.  It’s a good summary of how it impacts Burlingame, San Carlos, and other cities.  Here’s the article for your reference:

County and cities brace for tax reductions

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In a move that is becoming commonplace in communities on the Peninsula, the City of Burlingame is considering parcel tax as a way to support its school system.  Burlingame already has a  $104 per year parcel tax in place that supports the Burlingame Elementary School District, but that tax expires in 2011.  And with continuing State budget cuts, the School District will need these funds to avoid dipping too deep into their cash reserves.

Burlingame isn’t the only city who will be asking voters for help this year.  San Carlos will be putting a $78 parcel tax on a special ballot in May, less than a year after a similar Measure was defeated.   Redwood City is looking at taking similar steps as well.

Here’s some additional information on the Burlingame proposal, courtesy of The Daily Journal:

Burlingame Considers Parcel Tax Renewal

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Proving once again that the government isn’t in business to give things away for free, President Barack Obama’s proposed budget has its sights set on one of the most ferociously protected tax shelters to recoup funds:  The mortgage interest tax deduction.   His proposal is aimed at reducing this deduction for America’s wealthiest familes, and will surely face vigorous opposition from homeowners and the real estate industry.

Here’s an excellent article that summarizes what’s at stake:

Mortgage Interest Deduction on the Slicing Block

There’s a significant percentage of households on the Peninsula who will be impacted by this change.  It’s definitely a discussion you should be having with your CPA or tax attorney….

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