In case you missed my radio appearance last week on the Mind Your Own Business radio show, I thought I would share the link to the entire segment. We spend 10 minutes discussing foreclosures in the real estate market and the responsibility of lenders, property owners, and property management through the foreclosure process.
Listen to Howard Goldman’s radio segment on foreclosure
Read the entire MYOB interview on foreclosures
MYOB: First of all, tell us about Goldman & Pease:
GOLDMAN: Goldman & Pease is a Law Firm and we are located here in Needham. We have five lawyers that work with us and my Partner is Cameron Pease. Together we practice in business law for closely held businesses, real estate, and business and real estate litigation. The one area that we are very active with now is real estate and foreclosure work. We see that from many angles. And I think for the entrepreneur, there may be some opportunities; but proceed with caution. There are a lot of problems with foreclosures.
MYOB: There’s a lot of real estate out there.
GOLDMAN: There’s a lot of real estate in inventory. Banks have been foreclosing, as we all read, and the foreclosure rate continues to be extremely high. What’s happening is that lenders are foreclosing, taking the properties back, and asking themselves how they can liquidate the property. That’s where the opportunities come.
MYOB: What do they do with the properties, Howard?
GOLDMAN: They give them to real estate brokers to list but the reality is that the brokers don’t really spend time on each property, because there is such an excess of inventory. So they cherry-pick the properties with the most value, in the better locations.
MYOB: I noticed last week when I went on to Zillo.com and found a couple properties on the Cape that they were listed with Brokers. And you can see they are definitely priced to move. Would you recommend buying real estate at foreclosure?
GOLDMAN: It’s very speculative to go to a foreclosure sale and buy. That’s really for the person who is sophisticated and who has a good bank line of credit. But, buying from a real estate broker who holds the property after a foreclosure sale is a great way to go because you have a chance, once there is a broker, to inspect the property, to see what is broken, to see whether the roof is in terrible repair, and to see whether there are tenants in the property. Properties on the Cape are great but there are also some investments available in the outlying areas of Boston, such as Dorchester and Jamaica Plain. And these opportunities abound if you get involved with condominiums. Condominiums are good because it breaks down the investment amount. You can buy or you can rent the condo unit out and collect the rental income. The prices are affordable. But, there are lots of issues with condominium associations. For example, you want to make sure there is an adequate capital reserve account for future problems with major elements such as heating systems and repaving of the driveway.
MYOB: You don’t want the debt of the whole building on your shoulders?
GOLDMAN: Exactly. You have proceed to purchase a condo unit at foreclosure with open eyes, look at the books and records of the condo associations, look at the receivables, look at the payables, and look at their budgets. You have a chance to do that when you are working with a broker. Fannie Mae has guidelines that condos must put 10% of their reserves aside for rainy days, such as a damaged roof or a broken heating system.
MYOB: Are there a lot of condos in foreclosure?
GOLDMAN: There are a ton of condos in foreclosure. A recent case in Massachusetts, from Judge Long in the Land Court, really disrupted the foreclosure process. I don’t want to get too technical on this show but the bottom line is that the Robo-signing lenders, who mass signed documents and indicated that these loans had been properly transferred, did not accurately reflect the loan transfers on record title. Judge Long from the Land Court said “No, the title is defective, you must re-do the foreclosure sale.” The effect of that decision, which was taken up to the state’s highest court, was such that thousands of foreclosure sales have to be redone or that those lenders who have taken the properties back at foreclosure have to negotiate with the original owners to obtain a curative deed.
MYOB: So if you’re a savvy investor you’re saying there are some great opportunities available if you know what you’re doing?
GOLDMAN: Exactly. And, property managers are great for this. We are working with clients who are representing these large lenders who have a local presence and buy large portfolios. Yet, there could be a six unit condominium in Dorchester for sale and when you take those properties back there could be tenants and maintenance issues. So if you have a good team, good maintenance people, resources, and the banks are willing to lend money, foreclosure auctions present a good purchase opportunity. But, Real Estate is labor intensive. It is not for the person who wants to just collect the rent check every month. There’s a lot of work and risk that goes with real estate ownership and management.
MYOB: So how does a condo work? Let’s say a condo was foreclosed on, does the Bank have to pay the condo fees or do those fees not get paid?
GOLDMAN: That’s a great question. If a unit owner stops paying the condo fees in Massachusetts we have something called a “super lien.” This is a tremendous provision that was added by our legislature to protect condos. Therefore, six months of condo fees jump in front of the mortgage, along with the costs of collection and legal fees to collect these outstanding condo fees. So the superlien legislation has really empowered the condo associations to conduct their own foreclosure sales and to compete with the banks to see who has the higher priority lien. Collecting condo fees is what we do and the collections allow the associations to get back on their feet, and gives them financial security and the opportunity to get on solid footing.
