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Rick Solis Joins Bruce Norris on the Real Estate Radio Show #330

Friday, May 17th, 2013

Rick Solis

Appraiser and Investor

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Bruce Norris is joined this week by Rick Solis. Rick wears a lot of hats. He is an investor, an appraiser, hard money lender, a landlord, and on occasion he puts on his teacher’s hat.

Bruce asked what Rick’s least favorite thing is out of everything that was just mentioned he did. Rick answered that it was being an appraiser, which surprised Bruce. Rick said he does this to pay the bills, but when the other things give off enough cash flow he usually does not do the appraisal. Rick said he stopped doing appraisals from 2004-2008. In the next stretch after things mature, he may be able to exit the appraisal definition and possibly even the landlord definition. Rick said he probably dislikes the landlord duty even more than the appraisal. The appraisals are a challenge, and he used to enjoy them a lot more before 2006.

Bruce asked what has changed and if this change has continued into today. Rick said the main changes are that the lenders are so skittish now that they are back in their 2008/2009 mentality. The requirements for the appraisal are a lot more time-consuming, and it seems that no matter what they get they are never satisfied. Rick used to spend four hours on an appraisal report, give them 3-4 comps, and everybody was satisfied. Now he spends close to 7-8 hours on way more comparables, documentation, and photographs. Despite all this, they are still not excited about it and want more.

Bruce wondered if there was a review process that could trump his appraisal pretty easily. Rick was actually talking with an underwriter about this since he wanted to find out, and she said that on every transaction they do they get an automated appraisal done on the computer. These are similar to what Zillow does, although a little better quality. They get to double-check the appraisals, and if there is too much of a disparity between the computer-generated report and the appraisal report, then they order a review appraisal. A lot of times if the first appraisal going in is not extremely strong with 9 or 12 comps, then a lot of the time the review appraisal will come in low and squash the deal. If the review appraiser comes in low, he must be right. Rick said this is not just the case with the review appraiser, but it is also the lowest appraiser in the transaction who is right. If they have multiple appraisals and a review appraiser, the lowest person wins.

This is not the case with the AVM (automatic appraisals) since these are double-checked. However, with the AVM there are also comparables with which the underwriters will review and question them. This is a huge red flag. Bruce wondered if they are mostly concerned about the possibility of them buying back loans if they go into default. Rick actually asked his underwriter about this also; and what she said was after the loan ends up at its final destination, at various times throughout that transaction they will also pull a computerized AVM appraisal. At any point during that time if there are issues, then it does come back on the original lender and appraiser. She said this is not as big a concern for them right now because property values are increasing. This means the AVMs 2-3 months from now will be higher than the AVMs today. It is not as much of an issue now, but in 2008-2011 it was an issue.

Bruce said he would imagine prices going up is going to start affecting a lender’s relaxing standards. Rick said this was what occurred last time. Bruce said it has also happened every time he is aware of, but this time we almost have the only lenders available are Fannie, Freddie, and FHA. Bruce talked to another gentleman when he was trying to understand the ability for an FHA borrower to be qualified. He has a company that is stricter than some other companies. Even though they work with all FHA loans, they have a source where they go to where that company does loans that others won’t do. This is driven by the fear that they may have to buy back the loan, not that FHA would say no to the loan. It is all about how many of them they are going to have to hold for the duration of the loan. Enough of those buybacks will put a small company out of business. Their credit line is being used up solely on existing loans instead of collecting points.

When you have price increases, it seems like that solves most of our problems. Bruce asked Rick what he is seeing as far as price movement and if it is more uneven than normal. When he is appraising properties in a market before it is moving up, it seems like it floats most boats at the same time. Bruce wondered if this is happening or if things are skewed. Rick does not do a lot of the high-end things, but on the low side it is all moving up and moving up fairly rapidly to even 3% a month. In some areas he is even seeing huge shifts. Moreno Valley just did one, and the closed sales are at 175, and they all closed. Everything in escrow was around $10-$15 grand higher than that, and they all went into escrow relatively quickly. This makes Rick think they are going to close fairly close to the listing price. The few active listings that are available are even way higher than that at $200,000+. He is not even talking about 2,000 square feet anymore, but rather 1300-1500 square feet. The active listings are literally close to 20% higher than the ones that closed in March.

At the last bootcamp where Rick helped out, Bruce happened to pull Moreno Valley $150 and under. In, for example, the thirty-day period there was 90 closings in that price range, there were 130 pending and 12 available listings. This is less than a week’s inventory. Bruce does not know how many of these pending sales are going to close, but when you have 12 available listings then you are going to start moving to the next available price range, $175-$200, pretty easily. The 12 all seem like they are much higher than everything else, and they are just either waiting for the market to catch up to what they want or are waiting for somebody to get so desperate that they are going to pay it. The other thing strange about one done in Moreno Valley was that out of the six comparables, four of them were cash sales all at high end values. It was worth $175, and they were paying $175 in cash.

Bruce asked Rick if he happened to notice which investors were local and which were wearing a hedge fund hat. Rick said he did not, although Bruce thought there would have been some of each. However, Bruce thinks the majority of them are being bought by private people as opposed to hedge funds. Rick worked out some comparables, one in Torrance, the second an individual out of Arizona, and the third a private family out of Temple City. What is the most interesting is that these are all far away and not even local.

When Rick says he is required to have 9-12 comps, Bruce wondered if this is commonly available at this point. Rick said he is actually not required to have this many; but they are only required to have four or five. The nine comps he uses for comparables allow the appraisal goes through the transaction with no issues and nobody comes back to him. There is no review appraiser that is going to put that level of effort into smashing the appraisal or cutting the value. You can usually get by with 6, but if there is any question, it is a top of the market sale, and you are having trouble justifying the transaction, then he will put in a couple additional pending sales. He can then document the ones that went into escrow in a week, the listing prices, how close they are. He will then go the extra mile, which costs an extra hour or two with each transaction to make sure the appraisal does not have any issues down the road. If he does not do this, then there is a good chance the people will come back at him and make him spend the extra hour or two anyway.

Bruce asked Rick if he sees a lot of price movement in Moreno Valley, specifically $200,000 and under, then is this true for Moreno Valley at $400,000. Rick said no, and it seems like $200,000 is the cutoff right now. However, it probably will not be the cutoff by the end of the summer. Bruce said something interesting they run across a lot in the boot camps is that you have a 1500 square foot house selling for $200 grand and a 2200 square foot house selling for $230. All of a sudden, you end up asking how much the extra square footage is worth. It usually comes down to $20-$30 a foot. Rick said he has seen this many times, especially in all of the low income, lower-priced areas. The bigger houses usually price around $230; but if you want an even bigger house that is around 5-6,000 square feet larger, then it may go up $10-$15 grand.

The other possibility is getting the standard home where the more the market is willing to buy in that area, the less you get back. Bruce does not remember this holding true in years where you really had established bull runs. In the years 2003-2005, it seemed the square footage was bonused a lot larger. Rick said this is supposedly true in the years 2003-2005; but in going back to approximately 1989, in most of those years they were either gradually dropping or flat. During those timeframes, square footage is not worth as much. Rick said that during the boom times people are willing to pay a lot more.

Bruce thinks the next price range that will have that experience will be the bigger homes and that investors will move to some of that inventory. It would not be a bad plan to loan up on everything now while you do not have to pay a whole lot extra. You could then get a premium for it 2-3 years from now. The only drawback is that it costs a lot of refloor and repaint it every time a tenant moves out. This is the downside of the bigger properties.

It will be interesting to see what builders end up building this time. The rumor was they were going to build a scaled-down house, but he doubts it. Rick thinks there is a huge demand for things that are below 2,000 square feet from 1200-2,000. He says the land, permit fees, and everything the government adds on is so expensive that they really cannot build a 1400 square foot house and make it work. However, there is huge demand for this if they can. The profit at the end of the day is what they are going to look at and ask why they would build a 1300 square foot house when they can build a 3,000 square-foot house. The lot with all the permits and everything costs the same $150 grand for them, whether it is a large house or small. You can see that this will probably not change if they can sell it.

