Owner and Broker
This week Bruce Norris is joined once again by Mike Novak-Smith and Ted Boeker. Mike Novak-Smith is not only one of the largest REO agents in the Inland Empire, but the nation. Mike is in the top 1% of all real estate agents nationwide and is experienced in REO, short sales, bankruptcies, asset management, and negotiating. Mike specializes in REOs in Riverside, Moreno Valley, San Bernardino, Perris, Rialto, Colton, and Corona. Ted Boeker is the owner of the company that Mike is at and has brokered for RE/Max Results in Moreno Valley. Having started the company in 1989, Ted has vast experience in real estate and has been able to train and lead 35 of Southern California’s highest producing real estate brokers and agents to close deals quickly and efficiently for a variety of clients in commercial, residential, multifamily, and office real estate. Nationwide Home Loans Inc. and RE/Max Results escrow division are associated companies. Before that, Ted practiced law.
With short sales gaining momentum, the process has become simpler and quicker. There is definitely an improvement as the banks have geared up because of either direction from the government or the realization that this is the only way they are going to survive the process. They have shifted a lot of people into the short sale divisions and have shortened the timeframes. There is still a lot of work to do, but there are still a few very good negotiators and asset managers. What is needed is probably ten times this many to be able to handle the number of short sales that are coming. Bruce wondered if Mike and Ted have looked at the losses when they compare a house going the REO route as opposed to the short sale route. Mike said often times a short sale can be more effective, but it depends on the timeframes. One thing with the REOs is the REO seller does control the process of using agents who are very effective and can speed them through the process. Mike has watched short sales where they closed the REO in two months, from start to finish, and fourteen months later they’re still on the market and still in escrow with the short sales. If it is done right, the short sale would be a quicker way to do it, but you have to have control of the process or it will run late. Ted agreed with the exception that the banks are improving their timeframes. In fairness to the banks today and the companies that they are shoving the properties off to are doing a good job of getting up to speed.
Bruce said it has to be pretty detrimental to the agent. For example, a first-time buyer could want to make an offer, but not confirm the offer for another five months. You have to think you are never going to do this a second time even if you hung in there for the five months. You will never make another offer for the second short sale because you have to make the decision to go live somewhere. This is a real issue. Bruce said, being a lender, that if someone asked him if he wanted to take a short sale, it would take about 30 seconds to do the math and say yes. So he wondered why it would take months and what is so involved that the problem cannot be solved more quickly. Ted said with his experience today with short sales, they are doing a lot for one particular company. They have found properties that have seconds that nobody knew about and second loans that have been sold in the secondary market, in some cases days prior. The person selling did not know there was a second, was getting ready to close, and found out about the second after they had already sold the property. Now they have to start all over with the company, and the deal falls through.
Ted said the best one they have so far is first holder made a first. The owner came in, took out a second, and somebody in the process forgot to subordinate the second to the first. There is now a $160,000 second that is now in front of a $150,000 first. The very likelihood is the owner of the home is going to end up with a $60,000 first on his house, and the second will be out with 0. Bruce said a situation like this is not very entertaining when you buy one of these in a trustee sale.
On a side note, when you have 80% of sales going either REO or short sale, the assumption is all of those people become renters. However, Ted said he assumes that about half would become renters, while the rest would move in with someone else, rather their parents or move to Nevada where they can get into something free or inexpensive. So in reality, they become non-households. This is a very big impact when you are talking about potential buyers: they are credit incapable and don’t have the money to live with the extra burden of debt. Not only can they not get a new loan, but they can’t afford a household cost. Therefore, for the time being they are downsizing. This is not going to be okay for either party, both the person who owns the house and are living in the back room or the people in the back room. They would like to emerge some day and be able to leave to live in their own place. If you can pick the timeframe, then you will have excess demand. Theoretically, this should happen two to three years from now assuming credit repair happens in two or three years. Having visited Washington, Bruce said a lot of what is happening is very political rather than common sense. If they wanted common sense suggestions, they would probably find it pretty easy to get. Trying to mix it with political acceptance is a whole different story.
In the ‘90s, there was a niche that emerged that Ted and Mike became very familiar with and that investors did a lot of in the ‘80s. When Bruce became an investor, one of the niches was you would have a 7% mortgage existing on loans prior to 1975, and in 1981 or 1982 interest rates were 17%. If you could move that financing forward to another buyer, you could wrap it as it was allowed. There was something called a simple assumption, which cost Bruce $45, so he would his name and tell people to pick his name instead of the other people. Bruce had new liability, so it was like the loan could only be paid back by the residents, and that was its sole responsibility. They changed this being acceptable, but there were hybrids that emerged in the 90s, something of which Ted and Mike were very familiar. They used a specific vehicle to sell somebody a home who probably would not necessarily qualify for bank financing but to get them to be the owner of a home.
