Tag Archives: foreclosure

But what about the Shadow Inventory?

Tale as old as time, song as old as rhyme, Beauty and the Beast.  That’s a catchy tune.  And my little girls love the movie.   Honestly, I enjoy it too.  Lumiere, the suave French candelabra, cracks me up.  His big solo number, Be Our Guest, is very entertaining.

So imagine my frustration when I found out I couldn’t buy this film after my youngest daughter was born in 2004.  I looked everywhere.  Best Buy.  Walmart.  Amazon.  Barnes and Noble.  Nada.  Zilch.  Nothing.

Fortunately, we had a trip planned to Disneyland.  Problem solved.  I would go directly to the source – Main Street U.S.A., Disneyland, California.  The souvenir shop there had the movie selection prominently displayed behind the cash register.  I could see all of Disney’s big hits:  Aladdin, Cars, The Incredibles, Sleeping Beauty and Cinderella. 

But wait a minute.  Where was Beauty and the Beast?

It’s in the vault she said.  What?  The Disney cast member repeated it again – it’s in the vault.  So I said well go back there and get it!   No sir, you don’t understand.  Disney puts movies in the vault for extended periods of time.  You will have to wait until it’s re-released.  That was 2005.

Disney finally pulled Beauty and the Beast out of the vault – last October.  I gave it to my daughter for her 6th birthday.  I also paid $24.95, about twice what a normal kid movie would cost.

You see, the folks at Walt Disney are master marketers.  They don’t just make whimsical princess movies and cool adventure attractions like The Pirates of the Caribbean.  They’ve figured out how to create artificial demand.

Disney got a rational guy like me to pay double, and wait five years, for one of their products.  People who don’t even have children or grandchildren yet bought this movie out of fear it would get locked up in the vault for another decade.  Pretty smart.

That’s why I find it a little amusing when I’m in real estate circles and someone asks me about the shadow inventory.  Aren’t you worried about it?  If the banks unleash this shadow inventory on the retail market don’t you think prices will plunge even further?

The answer is no, I’m not worried about it because the banks will not unleash this shadow inventory (if there really is a shadow inventory) on the retail market.

First of all, let me clear up one myth – banks don’t foreclose on a  mass of houses, board them up and then wait to sell them off for months or years on end  (at least not in Arizona).  Many experts define this as shadow inventory.   I’m on the ground here in Phoenix and that does not happen.  Once a bank forecloses they promptly secure it and sell it as an REO. 

The home directly behind mine was foreclosed on last week and it was on the multiple listing service 6 days later.  The banks do this because there is too much liability in home ownership.  If they foreclose on a house and then let it sit they are responsible for property taxes, homeowner association dues, utilities and general maintenance. Even worse, bad things tend to happen in or around abandoned houses.  When bad things happen people sue – not good.

Banks are far more likely to postpone foreclosure proceedings on the current homeowner for months or years at a time.  I bid on house at the auction earlier this week.  Its sale had been postponed 38 times – 1148 days.  This property has been in foreclosure for more than three years.  I bid on two other houses scheduled to go to sale this week – their sales had been postponed 12 and 18 times.  And guess what?  All three of these sales were postponed again.

There is another camp of so-called experts who refer to these homes as our shadow inventory.  But how do we know the owners of these homes won’t eventually bring their loans current, get a loan modification or execute a short sale?  My guess is only a small percentage will actually get foreclosed on and end up on the market as an REO.

Here’s why I’m really not worried about shadow inventory (if there really is such a thing) – artificial demand.  The banks are actually copying the Disney marketing model.  They’re being fairly strategic about what they release and when.  This creates scarcity, which increases demand (albeit artificially).

There is nothing wrong with this.  I’m actually a proponent of it.  It’s good business and probably the smartest thing the banks have done since this crisis began.  It serves us all and makes me want to break out in song – Be Our Guest, Be Our Guest, Be Our Guest…

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Using AZ Bidder to Buy Homes at Trustee’s Sales: Videos 5-7

“The one thing I learned in jail is that money is not the prime asset in our lives.  Time is.”

–       Gordon Gekko, Wall Street:  Money Never Sleeps, 2010

A sequel is rarely as good as the original film.  Wall Street:  Money Never Sleeps probably won’t have the shelf life the original movie had.  Shia LaBeouf?  Please.  He’s no Charlie Sheen.

