This week Bruce Norris joined by Lance Martin. Lance is broker/owner of Coldwell Banker Pioneer Real Estate. He began his career in real estate at 19 and has mostly been involved with the REO side of the business for over twenty years.
Lance received his license in 1986 and began selling full-time in 1987. It was not until 1992-1993 that he became involved in the REO side. What is interesting is that whenever you start your career, in your first few years there is some assumption that this is how it always is. If you got in in ’86-’87, in the next few years things got progressively better for everyone who bought something. Many people ask when the market will return to normal, but Lance said in the 25 years he has worked in the business he does not think he has ever been in a normal market. From about ’88-’91 the market was on fire. Prices were accelerating, and real estate was easy so to speak. Things then slowed down; and in the mid-90s we worked a lot with REOs, which no one said was normal. We had some recovery we had in early 2000/2001, then things caught on fire from 2002 onwards. Lance did not think this was normal, and the last five years were certainly not normal. Lance said he has pretty much given up on a normal market. Bruce said you would pretty much have to live in Oklahoma for a normal market since California bounces between extremes.
Lance’s family has been in the business forever, and he used to have conversations with his grandmother that there was a certain sense of predictability in real estate that ended right around the time Lance got into the business. From ’74-’80 prices in California tripled and separated themselves from the national average for the first time. In ’74 the median price in California was $3 grand from the national number. For whatever reason, we separated ourselves from the rest of the world and became more of a speculative market rather than simply living in it and being satisfied. These kinds of things do change. Most likely when you have people buy homes now they are probably in it for the long haul with the idea that they are going to live in it and enjoy it. Lance said the mindset has changed to a degree, and there are a certain number of investors in the marketplace right now where it would not surprise Lance if in the next few years the pendulum swings and everyone forgets the lessons that we saw in 2006 and beyond.
If you ask somebody why they are buying a new house to live in 2005, it would have been to make money more often than not, even if they were living in it. In 2012, they would be more hesitant and want to stay where they are. They will end up making money on it, it’s just a matter of time.
Bruce wondered when the REO business peaked this cycle for Lance. Lance said we have been in a long cycle, but for Coldwell they started in about early 2006. For most people, if they were not paying attention, they may have thought the market was still hot because the market for the most part did not really peak median-price wise until June 2006. He said they started seeing inventory in early 2006, and from a sheer volume standpoint it peaked in 2008. You can map the peak out, and the top of the peak from the day they passed the first foreclosure moratorium in September 2008. Ever since then we have been drifting away a little bit. We still had fairly decent levels of inventory through 2009, and 2010 was not really exciting even though we were still doing quite a bit. Lance believes 2011 was a mirror of 2010. Lance is still puzzled as to what to make of this year. Lance thought four to five months ago we were going to see some decent numbers as far as new assignments and foreclosures going through the system. The first four and a half months not only did not prove this, it proved it wrong because we have seen the exact opposite. It has been very slow as far as new assignments and properties going through the system. Percentage-wise from the peak in 2008, Lance’s inventory levels now are about 15-20% of where he was in 2008.
It is a little hard to map out a business plan when you are probably being told to get ramped up for volume. This is often something Lance is told on the lender side. Prior to the robo-signing scandal, Lance sat in a meeting in September or October 2010 and was told to get ready and that it was coming. It was 2010 when the robo-signing scandal came upon us, and this certainly put a lid on things. This is now in the past with settlements and attorney generals getting together, which is one of the reasons Lance thought we were going to see more inventory this year. However, so far and for whatever reason, whether it is Fannie and Freddie, bulk sales or balance sheet management, we still have not seen it. The first quarter, for all intents and purposes, was a write-off for Lance since there was so few new properties hitting the marketplace. It might as well have been zero.
When Lance talks to the sources that he receives inventory from, they are in the position where they are probably not in the front line as far as making decisions. Bruce wondered if they themselves were surprised by the lack of inventory. Lance said he would think so because you would have to be because a lot of the asset management companies are in the same position as himself and others like him on the street. They have to gear up their staff, and field inspectors. Lance ran a couple numbers before coming on the radio show; and from Bakersfield down to about the California/Mexico border there are over 50,000 properties with notices of sales filed and another 38,900 properties with notices of defaults filed. There are also 11,552 properties filed in REO inventory in one form or another, whether they are on the market, in a rental program, or are being evicted. If you get 11,000 in inventory that are already foreclosed on and another 88,000 that currently have a notice of sale or default, then that means there are eight times as many properties that are behind those.
