Why the Supreme Court Decision on HOA Foreclosures Is Good News for Everyone

Lenders and investors are squaring off in Las Vegas over the recent Supreme Court ruling that stated that Homeowners Associations (HOAs) have the authority to foreclose on properties and sell them at auctions to recuperate delinquent dues without needing to go to court for permission. The Supreme Court ruled that the super priority lien that the HOA holds on the property for unpaid assessments trumps the first trust deeds held by mortgage lenders. The HOAs are allowed to sell these delinquent properties to recuperate unpaid dues. These properties are often listed for sale at the auctions at prices equal to the total amount of dues owed to the HOA plus collection costs and late fees, which usually equals only a couple thousand dollars.

This means that investors at these HOA auctions can purchase these delinquent homes for a fraction of the cost of their real value, making these properties an excellent investment opportunity. After purchase the property is transferred over to the investors via a quit claim deed or a foreclosure deed which gives them title to the property and allows them to live in, resell, or rent (depending on HOA rental restrictions) the properties. According to the recent supreme court of Nevada ruling the first trust deed held by the mortgagee (the bank) is completely wiped out.

The super priority lien held by the HOAs allows the associations to foreclose on the properties and any delinquent dues to the HOA are paid back.  Any overage from this sale will go in lien priority, with the bank being next in line in most cases, to recover any overage from the HOA foreclosure sale.  This September 18th 2014 ruling has, of course, put many lenders in an uproar as lenders now potentially can lose their security to the property if they choose not to foreclose themselves before the HOA does or if they choose not to pay the back HOA dues to prevent an HOA foreclosure.

The Nevada Supreme Court and the HOAs have no sympathy, however, for the lenders. Since the bank foreclosure process has been taking a very long time (sometimes years!).  HOAs are often left with empty homes and delinquent dues with no possibility of re-payment through the existing owners. Lenders are given the opportunity to pay for the HOA liens to prevent the property from being foreclosed upon by the HOA, but if lenders choose to not pay the liens they run the risk of losing out on possession of the properties that they could foreclose on themselves.

Some lenders claim to be unaware of HOA liens on the property or state that the HOA will not allow banks to pay the liens. In this case the issue of timeliness comes into play. If lenders foreclosed on properties quicker there is less of a chance of the properties remaining vacant for so long and thus acquiring further delinquent dues. If a new owner was allowed to move in quicker the current dues could be consistently paid preventing the HOA from needing to foreclose on the property in the first place.

There has been a definite shift in the real estate market with this new Supreme Court ruling, and some agents are already beginning to notice the difference in how short sales and foreclosures are being handled. Some agents are reporting short sales that are being approved in less than a month, a process that usually drags on for months or even a year or longer in the recent past. Why the sudden quick decision from banks regarding short sale approvals? Banks and lenders are trying to recuperate their losses before the HOAs foreclose first and thus prevent them from losing their security against the homes.

It will be interesting to see how the lenders handle the new ruling and whether it will affect mortgage rates or the ability to get a loan in Nevada. While the banks have stated that HOA foreclosures may be bad news for them in reality it is a great situation for the banks.  The delinquent properties sold at HOA auctions are selling at about 70% of retail value and will actually get the bank their money faster than if they waited to foreclose themselves. Remember that any overage of the HOA auction is paid to the bank.  This is the same way it works with a normal trustee sale.

This decision is also good news for real estate agents and short sale buyers and sellers who may see quicker short sale approvals and re-listing of foreclosed and short sold properties. Residents who live in HOA communities will also benefit as the HOAs will be better able to service and maintain their associations with the recuperated dues.

Local Las Vegas Investors will reap the most rewards, however, especially those who took advantage of the HOA foreclosures prior to the Supreme Court decision. Millions of dollars of equity was created with the Supreme Court ruling and investors who purchased many of these properties are now sitting on a real estate gold mine.

For more information on HOA foreclosures and how you can still take advantage of this investment opportunity contact Glenn Plantone today!

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Update on MGM Signature Towers

The last time I reported on the MGM Signature Towers was in late April when new low comps were established for both Studio and 1 Bedroom units at the close of the MGM auction. I wanted to take a moment to update my readers as prices continue to drop on these properties here in Las Vegas.

I have been following the MGM Signature Towers project since its inception in 2003 and 2004 and have stayed as far away as possible until recently as purchasing made no sense from a cash flow perspective. But as you know, things change quickly in Las Vegas and this investment is beginning to look a lot more lucrative. I will explain.

If you are unfamiliar with the hotel condo concept, it is quite simply explained as follows: You the investor buy and own the actual condo with all of its luxury furnishings, and the condo is put into a rental program and managed by a management company (in this case as part of the MGM Hotel and Casino). There are a lot of calculations that lead to how much revenue owners will make (or not make) from their condo hotel but a reasonably accurate estimate in the case of the Signature Towers would call for the owner to end up with about 40% of the gross revenues from the rental of the room. In simple math, if a condo hotel room is rented for $100 per night, the owner will net about $40.

