REOs, Short Sales, and Shadow Inventory

Some people believe that Pacific Palisades, like many other areas around Los Angeles, has not reached the bottom level of its current market price point. They comment about the bank REO (Real Estate Owned) pressure on prices, short-sale activity, and an assumed large volume of similar financially-distressed owners whose properties will soon need to be sold.

Anecdotally, this has not felt to be the case for many months. We have noted multiple offers in many cases, sales levels being maintained, and inventory not increasing significantly in comparison with the rate of sales. For example, at the current rate of sales of Palisades homes, there is less than a seven month level of inventory of homes available, which equates to a market that is fairly balanced between buyers and sellers.

In order to try to ascertain whether the financially-distressed property numbers might have a greater future impact, we have analyzed the past year of local sales, with the following findings.

The REO market has been relatively small in the Palisades. Only 10 homes have been listed in the past 12 months in the Palisades, with two remaining on the market today. Those that sold averaged five percent higher than the prices at which they were listed. There are currently approximately 14 additional homes owned by lenders, which obviously will be put on the market for sale. However, with approximately 140 homes for sale at present, at the rate that these REOs come on market, there is very little impact on the overall marketplace.

The remainder of the “shadow inventory” consists of approximately 35 homes which have been scheduled for repossession by banks at public auction. Many of these may eventually become REOs. However, a significant number of these will be successfully sold as negotiated short-sales.

A review of the last 12 months’ local short-sale activity showed that 24 homes were listed and four of these have already sold, with four others in solid escrows. Some of the remaining active short-sale listings have accepted contracts which are in initial stages of being negotiated with the lenders.

If all of the Palisades homes that are currently bank-owned (or in the process of being such) were to come on the market, it would equal approximately 35 percent of the number of homes currently for sale. This is substantially less in magnitude than in the various areas of the country where short sale and REO activity is 50 percent or more of the market, and the shadow inventory is also considerable. So far this year, only eight percent of the sales in the Palisades have been REOs or short sales! Naturally, only time will tell. However, it would appear to take a great deal of increased financial pressures for our local market to be greatly impacted by REOs or shadow inventory.

5 Strategies to Rebuild Your Credit after Foreclosure

If you’ve been through a foreclosure, you may wonder if there is hope for you to become a homeowner again. The answer is yes, but it will take a while. [...] Here's what you need to do to rebuild your credit to qualify again for a mortgage.

Pay your bills on time: The FICO score, the dominant credit score used by lenders, gives the greatest weight to payment history, so make sure you consistently pay your bills on time. “Stability is the key,” said Craig Jarrell, president of the Dallas region of IberiaBank Mortgage Co. “Have you demonstrated that you are now capable of owning a home and paying the bills, and have recovered from whatever circumstance caused the original foreclosure?”

Review your credit report: You’re entitled to a free credit report once every 12 months from each of the three national credit bureaus—Experian, TransUnion and Equifax. You should get a copy and check it for any inaccuracies.

To get your free credit report, go to http://www.annualcreditreport.com. “Make sure it is about you and only you,” said Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. “If you find errors, dispute them. If you discover old debts, it will weigh in your favor to satisfy them. Paid late looks better than not paid at all. Make sure that debts older than seven years have rotated off your report, as these could be dragging your score down unnecessarily.”

Check your mortgage: You want to be sure that you don’t still owe anything on your old mortgage. Sometimes proceeds from a foreclosure sale aren’t enough to cover what’s owed on the mortgage, which would leave you owing the difference.

"Make sure there is a zero balance reflected, and if you are responsible for a shortfall, make arrangements to repay the remaining balance," Cunningham said.

Many lenders are willing to settle that "deficiency judgment" for less than what's owed because "it's better than getting no money at all," Jarrel said.

Apply for credit: In particular, apply for different varieties of credit. “Credit scoring models value having different types of credit,” Cunningham said. “Having some revolving accounts, typically credit cards, and some installment fixed-payment loans, such as a car payment, can improve your score.” But don’t apply for too much credit at once. “This can appear as though you’re desperate for credit and perhaps make lenders less inclined to extend credit to you,” Cunningham said. “Further, too many credit inquiries can have a negative impact on your credit score.”

Don’t fall prey: Watch out for credit repair companies that promise to clean up your credit report so you can get a car loan, a home mortgage, insurance, or even a job—after paying a fee for the service. “The truth is, that no one can remove accurate, negative information from your credit report,” according to the Federal Trade Commission. “It’s illegal.” Only the passage of time can assure that negative, but accurate, information on your credit report will be removed.

When it comes to repairing your credit, there are no quick fixes, the experts say. What lenders want to see is responsible financial behavior over time.

“Know that time is your friend, as the farther you move away from the financial distress, the less negative impact it has,” Cunningham said. “Follow with responsible behavior with your new credit, and you’ll soon have a solid credit file.”