In Lance’s opinion, they are all going to transfer in one form or another, whether they go short sale or ultimately end up as an REO. Just given the number of properties that are in the pipeline right now, there are eight times more. However, those numbers have not changed. You talk about trying to make a business plan, and those numbers have been fairly consistent now for several years. You now just sit back and watch those numbers continuously turn, and what comes out on the other side is such a small percentage that it is real difficult to make a new business plan.
Bruce wondered what affect loan modifications have had on the REO business and if Lance is now seeing round 2. In other words, the loan mod was taken care but the payment was not made. Bruce wondered if Lance has seen foreclosures stem from this. Lance said he has and has managed a fairly significant amount of properties throughout the Inland Empire. Therefore, he has a pretty good sample of landlords to pull from. He can share a dozen stories from the last six months from their landlords who, for whatever reason, whether they bought the property wrong or refinanced with cash over the years, are upside down and have attempted to do loan mods, some being successful and others not so much. However, Lance believes the frustration level is high, and we will probably see a whole lot of people completely giving up not only on the loan mods, Lance has had clients who are absolute candidates for short sales. Lance knows he can get them approved and get a short sale done. Their frustration level at the process is so high that they have given up on this too. Lance said he may be wrong, but he is convinced they are going to see at some point these properties being forced into the REO segment on unless the people are able to stay in the properties forever.
Bruce wondered if Lance is noticing any of his businesses being affected by the large purchaser who is coming in to stock up rentals in the Inland Empire. Lance said not yet, but it is literally the number one priority he has just from a standpoint of what he is keeping his eye on and lobbying against as a realtor and someone who owns offices in the Inland Empire or California. Lance said the bulk sale initiative coupled with the rental restriction at least as it relates to Southern California has to be the worst idea that has come down the pipeline since the first foreclosure moratorium. There has not always been agreement on what level of properties should be allowed to come through the system, and managing the number of properties might be smart. Lance has usually taken the position to just let things go, let the chips fall where they may, and if things collapse then so be it. Lance really thinks the bulk sale and rental program is awful.
The FHFA is currently the regulator who is overseeing Fannie, Freddie, and HUD. They have a pile of programs out in which they are bundling up properties throughout the country and pulling these properties from what they are describing as the hardest-hit areas. There are two additional criteria which Lance said does not make sense to him. In addition to the hardest hit areas, other criterion includes areas with high inventory levels and areas with low buyer demand. Lance said neither of these pertains to them. With two of those three criteria not fitting Southern California, this pilot program decided to target at least a piece of Southern California, specifically the Los Angeles and Riverside markets.
There is somewhere in the neighborhood of 500 properties that they decided to put into this bulk sale program. These are then going out to large institutional investors, being packaged up, and are being offered to people who have those types of funds, who would not be your typical ma and pa investor. Coupled with this, they are restricting what those purchasers can do with those properties at the purchase. There may be other restrictions, but one of the restrictions that is a big deal is they have to lock those properties into rental stock anywhere from three to seven years. They pull them out of the market, and certain investors are for the most part going to be locked out. To be selfish, realtors and offices like the ones Lance is at will be locked out. It is a really poor plan to help the local economy. If they are locking these transitions into rental stock, obviously they would be buying these properties at what you think would be something less than $.50 on the dollar. Their ability to rent those properties at something less than market seems apparent, and now Lance and Bruce will be potentially competing with the rental stock in the Inland Empire that was purchased at a discount and very well may be able to rent for a percentage or so less. Lance said he has been following this since last September, and he hated then and hates it now. Now the program is in place and is moving forward.
