In an effort to help answer the many questions we get on a daily basis regarding trust deed investment in California with The Norris Group, we’ve put together a short 7-part video explaining the basics of trust deed investing, the players, the process, who qualifies, our unique borrowers, and how trust deed investors play an important role in the recovery of California real estate.
MDA Dataquick’s monthly report shows that 22,328 homes were sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange County last month. AFIRE conducted a survey in which 51 percent of foreign investors claimed the US provides the best opportunity for capital appreciation. According to the NAHB, builder confidence decreased from last month. Fitch Ratings sees many positive signals for housing and other related industries which may soon lead to a strong recovery.
DQNews - “Southland home sales, median price up over last year” (1-19-10)
“A total of 22,328 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 16.4 percent from November’s 19,181, and up 12.1 percent from 19,926 in December 2008, according to MDA DataQuick of San Diego.”
Housing Wire – “New Home Builds Strengthen Though Sector Remains Weak: Fitch” (1-19-10)
“There are more positive signals and developments for housing and related industries than at any time in the past three years, Fitch Ratings analysts wrote in a quarterly outlook report, but despite having fewer competitors, public builders will continue to be challenged and need to maintain tight controls over costs and expenses in 2010.”
Housing Wire – “Washington Federal Earnings Drop 61% in Q409, Driven by Large REO Expenses” (1-19-10)
“Washington Federal, the parent company of Washington Federal Savings, reported $7.9m in earnings for Q409 or $0.07 per share. Earnings dropped 61% from $20.1m or $0.23 per share in Q408, due to higher credit costs including the provision for loan losses and real estate owned (REO) expenses. Those expenses reached $82.5m in Q409, a 128% jump from $46.2m in Q408.”
Housing Wire – “Foreign Investors Revive Optimism in US Real Estate” (1-19-10)
“AFIRE conducted the survey in Q409 among its nearly 200 members. Respondents own more than $842bn of global real estate, including $304bn in the US. In the survey, 51% of respondents said the US provides the best opportunity for capital appreciation, an increase from 37% in 2008, 26% in 2007 and 23% in 2006. It’s the highest positive perception for US real estate since the same number in 2003.”
Housing Wire – “Citi Posts $7.6bn Q4 Loss After TARP Repayment” (1-19-10)
“Citigroup repaid $6.2bn of Troubled Asset Relief Program (TARP) funds during Q409, exiting its loss-sharing agreement with the federal government. Excluding the TARP payment, Citigroup would have lost $1.4bn, or $0.06 per share, in Q409.”
Housing Wire – “Google Teams with Tech Firms for Online Mortgage Search Tool” (1-19-10)
“Search giant Google (GOOG: 587.62 +1.31%) is partnering with mortgage technology companies for the launch of a new feature that allows consumers to search for mortgage products and rates through its site.”
Bloomberg - “Treasury Delay on Home-Equity Debt Imperils Housing” (1-19-10)
“The U.S. Treasury Department has failed to win agreements to get struggling borrowers’ home- equity debt reworked, among the biggest roadblocks to reducing foreclosures that may reach a record 3 million this year. None of the lenders holding a combined $1.05 trillion of the debt has signed contracts requiring participation in the second-mortgage modification plan announced eight months ago. The largest banks remain ‘committed’ to joining, Meg Reilly, a department spokeswoman, said in an e-mail.”
Bloomberg - “Homebuilder Confidence in U.S. Unexpectedly Decreases” (1-19-10)
“The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 15 from 16 the prior month, the Washington-based group said today. Readings below 50 mean most respondents view conditions as poor. The report showed traffic slowed to a 10-month low, indicating the government’s extension and expansion of its first-time buyer program has, so far, not drawn in new demand after propelling total sales to an almost three-year high in November. A projected record 3 million foreclosures this year may also pressure prices, making it more difficult for homebuilders to turn a profit.”
One year ago, MDA Dataquick reported that statewide home sales from 2008 to 2009 increased by 25.7 percent. Home sales in Southern California increased by 50.5 percent from 2007 to 2009. The Commerce Department reported that home starts had decreased to an annual rate of 605,000.
Statistics from 10 primary U.S. cities show that home prices declined by 1 percent. ABA expects economic growth to increase at 3.1 percent through 2010. The U.S. Treasury Department reports that 66,465 permanent modifications were made in December. Chris Thornberg forecasts that home prices will dip again in 2011.
