From the new July 2007 issue of Mammoth Real Estate Times.

Q: My friends are all excited about the possibility of getting a really good deal on a foreclosure property in Mammoth. They’ve been checking things out and really think it is going to happen. What’s your take?

A: Since my Q&A column on foreclosures ran in the March issue of RET, some fascinating examples of human behavior have been exposed here in Mammoth by the foreclosure realm. As I said back then, the Internet based information pipeline would change things in this market cycle. This has been the source of some of the mania, and some of it has been quite entertaining already.

This is what is happening. People (the public) are already taping into (and subscribing to) these information sources like foreclosure.com. Since March, about a dozen Mono County properties have appeared in the database for a variety of reasons. The properties and their owners are clearly identified in the databases. The problem arising is that these well-meaning members of the public aren’t clear on what the information is saying. They are mistaking a property/owner who is listed as in default, or now what is being identified as pre-foreclosure, as a property that is immediately available to be purchased. And most of them are thinking they are going to have the opportunity to buy at a real cheap price too.

So these potential buyers and bargain hunters are snooping around (literally) properties that are still owned, and likely will still be owned, by their current owner. Or some have run into the local title company (who is named as the “trustee”) to inquire how much the property is and can they make an offer. I hate to tell some of these anxious souls, but trespassing is a sure way to get in trouble (maybe even shot), especially in some of the more remote areas of Mono County. And it has already been a little embarrassing for some local property owners, who might be a little late on payments, to find “prospective buyers” poking around their properties.

I’ve been watching the information on these pre-foreclosures and foreclosures and trying to do a little homework on them myself. (Would a real estate broker be worth anything if he isn’t looking for that occasional good deal for himself–or for one of his clients?) Here are my “take-aways” from what I’ve seen so far. First of all, the volume of these distressed properties and owners is low in our area, relative to what I am seeing in the rest of California. This was my guess back in March, and so far this is the trend. Second, it tells me there is still a significant, pent-up demand and appetite for buying eastern Sierra real estate–but that price is the issue for the buyers. And the general impression of buyers is that there may be a little softening in values in the short term, but ultimately most values are going to hold steady–hence, get a good deal now because the long-term prognosis is still positive.

Third, some of these foreclosures are due to buyers who abused the financing opportunities of the last few years. Essentially, they purchased (typically in the 2003-04 timeframe) with 100% financing and then wiped out their original second mortgage with a HELOC (home equity line of credit) that was in excess of their second and then proceeded to not make anymore payments–not to the lenders, not to the County (property tax), not to the homeowners associations, etc. Basically, “I’ve got positive cash and screw you.” Some of them even derived revenue (for themselves) from nightly rental during this period. And of course, they entertained their guests at their property (and probably had a damn good time). But again, the volume of this type of activity isn’t all that significant in the realm of the local market. Ultimately, I hope the lenders, or someone, goes after these apparent frauds.

I think the most significant insight so far is that the lenders are positioning themselves to work with distressed borrowers. It’s a rational position based on what they are facing. The opportunity for the borrowers/owners, and buyers looking for a good buy, is in “short sale” market. As I said back in March, there is new “play” going on. Lenders not only appear to have an appetite for short sales, it appears they may bend over backwards for one. The reason is really simple–it is going to cost them far less to take a hit on the loan amount then go through the expense (including time) of foreclosing and re-marketing the property. And from what we are seeing so far, the lenders seem negotiable almost up to the minute of the Sale (foreclosure). As we move forward, each lender will cooperate differently, so what may work one time may not work another.

So the borrowers/owners who find themselves in trouble really need to become sellers. They need to list their properties on the open market at an aggressive price and make it very clear that the sale is subject to (contingent upon) a short sale. A short sale can’t be negotiated without a ready, willing and able buyer with a bona fide offer on the table. In actuality, we end up negotiating the price, term and conditions with the lender instead of the seller. (I can certainly tell you that many local agents are going to find it difficult transitioning from the “goldilocks” mentality to negotiating short sales.) But again, for the larger picture of the Mammoth market, it is all about the volume of these distressed borrower/owners. So far, the numbers aren’t significant. And for the overall health of the market, that is a very good thing.

The other wildcard in the Mammoth and Mono County markets will be the sellers proving hardship. In order for the lenders to justify a short sale, the borrowers are going to have to document why they can no longer make the payments. That documentation can include things like bank statements, tax returns, etc. Now this goes back to the whole nature of buyers/owners/sellers of real estate here. Outside of a few handfuls of crooks, speculators, and fools, very few are going to be able to claim hardship. And even if the bank listens to their tale, they may not go along with it. The lenders may just prefer to foreclose.

For the months (and maybe years) ahead the whole interaction between the macro and micro markets and the buyers and sellers shall make great drama here in Mammoth. There is no doubt people still want to invest and spend time here. The foreclosure and short sale interplay will be an integral part in the drama, and the Internet based data for the public to view just puts a little more fuel to the fire. For those that pay attention and finish their homework, there will be pearls to be plucked.