I hope you will find my sequel, Using AZ Bidder to Buy Homes at Trustee’s Sales:  Videos 5-7 as good as the original post, Using AZ Bidder to Buy Homes at Trustee’s Sales:  Videos 1-4 .  I guess my collection of videos are less like a sequel and more like a full season of Sopranos episodes – by themselves they don’t make much sense but when viewed together the message is clear.

One disclaimer before you watch this next set – I’m not paid by AZ Bidder to endorse their company.  I put these videos together on my own as a service to my readers.  Buying homes at trustee’s sales (courthouse steps) is very risky.  But armed with the right information you can minimize this risk, save time and capitalize on some incredible opportunities in the market.

*For the best resolution I recommend you view these videos in full screen mode with the 720p HD option selected at the bottom right corner of the video box.

Video 5 – Placing a Bid

Video 6 – Watching the Bid Cast

Video 7 – Final Results

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Using AZ Bidder to Buy Homes at Trustee’s Sales: Videos 1-4

“The most valuable commodity I know of is information.”

–       Gordon Gekko in Wall Street, 1987

I was 15 years old when the film Wall Street was released.  I had no interest in business back then.  I was too busy popping pimples and chasing girls – on my bike.  By the time I got around to caring about business, about 15 years later, the movie was off my radar.  That is, until Wall Street:  Money Never Sleeps came out in 2010.  I finally watched Wall Street and I wasn’t disappointed.

Last December, I was introduced to AZ Bidder by Tom Ruff of the Information Market.  This powerful web-based program allows me to bid on homes sold at trustee’s sales (auction) here in Maricopa County, Arizona, online.  With this service I can search for homes in foreclosure by city, zip code or file number.  It allows me to build in my own assumptions for holding costs and repairs.  I can order and view title and drive reports.  The market analysis information comes directly from the Arizona Regional Multiple Listing Service.  Once I finish my due diligence I can place my bid and watch the auction unfold live on my computer screen.

That’s a lot of stuff and I’m sure I left a few things out.  Whenever I log into the system I think of Gordon Gekko.  With all of this information at my fingertips I can make better buying decisions.  It makes we want to go around quoting him.  This line is one of my favorites –  “I don’t throw darts at a board. I bet on sure things.  Read Sun-tzu, The Art of War. Every battle is won before it is ever fought.”

I posted 4 videos here today.  On Monday I will post the other three.  Here’s the order:

  1. Property search
  2. Identification and research
  3. Market analysis
  4. Marking for bid (title and drive report)
  5. Placing the bid
  6. Watching the bidcast
  7. Final Results

*For the best resolution I recommend you view these videos in full screen mode with the 720p HD option selected at the bottom right corner of the video box.

Video 1 – Property Search

Video 2 – Identification and Research

Video 3 – Market Analysis

Video 4 – Marking for Bid


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Buying Investment Property in Arizona – Part II: Buying and Holding

“The investor of today does not profit from yesterday’s growth.”  – Warren Buffett

42,249 – Is that a big number?  I guess it depends.  Aren’t numbers supposed to be relative?  If you’re buying a house in Phoenix $42,249 doesn’t sound too bad.  But if you’re purchasing a Honda Civic it sounds a little pricey.  Approximately 42,249 new U.S. jobs were created in October.  That sounds promising.  But what if told you that on this day, December 16th, 2010, 42,249 homeowners are in foreclosure in Maricopa County, Arizona?

566 – Not a huge number right? $566 will buy you a fancy 40” high definition TV.  A pretty good deal considering I paid $2,100 for mine just three years ago.  However, if 566 people were ahead of you at the motor vehicle division wouldn’t you want to cry?  It just so happens that 566 homeowners were foreclosed on today in Maricopa County, Arizona.  To put this in perspective back in 2005 when I was following auction sales about 500-600 homes were sold a month at the courthouse steps.

So where are all of these homeowners going to go?  Where will they live?  Many of them will move back in with their parents or other siblings.  Some will move out of town.  A small number will rent an apartment.  1 out of 5 of them is an overextended investor so they don’t need a place to live.  What about the rest?  They will undoubtedly look for a single family home to rent, preferably in the same neighborhood they live in now.