Of course there are some perks to ownership of the unit as the owner can use it themselves (with a reservation) or the room does not have to be in the rental program at all. If someone wished to live in their luxury condo unit they could choose to do so. The home owner’s association fees are quite high, at near $400 for the studio unit and $900 for the one bedroom unit. These fees pay for the luxury resort amenities which are separate from, yet still attached to, the MGM Hotel. The Signature Towers resort features two exercise rooms, valet parking, guest services, coffee shop, lounge, deli, several pools, high speed internet service throughout and a gift shop.

The hotel condo project was sold in three stages with tower 1 (145 East Harmon) completed in 2005. This building is closest to the MGM hotel and was the first building of the three to be finished. Units in this building sold for between $300,000 to $600,000 for the smaller studio units (520 square feet) and $500,000 to $1,000,000 for the 1 bedroom units. The second tower was the 135 East Harmon tower which was completed in 2006. Studio units sold for a little higher, in the $400,000 to $700,000 range, and 1 bedroom units remained the same at $500,000 to $1,000,000. The last tower to be built, 125 East Harmon, sold for even higher prices. It was completed in 2006 with studio units selling for $500,000 to $800,000 and 1 bedroom units fetching prices from $700,000 to over $1 million.

Note that because tower one was sold at lower prices there have been less foreclosures coming on the market from this tower (145). As investors grossly overpaid for units in all buildings, but especially buildings two and three, we are now seeing a high rate of foreclosures begin to hit the market. I believe that as early investors begin to see how far upside down they are we may see even more people letting their units go as their equity or perceived equity is non-existent.

Over the last year there have been 92 re-sales as a combined total from all three buildings. As of April 2009 the lowest priced 1 bedroom unit had sold for $274,000 and the lowest priced studio unit had sold for $174,000. This was, of course, well below the original sales prices of just a few years earlier. Then in late April of this year, an auction took place at the MGM and 20 units were sold off in about 2 hours time. I reported on this auction in my blog as a new low of $202,000 for one bedrooms and $160,000 for studios were established.
It was about this time that I stepped in and began to educate my database of investors about these units as I could see that the prices were beginning to move closer to the point where they could hit bottom and actually begin to make sense as an investment for those looking to keep them in the rental program.

When looking at units from these high rise towers, each investor will want to be concerned with the price of the unit, its “rentability” potential, the profitability of the investment, and the future appreciation potential of the property.

I have identified 7 items that have a direct effect on these factors. These 7 items include the following:

1. Odd/Even address numbers: Odd = strip side views and Even = mountain views.
2. One bedroom unit (874 or 847 sq. ft) or studio unit (520 square feet)?
3. Handicapped unit or regular unit?
4. Does the unit have a balcony or not?
5. Is the unit located on a high floor or a low floor?
6. How is the View (strip/mountain/airport/pool)?
7. Is it a penthouse floor (29 to 33)? (Comes with a higher ceiling.)

Since April I have been working with several investors and fighting to get the lowest price possible for them on the units they are looking to take down. All this hard work paid o this past Friday the 17th as one of my investors closed on a lower oor studio unit at only $99,000. This new low blew away the previous low comp of $140,000 for a studio from only a couple of months back.

The very next day, Saturday July 18th, I attended the second auction for the MGM Signature Towers with cashiers check in hand ready to pounce on a 1 bedroom unit for another client. And as I predicted, a new low was achieved when the 1 bedroom sold at auction for $180,000 ($22,000 less than the previous low). The unit was in tower 1 ( first building), 7th floor, with a balcony and a nice pool view on the mountain side (even number). The unit sold originally for $540,000 and made for a nice deal at 33 cents on the dollar from the original high. This lower comp should help motivate the banks to continue pushing prices down into a range that will produce more investors traffic as people look to scarf up these luxurious condo hotels.

As of this writing, there are 155 units listed for sale in the entire MGM Signature Towers project. There are only 22 that are REO/bank owned foreclosures and 68 short sales. The remaining 65 units listed for sale are upside down owners who will not be able to resell their units at their asking prices for many, many years.

Anyone seriously interested in taking down a unit at today’s new lower prices should contact me as soon as possible as inventory is very light at this time. I am not sure how low the prices will go but I truly believe a studio at $100k and a one bedroom unit at $150k are very good deals.

This Friday the 24th of July there will be a third (silent) auction that will be taking place on 10 units at the MGM Signature Towers. You must be registered in advance in order to bid online. The highest bidder’s o er will be presented to the bank. If the bank accepts the bid, you will get the condo at your winning bid price. If the minimum (unpublished reserve bid) is not met, the deal will be renegotiated or you can walk away. There is no earnest money required for the silent auction. Call or email me for details to register.

