Johnson Reality Check

A butterfly flaps its wings in St. Louis and causes a tsunami in Japan. This complex chain reaction is better known as the Butterfly Effect and is the best way to describe the state of the mortgage industry right now.

Putting this effect into more tangible scenarios is a sub prime borrower received a 100% interest only loan with an initial adjustable rate of 6% which would adjust after 3 years (commonly referred to as a 3-1 ARM).

Three years later, the ARM adjusts by 3% and now the payment is significantly higher and it’s a hardship for the borrower to make their payment. The home forecloses and the mortgagee (lender) is stuck with a bad loan, a home that’s difficult to sell and may have actually depreciated in value.

So how does this create a tsunami in Japan? It’s all in the way our global economy works. When the mortgagor (borrower) purchases a home, the lender sells the mortgage to a financing group who purchases several different loans and packages them to sell to investors on the bond market.

Each package is then sectioned off according to risk to the investors in what are called tranches. These tranches are then sold n a group on the bond market with varying levels of risk and payouts; the better the borrower, the lower the payout. The worse the borrower, the higher the payout but also a higher risk you won’t get paid due to foreclosure.

While the more “A paper” (read: low risk and conservative payout) tranches were bought by pension funds, insurance companies, etc., the higher risk and higher payout tranches were purchased on the bond market by hedge funds and foreign cash.

When a large number of homes start going under foreclosure in any given American town, the investors, both domestically and internationally start looking at their portfolios and see the money they thought was going to come in- isn’t. The value goes down and the first people to get hit are the entities who purchased the higher risk tranches. Then, the cash they would have received from the profit of those specific bonds isn’t realized and they don’t have any money or are lacking the confidence to invest additional money back into the market to keep the cycle going.

This, although there are several other reasons, is in essence, why many mortgage companies are going under. No one will lend them money to issue loans and if they aren’t issuing loans, they aren’t paying their bills. Let’s say if they do have a buyer, heir company may have issued too many bad loans and there are no investors to purchase that loan due to their past performance history. Either way- they go under.

So what does this mean for you? One lesson to take from this is to NEVER, NEVER, NEVER “flap your butterfly wings” or over extend yourself on your mortgage or put yourself in a position where you have two mortgages which you can’t afford. In real state, you are going to have people who push you to go for more than you can realistically purchase without significant changes o your lifestyle. That person can be your Realtor, your mortgage broker or an overzealous partner. Don’t let them do that to you and if you feel pressure, get out of that relationship.

Also, we will feel this pinch for awhile but we WILL rebound. We will be OK- Especially in the St. Louis and Metro East area. We never had a bubble and therefore aren’t feeling it like Florida, Vegas or California. All markets have ups and downs and right now, the market is just correcting itself. We had a greedy period which will be followed by a period of fear. Soon the good old greed will be back and the state we are in now will be a distant memory.

Hang in there St. Louis and remember, empowering yourself with the knowledge of why and how real estate really works will make the likeliness of you being taken advantage of virtually diminish. From the global market to how local real estate works, Johnson Realty will help clarify real estate openly and honestly and to the best of our ability.

*** Special thanks to Michelle Steele, outside sales and member of the Executive Club for M &T Mortgage and Chad Schroeder of Citigroup in Chicago for contributing their vast knowledge of the industry to this blog en

August 10, 2007: ST. LOUIS, Mo.— Johnson Realty recently hit its 100th closing—only 17 months after the sale of its first home. The company is finding success with its hybrid structure, offering full service representation without the high commissions.

Mike and Cheryl Johnson started Johnson Realty in October 2005, realizing the power of the Internet and changes in the real estate market. The company has listed nearly 300 homes and Johnson Realty has sold 100 homes valuing more than $22 million. In 2006, Johnson Realty closed on 35 homes. In 2007, the firm is on pace to close on more than 100. This growth shows there is a demand for an alternative to traditional agents, Cheryl Johnson says.

“We’ve listed more than 150 homes this year, showing this concept is really catching on with customers who are looking to save money while also getting full service representation,” Cheryl Johnson says. “With the ever-changing market, consumers are looking for alternatives to traditional real estate agents and commissions now more than ever.”

Johnson Realty offers a $500 MLS listing plus 1/3 percent commission at closing. Traditional agents often charge 6 percent, although this is, by law, negotiable. In addition, Johnson Realty employs aggressive online and offline marketing strategies. It is one of the few St. Louis companies currently using up-and-coming technology like Zillow.com. Unlike many other companies, Johnson Realty will show clients’ homes to interested buyers. Finally, Johnson Realty provides expert negotiation and representation, which Cheryl Johnson says are missing from many flat fee companies.

