Sounds pretty grim for investors in St. Louis: their governor is making vague references to cutting nearly 86 million dollars in real estate-related tax credits. The opposition is heating up, blogging about how these cuts could destroy development in the city’s historic and low-income districts. The governor has responded by pointing out that these tax credits are not producing the revenue that they were designed to create.

At first, cutting these credits sounds to me like a negative as far as real estate investors are concerned. After all, about 1.8 million buyers made use of the federal home buyer’s tax credit expiring in April.  Don’t we want to keep that type of incentive for our investing and sales use? After all, anything right now that makes that house easier to move sounds pretty good in my book. However, when I did a little more looking, turns out a lot of that 86 million goes to historic renovations, movie shoots and agricultural properties supporting qualified livestock.

While historic properties, movie-ready properties and agricultural benefits are all good things and probably good for the city of St. Louis, it does seem possible that these types of credits are maybe diverting or “fuzzing” the focus when it comes to creating real revenue. While I imagine there are a lot of people who are making a good living by working these credits to their advantage, I wonder if it might not be more effective to remove the credits and find a different place to make that money work – maybe in the form of tax cuts for people who are creating revenue in the area.

Now, I’m not from St. Louis, so I’m not saying that I’m an expert on these matters. And if you are, I’d love to hear a local perspective. Because with such highly specific requirements for these credits, I wonder just how many people will actually be affected. It seems to me like a lot of these highly specialized real estate programs could be far more beneficial if they extended their sphere to include more of the people who are pulling the market out of the tank rather than excluding the majority of investors from the program.

Your thoughts are welcomed in the comments area below.  Thank you for reading http://realestate.BryanEllis.com!

A few experts said it was going to happen, and all sorts of people preferred to just pretend it wouldn’t or couldn’t while commercial property owners desperately tried to modify, extend and amend their amassed debts with lower and lower property values to work with. However, that time has come: Commercial real estate owners are walking away.

The Wall Street Journal reported March 10, 2010, that the latest commercial property owner to take this plunge is Vornado Realty Trust (VNO), a 13 billion real estate investment trust. The group warned last week that it would “walk away” from 235 million dollars in loans.

The Journal predicts that the trend will escalate in the coming months as commercial mortgages undergo the same painful correction that the housing market has been going through. However, it may ultimately be even “easier” to step back when it comes to commercial loans, according to the expert from Dow Jones Newswires, because commercial loans are non-recourse in many cases and there is no direct obligation or claim on the owner’s assets.

Add to this the fact that there is a decreasing level of stigma attached to this kind of default. For a while, investors boycotted companies that took this route out, but at this point, that trend appears to be ineffective and fading. After all, when these loans mature and can no longer be kept afloat by Federal Reserve engineering, what else can they do? Refi’s don’t work anymore thanks to newer, lower valuations on properties, and companies are simply unable to make up the shortfalls thanks to higher delinquency rates and lower property values and rents.

As usual, this story has two sides. This “walking away” is not a good trend for our society to start accepting as “without stigma.” Every time it happens, it gets a little easier to do again in many cases, and that is not good. However, as is always the case when real estate starts heading for rock bottom, there are a lot of opportunities out there in commercial real estate right now – if you can grab it and hold on.

It’s one of the cardinal rules of short sale transactions: the homeowner cannot profit from the transaction. (Aside, of course, from the debt relief and the fact that they no longer are in a home that they cannot afford). Now, I’ve heard plenty of ways around this, such as buying items inside the home from the homeowner, but part of the deal is that they do not make money on the transaction that allows a third party to buy the property from the bank for less than is owed on that property.

Now, however, the government is rewriting the rules – at least, when it comes to the government’s short sale transactions. Basically, a new HAFA supplement starting next month will offer banks 1,000 dollars for each short sale they conduct while the homeowners themselves will receive 1,500 dollars as a reward for doing the short sale instead of going through the foreclosure process.