What it will do is delay the timeframe for them to be able to start it. You cannot pencil these homes, yet as far as construction costs you are only getting $20-$30 a foot or less. For the extra 1500 square feet it is hard to build this. This is kind of a shame since there is a huge demand, especially for the 55+ crowd, for a 1-story house or condo that is less than 1800 square feet. When that type of inventory hits in an area where a lot of that type of borrower wants to live, they go on a huge premium. This is especially true if it is a 1-story condo. This will sometimes sell for $50 grand more than a much larger two-story unit right next door. He especially sees this in Glendora, Upland, Claremont, and other areas where the retirees with no children want to live. They just do not build this anymore since this is a product with a huge demand.

Bruce wondered about the Moreno Valley inventory and where it all was a year ago. Rick said it was 30% lower, possibly even more. He also wondered what would be the equivalent price range in Corona where you are having the explosive movement, and then you top out to where the movement is not so great. Rick said Corona is doing well also, but he does not think prices are escalating as rapidly as Moreno Valley. When he did his last comparable in Corona, it seemed like they were going up closer to 2% a month. Everything in Moreno Valley looked like three. This is on everything lower-end in Corona; he is not talking about a 4-5,000 square foot mansion but rather everything below 2500 square feet.

With the square footage he just mentioned, they recently bought a property at a trustee sale they thought was $400,000 six month ago. They bought it for $325,000, but they had a difficult eviction that was going to take six months. They listed it for $500, and it went pending with two all-cash offers in one day. What’s funny is this is like what a quadrant four bonus is: it is anything that takes more time.

Rick owns a fair amount of properties in the High Desert, mostly Hesperia and some of Victorville. Bruce wondered if any of the hedge fund activity affecting his ability to collect rent as far as higher rents go. Rick said they have not been able to raise rents since they started buying in 2009. Lately in the last six months, they have had to drop them and have noticed that there is a lot less tenant selection. When something goes up for rent, instead of having fifty interested people he may have ten. The quality of this ten is pretty low since they are a lot worse than they were ten years ago. When drives through this area either to buy something or look for vacant houses on which he can write numbers, he notices a lot more rent signs than he did a year ago. Since last summer it has been a lot more challenging, and there are no rent increases coming in the immediate future. Just like Moreno Valley, prices up there have also been rapidly escalating.

Bruce asked Rick what he thinks the main cause is of all that is going on with properties. Rick said he thinks it is similar to Moreno Valley in which they have been rapidly escalating. Bruce wondered what the main cause is, to which Rick replied it is a lot of investors flooding in trying to get whatever they can. He does not think there are a lot of owner occupants up in Hesperia as well as in Moreno Valley. There are a lot of cash buyers paying retail, some even paying a little more than retail.

Bruce asked Rick if he thinks inventory levels will be radically different a year from now. He doesn’t think so since it seems like inventory fluctuations are slow. They may be a little higher than now. Once people who started buying in 2009 and 2010 realized they had enough equity to sell what they had instead of living in what they just barely qualified for in 2009, selling it, walking out with a big chunk of cash, and buying something they really want that they will start buying. This is when things are really going to start picking up and prices start going through the roof. A lot of times Bruce hears others say that when those people that are upside-down receive equity from selling, then there is going to be a block of inventory. However, in the next minute they will also become buyers. Rick was surprised that the realtors are not out in force. If he was a real estate agent he would be knocking on every door in Moreno Valley, Fontana, Rialto, of anybody who bought anything between 2008 and 2011. These people all have equity now. This may not be the exact area they wanted to end up with, but they at least ended up with starting somewhere so they can have enough money to move on elsewhere. They all have $40-$50 grand to work with and the rates are lower, so they probably get the same payment for a much nicer home in the area they want.

Rick did very few appraisals prior to last month, in fact almost none to where it was a double transaction. In this situation somebody was selling to buy something else. Prior to 2006, almost 100% of the sales he did were this exact situation. The owners have mostly been short sale along with a lot of investor resales and first-time buyers. There are not too many REOs anymore. On the hard money loan side, Bruce wondered if the private sellers are catching up to short sales. Rick said it almost seems like 1/3 REO, 1/3 short sale, and 1/3 private party.

Bruce asked if Rick saw similar price movements in LA and Orange County. Rick does not work these areas as much, but with the few he did it seemed like it was not as rapid as Moreno Valley. This is usually the case with the higher-end things. The lower-end things in Moreno Valley will just shoot up like crazy. Everything in LA County seems to be 1 ½ – 2% a month for the entry-level housing. This is still at 18-24%, which is amazing. Rick never thought he would live through another time period like this in his lifetime. Rick is really betting that Bruce is right, and he was really happy to hear his opinions. Bruce said what is important is he does not really draw conclusions and then try to prove them.

Rick bases a lot of decisions on inventory levels. When he sees that inventory is tight and everybody is scrambling to buy something, he gets very excited. Bruce wondered when the last time Rick saw these kinds of inventory levels was. He answered that it was almost never, although possibly 2006. Back then we had already spent all of our room as far as affordability. It seems we have a long way to go before we get to anywhere near the house payment of 2006. This is an interesting point he makes because it is important to realize that this is where it could be over. However, we usually take a long time to get there. It will be very interesting to see how long it takes us this time. Rick said it seems right now they are going up as rapidly as they were going down, which is amazing. They were dropping 3-4% in 2008-2009, and now it seems they are going up at that pace. What happens is you have people who build equity at very quick paces to where they can become move-up buyers. This is when things get really good for the realtors, the title companies, escrow companies, everyone. This feeds on itself when afterwards everybody goes out and starts buying things and it begins to pick up more.

For the research on the report he is writing, Bruce looked through the history of magazine covers. It always lags what is next, but in 2005 you had a picture of a guy hugging his house on the front of one of the magazines. This was exactly how we felt about real estate, and Rick is glad to see people are feeling the same way now. They just came out with the first “Real Estate is Back,” so we are not hugging it yet but it won’t take long at all before we do. This is especially true with all the social media we have and the way everyone talks with each other. They are starting to find out how difficult it is for their family and friends who are looking to find things, and we are trying to get out at the same time.

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.

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Rick Sharga, Vice President of Carrington Holding Company, LLC, Joins Bruce Norris on the Real Estate Radio Show #328

Friday, May 3rd, 2013

Rick_Sharga

 

Rick Sharga

Vice President of Carrington Holding Company, LLC

(Full Bio)


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Bruce Norris is joined again this week by Rick Sharga. Rick is the vice-president of Carrington Mortgage Holdings and one of the country’s most frequently quoted sources on foreclosure, mortgage, and real estate trends. Rick has appeared on every major network and news show in the country, and he has even briefed government organizations such as the Federal Reserve and Senate Banking committee on foreclosure trends. Prior to being with Carrington, Rick was senior vice president of Realty Trac, with is responsible for marketing and business development.

Bruce asked about what kind of experience it was to speak in front of the Federal Reserve and Senate Banking Committee. Rick said it was an eye-opener, particularly when you realize how broad a range of subject matter on which these people have to become instant experts. This was especially true in talking about some of the more arcane aspects of foreclosures, how the processes work, and how there are 51 different jurisdictions across the country that all operate a little differently. This gave Rick an appreciation for the magnitude of the job they try to do because there is so very much that they need to try to absorb.

Speaking in front of the Fed was a little humbling for Rick. He was talking to the chief micro economist and the chief macro economist, and they were asking for Rick’s opinions on the market. He said it should be the other way. It was very gratifying for him and humbling to have enough of a reputation within a certain subject matter to be able to share it with other people who can put it to use.

