Tag Archives: REO

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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When Buying an REO be Last, Not First

If you’re not first, you’re last!  That has to be one of the best movie lines of all time.  Yes, Talladega Nights is a movie about NASCAR and yes it’s a bit sophomoric.  But Ricky Bobby, the race car driver who patterns his life after these words is wise – in a redneck kind of way.

Nobody likes to come in last.  It goes against everything we are taught.  There is no trophy or medal for last place.

That is unless you’re buying a bank owned property.  It pays to be last.  In this video my partner, Manny Romero and I share three tips for getting the bank to accept a low offer.

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The Just Plane Smart Real Estate Investing System

The year was 1966.  A pilot named Rollin King and his attorney friend Herb Kelleher sat in a San Antonio bar talking business.   Rollin grabbed a cocktail napkin and drew a triangle.  He wrote Dallas, Houston and San Antonio in each corner then showed it to his friend.  The plan was simple.  Fly people between these three cities as safely and efficiently as possible.  Get them there on time.  How did Herb respond?  “Rollin, you’re crazy.”   Then Herb thought about it a moment more and said, “let’s do it!”  Southwest Airlines was born.

My business partner, Manny Romero, and I had a similar meeting at a seafood restaurant in Tempe last summer.  Our objective was to implement a simple, easy to duplicate real estate investing system.  Since our cocktail napkins had ice cold beers on them I had to sketch out our plan on a yellow note pad.

We weren’t exactly starting from scratch.  Fortunately, I had been working for a real estate investor in town as a project manager.  This investor was doing about 20 fix and flips a month.  Believe it or not he willingly shared this successful system with me.  Why?  Because he recognized it would create other opportunities for himself down the road (more on that in a minute.) 

Practically overnight Manny and I raised $180,000 by partnering with someone that had a self directed IRA.  My investor friend wholesaled us two houses and we flipped them both 45 days later for a net profit of $31,500. 

Does it make sense now why my investor friend shared his system with me?  He just gained a wholesale buyer.

So here Manny and I sat at King’s Fish House with a blank piece of paper and a calamari appetizer – proud of our recent success and motivated to do more.  Like Rollin King and Herb Kelleher we focused on controlling costs and being efficient.  The plan was to be the Southwest Airlines of real estate investing.  This is what we came up with:

  • Acquisition – We buy at trustee’s sales and REOs off the MLS.  NO short sales.
  • Price point, not location – We keep our acquisition price under $150,000.  Location doesn’t matter unless the home is in a war zone.
  • Type – newer homes with tile roofs, wood-frame construction, 3 bedroom – 2 bathroom – 2 car garage minimum.
  • Target buyers – we buy in areas with a high concentration of first and second time homebuyers.
  • Rehab – we buy homes that can be remodeled in 7 days or less.

This approach enables us to control costs.  When we buy a house at the courthouse steps or an REO off the MLS with this criteria there are very few surprises.   We paint every house the same color.  We use the same appliances, tile, carpet, light fixtures, blinds, and door hardware.  Our houses even smell the same.  We buy apple cinnamon air fresheners in bulk. 

Have you ever noticed Southwest Airlines jets look the same?  That’s because they’re all Boeing 737s.  It’s more cost effective to fly the same jet because they don’t have to train mechanics on different aircraft or warehouse a variety parts.  Like Southwest, our homes all look the same.  The buyer’s agents love to show them.

Since that brainstorming session last summer Manny and I have flipped 29 houses with a 48% cash on cash return to our investors.  Not bad.  Our just plane smart real estate investing system is working.  Our balance sheet make not look like Southwest Airlines’ but these days we are flying high.  Break out the cocktail napkins.

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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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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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The Good News, Bad News When Selling a Home that is NOT in Foreclosure

Wife: I have some good news and some bad news.

Husband: What’s the good news?

Wife: The good news is I found a picture that’s worth $500,000.

Husband: Wow!  That’s wonderful!  What’s the bad news?

Wife: The bad news is that the picture is of you and your secretary!

According to animalinfo.org, the hairy-eared dwarf lemur is one of the world’s rarest mammals and one of the smallest primates, weighing in at just 3 ounces.  In the real estate world one of rarest mammals you’ll find is the homeowner who is NOT in foreclosure and has equity.  If you are homeowner or investor and fall into this category, congratulations!  Maybe animalinfo.org will create a new section for you.

If you are a listing agent that represents a seller that is NOT in foreclosure and has equity that too is excellent news!  You don’t have to deal with the bank, which could easily add another 7-10 years to your life.   You are also spared the “Are we there yet? Are we there yet? Are we there yet” question you will undoubtedly get from the seller, the buyer and buyer’s agent.  Isn’t it bad enough you have to hear your kids ask this question all of the time?

But here is the best news of all:  The market is willing to pay more for your home because the market doesn’t have to deal with a bank.  As a matter of fact, the market desires your home so much that it may pay more than your asking price because move-in ready homes are so difficult to find right now.  Here’s a December breakdown, taken from Michael Orr’s Cromford Report, of price per square foot sales in the Phoenix metro area:

  • Normal:           $115.34
  • Short Sale:       $85.41
  • REO                 $71.10

“Normal” means not a short sale, not bank owned, but a good old fashioned traditional sale where the owner is NOT in foreclosure or upside down.  Now doesn’t it feel good to be considered normal?  If that doesn’t warm you right up then the fact that, on average, your home will sell for about 20% more than a bank owned home or short sale should cheer you right up.  Or should it?

Brace yourself for some bad news.  Let’s say you find that buyer who is willing to pay your asking price, or perhaps a little more.  You execute the contract and open escrow.  Then, the appraisal comes back low.  I mean really low.  I’m talking 20% below your contract price.  How did this happen?  Because the appraiser used bank owned and short sale comps to determine the value of your move-in ready, don’t have to deal with a bank home that the market is willing to pay much more to get.

So is there a happy ending to this story?  It depends.  If you get the right appraiser the deal will get done.  If not?  You either lower your price to match the appraisal, get the buyer to come in with cash to make up the difference between the appraisal and contract price, or put the home back on the market.

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