“We have saved more than $740,000 for our customers—averaging more than 7,000 per homeowner,” says Mike Johnson. “We tell our clients that their equity is real money—and they should keep it to save or put toward their new home.” In addition to financial savings, Johnson Realty also sells faster than the average agent. The firm averages about 71 days on market, while the national average is 146 days, according to the latest news from the National Association of Realtors. The St. Louis average is about 134 days.

Johnson Realty of St. Louis was founded in 2005 to bring St. Louis an alternative to traditional and discount real estate companies. Johnson Realty is owned by Cheryl and Mike Johnson, and currently has more than $22 million in home sales. Johnson combines aggressive marketing, full-service expert representation and real financial savings to bring a better way to St. Louis sellers and buyers. For more information, visit www.johnsonstl.com or call 314-726-3174

###

Our new site is up and we are so excited about all of the new features and information it contains. Make sure to check it out at www.johnsonstl.com or www.johnsonmetroeast.com. 

This was an article written by my attorneys, Frascona, Joiner, Goodman and Greenstein, PC - http://www.frascona.com/ in Colorado where I am a broker.  This is article is so comprehensive and well written I have decided to run it uncut.

Many of you will be approached to commit load fraud and not even know it.  It can be as simple as asking a Seller to raise his price in the MLS so you can roll in closing costs or as blatant as a Buyer asking for an “under-the-table” rebate or kickbacks disguised as “repair costs” at close.

Please be aware that loan fraud is VERY serious and can result in several legal and financial problems for you, your family, anyone you involve in the transaction.  Consequences can be as difficult as fines and/ or as dire as jail time.  Please read and absorb this article and call me if you have any questions at 314-565-5720 or email me at cheryl@johnsonrealtyofstlouis.com.

How to Commit More Loan Fraud  http://www.frascona.com/resource/jag206loanfraud.htm

by Jonathan A. Goodman, Esq.

Question:  There is a home in my farm area which just closed at a price 30% more than it is worth. This conclusion is based not just on my knowledge of the house and the market, but also on the listing history. The property initially went on the market six months ago. Over the six months, the price was reduced twice and the reported sale is for almost 30% more than the last list price. The property supposedly sold for more than the original listing price. What is going on here?

Response:  In 2002, this column published an article entitled “How to Commit Loan Fraud” which is available for viewing at the following link: “How to Commit Loan Fraud” - http://www.frascona.com/resource/jag902fraud.htm, That article educated readers about how to avoid inadvertently committing a certain type of mortgage fraud-what this article calls “valuation loan fraud.” The frequency of valuation loan fraud has increased since 2002. This article intends to help real estate professionals and sellers from inadvertently becoming caught up in such a scheme.

Generally, valuation loan fraud occurs when the contract presented to the entity funding the mortgage exaggerates the true sales price. For example, the contract shown to the mortgage funder states a nominal sales price of $400,000. However, under the table, $50,000 flows back to the buyer or the fraud promoter and the seller only nets $350,000 from the sale. (In this article, “net” means net of transaction costs, not net of debt. A seller may receive zero dollars from a sale because $350,000 pays off the seller’s mortgage. While the seller may not have ever touched the $350,000, the seller benefits from the satisfaction of his mortgage and in the terminology of this article the seller netted $350,000. One tip to avoid valuation loan fraud is to focus on how much the seller receives net of transaction costs.) The mortgage investor who holds the $360,000 loan thinks it has a 90% loan to value loan ratio. Actually, the loan is for more than 100% of the property’s value.

Getting a real estate deal closed is a complex process often involving two real estate brokers, a buyer, a seller, a mortgage broker, a mortgage investor, a closer, an appraiser and others. All responsible real estate professionals know that it is illegal for a seller to kick funds back to a buyer under the table. The beneficiaries of the valuation loan fraud need the cooperation of real estate professionals, most of whom receive no substantial financial benefit from the fraud, to close the deal. So the fraud promoters: (a) devise circuitous paths for the money to get back to the buyer or the fraud promoter; and/or (b) use gimmicks to create the appearance that the kick back is disclosed to the mortgage investor.

The prior article mentioned the example where the mortgage broker exaggerates the buyer’s closing costs. The seller pays for those closing costs on the settlement statements and then outside of the closing, the mortgage broker rebates all or some part of the excess to the buyer. Perhaps the listing broker, the selling broker or both of them rebate the money back to the buyer.

Sometimes the path back to the buyer isn’t so indirect. The pressure to “get the deal closed” can create a blind spot in otherwise responsible real estate professionals inducing them to solve a roof issue (for example) by have the seller cut a $10,000 check to the buyer at closing. Often the $10,000 rebate is memorialized through an Inspection Notice. While an adjustment to a deal through an Inspection Notice is an amendment to a contract, it feels like something which is less important to disclose to the buyer’s lender. Often the duty to provide contract amendments to the lender gets sloughed.