It is a daunting task for the committees when you think about all the subjects on which they have to get up to speed. They most likely invite experts in and tell them to get them up to speed. This explains why well-intended and seemingly logical legislation that gets passed goes so horribly wrong. There really isn’t the expertise that comes with the business aspect of being involved in the everyday aspects of the operations like a lot of people like Rick are. The other part is you have agendas that really step up to play, so you really have to consider if you are hearing facts or if you are hearing wishful agendas. Rick jokingly said he was shocked that Bruce thought there were agendas playing in Washington.

Bruce asked where Carrington Mortgage Holdings is located. Rick said their headquarters is in Orange County in Alisa Viejo. They have an investment group that is headquartered in Connecticut as well as servicing operations with facilities in Santa Ana, California and Fishers, Indiana. Bruce also asked how many people all together are employed by the company. They have a little over 2500 employees and are continuing to grow. They are seeing growth in a number of their businesses, including the servicing business, loan origination, and real estate brokerage. Rick said it has been an interesting transition coming over to Carrington and seeing all these various aspects of mortgage and real estate related businesses we never had.

Bruce asked if this was the very definition of vertically integrated. Rick said they stopped talking about vertical integration because nobody really understood it. Rick said the CEO does like to say that they do just about everything involved in residential real estate transactions outside of cutting down the trees. It is an integrated operation in the regard that they have business units that invest in pools of loans, that write loans, service loans, buy and sell properties for consumers or investors, write title insurance, do property preservation and construction. It is really does run across the board; and the flip side of that is, depending on the customer, they do not have to work with all those entities.

Bruce said it would sound like Rick and the employees have been in the business for fifty years, but that is really not the case. It is like an accidental success story that the company really started as an investment management business. They began in 2003 investing in pools of subprime loans and managing the credit risk on the loans. When the market went sideways, the company bought the loan servicing business from New Century when they filed bankruptcy. They did this primarily because the loans that had been purchased were sitting in that servicing platform, so it was a defensive move. Bruce Rose, their CEO, likes to say that he had visions of running a hedge fund in Connecticut and suddenly found himself with a 600 person servicing operation. All the other businesses really have grown since then to support some of the other businesses.

It’s funny how things work out sometimes. Rick said Bruce Rose never had a master plan to be involved in all the various aspects of mortgage and real estate operations, but he has certainly been flexible enough in that he had a vision once he got started to put together a good business model.

Rick’s company also has a new loan origination business. Bruce wondered if this was originating loans only for owner-occupants or for investors as well. Rick said it is primarily for owner-occupants. It is aimed at this market, and they do a lot of FHA loans. They also do refis and retail lending. They have branches in about 22 states, and they have a wholesale channel, so they are also working with mortgage brokers and helping them to get consumers funded.

One of the services Rick mentioned was he buys existing note pools. Bruce wondered if this is usually a national note pool. Rick said a lot of the pools are regional, although they are buying nationally. Very often the pools have some regional influence to them. What they are really buying mostly are pools of non-performing loans since their servicing group is very good at getting those loans to re-perform. This is a win-win since it is best for the borrower and ultimately best for the investor as well.

Bruce wondered who the seller typically is, whether they are FHA or Fannie. Rick said they have participated in both government agency pools as well as pools sold off by large lenders or other financial institutions. Typically they work these loans through their servicing group and ultimately wind up foreclosing on less than 20% of the loans they purchase. The guys are very good at finding a way to come up with alternative disposition strategies other than foreclosures. It is a big deal when 8 out of 10+ families get to stay there and retain ownership. Bruce wondered if this is typical, or if they turn to lease or sometimes renters. Rick said no but that this is an interesting phenomenon. They really expected to see more of an interest in people handing over the deed and taking a lease. What they found was that the people who want to stay in the homes really want to stay in as the borrower and just do a loan modification. Since they are buying the loans at a discount, they can usually pass on some of the savings in terms of lower payment prices on a mortgage.

A lot of the people don’t really want to stay anymore, so they become very good candidates for short sales or even sometimes deeds in lieu. In other cases, people are really just ready to move on and get on with the rest of their lives and are happy for the opportunity to do a short sale so they don’t have debt hanging over their head.

Bruce asked Rick if a high percentage of the time the occupant owner is cooperating with a short sale or if they are getting the loan recast and stay to make the payment. These two categories make up the 80% that he talked about with Bruce. A lot of it depends on the pool and what part of the country you are in, whether the Northeast or elsewhere. If you are in the northeast and in a state like New York where you have 1100 day foreclosure cycles, it is sometimes harder to get a borrower to agree to a short sale since they know they do not have to do anything for a couple years. It takes 1100 days for a foreclosure in New York and 1,000 in New Jersey. It will ultimately wind up having a negative effect on the real estate recovery since the distressed inventory will be around for so long.

Bruce asked if Rick thinks we will ever see a national foreclosure law. Rick said probably not, at least not in our lifetime. The CFPB recently put out national loan servicing standards, and those were mostly aimed at servicing of delinquent loans. After they issued their national standards, they issued an addendum saying that state laws trump these national laws. From the perspective of a company that does loan servicing in many states, it would be great to have one set of foreclosure rules and one set of servicing standards, but it really does get into the whole state rights versus federal rights issue. Right now foreclosure laws are all managed by the states.

Carrington is also buying properties, although very selectively. They think the market is very frothy right now. Rick and Bruce have talked about how well some of the business models hold up or don’t hold up as home prices appreciate very rapidly. Right now there are better opportunities in things like non-performing loans and mortgage servicing right now. They are just not willing to pay 125% list price for a property they are going to hold onto and try to get a rental return. At the same time, there seems to be a new player willing to do that almost every day. Everybody has a different business model. There was an announcement recently about one of the companies having an IPO. If you are overpaying a little bit but put some leverage into your purchase by getting other people’s money, sometimes the returns look better. Rick said he does not know what the implications are for the people that are doing the follow-up investing on properties that were intrinsically over-valued. There is a lot of money coming into the return rates, so it will be really interesting to see if they are able to deliver what their perspectives indicated they would.

Rick is probably a lot more familiar with the different business models that are out there. For Carrington’s purpose, Bruce wondered if whenever they bought a property it was always the intent for them to have it occupied by a renter for some period of time and then resell it for a profit. Rick said typically when they buy a property this is the model. It is almost always with the notion of having somebody rent the property out for a period of 3-5 years and then sell it as home prices appreciate. Their model was and is a hybrid model. There are rental returns built into it as well as home price appreciation. When a market overheats, it really makes both parts of the model difficult to achieve because the underlying collateral is potentially over-priced.

Bruce wondered what surprised Rick as he went through the buying effort. He wondered if there was something more difficult than he thought it would be originally. Rick said there were a couple things, and the two biggest really come down to inventory. The properties of REOS and lender-owned properties really dried up much more quickly than they or anybody had anticipated. As part of that, there had been speculation that they would see a lot of bulk sales and fairly large pools of properties sold. This has really not been the case as there has been a couple exceptions over the last few years, although really not that much. The other surprise was how much interest developed in the particular asset class so quickly. It seemed there was a new company announcing a new $100 million fund every day. It went from an interesting idea to the investment topic de jeur.

Bruce said when they are bidding at the trustee sale they can always tell that somebody has gotten their first $100 million since it is usually spent in a 3-day period. Along these lines, Rick heard an anecdotal piece from an auction in Atlanta where one of the institutional people ran out of checks. What is sad is that because they are doing so much business, the auctioneer actually waits for them to come back. From the auctioneer’s perspective, it makes sense to wait for the person who is coming back with the fresh set of checks.