Lance read a letter written by FHFA Director Edward DeMarco, and the letter said there were two objectives to the rental program. The first was to look for alternative approaches to retail dispositions; in other words finding a different way to sell it. For the most part this cuts Coldwell Bank out and anybody in the transactional business as well as the small investor. The other objective of the program is to assess the investor interest, which you have to figure is pretty large if you are going to be able to purchase these properties at $.40-$.50 on the dollar. In regards of if there will be a bidding process, Lance said the first property has gone through the system, and Lance really wants to see what has gone on behind the scenes. From what Lance understood, there was a bidding process in play where you had to meet certain criteria to bid. They are now going through their due diligence, and Lance believes this first round of properties is in the process and within 60 days of either the final disposition of those properties or at least a bid being awarded to one of the investor purchases.
Bruce said what he has seen as a trustee sale buyer is Wall Street now has backed several companies in the local area to the tune of 100s of millions of dollars, and they are just buying them for very close to full value for cash. They are keeping the properties, and the goal is to get to 10,000 properties nationally. To Bruce this is the bigger threat. Lance is talking about bulking out 500 properties in the area, while Bruce would say they are buying 500 properties a week just on a one-off basis. If you have a stock of houses, you have probably been approached and then willing to buy them. Lance said he does not have as much of a problem with this, although it may put a damper on those of us sitting down at the poorhouse steps looking for those good opportunities. However, if they are buying them in that process and they are willing to pay market value and buy them on a one-off basis, then they can choose to do what they want with them. They choose to hold them for a year or turn around and try to immediately flip.
Lance said he does not really like the bulk sale thing in general, but if that is what it is going to take to move the inventory through the process, then so be it. For Lance, the part that is just the killer is the rental restriction because it is literally locking those properties up in the market for that period of time. This could mean it will be that much longer for our market to recover. We have been in an artificial marketplace, whether you are a buyer, seller, or somebody in the business of transacting real estate, since September of 2008. We are now coming up on the four-year anniversary of the foreclosure tsunami, which never came. This was when Lance started expanding his offices. He looked at the numbers in 2008, and he started to expand his footprint figuring that it made good business sense. Frankly, however, the policy makers were not looking at his business plan. What made sense in the past that all of a sudden did not happen.
Bruce wondered if lenders more commonly taking the property back and then renting it to the former occupant owner. Lance said this goes hand-in-hand with the question asked earlier about how it relates to the rental side. He tied this rental program more to the bulk sale. Starting about 2 ½ to 3 years ago, in every occupied property that goes through Fannie the owners are being offered a rental agreement. Point blank there are no questions asked. About 10-20% of those occupants are taking these rental agreements. Now, for the last few years some of those properties that have been in the system for a year have come back into the marketplace to be resold, and the system worked as it was planned. A few of those properties have actually been sold with tenants in them, and these have been good opportunities for some of the investors. They basically bought a property prepackaged with the tenant that had been there for years. Lance’s fear now is many of those properties that have been in that rental program that have already been foreclosed on, are already in the system, and have already been rented out; these properties are guaranteed to be pulled out of the stock and sold in a bulk sale program.
Bruce wondered how lenders are dealing with evictions now. Lance said not too much has changed. If they are not willing to accept cash for keys or are in a rental program and not paying their rent, they could move a little quicker as far as the process is concerned but are generally following the law and moving fairly quickly. There are some stories of evictions that have gone on for 2 ½ years, but those are the exceptions.
Right now the percentage of Lance’s business that is REO is closer to 20%, while two years ago it was 90%. The only part of the business he feels he can truly control right now is the property management business, of which he is still a big fan. From the standpoint of his agents, he sees that the focus this year is short sales. You still have a seller that still has the ability to make some decision on what to do with the property, and banks do appear to be more willing to push those short sales through. They are still taking way too long, but generally speaking we are seeing more transactional short sale business out there.
As far as the normal sellers with equity, Lance this market is small in his business but is increasing. Right now this market is about 15% of his business. Most of those equity sellers don’t have a lot of equity, and it has been exciting because they have seen some sellers enter the market recently that were buyers two years ago who bought it right. For the most part, in our market values have been flat for the last two years, and they are seeing equity sellers. This number should drift up ever so slowly granted 10 or 15% equity sellers is not anywhere close to normal. However, it is better than it has been in the past.
Tune in next week as Bruce continues his interview with Lance Martin of Coldwell Banker Pioneer Real Estate.
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