One of the truisms about valuation mortgage fraud is that if the seller concession is shown on the HUD-1 settlement statements, then there is no fraud. But this truism is only true if the entry on the HUD-1 settlement statement is not misleading. Among the gimmicks used to create the illusion of a disclosed kick back is a debit from seller suggesting a charitable contribution. Sometimes the entry suggests that the seller is paying for a service or that the seller is paying off debt. If money is being used to satisfy real debt of the seller, then the seller is benefiting from the funds. But in these schemes, the seller isn’t benefiting from the distribution. The debit to the seller is a disguise to route money from the seller back to the buyer or fraud promoter. The payment is not part of the consideration received by the seller and the stated contract price exaggerates the seller’s true net.

The written promises from the “charitable organization” or other recipient of the funds that the funds won’t be distributed to the buyer are meaningless. Even if the funds aren’t routed back to the buyer, some of the buyers are dupes who essentially rent their credit worthiness and social security number to the fraud promoter. In these schemes, the fraud promoter, not the buyer, pockets the bulk of the kick back.

Since 2002, suspected incidences of valuation loan fraud have grown. What appears to be mere cleverness, rather than fraud, is tempting for a seller who is frustrated with a slow real estate market. Sellers are often content to go along as the seller nets what the seller expected to net. It is especially tempting for a seller on the verge of foreclosure. The cleverness is enticing to all the professionals in the deal, even though they don’t directly benefit from it, because the professionals can move a property and produce a revenue generating event. No one likes to be the stick in the mud who prevents a deal from closing. All these things contribute to the blind spots of otherwise responsible professionals.

To decrease the likelihood that you will get caught up in the momentum of these schemes, take heed of some of the common badges of valuation loan fraud:
o Your instincts tell you something is fishy and rather than addressing the specifics of your concern, the proponents tell you “we do this all the time.”
o Someone asks the listing broker to raise the price of the property in the multiple listing service.
o The property has been on the market a while and sells for significantly more than the last listing price.
o The promoters from the buyer’s side insist on using a specific title company to close the deal.
o In response to your concerns, someone tells you “Well, the property appraised.”
o In response to one of your questions a mortgage broker tells you: “It’s fine with me, just don’t put it in writing.”
o In response to your need to amend the deal, in writing, the mortgage broker tells you: “If you need to put it into writing, do it on an Inspection Notice. However you do it, don’t send it to me.”
o An offer is submitted to a listing broker together with a Notice to Correct, before the buyer has done an inspection, calling for the seller to pay money to the buyer or someone else (including someone who will supposedly repair the property).
o A deal contemplates the payment of commissions to real estate and/or mortgage brokers which are substantially above market rates.
o The buyer is completing the replacement transaction in a section 1031 exchange and the cost of the replacement property isn’t high enough to use all of the buyer’s cash from the sale of first property. If the buyer seeks to boost up the stated price of the property and get something back under the table, the parties are seeking to commit tax fraud and valuation loan fraud.
The above list isn’t all inclusive, nor is it determinative. A deal with some of the above features may still not be loan fraud. Each situation needs to be evaluated on its own. Lenders can choose to make high loan to value loans, but there must be a record that lender is aware of true deal between the seller and the buyer. To avoid valuation loan fraud, the true deal must be reflected in the contract (with all its amendments) that is submitted to the buyer’s lender, and all deductions from the seller’s proceeds must be accurately reflected on the HUD-1. 

A story from last week’s Post Dispatch - http://www.stltoday.com/stltoday/business/stories.nsf/developmenteconomy/story/ 13E6BA1AE1B2AD7A862572FA00837F96?OpenDocument - was titled “Technology Changes the Way Homes are Bought and Sold.” 

It sure does!  No one in St. Louis understands this better than Johnson Realty.  Combining the power of the Internet with basic marketing tools like the MLS and yard signs, we have saved Johnson clients more than $400,000.  Plus, using technology like this blog you’re reading right now helps us educate clients.

Feel free to ask questions anytime or make a suggestion for our next blog post.  After all, it’s about arming you with tools to help understand St. Louis real estate, so you can sell and buy getting the best possible value.

We have all been hearing a lot of buzz about eminent domain over the last 18 months.  You may or may not be familiar with this term so let me define it in the best way I can.

Eminent domain is the right of the government (municipal, county, state or federal) to seize private property for public use in exchange for fair and/or just compensation.  Fair compensation is generally determined by using appraisers to find the highest price the property would sell for it were in the hands of a willing and able seller in an arms length transaction.  Just compensation is best described as money to compensate for loss of goodwill. (The business’ assets or the ability to provide the same services.)  This value can be determined using the diminishing of revenue, reputation, fixtures installed or any other extenuating circumstances as determined by the court.