Housing Wire – “JP Morgan Says Sell Mortgage Bonds as Fed Snaps Up Record MBS” (1-15-10)
“The spread of mortgage-backed securities (MBS) bonds yields to Treasuries is tight and likely to remain tight in the near-term, but swap spreads are currently 5-10 bps too narrow to greatly entice private investors, according to a JP Morgan Securities conference call on MBS and asset-backed securities (ABS).While private investors largely hold on the buy side, the government continues to buy up agency MBS as part of its $1.25trn agency MBS-purchase program.”
Housing Wire – “House List Prices Down 1% in December: Altos” (1-15-10)
“Altos Research’s listing price index declined 1% in December and 1.4% during Q409, but for the year, the 10-city composite price index was up 5.2%, the company said, adding it projects asking prices to continue to decline during the winter 2010 months.”
Housing Wire – “ABA Expects Economic Recovery Will Fuel Job Growth in 2010″ (1-15-10)
“High unemployment and constrained consumer spending will keep the speed of recovery in check, but ABA economists indicated real gross domestic product (GDP) will grow at an annualized rate of 3.1% throughout 2010. It’s half the historic rate of GDP growth seen after previous deep recessions, leaving the unemployment rate fairly high – but below 10% – at year-end.”
Housing Wire – “HAMP Servicers Permanently Modify More Than 66,000 Mortgages” (1-15-10)
“Servicers participating in the Home Affordable Modification Program (HAMP) completed 66,465 permanent modifications through December, according to a report from the US Treasury Department. It’s more than double the 31,382 permanent modifications reported through the month of November. More than 40,000 more active modifications need only the borrowers signature to become permanent, totaling 112,521 permanent modifications approved by the servicers.”
Housing Wire – “JP Morgan Posts Q4 Profit Despite Mortgage Losses” (1-15-10)
“JP Morgan said it made approximately 600,000 mortgage modification offers to homeowners and approved 120,000 modifications during 2009.”
Housing Wire – “Treasury Raises Cap on HAMP to $35.5bn” (1-15-10)
“The US Treasury Department raised the total amount of potential capped incentive payments for the Home Affordable Modification Program (HAMP) from $27.7bn to $35.5bn, according to the latest Troubled Asset Relief Program (TARP) report.”
Bloomberg - “U.S. REITs Poised to Boost Dividends After Raising $33 Billion” (1-15-10)
“A dozen U.S. real estate investment trusts, part of an industry that raised $33 billion last year, likely will increase their next quarterly dividends. Public Storage, Annaly Capital Management Inc., and Inland Real Estate Corp. are among those that may boost payouts, data compiled by Bloomberg show. Vornado Realty Trust said this week it would resume paying its dividend fully in cash after a year of issuing it partially in stock. ”
Inman - “RPR courting MLSs” (1-15-10)
“By promising not to compete with MLSs — and allowing them an opportunity to make a quick exit from RPR if they aren’t satisfied with the results — company executives say they are out to sign up half the nation’s roughly 900 MLSs by the end of the year.”
Orange County Register – “Home sales, prices seen falling in 2011″ (1-15-10)
“Orange County-based homebuilders were told Thursday that the recession may be over, but the future for the economy and the housing industry remains uncertain. As if to underscore that point, economist Chris Thornberg released a forecast projecting that after modest gains this year, home sales and prices will dip again in 2011 because of rising foreclosures and interest rates.”
One year ago, the NAR announced that sales on homes priced above $750,000 had decreased by nearly 50 percent. The rate for 30-year fixed mortgages dropped below 5 percent. The CBIA claimed that new home sales in California were “glacially slow”. Statistics from the Federal Reserve showed that jobless claims were rising.
 FBI Mortgage Fraud The FBIPaul Bertrand,
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This week Bruce is joined by Paul Bertrand. Paul is a supervisor for the Los Angeles Mortgage Fraud Division in the FBI.
When Bruce thinks of fraud in real estate, he thinks of a borrower lying on a loan application, but there is much more to loan fraud than that. Paul’s division likes to focus on larger, organized groups who can devise a complex scheme. Many of these schemes have the purpose of defrauding banks. Paul prioritizes his actions based on the number of transactions and the dollar amount involved in the scheme. He tries to identify who the most damaging schemers are based on the volume and size of a schemer’s transactions.
Mortgage fraud has evolved over the last 3 years. Traditional straw buyer schemes with artificial appraisals have decreased, but since then, other kinds of fraud have been developed. Every time one kind of fraud decreases, another kind develops.
