The Standard & Poor’s/Case-Shiller Index tells us that the 20 largest cities in the United States had home price increases of 4.3%, comparing October 2011 to October 2012. The real estate bust was pretty severe in the Western states, and the recovery seems to be stronger here.
San Francisco and Phoenix are both up 22% from their bottoms. The Los Angeles area is up 10.5% from its bottom while San Diego is up 12.2%. In California, inland areas are lagging behind the gains posted in the coastal regions, according to Case-Shiller.
This is great news for the housing market, the economy and our country.
However, for those of us who are in the business of buying seller carryback notes, some of our experiences don’t jive with the media reports. We will make an offer to purchase a note at a certain price, then have an appraised value of the property come in substantially lower than the sale price. This is certainly happening with properties that were sold at the peak of the market in 2007 and the years following, but we see it with properties sold within the last 12 months. It is very frustrating for buyer and seller.
What to do? Many note buyers will opt to purchase only a part of the note, not all of it. Why? This lowers their capital investment as a ratio of the current property value, thereby minimizing the risk. It also allows the seller to get some cash now, then recoup the balance of the payments due under the note when the buyer has received his share. Good for both parties.
As always, sellers who may be creating seller carryback notes today should not be lulled into complacency by the reports of recovery. Sellers should protect themselves by demanding a decent downpayment, checking out the credit history of their buyer, requiring a higher than preferred risk interest rate, and use a 3rd party to service the account. Both parties will be better off in the long run with this prudent approach.