Since people worry a lot about home price inflation rather than appreciation, the encouraging thing Rick has seen is that as the investors have come and gone from some of the markets, the prices have held. They may have accelerated the price appreciation and driven prices up a little faster than they would have gone on their own. However, once they have hit that new level they have generally held. This suggests that the value is still right for the properties that are being purchased. Rick brings up a really important point and something that is really a concern of people that are investors. Bruce does not think the homeowners really thought things out because this is a new experience. Bruce does not recall ever having this money invested in single-family homes. To Bruce, this is an unprecedented group of people. Collectively, all of these companies together have become market-makers.

Rick thinks the aforementioned is over-stated in the press right now. On a localized basis you could sometimes make an argument that they could become market makers. If you look at Phoenix last year and Atlanta, you see it happening. Collectively, there was $10 billion of funding announced last year, which was not all spent. $10 billion as a percentage of the overall housing market where there were about 5 million units sold is really a rounding error. Bruce has been studying foreign buying, which is about $800 billion. Rick does not think the institutional investors are really market makers in a broad sense. It has been interesting press conversation since it is not a new phenomenon. In terms of actual impact on the overall market, this affect has been overstated.

Bruce wondered if he also feels the same way about rent values. He wondered if they would not have so much inventory that they would sway. Rick said not yet since rental units are still occupied somewhere north of 95% across the country. What they have seen on a short-term basis is you take a neighborhood in Phoenix, and suddenly there are a lot of homes on the market for rent. You might have a temporary over supply because you cannot break their lease and move into something new. There could be some softening of rental rates, but he does not think it is because the entire inventory is hit at once.
FHA just announced that they were selling 40,000 notes this year, which is in a competitive bid situation. Bruce wondered if the FHA retains part ownership of this. Rick said he is not aware of any of those types of arrangements where the seller retains partial ownership. Rick believes they are all at right sales. The government pools, specifically FHA pools, tend to come with more specific requirements and language about what the buyer may or may not do with the pools. In the FHA pool that was sold earlier this year, there was some language that restricted buyers from being able to foreclose on properties for a certain period of time. It required a certain percentage of loan modifications. There were more restrictions and requirements with the government pools than with the private pools, and Rick believes they are all outright sales.

Bruce wondered if these are all auction type settings to where it is just the highest bidder who receives it. Rick said he is sure highest bid is one of the factors, but there are also performance and disposition considerations. He is not sure it is necessarily 100% based on the highest bid, but they do at least have to be competitive.

Carrington has a model where they are going to buy and sell a property. Bruce wondered if there are other models he is aware of that are going to have the single-family homes with a different disposition where they may be putting the homes into a scattered apartment type REIT. Bruce said they would not come back on the market; although Rick said they will at some point, and this is one of the differences between a traditional apartment REIT and a real estate investment trust. It would make sense to build flexibility into a REIT like this where you can move certain properties out and replenish with other properties as they come to market. Rick is not aware of anybody’s plans that call for a permanent hold of the rental properties. The big variances tend to be the length of the potential hold and how much of the return for your investors you are planning to get for rental rates as opposed to home price appreciation.

Rick talked to a group in Indiana, and they were looking at 18-20% annual yields on the rentals, but they were really ultra holds. They did not see prices appreciating in a suburb in Indianapolis any time soon. Rick said they saw another big investor get out of Northern California since they were buying three $400,000 homes. You cannot simply have rental yields since you cannot charge $3-$4,000 a month rent for too many tenants. What they saw was home prices appreciating more rapidly than they thought, so they got out and made their profit. The REITs would be long holds. What you are basically counting on is the cash flow from the rental units being what you are investing in. Those building units would stay in the REIT longer than a typical buy and short-term hold. There could be some transactions that move properties in and out of that REIT.

Bruce asked Rick what a long-term hold would be. Rick said it would probably be anywhere from 5-10 years, which is a long-term hold. The average for most people going in was they were looking at a 3-5 year old. If you are looking at a REIT, you are probably looking at something a little longer than that. Bruce said it would seem to him that most of the product they would have in the REIT would have to be bought in the next 6-12 months. One of the largest investment groups looking into this was Blackstone, and they really believed there was about a two-year buying window, and we are in the second year of this right now. As prices go up, it gets harder to get the returns you are trying to find.

Bruce wondered if they keep switching locations, or if they do them all simultaneously. Rick said you are actually seeing a movement right now away from some of the more popular states. Typically everyone started where the foreclosure numbers were the highest, so you go for states such as Arizona, California, Nevada, Florida. What we are seeing now is a movement into second tier states, or states that did not have as terrible a fall from peak to trough in terms of home prices. In this case, you can buy reasonably priced homes and get a reasonable rental yield for the next few years. It is really not a buy/flip business so much as it is something that already cash flows and you might as well keep it.

Bruce asked Rick if he thinks this model is going to be gone at some point and they will find something more traditional to do with their billions of dollars. Rick said as there are other opportunities to deliver good returns, you will see less interest in this. However, he thinks you will see a more permanent group of large investors in the single-family rental space when we come out of this cycle than when we started.

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.

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Peter Schiff, CEO of Euro Pacific Capital, Joins Bruce Norris on the Real Estate Radio Show #327

Friday, April 26th, 2013


Founder of Foreclosure Forum


(Full Bio)


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Bruce Norris is joined again this week by Peter Schiff. Peter is the CEO of Euro Pacific Capital and bestselling author of The Real Crash: America’s Coming Bankruptcy – How to Save Yourself and Your Country. He is also the host of the nationally syndicated Peter Schiff show, heard daily from 1-3 Pacific Time at schiffradio.com.

Bruce asked a question very near and dear to most of his clients’ hearts. Bruce asked about Riverside where the prices are so low that a builder could not possibly create a building lot or build a house for a profit. He wondered if this makes it underpriced or if it is still over-priced. Peter said that California is certainly not one market, but there are many local markets within the state. To the extent that property prices are below the construction cost, it is an indication that the market in that area may not be as overvalued as it is in other areas. In many cases, this depends on what the land is being valued. The land may actually be worthless in that respect, and the only value is the improvement. The improved property does depreciate over time, so if it is there to be used then it is also wearing out. If you cannot really sell it, then you have to factor in the depreciation until there is a point where you can factor it.

A lot of people who were in California during the Bubble were getting priced out of the market and started to stretch into distant Inland Empire type markets. Here they had about an hour commute, but they thought it was worth it because it was the only way they could get into the real estate game. They wanted to get rich, so they figured they would endure the long commute. Now that the bubble is burst, there is really no reason to live so far away from where you work, especially with the higher cost of gasoline now making it so expensive to get to work. This is assuming you still have a job. Peter said he thinks more people would rather rent something closer to work than buy something an hour away, even if it is a bargain based on what it may cost to build it. There could be no reason to build it. You could build a house in the desert and say it is selling for a lot less than it cost you to build it. However, there was no reason to have that house out in the middle of the desert.

In some respects you cannot say a property is selling below construction cost because it maybe should not have been constructed in the first place. It may have to go down a lot more before it makes sense for people to buy it. Usually when you think about California you think about the San Francisco Bay area, Los Angeles, and Orange County. Even here prices are still way out of whack with people’s ability to pay. The only reason that people are still able to afford these high prices is because of massive government subsidies. Right now we have the lowest mortgage interest rates ever in the history of the country. This is what it is taking to pop up real estate markets. In addition, interest rates should not only be at record lows, but the Federal Reserve is buying $45 billion worth of mortgages a month.

