Monthly Archives: July 2010

Riding the REO Roller Coaster

Earlier this month Swedish scientists published a design for what could be the world’s smoothest roller coaster.  Evidently roller coaster technology has really evolved since the first kind with a loop was designed in 1846.  This 13 foot coaster entered the loop with so much force that it would break the riders’ collarbones.

So ponder this question for a moment…if the Swedes can design such an elegant and comfortable roller coaster ride (a highly scientific, but admittedly fun task) then why can’t banks and asset managers come up with a more efficient system to liquidate their growing inventory of homes?  Yes, there have been some minor improvements.  But, we are three years into this slide and they still haven’t completely mastered what should be a very simple process.

On June 26th I attended an REDC auction.  REDC auctions off excess REO properties that aren’t selling on the MLS.  Many of them aren’t even on the MLS because they have an issue (i.e. they’re occupied or are uninhabitable.) I won the bid on a home in Goodyear, Arizona.  It was an all cash sale so presumably the closing would occur very quickly.  Well, here we are 33 days later and I just got the executed purchase contract from the asset manager at American Home Mortgage Servicing.  What is amusing is that the transaction coordinator at REDC asked if I wanted a “quick closing.”  Can you imagine how long it would take to get this deal done if I said no?

About this same time I wrote an offer on a Fannie Mae owned home in Chandler, AZ.  It had been on the market for more than 60 days and needed a major rehab.  We ultimately had our offer accepted after some back and forth negotiating and were on our way to opening escrow when I got the addendum with this language:

GRANTEE HEREIN SHALL BE PROHIBITED FROM CONVEYING CAPTIONED PROPERTY FOR A SALES PRICE OF GREATER THAN $264,000.00 FOR A PERIOD OF 3 MONTHS FROM THE DATE OF THIS DEED.

Oh no.  The dreaded deed restriction!  Fannie Mae apparently doesn’t like it when investors like me fix up their houses and sell them for more than they can (in good condition this home would retail for $285,000.)  The problem here is that this home will not sell to anyone BUT a real estate investor because it’s a clunker.  I just checked today and the house is still on the market…93 days and counting.

I’m by no means suggesting that you should give up buying REOs.  There are some great values to be had.  Just be prepared for a wild ride that won’t break your collarbone but may make you sick.

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Know how to Talk Politics in a Crowded Room

“In a time of drastic change it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists.” – Eric Hoffer

 They say never talk politics (or religion) in a crowded room.  These days there are rooms offline and online.  Take Facebook, for example.  That is one crowded room – over 500 million users as of last week.  Contrary to what “they” say, if you’re going to be a successful real estate professional you need to understand politics and you better be able to talk politics in public.

Why?  Because what is going on in your state and in D.C. right now will have a major impact on your business – today, tomorrow and 10 years from now.  The people you deal with in your community will have insight, opinions and predictions that may help you build a better business model.  It is in your best interest to know the issues and be able to talk about them intelligently without offending anyone.

In my state not a day goes by without a story in our major newspaper about SB1070 (today’s headline was Arizona’s U.S Attorney Part of Fight vs. SB1070.)  This is a law passed by our legislature that makes it a state crime to be in this country illegally.  Now whether you agree with this law or not is irrelevant.  If you or a customer are purchasing real estate in Arizona how the passage of this law impacts the housing market is the issue.

Frankly, I’m not nearly as concerned about SB1070 as I am about jobs.   Unemployment figures here mirror the national average of 9.6%.  I’m also watching the market to see how the expiration of the tax credit will affect pricing.  The Associated Press reported today that housing prices are likely to go lower.  This, they claim, is because of the expiration of the tax credit, unemployment and tighter lending restrictions.  And guess who has influence over these things? The President, our congressmen and women and the state governors, top the list.

Will the tax credit be brought back?  When will unemployment numbers start to go down?  Are banks ever going to start lending again?  Is Tiger Woods really going to get divorced?  For answers and updates to three out of the four of these questions I recommend reading your local newspaper first, and then branch out to the national publications.  Read them every day. 

And if you’re looking for dirt on Tiger, or any other celebrity, just visit the magazine stand at your local grocery store.  By the way, it doesn’t hurt to stay up on your celebrity gossip.  It will help you break the ice when socializing in a crowded room.

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Effective Exit Strategies in Today’s Housing Market: Take the Good with the Bad

A man walking down the street bumps into an old friend.  His friend asks “how have you been?”  The man replies, “Good, I recently got married!”  His friend says that is good!  The man answers “actually, that’s bad, she’s very ugly.”  His friend agrees that this is bad.  But then the man says, “No, it’s good because she’s rich.”  His friend quickly shouts “that’s really good!”  The man responds “No, that’s bad; she’s very stingy with her money.”  His friend, confused at this point says “well I guess that is bad.”  The man disagrees with his friend again and says “it’s not really bad because she bought us a huge new house.”  His friend excitedly replies, “That’s very good!”  The man says “no, that’s bad too… it just burned down.”  Well, his friend says “that is very bad news.”  The man happily replies, “No, that’s good news.  She was in it!”