(To date, I’ve seen nothing that indicates I’ll be able to offer this kind of incentive directly to the home owner should I find it necessary )

Now, I understand that this money could be a lifesaver for many of these folks. It could get them moved, get food on the table or tide them over while they find a new place to live. Honestly, my main complaint about this is that investors are not allowed to do it directly, because it sure would make the initial process of a short sale easier. But let’s think about the bank’s end of the deal:

Of course, it’s nice that the bank will receive an additional 1,000 dollars to defray their loss, but let’s think back to other incentive programs in recent years. What about loan modifications? There were incentives for those, and lenders and loan-mod brokers made innumerable modifications that everyone knew were worthless, just to get the incentives. Then, when the loan mods fell through, the brokers who had arranged them were still sitting pretty because they had raked in tens or hundreds of thousands by doing these ill-advised deals in bulk. Sound like an echo of a certain mortgage-related issue we’ve been dealing with? Well, I think it does, and I think this new incentive program has all the hallmarks of more “good” government intentions all set to go awry.

If you have any experience with this program or more information that would be useful for the real estate investing community to know about, please use the comments box below - your thoughts are welcomed and encouraged!

New statistics indicate that over 20 percent of Detroit is standing empty. One in 5 homes is abandoned or foreclosed on or both. And that is just one of many statistics that are so far over the top about the once-prosperous metropolis that they almost seem surreal. So it may come as no real surprise that the next step in the saga for Detroit is careful, contemplative, strategic destruction.

Turns out, Detroit officials have actually been considering reverting large swaths of the city back to farmland since the early 1990’s. Fruit trees and vegetable farms would replace empty neighborhoods, and the newly minimized metropolitan area would actually benefit, argue many urban development experts, because the people would be living in more concentrated patterns that would allow them to make better, more effective use of public services like transportation. Sound unthinkable? It certainly did to most Detroit natives until now.

“Things that were unthinkable and now becoming thinkable,” said James W. Hughes, dean of the School of Planning and Public Policy at Rutgers University, in an interview with a member of the associated press.

However, even for people who think the idea of downsizing Detroit is a good idea, the methods behind the process are frightening and unclear. This raises a lot of issues for real estate investors, who own or are at least considering investing in many of the properties in the area that are available for pennies on the dollar or, in some cases, fractions of pennies on the dollar. What happens to the owners? Do they receive a payment for the loss of their homes? And if you are invested in the area, do you also, or do you fall victim to a sweeping act of eminent domain by the local, state or federal government? And what does it mean for other areas that are currently in serious economic distress? Can the members of the city vote the investors out?

Other, smaller cities have made downsizing and shrinking work for them. Youngstown, Ohio is a good example. But while most of the news from that area is good when it comes to the results and ramifications of deliberate downsizing, you don’t hear much from the owners of the properties – and they have to be out there somewhere – that were demolished.

I want to know what happens – and what the precedents that will be set if this goes through will mean for investors everywhere.

These are strange times in the mortgage business.

Bankers have long assumed that a mortgage borrower would do virtually anything necessary to stay in their home and avoid the stigma of foreclosure, including opting to withhold payment on other bills in order to stay current on their mortgage payments.  And for decades, this assumption has been correct.

Not any more.

Two big trends have emerged recently, both of which were completely unexpected by mortgage lenders:

• “Strategic Defaults”:  Faced with declining equity, home owners - many of whom are financially able to make their payments - are walking away from the properties to “start over” in a different home that has lower financial commitments and/or more potential for price appreciation
• “Credit Card Prioritization”:  TransUnion says that there’s been a 58%+ jump in the number of consumers who are current on their credit card payments but delinquent on their home mortgages.  Consumers appear to be prioritizing ready access to cash over [negative] home equity

It totally makes sense to me why a person would prioritize their credit card payments over their mortgage when the value of their home is likely far “below water”.  After all, you have to eat, and a home can’t buy food.

The question of “strategic default” is stickier.  My gut-level reaction is to condemn those who are financially able yet still choose to walk away from their obligations.  But is that reasonable?  I’m not so sure - if there are agreed-upon penalties for default (such as foreclosure and the damage it causes to one’s credit rating), and that person consciously choose to accept those penalties, then has that person violated any ethical or moral requirement?

I think a good argument could be made in either direction.  What do you think?  Your comments are welcomed, and encouraged, below - and thank you for reading http://realestate.BryanEllis.com!