Without the Fed buying up the market, mortgage rates would be rising. The only reason they are not rising is because the Fed is buying them all. The government is directly loaning money to people to buy houses at the lowest mortgage rates in history. This is the only thing holding onto the market. Eventually, the Fed has to take away the punch bowl; interest rates have to go up. This means mortgage rates have to go up and real estate prices have to plunge. Once interest rates go up, people cannot afford to buy these houses at these inflated prices. The other problem with California is the fact that the jobs are going to go. No entrepreneur in his right mind is going to move a business to California since plenty of entrepreneurs are planning to escape from California. Peter talks to people all the time who are planning to move to Nevada or someplace else and get out of California. You have governors, such as Rick Perry from Texas, who almost lives in California now recruiting California businesses to move from California to Texas. With a 13% income tax versus 0% along with work the California Labor Board is doing, the tax base will most likely be eroded. It is very expensive and risky to hire people in the state of California. People will most likely be leaving the state, not coming into the state. This means more houses will be up for sale and not as many people up to buy them. It is a disaster in the making for California real estate.

Peter is not opposed to signing up for a thirty-year payment at this level. If you own a house, you have to take advantage of the money. The worst way to own real estate right now is to own it free and clear and own it all-cash. The only way that you make money as a homeowner is by being a debtor. You are not really making money on the value of your house going up, but rather on the value of the debt being wiped clean. If you can buy a property with a 3 ½% down payment, which you can with an FHA loan, then you get a lot of leverage and can take advantage of the chief financing. When inflation wipes out all the savers and debtors, they also wipe out your mortgage debt. Therefore, Peter definitely thinks if you are going to own a house, then it should be done this way. However, if you are looking at an investing in property, he would not be buying in California.

There might be places where the economies are likely to be better, such as Texas, but the national economy is still going to suffer. This is because of the policies that come out of Washington and the Federal Reserve that affect everybody, even if you are living in a state that is getting it right. You are still living in a country that is getting it very wrong. In general, real estate is not a preferred asset almost anywhere. Peter said if he is right about the US economy headed for a major collapse, the financial crisis, the sovereign debt crisis, the dollar crisis, then it is not a good market for real estate. People are losing their jobs and will be spending more money on food and energy. They will not have as much money left over for rent or mortgage payments. Peter said he also thinks that households will be destroyed.

In the late 1990s, people were graduating from college, were getting good jobs, and they immediately bought a house. This is not going to happen anymore. People are graduating from college, cannot get jobs, and are drowning in student loans. There is no way they can afford a house, so there would be no reason for them to want one. There is no compelling reason to buy since the reason to buy before was that you could get rich since the prices were increasing. Now, people start to appreciate the cost of owning a house. There is a money pit, and you have to pay taxes, insurance, maintenance, and everything that costs money. People forgot about the cost of owning a house when prices were rising since it cost them nothing. The appreciation offset all those costs and caused money to be left over. Houses are not appreciating if they are just keeping pace with inflation. It costs you a lot of money to own them, so a lot of people cannot afford it.

You also have older people now who are retiring, but they do not have any income since they are getting 0% interest on their savings. They cannot afford to stay in their homes, so they are putting their homes on the market for sale. They have to downsize because they do not have the income to sustain themselves. You have a lot of people leaving the workforce now, so you have people who want to downsize, young people who cannot afford to buy, and the old people who have to sell. The supply and demand imbalance is going to be enormous, and you have all the backup in foreclosures. The whole process has been dumbed up for years, and there is a huge shadow inventory of property that is not on the market right now because people don’t think they can sell. The minute people see some kind of uptick in prices, you are going to see a lot of properties come right back on the market. Most of it will not be able to sell since there are not enough buyers. It is not going to be good if you are really worried about inflation and want to buy gold, commodities, or foreign stocks. If you want to buy real estate, buy it in Asia, Australia, or anywhere the economy is going to improve.

Peter lives in and owns a home in Connecticut. His home is way underwater even though he just bought it a couple years ago. He did not buy it as an investment, but rather because he was tired of moving. He rented it before he bought it. However, he bought the property for about 60% below what the guy who sold it to him paid, and he is still losing in it. It is still down because he spent money fixing it up, and he probably lost about 70% of the money he improved. Whatever he spent improving the house, he got back on the appraisal about 30%. The house went down anyway even though he bought it in December 2009. He bought it for half of what the price was in 2002. The person who sold it to him spent a lot of money on it and fixed it up. He really took a hit since he owned it for several years. Peter did not buy it because he thought he was picking out of the bottom. He bought it because he had enough money that he did not care how much money he lost on the house.

Peter owns a boat, which he said is not a smart financial decision since he only uses it about three or four times a year. At what it cost him to maintain the boat, he could rent a much better boat and save a lot of money. However, he does not own the boat as an investment. It is a lifestyle and something that he wanted to have, just like his cars. He buy cars he knows will go down in value every year, but he buys them anyway. This is the same attitude he has about a house. This is why you should not buy a house if you are not prepared to lose money. Otherwise it is rent. For most people, renting is cheaper. Brokers always try to con you into thinking you are throwing away money when you are renting. You’re not because you are getting a place to live out of it. For years he was renting houses and paying his landlord such a low rate of rent that they were in negative cash flow.

Peter was getting a great deal renting because he was avoiding all the headaches of owning a home. Now he owns a home, which he enjoys. However, it costs him a fortune. Things are breaking in his house all the time. Even though the house was built in 2002, things are still going wrong in it. There are workers at the house fixing something every week. Part of the problem is a lot of hot money has moved into the real estate market. There are a lot of private equity people who have borrowed a lot of cheap money and bought all these single-family homes. A lot of the home sales that have taken place recently are not legitimate buyers. They are flippers and speculators who have bought these houses up, are putting them up for rent, but they are hoping to sell them when the market comes up. It’s like a war because when interest rates go up, the prices are going to come down and they are going to start losing money on these houses.

With interest rates going up, if they take just the money they borrowed to buy them, they are not going to collect enough in rents to cover the interest on the borrowed money. As the economy worsens, some of the tenants may lose their jobs. Peter thinks you will see a lot of these speck homes coming down in the market. These guys are levered up, but when the investors want their money, they are just going to sell. They are just going to hit the bids, so you can see a big drop in prices because of all the speck money that is trapped in residential housing right now. Single families, for example, did not just buy an apartment, but rather huge blocks of single-family homes in Nevada, Arizona, Florida, and even Riverside, California. They think they are going to make money and are trying to catch a falling knife. However, they are going to end up catching it right in their stomach.

Peter has a son named Spencer who is ten years old and another on the way. Right now Spencer is too young to have an opinion on what he will have to deal with, but it probably starts early in the Schiff household. Peter does have one book he wrote that young people can really read, understand, and enjoy. It is called How an Economy Grows and Why it Crashes, which a lot of ten and eleven year olds have read. Peter recommended if you have a young child to buy the book for them, and when they are done to read it yourself.

Peter uses the term decoupling to describe a situation where, using the analogy of the global economy as a train, all the trains are attached to one another. If one moves, they all move. In that analogy, most people think of the U.S. as the engine with all the other trains. However, the idea of decoupling is that a train can decouple from that engine and keep on going. This means the U.S. might can stumble, but emerging markets can still do well. Peter’s idea about decoupling is that the U.S. is not the engine, but rather the caboose. Decoupling will actually benefit all the other cars because America is not pulling the train, but rather the train is dragging America’s dead weight. The reason Peter says America represents a dead weight is because we are net importers. We consume more than we produce, which means we are living off the global economy. If America just disappeared, then the world would have more, be able to work less, and enjoy more consumption from the work they are currently doing. They would have more. This kind of decoupling is going to be very positive.

A lot of people think if the US economy crashes, we will take the whole world down with it. Peter thinks it is the opposite and that it is actually popping the US economy up that is holding the whole world back. If the world lets the dollar collapse and stops subsidizing our economy, then their economies will take off.