If the owner is unwilling to give up the rights to the property, the government can then sue to obtain the property using the power of eminent domain.  The government has to prove the land is being used for the “public’s safety, health, interest, or convenience” (Quoted from www.expertlaw.com) and the property is blighted and must condemn the property.  The trouble with determining a property to be blighted is there are serious varying degrees of blight.

When most people think of blighted property they imagine a dilapidated building in a slum whose owners have stopped maintaining the property.  You might think of vagrants inhabiting the property and the windows boarded up.   In this case, it may benefit the public for the government to mark the property is blighted and take the property and revitalize it to promote safety, quality of life or commerce.

What if it were a two story office building in a prestigious area of town surrounded by skyscrapers.  Is that property blighted because its land is so valuable?  According to the United States Supreme Court decision Kelo versus City of New London- it can be.  Meaning all the government would have to prove would be that the public’s interest is best served by a higher tax base.

It was a tight court decision 5 to 4 in favor of the government.  The affirmative stated that promoting economic development is a long standing function of government.  The negative wrote that no private property would be safe and the most likely victims of eminent domain would be the elderly, minorities and the poor.  To quote the negative, it would give a “disproportionate influence and power in the political process, including large corporations and development firms.” (Quote from the Washington Post.) - http://www.washingtonpost.com/wp-dyn/content/article/2005/06/23/AR2005062300783_pf.html

The savior in this decision for the eminent domain abused is the court wrote the individual states could set their own rules for eminent domain.  According to the St. Louis Post Dispatch’s June 13 article by William C. Lhotka, Margaret Gillerman and Tim O’Neil http://www.stltoday.com/stltoday/news/stories.nsf/stlouiscitycounty/story/F6D72AD01564F244862572F90014DEB7?OpenDocument the State of Missouri has narrowed the federal requirements to “developers who seek to use condemnation to take land from other private owners will have to give proof that the property is not only old or of obsolete design but that it impacts health and safety as well.”

This is great news and levels the playing field from what had seemed to be the slippery slope of property owner rights.

I used many different resources in my research of this very relevant subject.  They are listed as links throughout the blog.   If you have any questions or your own eminent domain story, please call me at my office to discuss or email me at cheryl@johnsonrealtyofstlouis.com.
 

Check out June’s Alive Magazine to see Johnson Realty’s home featured in the Market Watch section on page 74.  Just in case you missed it, check it out below or see it here - http://www.johnsonrealty.org/files/AliveMarketWatch.jpg

This home was a passion for my clients, Mike and Kristy Larue.  They worked with a local architect who did everything possible to preserve the integrity of the neighborhood.  We were happy Alive Magazine was responsive to this home in Tower Grove and are appreciative of all the people who have worked so hard to bring Tower Grove back to life.

If you would like to see more information about this home click here - http://homes.realtor.com/search/listingdetail.aspx?poe=realtor&lid=1076089211 - and then call me at 314-726-3174 or email me at cheryl@johnsonrealtyofstlouis.com.

I am helping two wonderful clients purchase a home in the Clayton area. We are having a little trouble finding the perfect home for them and I need some help from my loyal readers! If you are interested in selling your home or know someone who is selling their home or might entertain selling their home in Clayton or Ladue, please call me at 314-726-3174 or email me confidentially at cheryl@johnsonrealtyofstlouis.com.

About My Clients: My clients were educated at Washington University and will be joining their alma mater as staff members. For entertainment, they enjoy the Central West End and the restaurants in and around the Clayton area. They have a small child so Clayton or Ladue schools are a must. This couple is not interested in sending their child to private school.

Their Ideal:

•My client’s ideal home would have a minimum of four bedrooms (real bedrooms) and at least two bathrooms.

•They really like the following neighborhoods:

-Aberdeen/Arundel/ Ellenwood area

-Davis Place Subdivision

-Polo Drive -Claverach Park

•They would like to be away from any commercial area or busy intersection. A nice fenced yard is a plus.

•They do not like unnecessary additions. One thing we have found in some homes is there is addition on it that doesn’t make sense. For example, a sunroom that is added on out of nowhere. It doesn’t fit the décor or style of the rest of the home but seems to be there just to beef up the square footage.

•An open and updated kitchen is a plus Price: They would like to stay between the 600 and 800 price range. When quoting your price, please make sure to add in the commission for Johnson Realty, which would be 2.7%. (Which is a huge savings since you don’t have to list it!)

Timing: A September close would be ideal.

I will be going door to door this weekend personally looking for the perfect home for them. Please let me know if you can help us. It would really mean a lot to this wonderful family who is looking to plant permanent roots in St. Louis. Thank you so much for your help and don’t forget to call me at 314-726-3174 or email me at cheryl@johnsonrealtyofstlouis.com.

— Next Page »