 The Law of Relativity, explained by Bob Proctor in the Science of Getting Rich seminar goes like this… if something is just a little bad, then only a little good will come from it.  If something is considered really bad then expect a lot of good to come from it.  The gulf oil spill comes to mind.  This is a horrible tragedy and there is plenty of blame to go around, starting with BP and the federal government for their lax oversight of the project.  But as the region begins to heal there will be a tremendous amount of positive changes that will take place.  Oil companies will find safer, more efficient ways to drill for oil and the government will increase its support for the development of cleaner energy sources.

Today’s housing market is no different.  If you’re a real estate investor it’s important to find the good in the bad.  In yesterday’s Arizona Republic newspaper column, Falling Prices Prompt Concern over Home Values, it was reported that price per square foot was down 4% last month and that experts predict a similar decrease this month.  So given this information what is the most effective exit strategy in today’s housing market?  Well, since there are only four I’ll rank them in order, from best to worst:

  1. Buy and hold – even though values have dropped here in the Phoenix market since the expiration of the tax credit it is still a great time to purchase a long-term investment property.  There are a lot of renters in the market looking for clean homes in desirable locations.  Because prices are so low, cash flow is easy to find and the ROI is much higher than anything you could get in the stock market.
  2. Seller financing – if you have the capital to offer financing to buyers who have dinged up credit from a recent short sale or foreclosure then this is an excellent exit strategy in today’s housing market.  It’s like a hybrid buy and hold/fix and flip strategy.  You get a chunk of money upfront from the buyer (down payment), cash flow (mortgage payment) and a huge payoff at the end of the term when the owner refinances in 1-3 years.  We’re implementing this model now and the ROI is about the same as our fix and flip business.  The only downside is our investors have their capital tied up for a longer period of time.
  3. Wholesaling – this is becoming more difficult in the Phoenix market because of the competition (if you are wholesaling properties to fix and flip investors.)  While retail values are trending downward here, prices at the courthouse steps and for REOs seem to be trending slightly upward, killing the margins we were seeing 6-8 months ago.  I’m not sure why this is but it could be because long-term investors are willing to pay more for properties, content with just 15-20% in equity in a property.
  4. Fix and Flipping – the most risky exit strategy of them all, my company was doing this exclusively up until the tax credit expired.  Now, pending sales are down here 17% and nationwide new mortgage applications are down more than 30%.  Due to the tax credit expiring, tighter lending restrictions and unemployment there are fewer qualified buyers in the market which makes turning a profit with this strategy difficult.  However, we are seeing good margins on homes priced at or above 400K.

My advice to you is keep up to date with what is going in your real estate market.  Talk to real estate agents that work with investors.  Talk to title company representatives.  Attend local real estate investment club meetings.  Keep your finger on the pulse of the market you live in and remember there is never a wrong time to buy real estate, only a wrong way.

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Home is Where Your Family, and Stuff Are

The song sat at number one on the country music charts for four weeks.  Today, it remains on the charts at number six, a record this year for singles of this genre.  The lyrics, which begin, “I know they say you can’t go home again, I just had to come back one last time, Ma’am I know you don’t know me from Adam, but these handprints on the front steps are mine,” will bring a tear to your eye.  The House That Built Me, performed by Miranda Lambert and written by Tom Douglas and Allen Shamblin will conjure up the warmest memories in the hardest of souls. 

Last spring I had to move my daughters out of the only home they ever knew because we were broke.  We had gone through our savings and even cleaned out our retirement accounts in a vain attempt to stay in our house.  After the short sale was approved reality finally set in; our only affordable living option was a small rental home six miles to the east in a new school district.  It would be my oldest daughter’s third school in three years.

As we unpacked the boxes and got settled in I came to the realization that home is not a place, it is a state of mind.  Home is where your family and stuff are.  The memories are portable.  My wife, daughters and I quickly adjusted because the people inside the four walls, the pictures, the blankets, toys, furniture, books, dishes, and treadmill (I should have left that at the old house) were all the same.

We miss certain things about our old house.  With temperatures peaking at 112 degrees this past week the pool tops the list.  The park within walking distance is another.  But, these are features.  Our new neighborhood has features too that my girls love, like the tunnel we ride our bikes underneath on the way to the nearby park.

If you are clinging to a home you can’t afford (the payment is too high, you are upside down, or both) because you have an emotional attachment, it is time to let go.  Your child may have handprints on the front steps and their favorite dog buried in the yard.  Maybe they learned to walk in the living room or ride a bike in the driveway.  The good news is you can bring these memories with you, along with the Time magazine collection and treadmill that weighs 900 lbs.

Most importantly, you will no longer be burdened financially and can avoid becoming the subject of the next big country hit I plan to write called The House that Broke Me.

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