One of the questions Peter asks in his book is if we will default in order to avoid a crisis, or will we react to one. Peter said he does not think we are going to avert a crisis. The only hope we have of eventually doing the right thing is doing it in the aftermath of a crisis. This goes to the nature of politics. Politicians follow their own self-interests, their own need for preservation, and their need to be re-elected. They are never going to deliberately do something to bring on short-term pain, even if it is exactly what is needed. They are never going to ask them to swallow medicine that is bitter, even if it will cure us. They would rather give us some sugar or something that tastes good just so they can get re-elected, even if in the process the disease gets worse since we are not treating it. Once it comes to the point where it is so bad they cannot do it anymore, then they may finally be forced to do the right thing. However, they will try everything else first.

Bruce said it seems like the one suggestion of just giving a one-time tax of the wealthy certainly seems like the sentiment is leaning toward people who have done well and have savings. They want to tap that spigot and tax it as hard as they can. Bruce said this feels like a pretty dangerous trend to him. Simply confiscating wealth through a confiscatory tax plan is not going to solve any of our problems. First of all, whatever money the government confiscates is just going to spend it. It is not like it is going to help the economy. However, you also create a very dangerous precedence that what you own is not yours and the government can steal it. People will not be trying to accumulate more wealth, but rather trying to hide whatever wealth they have out of the county. Once you start this, you are pretty much finished. What we need to do is restructure the debt by simply not paying back what we borrowed. This is not confiscating anything; this is simply defaulting.

Individuals declare bankruptcy all the time, but it does not mean we are no longer a nation of laws and that we no longer have a market. The market allows for bankruptcy. Stockton, California just declared bankruptcy. Cities can declare bankruptcy if they are broke. The US government is broke, and there is no way to pay its bills. All we can do now is keep interest rates at 0 so that we do not have to pay our bills. $1 trillion is being printed a year so we don’t have to pay our bills. This is damaging the economy much more than if we just defaulted. What we are doing now is far more dangerous to the economy than a legitimate restructuring of our debt where we tell our creditors we cannot pay them back. If we were to immediately default on our debt, nobody would want to loan us anymore money. This is a good thing. The best thing that can happen to America is that nobody wants to loan the US government any money because then the government has to stop spending. If they cannot borrow, they cannot spend.

In addition, we have to tie the Fed’s hands and make sure they cannot print. Right now the Fed is monetizing all this debt. They have to stop doing this. They have to stop giving the government an easy way out. We need a better Fed sharing with some backbone to let interest rates increase and to refuse to monetize any of this debt. This would force the government to cut spending. However, because the Fed gives them an easy way out they do not have to cut spending because there is no immediate negative consequence to the budget deficit because the Federal Reserve modifies them. However, this is creating grave long-term consequences. Peter said he is not talking about 10-20 years from now, but rather we are going to face these long-term consequences in the next few years.

Peter mentioned Stockton, California earlier. This is a real test cast for a lot of people who have debt who are in line, Calipers being one of them. There was another event with Cypress recently that probably makes people feel uncomfortable with large deposits. This could even be true with small deposits since initially they talked about giving everybody a haircut, including the accounts that were insured. If you have a bank account in the United States, you are going to lose. One way or another, you are going to lose. Your bank is going to fail, the government is not going to bail you out, and you are going to lose some of your deposits even if your account is insured. We have $8-$10 trillion of insured deposits, and the FDIC has about $20 billion worth of treasuries to back them up.
One scenario is that your bank fails, there is no bailout, and you lose and don’t get back your money. The other scenario is the bank does not fail because the government bailed them out and you get back all your money, but your money is not worth anything because the government had to print trillions in order to bail everybody out. Either you lose to inflation, or you lose to default. The lesson is don’t maintain a large bank account. You just need to keep enough money to clear your rent check or your mortgage check, and don’t keep any significant amount of money in the bank. You have to do something else with it, whether it is to invest it, buy gold, silver, stocks. Even buying real estate is better than leaving your money in the bank. Peter said he likes buying foreign stock or dividend-paying stock. Do something with your money. You have to buy something that the Federal Reserve cannot print.

One of the hardest things about investing now is because of the manipulation and interference, it is hard to say how it is going to play out in the short term since it is so volatile due to the interference. There is a lot of noise and a lot of things happening to manipulate the market. We also have foreign central banks, including the Bank of Japan, the Bank of China, the European Central Bank. We have banks all around the world and emerging markets in Latin America and Southeast Asia that are all interfering to prop up the dollar. All of this is delaying the day of reckoning, and it is impossible to know when this day will arrive. The only thing we know for sure is that it will arrive. The longer we have to wait, the worse it is going to be.

If you are interested in learning about how to build a globally diversified portfolio of foreign stocks and bonds, you can talk to one of the brokers at Euro Pacific Capital. The website is www.europac.net. If you want to buy physical precious metals, he also has his own metal company. You can visit him here at schiffgold.com. If you also want to listen to more of what Peter has to say, he also has his daily radio show he does on weekdays 7 am to 9 am California time Monday through Friday at schiffradio.com. He repeats the show every two hours in case you missed it the first time.

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.

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John Karevoll of DataQuick Joins Bruce Norris on the Real Estate Radio Show #323

Friday, March 29th, 2013


Data Analyst at DataQuick


(Full Bio)


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Bruce Norris is joined again this week by John Karevoll. John was born in Minneapolis in 1951. His family moved to Norway where he was raised, educated, and married. He worked as a journalist in Oslo for ten years and joined a Scandinavian business publication in New York in 1983. In 1987 he was pulled into the world of data, mining large databases for trends. He has worked for TRW, CDB Infotek, Axiom, and others. His relationship with San Diego-based DataQuick Information Systems goes back to 1989. The statistics he generates are used by public agencies, lending institutions, title companies, and others.

If you are in the business of selling properties, one of the things that has been obvious in the last twelve months, it is becoming increasingly obvious that there is less to compete against. There are also several buyers beating each other up to get something when before there was plenty for all. One of the problems is a lack of inventory, and the other is a competitor who will probably pay cash. John said right now we have the highest level of cash buying. In the Inland Empire, roughly 40% of the buyers are paying cash. As a whole, it is about 30%. It is really hard to get in and compete with this, even if you go in with a pre-approved offer from your lender. It still takes an appraisal and other things, and they are just losing out here.

John goes to a conference at the Department of Finance about once a year where a lot of the number crunchers look at various things. John said he thinks the last time around one of the biggest issues everybody thinks is going to emerge is this pent-up demand. There is an awful lot of buying activity, which has been put on hold. We have to remember that demand is generated by just the most mundane of things. It could be because people move to an area, graduate from college, get divorced, have kids, or anything that could generate demand. The demand that has been met the past six years has really just been a fraction of the demand that is being generated out there. No matter how you do the numbers, it appears that there is an incredible amount of pent-up demand out there. It is not just the boomerang kids who have gone back to live with their parents after they finish college, it is also retirees and people who want to move closer to work. What we are seeing now with prices off-bottom, people understand that property values are just going to continue to go up for a while. This was a psychological turn. It is hard to buy something if you think it is going to go down in value; but rather it is a lot easier if you think it is going up in value.

John said he has been hearing about open houses in North San Diego County and Southern Riverside as well as a lot of LA. You literally cannot get in the door. People are lined up outside waiting to walk through the living room and kitchen. All of a sudden it just hit; so it will be interesting to see just how much that demand pushes prices up between now and summer. One of the things that was unprecedented is the number of foreclosures that happened in 2007 and 2008. When you can qualify for a loan three years later, you created unprecedented demand on top of normal demand. This is where a lot of it has been coming from, but they have not been able to buy because 40% of the market is cash-buyers beating them out. They are still in the hunt, but they have not been satisfied.

We have to remember that there is a lag between the agreed upon purchase price and when it is agreed upon, and when the appraisal comes in. When we go back 2 ½ years, John was at a conference. The CER representative here said that half of the escrows were dying because half of the appraisals were not coming in anywhere near where they needed to be. John’s understanding now is that the appraisals are a bit better, but it is still very bad out there. If you go out there, make a bid, and are even pre-qualified for your financing, then there is a good chance that the appraisal will be based on the last 3-4 months of sales activity. It is not going to come in where you want it.