A couple years ago, banks stopped lending money to people trying to buy homes. After this happened, Paul began to see more builder bailout and home equity lines of credit schemes. As equity decreased, foreclosure rescue schemes began to increase. These foreclosure rescues involved the filings of fictitious bankruptcies. As that went away, Paul began to see an increase in loan modification schemes. Now, Paul is beginning to see more short sale schemes, especially short sale schemes involving real estate agents.
California has the highest volume of fraud. However, there are other parts in the country like Las Vegas with similar problems.
From 2005 to 2007, misstatements of income, for the purpose of qualifying for a home loan, were highly prevalent. Sometimes people would not qualify for a full doc loan, so they would be told to attempt to qualify for a stated income loan. These people would often be told what level of income they would need for a loan, so the borrowers would put that required amount on their loan application. Bruce thinks this sort of fraud involves a team effort. If Paul found a particular loan broker who had dozens of false income statements, then Paul might try to figure out if the broker was involved in the fraud.
Bruce asks Paul how he gets his fraud information in a timely basis, and whether or not people who commit fraud think that they are inventing something new. Paul gets lots of complaints from banks who are victims of fraud. The FBI offers classes on real estate and fraud. Paul does not know if people who are involved in fraud often think that they are doing something new.
If a person is committing fraud for ownership, they are probably committing fraud because they want to live in the house and intend to pay for it, but they are not capable of normally qualifying for a loan. The chances of default on these schemes are significantly less than in an organized scheme in which the schemers intend to defraud the bank. Paul focuses mostly on the fraud for profit schemers, rather than the fraud for housing schemers.
The National Mortgage Fraud Team is a unit at the FBI headquarters. This unit is in the financial crimes section. That unit is made up of a unit chief, who oversees the mortgage fraud program for the whole country, and several specialized supervisors who are responsible for different sections of the country. These people provide policy guidance to the country. They also collect information from Paul’s division, so that they can comprehend the way fraud is occurring in his area.
In short sale fraud, a listing agent will often convince his clients to negotiate a short sale with the bank without telling them that there are legitimate buyers who will pay for their home at market value. In this kind of fraud, the agent will approach a lender and negotiate a short sale for an investor who is related to the agent. In a short period of time, this property will be flipped to a legitimate buyer who will pay at the market value. The profit from this deal will then be split between the people involved in the fraud.
The FBI has no problem with a short sale in which the buyer pays for a home and is then able to sell it for a profit. Just as long as the deal did not involve lying, and if all aspects of the sale were fully disclosed, then the transaction will probably not be labeled as fraudulent.
A typical short sale candidate, in Riverside, would be someone who owes more on their house than their house is worth.
Bruce gives Paul an example of a short sale:
A $400,000 dollar loan on a $250,000 house. The agent negotiates for the lender to list it at $190,000. A disconnected buyer buys it for the listing price, and then sells it for a profit. The lender does not know that the intent was to resell the home for a profit.
Bruce asks if this example presents a problem. Paul says it might. In this case, there are two banks involved. One of these banks owes $400,000, and the other bank would the one that the investor is using to purchase the home. The second bank would usually be giving a cash offer. Paul says that if everything in the deal is fully disclosed, then there would be no problem. If the first bank was told that it was being purchased as an owner occupant, then that would present a problem. Investors sometimes worry that these kinds of investor deals could be interpreted as fraud, because these deals are frequently being performed. Investors sometimes make offers, but they may have no idea what the lender was told by the listing agent. People will know if they are making deals that are being hidden. The real problem being addressed here is whether or not the lender is being ripped off.
There was a time when sellers would receive tax bills for the difference between what they owed and what the short sale went through at, but this is not currently happening.
A flipping scheme consists of tricking a bank into funding a loan for the purchasing of a property. Usually this involves a straw buyer and an over appraisal. These homes are then sold at the highly appraised value. This causes banks to be defrauded out of the difference in the mortgage money paid to the seller.
When an investor buys a home that needs work, the appraisal on the fixed home will be higher than the unfixed home, but this should not be detected as fraud.
When you have lots of foreclosures, people create foreclosure rescue schemes. Foreclosure rescue schemes usually involve a lie to the person who’s home is already in distress in order to get money from them. These homes will ultimately foreclose either way. Today, people will promise a loan modification or a low fixed rate in exchange for a fee. As soon as the fee is paid, the person committing fraud will do nothing.