MYOB: How does it work, if say there are 20 condo units in a building and somebody buys one for $300,000.00, and the guy next store is foreclosed on? Does the condo sold for cheap money end up lowering the value of everyone else’s property?
GOLDMAN: It does. Foreclosures bring the market values down and often these properties aren’t maintained well and the foreclosure deeds are recorded at the public registries, thereby generating a floor. It definitely brings the values down. So that’s where the opportunity lies if you have confidence that an association has the ability to become financially secure. If a condo is selling for 300,000, you can probably get it at half that amount in the foreclosure process.
MYOB: What about basic maintenance for these condos? A lot of towns have cracked down on this haven’t they?
GOLDMAN: Yes, that’s true. In Boston, in particular, the city counsel passed an ordinance requiring lenders that are participating in foreclosures to register properties with the Inspectional Service Department. The ISD focuses on maintenance failures; such as if the property is run down or the water is shut off in the winter time. The City of Boston now has powers against the foreclosing parties. And this power has been very effective because there have been a number of areas in Boston that have been plighted because of abandoned property. The city’s legislation gives a leg up to associations because they can call the ISD to get this government agency to inspect and cite the lender. You need to get people who are going to be proactive. Again, buying a foreclosed property requires being someone who is going to be active and kick the tires to collect those fees, and to fight with the lenders to get what is fair.
MYOB: Do you see an increase or decrease in the foreclosures?
GOLDMAN: Because of this SJC decision called “Ibanez” roughly 8 months ago, lenders were very nervous about foreclosing because the paperwork wasn’t in order. But, they sorted that through and we are seeing more and more foreclosures. The rate is back to a historic high. Millions of properties are being foreclosed throughout the country and I have read statistics on condominium associations that about 5% of all condo units are vacant due to foreclosures
MYOB: It sounds like there are a lot of regulatory rules which come with real estate ownership. Is this something that has been received positively by the real estate owners?
GOLDMAN: Well, we get complaints from unit owners that the trustees aren’t responding to a leaking roof, the neighbor next door is too loud, second hand smoke, and various other matters. There are a lot of issues in condo living. People have to get along in close quarters. A lot of it is politics, and getting elected to the board of a condo association is a voluntary position. You have to ask yourself what am I doing here? But, you need volunteers and you need people to step forward as trustees to enforce and make rules. We had a case recently regarding a 150 unit development in Arlington regarding second hand smoke. We all know coming into contact with second hand smoke is dangerous. The question is what duty does the condo association have to protect? Questions such as does the condo have to put in sealants? Do condos have to outlaw smoking? There are a lot of issues in dealing with people in condos and we encourage people to mediate problems. We are active litigators, and while that is expensive, you will get a decision at some point. Mediation is a separate process and we do some mediations ourselves, as well. We have used mediation in some of our more complex cases.
MYOB: Howard, when you buy a condo is there a Homestead Act in place like when you buy a house?
GOLDMAN: Rick, you must be psychic! The Massachusetts legislature just passed a new law about 6 months ago to help the homeowner to protect equity in his or her home. There is now an automatic homestead provision of $125,000.00 of equity in your home, whereas before the passage of the new legislation you had to do a homestead filing at the registry of deeds. And if you do this filing, you can protect up to $500,000.00 of equity in your home. The point is that if you lose your job, income is down, you can’t pay your lender, or have a lot of credit card debt obviously people will consider bankruptcy. Yet, if you have some equity in your home the recently passed Homestead Declaration Act in Massachusetts will help save your house, assuming you can make current mortgage payments to the lender. Through the bankruptcy process the debtor will give his creditors the boot and still retain his house.
MYOB: I see. So are the rules different for condos then they are residential houses or are they the same?
GOLDMAN: Well, we pursue the collection of condo fees through bankruptcy because condo fees are not excluded, exempt, or discharged through the bankruptcy process. Again, this helps the association collect these unpaid fees even through bankruptcy.
MYOB: So Howard, if someone wanted to discuss this real estate topic how would they get in touch with you?
GOLDMAN: They should call me at (781) 292-1080 or visit us on our website at www.goldmanpease.com. We’d love to talk to you. We get ideas from clients and we often have the ability to refer clients to each other through the different services that we provide.
MYOB: Howard, thank you very much for coming in. It was great having you.
GOLDMAN: Gentlemen, it was great to be here again. You’re both looking well and the show appears to be a big success for a good reason. You have a great program. Thanks!