Monthly Archives: August 2010

Follow the Numbers, Not the News

It started out innocently enough.  An email popped up in my inbox from a real estate investor I’m connected with on LinkedIn.  This investor, who shall remain nameless, was responding to an article titled ‘Mortgage Picture Brightens, for Now’ I sent out via Twitter.  He brought another article to my attention that stated 1 in 10 with a mortgage faces foreclosure.  This discussion quickly evolved.  Here are a few excerpts: 

Me:  I’m in Phoenix and these reports don’t accurately depict what is going on in our market. Real estate is a local business. I’ve flipped 5 homes here since the expiration of the tax credit – all of them sat on the market less than a week. Demand here remains strong and in many areas there is less than a two month supply of homes. While median prices may dip another 5-10% that doesn’t bother seasoned investors because they will adjust their buy price accordingly.

Investor:  The current inventory in the Phoenix market has never been higher with for sale signs literally everywhere. I do a significant amount of business in Phoenix. I have a client in Phoenix who buys over 20 properties per month at sheriff sale at dramatically reduced prices. The listing time on residential properties continues to longer than we have ever seen. Obviously, no two investors see the market the same way. That’s what makes apples and oranges.

Me:  Actually inventory levels have been higher. At this moment there are 43,566 homes for sale on the MLS. Two years ago there were 53,511. Days on market today – 172. Days on market two years ago – 383. I agree with you that things have slowed down here but to say that inventory levels and listing times “have never been higher” and are “longer than we have ever seen” is not accurate. Check out Mike Orr’s Cromford Report.  I buy about 4-5 houses a month at the courthouse steps. I have a few that aren’t selling in dead areas, but in other parts of town inventory is moving.

Clearly this investor and I have different views of the Phoenix housing market.  He has based his investing decisions on what someone else has told him (news articles, clients) and on the amount of for sale signs he sees when he visits Phoenix.  I choose to buy when the actual numbers make sense.

Since this exchange took place last week I’ve put two more homes into escrow, one of which I didn’t even have to list on the MLS and it’s all because I follow the numbers, not the news.  What Warren Buffett once said about stock investing can also be applied to real estate, “be fearful when others are greedy and greedy when others are fearful.”

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How About a Homebuyer Mulligan?

The story is part urban legend, part sports folklore.  David Mulligan was driving to the golf course one crisp, early morning when he nearly crashed his car after crossing a rough bridge.  His nerves were understandably frayed by the time he reached the clubhouse.  As he gripped his driver at the first tee box the events from earlier that morning flashed through his mind and he shanked his golf shot into the woods. 

David’s friends, a very forgiving bunch, took pity and gave him another shot without a penalty.  The rest is sports history.  The “do-over” shot, more popularly known now as the ‘Mulligan’, became a part of the golf glossary forever.  As a matter of fact, the term ‘Mulligan’ has transcended golf.  You can now hear it used in other sports and life situations whenever someone needs a do-over.

The median home price in Phoenix dropped 2.26% from June to July and sales are down 26% from this time last year, according to Tom Ruff of the Information Market. Much has been written lately by economists, analysts, pundits, politicians, columnists and bloggers about what can be done to turn this housing market around.  It appears as though the homebuyer tax credit has done more harm than good.  It artificially boosted prices and now that it is gone sales are plummeting faster than my golf handicap after a few cold ones at the turn (for you non-golfers that means my game falls apart after I have a few beers between the 9th and 10th holes.)

Last week, the Treasury department held a Future of Housing Finance conference to discuss this issue.  Bill Gross, who runs PIMCO, the world’s largest bond fund, was there and advocated that all government backed loans over 5.75% (Fannie Mae, Freddie Mac, FHA) be readjusted to today’s interest rate.  This plan, according to Gross, would provide much needed stimulus and boost home values by 5-10%.  Sounds like a good idea right?  Unless, of course, you are a bond investor.  They argue that’s robbing Peter to pay Paul.

No one invited me to this conference.  I recently moved so it may be because they didn’t have my new address.  But, I’m not that hard to find so I can only conclude that they could care less about what I think.  Nevertheless, I’m going to submit my opinion here and hope this gets passed on to the powers that be.

I know a doctor, attorney, physical therapist, social worker, church pastor and engineer who are all upside down on their mortgages and are going through short sales.  These are responsible, educated, hard-working people that, besides the mortgage on their primary residences, are current with all other payments.  They have good incomes, cash reserves and assets.  Their only mistake was buying a home at the absolute worst time in American history.  These people deserve a do-over, a homebuyer Mulligan.

Banks should loosen up their lending criteria and lend money to people who:

  1. Have just one blemish on their credit report (i.e. a short sale or foreclosure).
  2. Have an income greater than 3 times their mortgage payment.
  3. Have at least 20% to put down.

The banks wouldn’t even have to offer rock bottom interest rates.  I’m fairly certain they could get at least 3-4% above prime for a loan product like this.  It would allow hundreds of thousands of Americans to become homeowners again and increase demand at every price point.  There would be dancing in the streets and I would finally get invited to the big Treasury department meetings.