Bruce said the appraisal world is lagging the real world by at least 45 days. The time it takes for those transactions to close, especially in FHA areas where a buyer cannot arbitrarily say they want it anyway and give you $20 grand, is different. If you are in a conventional market, you will have people pay a 5-10% premium just to get one, and this becomes a comp. The market proves the appraiser is behind because they wanted it bad enough to close it anyway. John said this will probably self-balance itself at some point. John and Bruce both remember in the late 80s and early 90s when one of the ways the pressure was eased was by carrying a second. This would mean if you were selling a piece of property, you sell it for $350,000 while the bank says it is only worth $300,000 because of the appraisal and are only going to lend 20% on it. The person may have a $50,000 down payment, and suddenly there is money that just is not there. Therefore, you carry a second. This was about 1/3 of all the sales from 1989-1991. We are facilitated by the seller carrying a second and the lender being willing to let that occur.

A lot of the lenders said they did not want the aforementioned to happen, and people did. If you bought a property, it was financed, and everything was recorded, the lender cannot go up to you after the fact and say you cannot use the property security for a loan even if it was on top of the one put out there. People did that, and seconds were big. Bruce wondered if when you have price increases lenders will look at it and say they can become a little more aggressive with their policies? John said the answer is they did and he expects them to continue. This was Ditek in 1997. It is somebody going out there and saying they will make loans based on what they think is happening out there. It cannot happen now, but if an aggressive lender comes in and says they won’t give you a 4%, 3o-year fixed but rather a 6% and let the agreed upon sales price constitute the actual sales price, then they could go forward with it. This is where you have the little 2% margin and what you have as a differentiated, good, healthy mortgage market where you everybody making all kinds of different loans for different purposes. Although it’s pretty absent right now, John thinks it will come back.

If you pile stated income on top of a low down payment and on top of an ARM as well as a negative AM, that is a recipe for disaster. Being self-employed, John has to go out and show all kinds of documentation, so stated income loans are appropriate for this. John’s wife is a physician, and a lot of her colleagues are self-employed as well. They do not have an employment history since they are self-employed, so a stated income loan is absolutely perfect for them. They would simply go out there and get the stated income loan. All of these loans, whether they are a negative amortization or interest-only, they are all appropriate for their specific circumstances. We have the loans gone wild crazy period where these people were unfettered, went loose on the market, and nobody reined them in and they are causing us all problems.

John said there was one person at a conference he was at who brought up one of the most controversial types of loans. She said the most controversial new loan characteristic out there for home loans was when they decided to let spousal income become part of the qualifying process. Before then it was strictly the bread-winner’s income, nothing on the side. It was basically, “Wives’ incomes count,” and when this came in this was much more controversial and there were more naysayers. John grew up in Norway where ARMs are what people use there. The fixed rate loans are just not used. Here the down payments are around 25-30%. Bruce thought things would change and wondered how other countries finance things, and he saw that a 30-year fixed is not normal. However, John said in Norway you can get a 10-20% down loan, although they are more expensive and harder to qualify. Their rules and laws are also different.

Bruce asked if you had a lender finally break the ice and say something was perfectly safe, it would seem to him that as soon as they have a track record for being paid somebody else will say, “Here we go.” After that we will be off and running with something of a program. John said where things get really interesting is when you go and talk to the lenders, you will see that most of the loans made by them are still bought by investors. Now there is just no stomach for risk, although John does not think this is the case. He thinks they may think that’s the case, but John said he has heard in other context that there is a lot of money, especially foreign money, just stacked up and waiting to jump into the market. They are looking for ARMs. The one John heard about was tens of billions of dollars waiting to be invested in ARMS, and none of the lenders were willing to bundle a lot of ARMs for them so they could invest in it.

However, the returns are going to be good. If you have a pension fund and are looking out there to park $10 billion a month, whether in a teacher’s fund or public employee fund, the question is what you are going to do with the money. You cannot put it into a savings account since you only make about 2.25% interest in it. This is the flip-side of having great rates to borrow, and then you have people with money saying they do not want to do it. This is especially the case with a 30-year term. John thinks this is going to cascade at some point and become more available. John does not want it to get to the way it became back in 2006 and 2007.

John said he remembered going to a meeting with Wachovia, and he listed to the people talking about how they were originating mortgages out there. John was not aware of this mirror in front of the mouth qualification where you fog the mirror and get your loan. They were using this exact analogy and laughing about it, which confused John. It was after the fact for Bruce as well since he did not know what a collateralized debt obligation was or a mortgage-backed security until about mid-2007 when he really studied it and was surprised. There were other people on the other side betting against it with credit default swaps, and you find out that they sometimes have on the same hat. One of the things interesting in California and possibly Nevada and Phoenix is the hedge fund world has really played havoc with the private buyer trying to get inventory they would not have to finance since people are coming in with all cash offers and buying everything in sight.

John said growing up in Scandinavia, he is wildly at the other end of the political spectrum, but he does believe in a good strong market. He just thinks the people need to be reined in and that it should be a level playing field for everybody. Unfortunately, if you go back to the 2006-2007 period, it was not a level playing field. It took John a long time to understand what one of the debt obligations actually was. If you go and look at all the derivatives, it is astonishing what happened and how little regulation there was. The deregulation was not a good thing for the economy or the world. The thought that they would rein them in themselves turned out to be not true. What we had was a chain of participants, all of whom had made their money on commission. There were no grownups telling them to stop. Everybody in the chain from the local originator all the way up the chain to the person packaging things on Wall Street were all making their money basically on commission. You have a lot of sales people out there, but these sales people need managers or at least connected to the real world in order to know what the rules are.

However, at the end of the day it really did not help anybody. They made a lot of money, and that was the only thing they know how to do. They have basically been out of business for five years. Money should reflect an underlying value, whether it is productivity or some kind of tangible; and this money was just funny money. When you go look at the derivatives, it was like a synthetic CDO. It would be like John and Bruce investing money in somebody’s life insurance policy, and then they start selling what they invested in it.

Bruce said inventory right now in some areas is about a month to a month and a half, although in other areas it is literally days. Bruce wondered how this reverses and gets back to a normal inventory level if lenders are not going to come up with the REOs. Short sales have also been consistent, so the only place it can really come from is equity has it. In Sacramento, for example, half of them don’t have it. According to Economics 101, the solution to this is prices have to increase. Bruce said for 2013 he does not see how the inventory would grow to months and months of supply since it will have to have more demand than it has supply for the entire year or two. However, John said this would happen if we kept the six-week lag between the when sales occur and the appraisal can come in properly. This will have to shrink down a bit.

Additionally, we are bouncing off the bottom right now, and the velocity of the bounce is the fastest. Once the bounce gets further up off the bottom, a little more gravity will exert itself and pull back a little bit. With the low interest rates, a rise in prices is just in the cards. This will keep going until there is equilibrium of some kind. This will probably go up fairly strongly, at least between now and summer. Bruce said what is interesting about equilibrium is it is hard to get if you only have two months’ supply of inventory. You then still have a huge push. However, it seems like once people start making a lot of money on their real estate, it does not end until it is numerically possible to qualify. Usually this regains momentum instead of slacks.

Right now we are probably going to have a period of time where we dipped up into the pent-up demand, so things will be going very well. However, at some point it is going to level off a bit and the regular things will exert themselves. This includes household income, how much money you saved, self-directed IRAs. Here we also have demographics, which is the baby boomer generation of which John was a part. It was a big bump on the curve that is now past us. A lot of the force that was built into that will probably dissipate and go back to the basics. There has also not been much building going on the past six years. No matter how you do the numbers there are too few houses, especially here in California. How this plays out will be interesting.