In California, it is no longer legal to ask for a fee in advance of a deal. California made advanced fees illegal last summer.
It is hard to get people in foreclosure any help, because there is no advance fee. A legitimate company could be trying to do good modification work, but if a lender doesn’t cooperate, then that company will not get paid. Unfortunately, rules are made to protect consumers, but they probably do not get a lot of help at this time. On the other hand, lenders are more open to offering help than perhaps any other time in history.
To get a loan modification, you must present a lender with some sort of hardship. Today, people are beginning to “dumb down” their assets and income in order to get a modification. People are now making false claims of identity theft as well. They will try to claim that they never purchased x home, and that they were used as a straw buyer, so that they can get out of their home.
Bruce has discovered that people are making plans to swap short sales, and then deed their homes back to each other at another time. This kind of plan can be labeled as fraud.
Bruce asks if people have been trying to burn their own homes in order to get out of loans. Paul does not believe that this sort of fraud has been increasing.
Bruce asks what kind of process occurs when a person is claimed to be guilty of fraud. The first stage in convicting someone of fraud is the complaint. After the complaint has been filed, an interview of people who are knowledgeable of the case is performed. Business records are then gathered and surveyed. After the FBI thinks they have enough information to make an accusation of fraud, the perpetrator is presented to a grand jury, or an affidavit is written to get a criminal complaint. This criminal complaint will then allow the FBI to get an arrest warrant. However, by the time someone is arrested by the FBI, they have already been charged with a crime. Most people know that they are being investigated for mortgage fraud before the FBI gets to the point of arrest. Paul believes that 2010 will be a busy year for mortgage fraud.
If you want to find out more about the FBI and mortgage fraud, the FBI’s website is www.fbi.gov
The national unemployment rate remained at 10 percent during December. LPS reports that 1 in every 7.5 fell into foreclosure or delinquency during November. According to Fitch Ratings, 2009 commercial delinquency rates ended at 4.71%.
Bloomberg - “Shrinking U.S. Labor Force Keeps Unemployment Rate From Rising” (1-9-09)
“An exodus of discouraged workers from the job market kept the U.S. unemployment rate from climbing above 10 percent in December, economists said.”
Housing Wire – “More than 13% of Mortgages Delinquent or Foreclosed in November: LPS” (1-11-09)
“One in every 7.5 homeowners either fell into delinquency or foreclosure as of November 30, 2009, according to the December mortgage monitor report from Lender Processing Services (LPS), a mortgage data provider. The total amount of delinquencies reached a record high 9.97%, a 5.46% increase from the previous month and a 21.29% increase from November 2008. In a sign that homeowners continue their struggle to meet their monthly mortgage payments, loans falling into more severe delinquent categories reached 5.01% through November, compared to 1.52% of loans improved toward a current status.”
Housing Wire – “$47bn of Interest-Only RMBS Loans to Recast This Year, Fitch Says” (1-11-09)
“More than $47bn of collateral backing prime and Alt-A residential mortgage-backed securities (RMBS) is scheduled to recast over the next 12 months from an interest-only (IO) payment to a fully amortizing payment, Fitch Ratings said in market commentary Monday.”
Housing Wire – “Financial, Mortgage Hirings Up as Overall Employment Dips” (1-11-09)
“The DOL’s Bureau of Labor Statistics (BLS) on Friday said the national unemployment rate was 10% in December, unchanged from November. Despite the overall loss, the financial-activities sector gained a net 4,000 jobs in December, the first gain since summer 2007, according to a search of the Bureau of Labor Statistics online database. Jobs increased from November (7,691,000) to 7,695,00 in December.”
Housing Wire – “Q409 Losses on the Way for Banks: Citi” (1-11-09)
“Citigroup (C: 3.63 +1.11%) analysts expect Q409 losses for Morgan Stanley (MS: 32.04 -0.65%), Goldman Sachs (GS: 171.56 -1.58%), Bank of America (BAC: 16.93 +0.89%) and JPMorgan Chase (JPM: 44.53 -0.34%) due to a “substantial” decline in fixed-income, commodities and currencies (FICC) trading, according to a 2010 Outlook report.”