As published in The Dallas Morning News, 2010.

A New Short Sales and Forclosure Resource Certification

I am happy to announce that I have been certified by the National Association of Realtors(R) as a Short Sales and Foreclosure Resource specialist. This enables me and my team to better assist distressed property owners. We are available for counseling and discussion of various options. If you or someone you know may be falling behind on their mortgage payments please call a Realtor(R) sooner rather than later, it may make all the difference.

Current Financial Pressures on Homeowners & Some Available Solutions

We have recently been asked more and more frequently what alternatives there are for people to try to maintain their homeownership under tremendously stressful situations. Correspondingly, many prospective buyers are “looking for a deal”, and think that it may be found in all situations where a home is being marketed as a short-sale. The short-sale of property occurs when the market value is less than the loan currently owed by the owner. The issues are complex and not simple to explain. The following gives an overall picture of the current market conditions.

The recent history behind the current foreclosure problems is well-known and it may appear that the problems are getting worse. A lot of the pressures are the result of five-year adjustable rate mortgages (A.R.M.s) that have been and are adjusting to higher rates of interest between 2008-2013. Additionally, job losses have contributed to even more pressure on homeowners even in Pacific Palisades. We have identified 10-12 bank-owned properties (R.E.O.s) in the Palisades which have not yet come on the market. The impact of such a small number will not likely affect market prices very much, although if the prices of these sales are significantly lower than previous comparable sales they eventually will have an impact on appraised values. More significantly, there are more than 30 additional local properties in various stages of pre-foreclosure which could present challenges to local market values later this year. Pre-foreclosure means a notice of default (N.O.D.) was filed against the property to indicate an owner is 30+ days late in making their mortgage payments. The lender could schedule a trustee sale within 120 days of the date the N.O.D. was filed. The trustee sale enables the lender to either sell it to a third-party buyer or buy the property themselves if no acceptable offer is made on the date of the trustee sale.

When homeowners experience financial stress, it is critical to identify a real estate agent who is knowledgeable and experienced in helping people become aware of various alternative solutions. Those who do not seek help in a timely manner quite often end up having even greater challenges down the road. A few of the local bank-owned homes were foreclosed at values significantly below the market value at that time. Some of these properties could have sold at higher prices and would have prevented the owners from having a foreclosure on their record had they been appropriately informed. The foreclosure could also delay their ability to purchase any other real estate for approximately seven years).

We were all surprised by the magnitude of the problems that have occurred and many people are experiencing serious challenges. Some agents have become expert in working with lenders on behalf of their clients toward various solutions. Some of us have had numerous experiences in actually negotiating short sales with lenders, and there are certifications that real estate agents can now qualify for to more expertly help their clients in these types of situations.

Not everyone facing a foreclosure can qualify for a short-sale. Those who don’t qualify for a short-sale may still be able to negotiate what is termed a “work-out” with their lender whereby they agree to pay the balance of their debt in a renegotiated manner. Contacting a real estate agent or attorney knowledgeable in the negotiation of short sales will start the process and help to identify which of these alternatives is an option available to them. There are many guidelines that can be utilized, and it is highly advisable for individuals considering a short sale to seek an experienced real estate agent’s advice regarding the feasibility of proceeding in this manner as soon as possible. Any real estate agent involved in this work must be organized, highly focused and, if possible, certified in working with people who are in a financially distressed situation.


Some real estate companies have prepared extensive informative materials to aid in educating people about the different alternatives available, procedures that must be followed, and guidelines for agents to maximize the probability of being successful in negotiating with the lenders on their clients’ behalf. The process is complex and challenging due to the tremendous log-jam of files that the banks’ loss mitigation personnel have to deal with. For this reason, it is also vital that any negotiations be done with great care and thorough adherence to the procedures that are essential for success.

While some buyers find excellent short sale purchase prices, it is not for those who are faint of heart or needing closure quickly. Although several lenders have streamlined the process recently, it can easily take up to several months for some to complete the approvals. Buyers who are not willing or able to be patient with this process may lose interest and withdraw their offer prematurely.

Bank-owned property sales differ from short sales in several respects. Buyers purchasing bank owned properties need to be prepared to take action swiftly, often pay more than the initial listing price, and unconditionally purchase the property in its present condition. Competitive bidding is not uncommon, and thinking they can get “a deal” because it is a bank sale is often a frustrating exercise.

The potential overhang of such types of properties in Pacific Palisades may be small enough that at the current rates of sales the increased inventory will be absorbed by the market without much negative impact. If dozens of foreclosures come on the market in a short period of time, however, there could be a fairly significant impact on prices.

For the past 24 years Michael Edlen has provided real estate counseling services to prospective buyers and sellers. More tips and information are available on MichaelEdlen.com. He can be reached at 310.230.7373 or Michael@MichaelEdlen.com.