It’s still a mystery to me that I sell entry level housing on LA’s lower Westside. It has been a career saver and I do it well, but today it is even more challenging. While the upper reaches of real estate are, to my experience, not doing nearly as well as the entry level homes in Culver City, even the lower levels offer a glimpse of why we are yet a long way away from a healthy market.
Consider this client, we shall call him David. David is a retired school administrator with terrific credit scores in the mid 700’s and a large regular pension. While his income is ample to buy a home, he doesn’t have much cash. So he looks for a home in the low $200,000’s to match his ability to pay.
We found him a condo in order to qualify for an FHA loan. FHA sets guidelines which deal with income, cash down, condition of the building and so on in order to make sure the banks, who sell off their loans to servicers, will be able to get payment. They do this because the bank lending standards before the “crash” were lax and no one wants to repeat the past.
In order to accomplish this, the lending guidelines used to state that any given condo had to pass an FHA inspection before the loan could be underwritten. This was to insure that the unit was in condition sufficient so that if the bank took it back in foreclosure, at least the value in the unit would still be there to protect the lender if the unit were re-sold. While in itself this is a fallacious assumption (ie., that the unit at the time of inspection will still be in that condition in the event of a foreclosure), it still wasn’t safe enough for FHA or the banks.
So to up the ante and make it safer, after all the lending was being underwritten and guaranteed by your tax dollars, the FHA changed the rules. Now it is not sufficient if the unit for sale meets inspection guidelines – the entire building has to meet the guidelines. And in order to do this, the Homeowner’s Association (the HOA) must file an application with the government to pass an inspection approving the entire building for FHA lending guidelines!
Now imagine you are a homeowner trying to sell a low priced condo. Typically the people who bought these a few years ago at inflated market prices are now out of work, have reduced income, can’t afford their unit or their homeowner’s fees. So they default or fall behind. And instead of being able to sell, because their buyers are as economically challenged as they are, they are asked by the HOA for more money in order to bring the building up to FHA standards so the buyers can afford a loan. You are the homeowner, how do you react?
Well, in my experience the reaction is negative. Instead of putting money in to advance the building and make it marketable, the HOA lets the building stay below FHA levels. At that point, loans can’t be made to anyone who doesn’t have a cash down payment. And at this price level, without a loan the units don’t sell.
This is what happened to Dave. He found his unit only to discover he can’t get a loan. The unit he chose is a short sale and requires bank approval. Yet the banks’ tighter lending standards, now in place to make up for their losses in the past, prevent them from making the loan.
From an objective viewpoint, there is no sense to this. In David’s case the unit is on market now 275 days and has fallen into disrepair. The price, which has decreased by almost 30% since first being placed on the market, is still too high due to the repair issues. And without an FHA loan, there are no buyers at this entry level pricing.
What to do? Well for David, unless he can get a larger down payment, this unit is beyond him. That causes the market to continue to decline as the bank eventually will sell for less. But to avoid this and generate a sale, I offer these partial solutions.
First, all HOA’s should be required from scratch to keep their buildings in a condition to meet FHA standards. This isn’t that expensive and will enable loans to be made to lower income buyers. Being part of the HOA dues from the beginning gets the owners to understand the need to keep the building in good repair and improves value by making it easier to sell what will be a unit in good condition.
Second, where a bank has to take a loss on a short sale, it should be required as a condition of its Federal charter to make the loan itself to the new buyer, FHA or not, but along FHA guidelines. While the bank is still taking a hit, it will not be as big as the hit it will take by leaving the property fallow. And by turning the units over, the market will cease its decline, level off enabling the banks to unload more of their classified assets until they are gone. Once gone, these short sales will no longer influence the market because by FHA fiat the standards are now higher preventing the downturn. And last, the homeowner’s benefit because they are now required to assist in the market by maintaining their buildings.
Let’s try to make this happen. We love your feedback, what do you think? Want more information? Dial me direct at 310 383 8294