Housing Wire – “CMBS Delinquencies May Double by 2012, Says Fitch” (1-11-09)
“An increase in defaults across property types pushed total commercial mortgage-backed securities (CMBS) delinquencies 42 bps higher, closing 2009 at 4.71% delinquent, according to credit-rating agency Fitch Ratings. The rate of growth in delinquent CMBS looks set to continue in coming years, with a potential peak at 12% in 2012.”
Housing Wire - “Redefault Rates ‘Tragic’, Says Amherst” (1-11-09)
“According to Amherst Securities Group, default and prepayment rates on non-agency, private-label mortgage-backed securities (MBS) were constant in November. However, re-performance rates, where payments return to less than two months delinquent, were down and re-default rates “tragic” in November, according to market commentary provided by the firm.”
Bloomberg - “Fed’s Bullard Says Asset-Purchase Adjustments Main Policy Issue” (1-11-09)
“Federal Reserve Bank of St. Louis President James Bullard said the main challenge for U.S. policy makers will be to adjust the asset-purchase program so as to continue supporting economic growth without stoking inflation. ”
One year ago, some Realtors forecasted that condo prices would not bottom in 2009. Congressional budget analysts anticipated a $1.2 trillion deficit for 2009.
Economists are criticizing Gov. Schwarzenegger’s $10,000 homebuyer tax credt and claiming it to be a waste of money. According to Amherst Securities Group, default and prepayment rates on mortgage-backed-securities remained consistent from October through November. Colony Capital Acquisitions bought 1,200 commercial mortgages from the FDIC. Multiple appraisal institutions filed complaints to the Department of the Interior regarding the absence of a qualified Chief Appraiser.
Sacramento Bee – “Home Front: Some economists not buying proposed homebuyer tax credit” (1-8-10)
“Gov. Arnold Schwarzenegger’s proposed new $10,000 homebuyer tax credit is thrilling the real estate universe, but don’t think it’s a done deal. Opponents, who include economists and advocacy groups, are weighing in. Their point: it’s a poor use of money in a state that’s whacking community college budgets and health programs for poor kids”
Washington Post – “FDIC considers plan to penalize banks whose pay practices encourage risky moves” (1-8-10)
“The Federal Deposit Insurance Corp. is considering financial penalties for banks whose pay practices encourage reckless behavior, potentially opening a new front in the federal government’s effort to reshape the way bankers are paid, according to people familiar with the matter. Officials at the FDIC and other federal agencies are concerned that some banks reward executives for increasing revenues and profits in the short term even if those executives also are increasing the company’s risk of losses in the long term.”
Housing Wire – “Settling the Chinese Drywall Fight” (1-8-10)
“Homeowners and builders are facing difficulties seeking recourse from manufacturers of a toxic drywall that’s been alleged to emit sulfur fumes, causing damage to heating, ventilation and air conditioning (HVAC) components and health problems ranging from watery eyes to respiratory issues. The problem? It’s difficult for plaintiffs to serve foreign manufacturers in US courts. In this case, the problem with the manufacturers of Chinese drywall is exactly what you’d expect: the manufacturers are in China.”
Housing Wire – “Redefault Rates ‘Tragic’, Says Amherst” (1-8-10)
“According to Amherst Securities Group, default and prepayment rates on non-agency, private-label mortgage-backed securities (MBS) were constant in November. However, re-performance rates, where payments return to less than two months delinquent, were down and re-default rates ‘tragic’ in November, according to market commentary provided by the firm.”
Housing Wire – “Carlton Selling $307M Distressed Asset Portfolio” (1-8-10)
“Carlton Advisory Services is selling a portfolio of non-performing loans and real estate owned (REO) assets worth a combined $307m. The portfolio includes office, industrial, retail, multi-family, assisted-living facility, and self-storage assets located across 24 states. The New York-based firm said its services were retained by the commercial mortgage-backed securitization (CMBS) trusts that currently hold the assets.”
Housing Wire – “FDIC Sells Equity Stake in $1bn Portfolio of Distressed CRE Loans” (1-8-10)
“Colony Capital Acquisitions won the bidding process on a sale of equity interest in 1,200 commercial mortgages the Federal Deposit Insurance Corp. (FDIC) seized from depository institutions that failed within the past 18 months. FDIC created a limited liability company, called a multibank structured transaction, to hold commercial real estate assets from 22 failed bank receiverships. As winner of the bidding process, Los Angeles-based Colony Capital purchases a 40% ownership interest in the company.”