For Ted, he preferred a land sale contractor or land contract. He said many people favor an all-inclusive trust deed; but his whole point about favoring land contract was that it did not create a grant deed, which in those days would tip off a lender that a sale had occurred. The recorded document was a contract between the two parties which memorialized the fact that one party would pay the other party a certain amount of money in five years. In today’s world, Ted does not believe one is necessarily better over the other. A lot of times it is the mood of the lender because the only thing to be concerned about is a due on sale clause being aggressively pursued by a lender. Bruce cannot imagine someone’s desk who decides to foreclose on a current loan because there was a breech on a due on sale clause in 2012. He would be fired quickly.
Mike said he has had many lenders tell him they did an AITD or a land contract who did not care as long as they received their money. Bruce said he once sat across from FHA in a meeting, and he said it would be helpful if they could take over subject to the existing loans, and they said they did not care. With a contract of sale, people would most likely relate to it more if you used it like a car sale. A car sale usually has a lien holder who actually has title. They almost hold the pink slip until the deal is made, whatever the deal is. In a car sense, it is usually paid off; but in a land contract it could be a meeting of certain agreed upon prior demands. It could be a demand for someone to pay them for three years, make every payment on time, and then they receive a grant. Somebody is always in distress, whether it is the seller or the buyer who does not have the credit to get a new loan. In the hard money loan side, there are investors buying properties that cash flow, and they have investors who put money in 9.9% trust deed investments. Smart money is on both sides of this table, and in this particular timeframe you could have smart people on both sides of those decisions. It could even be in a property that is almost a break-even.
Bruce bought a house in Moreno Valley two years ago, so the price really had not damaged; but he just had a job shift. He owed $140 on a $135 house and is $5 grand upside down. If he listed with someone and went through the normal cost, he would have to write a $20 grand check to escape. He had someone on one side, who was renting the same house in Moreno Valley for $1300, and he could make a deal to where he puts up a certain amount of money for a security deposit or pay a commission, and he could walk into a payment that is probably $900 with a chance of owning it. This makes more sense to Bruce, and this is why he believes it has a future pretty quickly. Ted said in this case the interest rate in the loan is becoming more valuable. In the old days, the equity was more valuable; and now the loan is valuable.
When Bruce first got into the business in 1981, he refinanced his house at 17 ½% interest, so to have an interest rate sub 4% is completely ridiculous. Bruce said he could certainly envision an 8% mortgage rate five years from now. Bragging rights would be somebody asking you your interest rate, and you tell them a number that is worth money. Lenders will be very sensitive to this at some point, but he cannot imagine for the next few years this standing in the way of asking if the person wants to foreclose or if they should find a buyer who still makes it current. It also speeds up the healing process in that they want stability from going from owner to vacancy. There are already a lot of damaged people, so when you’re talking about 80% of your business being credit incapable of buying a new home, they are payment capable of owning one in this type of circumstance. Realtors can then make a living not having to count on a group of buyers that won’t emerge for three years. It can absorb the next two or three years of people who are still waiting. Financially, we have two underserved groups: the group that just lost their property and the group of investors that could buy and hold rentals. If we would think this out and think about how we did it in the past, we could solve the problem without a lot of damage. If you had a lot of REOs where it was earmarked for owner-occupants and eventually there is a little pile of them that go to investors, there is five or ten of them at a time, and the mandate is to not sell them for five years, then it would not make sense to give these people financing. This would be game over as you would have more business than you would know what to do.
Ted said investors will save the day eventually, even if they are not allowed to because they are creative. Bruce once sold a property to a lady on Polk Street in Riverside, and it was in a land trust with an AITD on top. She received the property, but then she talked to her team later, and the tax person said when she writes her check she will not be able to deduct the interest as it was not in her name. All of a sudden, the lady called Bruce saying she could not understand that she owned the house, and Bruce could not make her team understand that she owned the house. Finally, he asked her if he could just buy the house back from her, and she said yes. He then asked her if she knew how she was going to have to give him the house. She was going to have to grant deed it to him because she owed him.
Bruce wondered if it was a difficult concept for people to understand the difference between a grant deed and a land contract or even an AITD. He also wondered if it was necessary for an escrow to be experienced with it. Ted answered yes to both questions. People do have a difficulty understanding, and it is a little funny because if you lay it out correctly and simply for a person, they do understand it. It is no different than buying anything else and promising to pay an amount and receive a grant deed or pink slip in return five years from now when the person has made their payments on time. Many real estate offices, certainly in the past, have simply refused to do any creative financing. This could include seller-carried financing, AITDs, or land contracts. One of the things Ted has insisted on is he will not do one of those transactions unless he can control the escrow because he needs to know that the escrow people will know how to do it and can explain it to the people whenever they have questions. Having been an investor for 30 years, Bruce has had experience and said there are some escrows that are worth their weight in gold and others where he is simply stunned by the questions people ask.