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How to Profitably Invest in Foreclosures

Within the realm of real estate investing, each type of investment (foreclosures, fixers, land, REITs, etc) has its good and bad times to buy. To be a successful investor you need to be able to identify not only which type of investment is the best at any given time but also which sub-category within that investment type you should look to specialize in, and when in the market cycle to buy.

Perhaps you are new to real estate investing (or not) and have heard that foreclosures currently abound and offer the best way for investors to gain instant equity in a property. This may well be very true. But the designation “foreclosure” is a general term comprised of many types of properties. Understanding the different types of foreclosures, where in the time line a particular foreclosure stands and which type of foreclosure offers the bet deal is critical to your success as an investor.

Along the time line of the foreclosure process, there are three basic areas that present buying opportunities for investors. The first of these has investors buying before the foreclosure auction. The second opportunity comes through buying homes directly at the auction. The third and final possibility is to buy properties after the auction is over, either directly from the bank or from an auction company. These bank owned properties are referred to as REO’s or Real Estate Owned. Each of these stages in the process provide unique benefits as well as challenges. The smart investor will need to contrast the pros and cons of each method in order to find the best and safest investment opportunities within the broad field of “foreclosures.”

The first opportunity for foreclosure investors, buying before the auction, encompasses the period of time when home owners are behind on their payments and realize they are in danger of losing their home but have not yet been foreclosed upon. This sub-category will include listed properties from the multiple listing service (MLS), short sales, notice of defaults (NODS) and notice of trustee’s sales (NOTS). For a number of important reasons, this is not a good time for anyone to be attempting to sell a home through “normal” retail channels. The sluggish nature of the housing market, the excess low priced inventory on the market, lending resrictions, and the anxiety of potential buyers willing to sit on the sidelines and wait for conditions to improve combine to make selling retail nearly impossible for most home owners. Sellers cannot compete against foreclosures so unless they too become a foreclosure they have no viable way to sell their home. This means that we as investors will have a very hard time finding a property to purchase with equity in it, at this stage of the foreclosure process.

There is one segment within this first stage to which we should direct a little bit of extra attention: short sales. A short sale occurs when an owner is in trouble and a potential buyer comes in and negotiates with the bank to purchase the property for a value less than the amount owed on the loan. This provides both a potential solution to the home owner and a way for investors to get a home at below market value. The downside to this method is that with the huge amount of foreclosures blanketing the nation, short sales are taking way too long to complete (4-6 months on average) or aren’t going through at all. Some recent statistics show that only about 20% of short sales actual close. There are still many companies, Realtors, and investors that are quite successful in short sales, but this niche is difficult and not one in which most investors find success.

The second opportunity for investors comes through buying properties at the foreclosure auction or trustee’s sale. Note that some states liquidate foreclosures through judicial proceedings, while others, like California and Nevada, have trustee’s sales that are held on the courthouse steps. The positive side of buying foreclosures at auction is that the competition for the property you are looking to buy is not usually all that stiff. However, in trust deed states you must have cash or the equivalent of at the time of the auction to be the winning bidder. This eliminates a huge majority of potential buyers as most folks do not have $100,000 or more easily accessible in cash. Because REO properties are now selling for levels under amounts owed on comparable properties in the (NOTS) stage, buying at the trustee’s sale is not a viable way to buy in most situations. Most properties brought to auction at this point are failing to sell for asking price and are reverting back to the banks and becoming bank owned REO’s. Again, there are professionals who are buying good properties at trustee’s sales and auctions, but it is not an easy way for a beginner to break into the foreclosure arena and it is a very small segment of the market at this time.

By far the best, easiest, safest, and most lucrative way to buy foreclosure properties at this time is during the third and final stage of the process: when the properties that are not sold at auction revert to the banks and become REOs. Because of the huge volume of foreclosures now on the market and the record numbers that will be coming in over the next 12-18 months, banks are lowering their prices daily just to move inventory. Banks are also, in many cases, placing homes with listing Realtor agents that specialize in selling REO homes.

If the properties do not sell in a 60-90 day period (after initial price discounting) many properties are going back to the bank and being re-listed t an even lower price with an auction company or sold off in bulk REO portfolios of $5 million and up for literal pennies on the dollar. Another benefit of bank owned properties is that they are almost always vacant, making it easy to get inside and inspect them before purchasing. This is usually not the case when purchasing in other stages of the foreclosure process where most homes are still occupied by owners or tenants.

As an investor and licensed Realtor that has bought homes in all stages of the foreclosure process, both for myself and for my investor clients, I am advising my clients to take full advantage of what could be one of the best foreclosure buying markets we will ever see. I personally am based in the Las Vegas area and I have seen the Las Vegas real estate market go from the #1 hottest in the nation in 2004, to one of the slowest in 2007. In 2009 volume is increasing and Las Vegas is once again becoming one of the best and busiest real estate markets in the U.S. There is one thing and one thing only that is driving this change: foreclosures.

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