Housing Wire – “Call for Chief Appraiser Gains Momentum” (1-8-10)
“A handful of appraiser organizations joined together Thursday to send a letter to the US Department of the Interior, urging the hire of a chief appraiser. The groups – the Appraisal Institute, the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers and the National Association of Independent Fee Appraisers – noted a December report (download here) from the Interior Department’s Inspector General directs the filling of such a position, which has not been filled by qualified executive in almost three years.”
Housing Wire – “Fed’s MBS Purchases Slow and Spreads Hold, For Now” (1-8-10)
“The Federal Reserve Bank of New York bought $12bn of mortgage-backed securities (MBS) from mortgage giants Freddie Mac (FRE: 1.45 -3.33%), Fannie Mae (FNM: 1.15 -2.54%) and Ginnie Mae in the week ending January 8.”
Bloomberg - “Fed Won’t Raise Until After Jobless Rate Peaks, Crescenzi Says” (1-8-10)
“The Federal Reserve won’t raise its target rate for overnight loans between banks until many months after unemployment peaks, according to Pacific Investment Management Co.’s Tony Crescenzi.”
Bloomberg - “U.S. Office Vacancies Climb to 15-Year High on Employment Cuts” (1-8-10)
“Office vacancies in the U.S. surged to a 15-year high in the fourth quarter and rents fell the most on record as the deepest recession in more than half a century slashed demand for commercial space, according to Reis Inc. The vacancy rate climbed to 17 percent from 14.5 percent a year earlier, the New York-based research company said. Effective rents, the amount tenants actually pay landlords, dropped 8.9 percent, the biggest year-over-year decline since Reis began tracking the data in 1980.”
Inman - “Economy: Bad is the new good” (1-8-10)
“A renewed, two-group consensus drove the jump: The economy is in a solid recovery, or even if it isn’t, immense Treasury borrowing will force rates higher. Both groups agree that the Fed should stop its assistance, either because the economy no longer needs it, or because even if the economy does need help, to continue assistance would produce inflation. I think this consensus is mistaken. There is no meaningful recovery under way, and the Fed has already pulled up short. More data like today’s will add to policymaking tension, force the administration’s hand, and soon have the Fed back to buying mortgages, Treasurys or both.”
Inman - “Confidence slips among agents, brokers” (1-8-10)
“Confidence among real estate agents and brokers dipped in December after a heady rise in November, according to a monthly survey conducted by real estate tech company Point2 Technologies.”
One year ago, Fannie Mae and Freddie Mac decided to halt all foreclosure sales and evictions until January 9, 2009. A panel of economists predicted that home sales would not increase, despite the Federal Reserve’s attempts to lower interest rates. Consumer borrower dropped by $7.8 billion last November.
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This week Bruce is joined by Randy Grigg. Randy is the president of Elite Auctions. He spent 30 years as a pest management consultant, and gained a large portfolio of rental properties during that time.
Bruce begins by asking how Randy’s auction properties get purchased, and what the sellers’ perspective is towards their property values. Randy is soon going to have his largest auction. He has two trustee sale buyers that his company is working with. These two people have 50 unsold properties in their inventory. Most of their properties are lower quality houses. Right now, nice properties in nice areas have more demand. Bruce has noticed that trustee sale properties are typically cleaner than REOs, but the trustee properties that Randy will soon sell are in moderate condition. Some of them are beat up, but their landscaping is still in decent condition.
Many trustee sales are still occupied when the sale takes place. Bruce has noticed there is a common perception that these occupants are beating up the property, but he does not believe this is generally the truth.
Randy has typically been a low volume auctioneer. There are 4 nice properties that he will be selling at his next auction. His two clients will be selling 22 properties with him. This auction will be taking place at the end of January.
The trustee sale business is a highly competitive market, and most of the competitors are educated investors. There is also a much smaller range of profit to be gained in a trustee sale, and this profit can easily be lost in overhead costs. Trustee investors will often buy at 80 to 85 percent of market value with all cash. This is the model that The Norris Group uses, but in order to do that, you must be very good at minimizing expenses. Sometimes a trustee buyer has access to a property on the day he buys it. This allows trustee buyers to quickly plan for selling through methods like auctions.
Advertising has changed since Randy began his auction business. In the past, Randy had to spend $8,000 per house, because the print advertising is very expensive. Recently, people have started searching for properties through the internet. This has made it much cheaper for Randy’s business. His business posts properties to about 100 websites, and then sends emails to 100,000 Realtors.
