On October 14th, 2011, The Norris Group returns with its award-winning event I Survived Real Estate. An expert lineup of industry specialists join Bruce Norris to discuss current industry regulation, head-scratching legislation, and the opportunities emerging for savvy real estate professionals. 100% of the proceeds support the Orange County Affiliate of Susan G. Komen for the Cure. This event would not be possible without the generous help of the following platinum partners: Foreclosure Radar and Sean O’ Toole, Housing Wire, The San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops and President Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobbie Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Real Wealth Networks, Frye Wiles Web and Branding, MVT Productions, and White House Catering, who will provide the 3-course meal for this black tie event. Visit iSurvived2011.com for more details.
Bruce is joined this week by Sean O’Toole. Sean is the founder and CEO of ForeclosureRadar.com. Prior to launching ForeclosureRadar, Sean successfully purchased and flipped more than 150 residential and commercial foreclosures. Leveraging 15 years in the software industry, Sean used technology as a key competitive advantage to build his successful real estate investment track record. Prior to that, he was involved in software startup companies.
Back in the late 80s and early 90s, Sean ran a homes and land real estate magazine in the Hawaiian Islands. He spent time taking a break from his software career to run this magazine and to buy and sell his own houses, which played a part in his real estate business career prior to buying at trustee sales. He became attracted to trustee sales after the .com bubble when he was trying to figure out what to do with his life. They were trying to take public company he had started and raised money for about the time that the bubble imploded, bringing it to an end. He was trying to figure out what he was going to do next when he was thinking of starting another software company since this was really all he had ever done. He was introduced to a friend who was buying foreclosures, and he said he should give it a try and if Sean helped him write some software to run his business, then his friend would teach him the rest of the business. At first Sean did not think this was very interesting; but then his friend showed him the kind of money he was making, and he became a lot more interested. Sean started buying at the trustee sales in 2002, which was an interesting time to be involved in something like this. During the era from 2002-2006, Sean was often surprised on the high side. He bought a property, and if it was a hassle to fix and get people out, he was bonused money along the way for the time delays.
One of Sean’s most profitable deals was where he had a gentleman fight him on the eviction for a year through multiple bankruptcy declarations to the point where the judge said he could never file bankruptcy again for the rest of his life. It seemed like a real headache until he went to sell the property, and it had gone up nearly 50%. It’s a very different world today. You would not want to have delays; if you can get to the finish line, then you would want to get there.
When Sean first started in the trust deeds business, it was tough to access information about properties and liens. There was a decent little service up in Northern California that later changed their business model and didn’t have as good of information as Sean had first used from them. After they changed their business model and stopped collecting the data directly, he had to find out how to collect the data himself. He was pulling data from the assessor’s office and the recorder’s office. The biggest thing was you would show up at the sales from everything that had been in the paper, and you would have a list of about 20 properties. They would then call 100 properties because the other 80 had been postponing for some period of time. Unless you went back years and went through all the notices, you had no idea what was still coming up for sale or not. You would have to play catch-up, which would be an awful lot of homework. People don’t realize unless they are in the business that each property entails a full-blown title search, an appraisal, and you have to determine if the pursuit is worth your time. Fortunately, from 2002-2006, there was natural equity most of the time. You wouldn’t have been following a lot of trustee sales that did not have equity; whereas now it is completely different. Back then, term “drop-bid” was unheard of at the time. It was very rare that the banks discounted the bid from the amount owed on the property and was unnecessary. The nice part about having inflation was that their loan was probably below what it was worth and therefore attractive to trustee sale buyers even though the number of trustee sales was way down compared to now. The amount of properties that had equity had to be very high in percentage.
Since Sean’s father is a logic professor, to him he needs things to make sense for him to understand them. So one of the hardest times he had with trustee sales was none of the deals sold on the courthouse steps made any sense. They had equity, and the person could have sold the house. It should not have gone to sale; they should have taken care of their problems, paid their mortgage, or refinanced. This was when he had learned that there were some basic reasons for foreclosure which had happened even in the best of times which were called the 5 D’s: drugs, divorce, death, denial, and disease. These things were not fun to talk about and made the business not feel very great on that side, but back in that period of time these were the reasons properties were foreclosed on. We still have foreclosures for those reasons, but the vast majority of foreclosures happening today are due to negative equity. We have an additional category that is really raining a lot of properties into the system. Back then when you were checking up on sales, you were on the phone and trying to get information to see if it was going to be worth going to the sale.
Sean’s website has really changed the process for someone wanting to be a trustee sale buyer and made it simpler. The person who taught him the business would take a Polaroid of each house and then write down the postponement dates. He had a shoebox organized by date of all the properties that could come up for sale, and literally each time a property came up for sale he had to put a new date on it and put it in a new spot in the shoebox. Other people would keep spreadsheets, and you really had to have somebody down at the sales every day to track everything. One of the big goals for ForeclosureRadar was to get people out of the really tedious sale tracking business. This is one of the areas where they have been very successful. Sean’s website is much more accessible and understandable, and it has made the competition greater. There are definitely new people that can go from novice to acceptable much quicker these days. Sean and his team was definitely in the right place at the right time, but he thinks the transition still would have happened if they were there or if somebody else was there. They launched in May of 2007, and it was towards the end of 2008 that banks began dropping bids and people began making a lot of money. At the same time, they had a lot of contractors and commercial real estate folks who suddenly saw their business go away and needed to find something else. Trustee sales were the right thin at the right time for a lot of people, and Sean and his team benefited from being the best tool at that time. However, he still thinks the transition and the competition would have heated regardless of whether they had been there or not.