Bruce wondered if Ted has talked to people who asked to speak to people experienced with escrow, as this is something that would be valuable. Ted said he has never heard this asked, but he said by the time they finish explaining it they are fairly comfortable with the idea. Bruce said if Ted had worked with land contracts in the early 90s, there was not equity progression for quite some time. Ted said he did about 1300 land contracts, three of which actually went into distress and Ted and his employees were threatened with lawsuits. Out of about 1300, they had three that really did not get resolved and went bad. Ted’s feeling is it is a slam dunk, and the key to it is the people have to understand what they are doing upfront. Ted said he had a number of people who came in three or four years, and in those days the length of time was critical. Three years was too short a time; five years was really better. They had a number of people who came in five years and said they simply could not do it as they had either messed up their credit or had another type of distress. They would resolve the issue through either a reconveyance or a deed back. Everybody walked away relatively happy. As long as people understand what they are doing, they can solve a lot of problems creatively, which is what this market needs.
Bruce wondered if people are gun shy in buying right now, to which Mike said pretty much all the news on housing nowadays is negative. If you go to work and tell your coworkers you bought a house, you get chewed out for it, and then it becomes harder to follow through with it. There is not a lot of support for buying a house today other than the cheap interest rates. Mike said he does not really have the deals fall out once they are in escrow, but for many people today just going out into the market takes a lot of courage. Fear is the biggest factor they are dealing with, and this is why Bruce really spends time looking at his charts as these take him away from emotional decision-making, both on the high side and the ridiculously low side.
If you are in escrow for the first time in your life, you wonder if every situation is the same way. All of a sudden you are not tuning into news you probably heard but really did not hear. Now, all of a sudden, you are questioning every decision, even if you are locking in a 4% 30-year mortgage. Bruce cannot imagine this being replicated in our lifetime. Once we leave this cycle, we are going to see a chart that goes the other way for a considerable period of time. Young buyers today do not have any comparison, so they do not think something is a great deal and are not drawn by the 4%. Mike said there were people who walked when 4 ½% deals went up to 5%. He tried to tell them when he first bought a house it was at 13 ½%, and he was happy to get it. That payment emerges from a discounted price, and it is astonishing.
Bruce wondered what basic changes are going to come about because of this downturn in the future of financing for real estate and down payments. He wondered if there will be permanent changes or if we are only going through the emotions politically to make everybody happy. Mike said he believes there will be permanent changes. The problem today is it has become so hard if you are loaning money to buy a house to enforce your contract and get your collateral back if you make a mistake. If you compare it to car sales, they are way up from three years ago because they can enforce their contracts. If you do not pay for your car, they can come take it. With houses, it is almost impossible to enforce your contract now, so the financing is very tough. It will most likely get easier some day at some point, but it will most likely never again be what it once was. It should not be what it was from 2003 to 2008 because that was crazy, but there will probably be a little bit more of a push for a 5% minimum down payment versus 3% with a Fannie or Freddie type of purchase. As Bruce has pointed out very accurately, the VA program has a very low failure rate, and it is 0% down. There is a way to do it, but it is called underwriting and qualifying somebody. The hard money loan business just puts you in the seat of making common sense decisions. What it boils down to is are we likely to get paid monthly and get paid back? The VA is most likely in this same decision process where the whole world is driven by a FICA score, and yet they can make common sense decisions that look like they are going to be paid back and it makes successful loans.
Bruce wondered if interest rate deductions ever bite the dust, but Mike is not as convinced that this will make as big a difference. Most people’s perceptions of their interest rate deductions are much greater than the actual event. They think they are going to save a lot of taxes, but the truth is it is not really a big deal. At 4%, you have a bit of money to pass whatever the basic deduction is. They will probably have to owe $300 grand or more before it is even relevant, but this is not a real factor. There was another document drawn up where there was two sides of a panel where the Democrats and Republicans both had input about what to do about the budget. To Bruce, real estate seems like a piece of low-hanging fruit. We have had a lot of goodies for a while, and Bruce said if he was on the real estate side, like CAR or NAR, he would find a sacrificial lamb to take something back. One of them would be the $500 grand freebie, which occurs every two years. Bruce said he was surprised the people came up with this even though Bruce happened to own properties that would be affected. You have to wonder what percentage of people nationally could ever take advantage of that. If in fact they are going to take some of our things away, Proposition 13 should not be one of them. Ted said he does not know if he would be willing to give this up as it could be pretty damaging. This would allow taxes to go up 2 or 3 times and affect people who own things free and clear. Bruce said he interviewed a well-known economist who said this is why they have reverse loans.
For more information on their escrow company, American Independent Escrow, Inc., you can contact the company itself.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.