Bruce once tried selling his properties through auctions, but he discovered that it took a lot of effort. He tried advertising his properties using street signs, and it did not work well. Bruce thinks that he has never worked harder than the 45 day period he spent trying to set up his real estate auction.
When Randy heard that The Norris Group was going to try doing real estate auctions, he was worried at first. Fortunately for his business, it is not as easy as most people think to begin an auction business, and most people eventually fail. There is a costly learning curve that is required for setting up a good auctioning business model. Randy lost 20 percent on his properties when he first started, but that process of trying and failing helped him to learn. There are many ways in which an auction can fail to have a good result. The first phone call that a potential buyer makes can completely lose their interest if they do not receive the proper response. Many people call on auction ads, and they receive a recording.
Bruce attended an auction one year ago in which 93 stilted duplexes were being sold. The sellers had placed their ads in the wrong place of the L.A. Times. Bruce tried calling the company, but all he got was a recording. By the time he arrived at the auction, the seller was closing the gates. Bruce talked to the seller and he discovered that he was the only person who had ever showed up to this auction.
Randy’s auctions are held in front of the home being auctioned. He has to analyze each house individually in order to understand what kind of buyer he wants to attract. If he wants an owner occupant buyer, he always advertises the phrase “45 days to close”. He also tells buyers that if they can close within 30 days then the sellers will agree to pay their escrow fees. The escrow fees are $400, but the cost of holding the home for two weeks is much more. Randy offers a 45 day closing, a free home warranty, and a guaranteed clear title. A home warranty does not cover foundation problems, but it does help relieve some of the buyer’s concerns. People often worry that they will not have a clear title when they buy a property from an auction, so Randy always mentions that they will.
Randy does not invest much time in open houses for his auctions, because he has discovered that establishing urgency is the key. He has a two hour, two day open house which takes place on the weekend. The auctions always take place within the working week.
The key to getting a potential buyer to come to an auction is to make them feel comfortable with the process. Randy usually has a mortgage broker present at the sale. If the buyer has not been prequalified, he encourages them to do so. He tells them that an auction sale is just like a normal transaction except they get to choose their price. You have to make people believe that they can get a good deal at an auction. Randy also offers a cash prize for people who guess what the final auctioning price will be. Their guesses allow Randy to more adequately gauge a property’s true market value. Randy does not hold auctions on the weekend, because holding auctions during the week attracts more serious buyers.
Randy has discovered that his quality buyers in Bakersfield discover his auctions through paper advertisements, because there are a lot of people who read the news there. However, buyers from other areas typically discover Randy’s auctions through the internet. Knowing where your audience comes from will help you to know how to advertise.
Bruce asks Randy what he considers to be a safe number of bidders in each auction. Randy has found that his auctions do better when there are not a lot of bidders. When lots of bidders come, they become more competitive and over price the property. Unfortunately, the high bidder often realizes 3 weeks later that he does not want the property, because he will pay too much. Randy’s typical preference for an auction is 5 to 10 buyers. Having fewer bidders will cause the property to sell closer to market value, and it will more likely be a successful sale. High bids might make clients happy, but if their property does not finish the selling process, then the selling value does not matter.
When Bruce has sold his properties through auction, most of his failures came as a result of defects in the property’s location and condition. Sometimes Bruce’s own selling expectations have brought about his auction failures. Sellers must have reasonable expectations for their selling prices.
There have been occasions when Bruce though his house would sell at a low value, but ended up selling for a much higher value. It is hard to predict what will happen at an auction.
When Bruce tried to hold his own auction, the only house that sold was the one in the worst condition. Two of his houses were priced very highly, and one of his potential buyers could not get financing. Bruce asks Randy if the property’s condition is a major factor in whether or not a house will sell. Randy usually makes minor repairs on his auction properties. He tries to make his properties better than the average REOs in that area. Bruce thinks that is a very smart decision. Bruce made many repairs and upgrades to his properties, but this caused trouble with appraisals, because his homes were in much better condition than the comps in his market.
Randy’s son Mike enjoys working as the president of the California Auction Association. He is still on the board for the CAA. Mike won the bid-calling contest this year for the CAA. He prefers doing charity auctions, because there are a lot of items, and that makes his job more fun.
If you are interested in doing auctions with Randy, his website is www.sellwithauction.com, and his office number is 661-325-6500.
The number for Elite Auction is 661-325-6500, and their website is www.sellwithauction.com