Consider this hypothetical scenario for a moment – I’m an investor with $100,000 in a traditional IRA account earning me 7% interest annually.  Unhappy with such an average return I roll the $100,000 into a self-directed IRA account and use the money to purchase a single-family home in Peoria, Arizona.  I rent the house for $950 a month and net $775 after paying taxes, insurance and HOA fees.  That’s a 9.3% cash on cash return.  Not bad.

Okay, I know.  You didn’t come here looking for hypothetical scenarios.  You want real world examples.  Well, here you go – I recently represented an investor that purchased a single family home in Maricopa, Arizona.  It was a bank owned home we found on the multiple listing service.  He paid $82,000 and made $5,000 in repairs.  He put $24,000 down and financed the rest.  He rented the home immediately for $850 a month, netting $400 a month in cash flow.  The cash on cash return is 16.5%.

Here’s the best part.  He’s depreciating the home over 27.5 years earning another $2,500 annually in tax deductions.  This asset serves another purpose as well – an inflation hedge.

It’s a rather simple formula but it amazes me how many investors screw this up.  Renters want single-family detached homes – not condos, townhouses or attached dwellings.  Renters, especially those with families, want at least 3 bedrooms with a den, a two car garage and a finished backyard with grass.  Most importantly, they want to be close to schools, shopping and freeways.

Renters don’t want to commute so stay away from the far out areas like Buckeye, Queen Creek and Maricopa (even though my investor client bought in this area I’m still not a fan.)

So do you feel ready now?  Not so fast.  Do your homework.  Connect with real estate professionals and investors that have similar goals.  Ask questions – lots of them.  And remember what Warren Buffett once said, “A simple rule dictates my buying:  Be fearful when others are greedy, and be greedy when others are fearful.”

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The Foreclosure Story No One is Talking About

Fear and loathing Marty, fear and loathing…that’s what Vince Gonzalez, the then KPHO news reporter, used to say to me whenever we’d head out of the newsroom on our daily search for the latest victim of wrongdoing.

Vince and I once got into a heated on-camera exchange with the owner of a mortuary.  Evidentially, this guy was cremating people using sub-standard equipment and techniques.  Let’s just say the loved ones of the deceased and the Arizona Department of Environmental Quality were not too happy with this mortician.   So we did what all good local TV news teams do – we ambushed him at this place of business. He nearly punched out Vince and ripped the camera off my shoulder.  Good journalism?  No.  Good TV?  Yes.

Last I heard Vince was a correspondent for the CBS Evening News.  I left the news business in 2002 to embark on a more stable career in real estate.  These days whenever I read or hear a real-estate related news story I remember Vince’s words – fear and loathing.

The news media’s job is to attract the maximum amount of readers/viewers.  More readers/viewers equal more money.  It’s a simple formula that media executives have mastered – scare the crap out of your readers/viewers and they will read/watch your news more often.  That is why at least once a quarter you’ll hear a moronic news reporter saying that the bacteria in your kitchen sink could kill you.

For the past month Bank of America has dominated the headlines.  Their moratorium on foreclosures has created an industry-wide panic.  Retail home buyers and investors have put the brakes on because of all the uncertainty.  The mainstream media loves this stuff.  It’s good for their bottom line but lousy for us real estate investors.

Needless to say, it came as no surprise to me that THE foreclosure story no one is talking about, first announced on October 12th and updated October 20th, is a story no one is talking about.  Why?  The story puts an end to all of the fear, speculation and uncertainty circling “foreclosure-gate.”  The wide reporting of this story would get scared retail buyers and investors back into the real estate market – exactly what we need to continue the recovery.

The Associated Press headline read ‘Fidelity National, Bank of America in Foreclosure Deal’.  You don’t have to read the entire article.  Here’s the deal in one sentence – Fidelity National will continue to issue title insurance on all foreclosed homes and Bank of America will pick up the tab for any potential litigation that could come from cutting corners on paperwork or legal procedures. 

What does that mean if you are a retail buyer or investor?  It means you will get a title insurance policy on that foreclosed home you want to buy.  It means that if the former owner tries to sue, Bank of America will step in and cover all the costs.  You no longer have to worry about giving up that foreclosed home you just bought to the prior homeowner.  This deal removes the cloud of uncertainty that hovers over the huge supply of foreclosed homes. 

That’s good news for retail buyers and investors.  But like I said, news outlets prefer fear and loathing.  It’s like an economist once proclaimed, “If the media was there the day Jesus walked on water next day’s headline would have read JESUS CAN’T SWIM!”

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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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