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Your Home is Not an Asset; it’s a Place to Live

I was standing at the checkout line in Target on Sunday with my 7 year-old daughter, Allyson.  She desperately wanted me to buy the spearmint Icebreaker breath mints.  Now I’ll admit…these things are good.  But, at $1.99 they are a want, not a need (unless of course I just ate Mexican food.)  I decided that this was an opportune teaching moment.  I explained to my daughter that Icebreaker breath mints are a liability, not an asset.  They cost a lot of money and within a few hours she will have nothing to show for her investment.  My comments didn’t stop her from wanting the breath mints but they did make her think.

I can’t really take credit for this clever parable.  It just so happens that I’m reading Robert Kiyosaki’s ‘Rich Kid, Smart Kid’ book.  Among the many lessons he writes about is the importance of understanding financial statements.  Poor people buy liabilities.  Rich people buy assets.  If we can instill this fundamental concept in our children can you imagine how much better off they will be financially as grown-ups?

As adults we frequently mistake liabilities for assets.  Your home is a perfect example.  How much are you paying to live there?  There’s the mortgage, utilities, HOA dues, repairs, taxes and insurance.  Yes, your home will eventually go up in value and if you’ve been paying down principal you may actually have equity.  However, when you sell and move away then chances are the next house you buy will have gone up in value just as much, thus negating the increase in value and reduction of principal in your old home. 

The same can be true in a real estate market moving downward.  My parents sold their house at the peak and purchased a new one closer to me and my family.  Within a year the bottom dropped out and they watched values in their neighborhood drop by more than 30%.  I did some quick research on their old neighborhood and found values there had dropped by more than 40%.  I explained to them that in the end they were no worse off – the market in both neighborhoods was almost identical.

Once you understand this it’s easy to see that your home is not an asset or investment; it’s just a place to live.  When you hear someone say your home is an asset they are not lying to you.  As Robert Kiyosaki points out in his book, your home is an asset – the bank’s asset. 

The bottom line is ANYTHING that costs you money is a liability.  I recommend getting in the habit of asking yourself these questions every time you reach for your wallet:

  1. Is this a want or a need?
  2. Will this cost me money or make me money?
  3. Is this an asset or liability?

More assets and fewer liabilities – that is how wealth is created.  It’s like Robert Kiyosaki’s Rich Dad once said, “One of the main reasons people work so hard is that they never learned how to have their money work hard.  So they work hard all their lives, and their money takes it easy.”

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Filed under Business Development, Finance, Homeownership

Seller Financing Strategy an Oldie but Goodie

Last week I tuned into the oldies station here in Phoenix.  Huey Lewis and the News’ 1985 hit, The Power of Love, was playing.  You may recall that this song was the title track from the movie Back to the Future.  It’s memorable for me because the main character was named Marty McFly (I was often called McFly in high school after this movie became popular.)  The other reason I enjoyed this flick was the time machine they used – a 1981 DeLorean.   It was a very cool car made of stainless steel with winged doors.

After my stroll down memory road was complete I came to the stunning realization that a song I love and identify with was playing on an oldies station!  I’m only 38.  How could that be?  Oldies stations play the Beatles, Elvis, and the Beach Boys.  This got me wondering –  when does a song officially become an oldie?  My local station believes 25 years makes a song old enough to play on their airwaves, however I’m told there is no official industry standard.

Last month, I closed the sale of one of our properties using a seller financing exit strategy.  The buyer put 15K down and our spread is 29K.  The term of the loan is three years and the ROI to our group will be 30%.  After I got the first interest payment of $877 in the mail a few days ago it occurred to me that this exit strategy is a real estate oldie but goodie.  The last home I sold with seller financing was in 2001.

With loose lending criteria and stated income loans the norm who needed seller financing from 2001-2006?  Rent-to-own, lease-option, lease-purchase and seller carry back transactions virtually disappeared like 80’s rock bands.  If you could fog a mirror the bank would lend you money during this time. 

With the collapse of the real estate market in 2007 millions of homeowners with stellar credit histories began walking away from their underwater mortgages.  And while industry experts and moralists continue to cry foul, seasoned real estate entrepreneurs smell opportunity.  These former homeowners, many with steady income and cash reserves, got burned by a bad real estate market and deserve another chance.  The banks can’t lend them money to buy a house again because of draconian government and self-imposed regulations.  But private real estate investors can and will.

Since I started offering a handful of our properties for sale with seller financing my phone started ringing off the hook.  In less than two months I have built a list with more than 70 prospective buyers.  Most of them don’t have two nickels to rub together but I’m working with several that have solid incomes and significant cash to put down.

So I’m thinking of a few requests my local oldies station can play.  For the musical equivalent of the real estate market from 2001-2006 how about ‘Easy’ by the Commodores?  From 2007 to the present I dedicate ‘These Boots are Made for Walkin’ by Nancy Sinatra.  And the future…I can’t think of a more appropriate band or song then REO Speedwagon’s ‘Roll with the Changes’.

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