Sean’s customer base is dominated by investors and realtors. Just in Sean’s little hometown of Discovery Bay, there is about 85 properties listed for sale; but there is 200-300 in some stage of foreclosure at any give time. If you want to call yourself a market expert, it is pretty hard to do if you don’t have a clue about the all the properties in some stage of foreclosure. If you’re listing a property, and two days later a bank-owned listing pops up next door, there is no excuse for not having known about it ahead of time. At ForeclosureRadar, they can give you months of advanced notice that is potentially coming, so you can work with your customers to be ready for it. The volume of dollars in sales as far as trustee sales in California is in the billions. Typically, the third-party investors are buying 20%, about half a billion dollars worth of property, a month. ForeclosureRadar’s peak month was around $8 billion at original loan value, not at current market value. The $8 billion encompassed the properties that would go to third party and to REO, anything for when someone has lost their house to foreclosure. The two categories combined, REOs and third-party bidders, is a resolution.
In California, there are currently 95,000 properties scheduled for sale, which is down quite a bit. A year ago, there were 120,000 properties scheduled for sale. Out of that, between homes sold back to the bank and sold to third parties, about 14-15,000 sell in a month. Last month, about 24,000 were added. If you take the 95,000 with 24,000 new added, you have 15,000 taken away. This means about 15% or more of the properties are bought by people that are investors to fix and resell. This is one of the reasons they don’t use trustee sales when talking about market sales. When NAR or CAR talks about the number of homes sold per year, they’re not including what happens at the trustee sales. The vast majority of things purchased at trustee sales are resold. Almost all the investors at trustee sales flip the property, and then the banks largely relist the properties as REOs.
Investors are the ones who tend to get rid of properties quicker. Right now in California, it takes banks on average 237 days and 131 days for third-party investors. Investors are a lot better at disposing of properties than banks. Investors are pretty motivated in terms of the fact that it is their money on the line and not a shareholder or tax payer. They also know the local markets better, and they invest in and fix up homes. The people who are fixing up properties put in new paint and carpet, and they are getting them ready for a first-time buyer or a landlord to turn them into a rental. Therefore, they usually try to make them really nice. The banks, usually because of the servicing agreements, try to do a little more than clean out the properties. You will have a lot of properties that are trashed that end up going as REO sales that first-time buyers simply can’t afford to buy, fix, and clean up. You also have some that are so trashed that you cannot get loans on them. The banks not fixing the properties is a big part of it.
When they first started talking about shadow inventory at ForeclosureRadar, it was prior to September 2008 because at that point the banks were taking on huge inventories of REOs that were not listed. Shadow inventory is described as bank-owned homes that were not listed for sale. After September 2008 when they really slowed down the foreclosure sales, at the time when the government made some changes that really slowed down the foreclosure sales, the bank-owned inventory came down to the levels where it really should be. Several folks that had been talking about shadow inventory changed the definition to now include the folks that were now in foreclosure and not-yet-bank-owned. Later, it was changed again to also include delinquent properties and not yet in foreclosure. Depending on who gives the term these days, Sean has even seen some people expand it to those who have so much negative equity they will eventually be delinquent, lose their home, and pay inventory. Sean even had someone the recently tell him that you also have to include all the people who like to sell their home, but not at the current prices. Pretty much most of the country is shadow inventory. Nationally, there are about 4.2 million properties that are between the stages of 90 days late and the bank already owns them. Of the folks that are in foreclosure, you have 134 that are at the default stage plus 94 scheduled for sale. You also have another 100 that are currently bank-owned. NODs are usually filed at the 13-month mark, although this has gone up a lot. Traditionally it was at the 90-day mark, and now it is at 13 months, which is roughly 398 days. The other 300 days, between 90 and 398 days, included defaults and delinquencies. Delinquencies in California are usually around 9%, so that is 30 or more days late. If you take 9% of homeowners with a mortgage, that is another 650,000. All combined, you have close to 1 million.
There are some problems that are going to have to be resolved one way or the other, which will be discussed with the group on the panel at I Survived Real Estate on October 14. They will be discussing possible resolutions since there seem to be conflicting goals. One document says it wants the country to save between $2 and $4 trillion so we can pay our bills, and we have an industry that almost needs more support. It will be interesting to see how the discussion comes about.
The percentage of owners that are over encumbered in California is unknown right now, but a lot of the larger properties are more over encumbered. They have not yet seen the declines in the upper end. There have certainly been declines in the Bay Area and in Newport Beach, but they have not been as traumatic as the declines in San Bernardino, Riverside, Central Valley, and Sacramento. This would most likely be attributed to the bulk of the inventory that is for sale being a foreclosure property. The other reason could be it was a different loan type that did not have the biggest problem as early as its subprime. Also, wealth plays a part. Higher end neighborhoods tend to have more wealth. In addition, data shows that the banks are taking a lot longer to foreclose on higher end homes where the losses are bigger, so part of the reason we have seen less in that area is because the banks are trying to delay losses and remain solvent.
Sean O’Toole will be on the panel for I Survived Real Estate 2011, taking place on October 14th. The Norris Group would like to thank their gold sponsors for the event: Adrenaline Athletics, Coldwell Banker Pioneer Real Estate, Conaway and Conaway, Delmae Properties, Elite Auctions, Inland Empire Investors Forum, Keller Williams of Corona, Keystone CPA, Kucan & Clark Partners, LLC, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Pacific Sunrise Mortgage, Personal Real Estate Magazine, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Board of Realtors, Starz Photography, uDirect IRA, Wilson Investment Properties, Tony Alvarez, Tri-Emerald Financial Group, and Westin South Coast Plaza. Visit isurvived2011.com for more details.
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