Cal Poly produces a report about this, and they are the only place that actually counts sub-divisions. Sub-divisions are down by 95% in Riverside County, which is where building would obviously take place. You cannot catch up with sub-divisions or finished lots tomorrow if you decide it is finally okay to do a sub-division. There was some consolidation out there, but the builders were pretty good about keeping the pipelines active. There are a lot of projects that were being incrementally pushed through the pipeline, and you can crank it up just a little. John said he has watched a few; and they will be able to crank it up, but like nothing compared to what the demand is going to be. During the last boom in 1989 when people were building like crazy, they were building a lot of really crummy things. There were then an awfully lot of boxes being put up and long lines on asphalt roads. The things we are looking at now and the things built back in 2004-2006 were well-thought through projects. If you go drive down in Murrieta or Temecula, there are a lot of homes that are 4,000 square feet. The neighborhoods and homes are nice, they have planned for schools, parks, and commercial development. It is not like driving around in Palmdale where everything was built back in 1988.

This all takes time. If you start breaking ground tomorrow on the next one, you are going to have to go through all the approvals. These don’t come out of the ground for a while. John said he flies ultra-light airplanes out of Paris, and they fly about 20-30 miles. There are a lot of building projects they fly over in these planes and oversee, and they see how they brought the development as far as they could before they pulled the plug on it. There are 400-500 lots built in these half-circles, and they kept them active. There were always 2 or 3 houses being built right at the end of some street, so there was always something occurring. During the past 3 months, you are all of a sudden going around and there are no longer only 2 or 3 but 12-25. They still have plenty of other lots there, and the lots never degraded that badly. They are still rebuilding, and things are now starting to come online.

Bruce asked John’s opinion of interest rates starting to go up and what the reaction of the buying public will be. John said initially there will be a rush to go out there and buy before it goes up even farther. Not only did they miss out on the bottom of the price, but now they don’t want to miss out on the interest rate too. A lot of people think the opposite will happen, but that is not true. Even back in 1983 when John moved, people were still talking about their 17% mortgages. Bruce refied back in 1981 to become an investor at 17 ½, and he was shocked when he was able to pay it off with a 12. John remembered when it went below 10 and everyone was saying it was only temporary and would go right back up to 18 again. However, it never did, but in the future we could see in the future is the other end of the chart.

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.

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David Kittle of IMARC Joins Bruce Norris on the Real Estate Radio Show #321

Friday, March 15th, 2013


Senior Director of Industry Relations


(Full Bio)


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Bruce Norris is joined again this week by David Kittle. David is the senior director of industry relations for IMARC, a fraud investigation company located in Santa Ana. He manages IMARC’s Washington D.C. office. He is the past chairman of MBA’s political action committee MORPAC and former vice-chairman of MBA’s residential board of governors. He also served on MBA’s board of directors from 2004 through 2010. David is the past chairman of the Mortgage Bankers Association in Washington D.C, completing his term in October 2009.

Bruce and David talked off-air about some of the loans that should have been easy to get funded that have not been easy. Bruce mentioned how it seems there is a conveyor belt A and then everything else; and it seems you can get off of conveyor belt A very easily. If it is not meeting a very standard format, then it seems that your loan can go unfunded or unwanted for months. Bruce wondered what conveyor belt A is, what the desired product is, and how hard it is for the lender to want to spend time on it should it get out of that matrix. David said the answer to the last question is the fear in the marketplace of making a mistake. If you are not in a mid to high 700 credit score and a relatively low loan-to-value 80% or under, no dings on your credit, a very good stability record with some cash, and not self-employed, then you can have issues. Even somebody in that particular matrix can have issues. It has to be pristine; and these are all the rules coming out of Dodd-Frank and the CFPB that is driving fear and uncertainty to the lenders.

This means QRM is already in place even though it is not law because everyone is afraid that if they do something wrong, they will buy back the loan. Fannie Mae is still kicking back loans. David Kittle’s company does loan purchase rebuttals for their lenders as well, so when they get a loan kicked back it’s not good. David said he has seen cases where lenders are being asked to repurchase the loan on rules that were not even in place when the loan was made. This was highly unfair, but it is still happening.

Bruce said he was a part of a foreclosure task force in a city he lived in, and if there was a room he was on the farthest right-hand corner you could possibly be. A lot of the suggestions were how they could teach classes on helping people stay in their home longer. Bruce suggested teaching two classes. One would involve if a lender was not getting paid payments, it is perfectly within their right to foreclose on the asset. The other class would be about the person being foreclosed on getting a chance to buy again. What frustrates Bruce about this whole experience is he doesn’t think we have learned anything. We are not letting people fail, but rather we are teaching people that the government is always going to be there to bail them out in one form or another. This could be through an extension of unemployment benefits that go on for two years due to the government holding up job creation. It could also be from the government stepping in to help you with a loan modification. Somebody is paying for that, and nobody suffers the consequences of their own decisions anymore. We have continued to create false bottoms; and if we want to get values back up they have to hit a bottom.

We are probably very close and may be there now. The people were saying back in 2008 and 2009 that we were going to hit the bottom in 2009 or 2010, and it just didn’t happen because the government keeps stepping in to cushion people’s fall. A government solution to an economic problem never works. As was touched on in the first segment, they are so far in now that the stepping back gets more painful the longer they wait. It also becomes more difficult for them to do since they keep promising something, and they have to keep breaking their promises. People are not even being prosecuted today for doing strategic defaults. People can walk away from their house, go down the street and try another loan, and the fact that they walked away is not being held against them. It is an absolute mess out there in many areas.

One of the things that got us into the mortgage mess was we had stated income loans. Now that you people on the other side of that trying to get short sales and loan mods, you would also have stated hardship. David does not know what the percentage is today, but there is still a relatively high percentage of the stated income and loans that are still paying on time. The loan products were not bad products, but rather they were made to the wrong people. They all started taking advantage of them. David remembers one testimony he did on November 19, 2008 after he had become chairman. He made the testimony in front of Senator Dick Durbin, and one of the disagreements they had that day was about whether or not they should continue to make 100% loans to people. He told them there were still good 100% products out there, and Dick could not believe it. David said this was all on CSPAN and mentioned VA loans, which never left their charter. They underwrote the credit and collateral, and these loans are some of the best in the servicing portfolio. Under the right product, 100% loans made under the right underwriting guidelines and to the right people are very good loans.

Bruce thinks the part everyone is afraid of most in a qualified residential mortgage scenario is a mandatory 20% down payment. However, a down payment is not even necessary if it is underwritten properly. A lot of good people lost their jobs and good mortgage insurance companies closed because of the capital requirements that were being put on them. Lots of mortgage companies left even though you can still get a high LTV loan as much as 95%. With mortgage insurance, if your credit is good then you have good job stability. The programs are still available, they’re just a lot harder to get to now.

One of the things Bruce has learned by studying economics is unintended consequences. Bruce wondered what lessons lenders have learned in the last few years that will shape the loans of the future. David said unfortunately these loans are being shaped for us by regulation. David said through MBA they are trying to have as much say in the shaping of the regulations that shape the products as possible. They want FHA to be around, but FHA has loan capitalization problems as it exists. It is underwater, and they are raising the mortgage insurance premiums on future borrowers to pay for the fact that they let the brokers run over, get approved, and do all the subprime loans in 2009 and 2010. FHA, which has been a stalwart for over 80 years is in financial problems right now in spite of what they say.

When FHA looks at their loan portfolio on loans they did in 2011 and 2012, Bruce said he would be shocked if this was not the safest pile of loans they have ever written. David said as an industry they are making the best loans they have ever made in 15 years. When the meltdown started to occur, the subprime faucet was being turned off in 2008 and 2009. During this time, the brokers out there ran out and got FHA approved. The loans were still being made through people with very bad credit scores, and we are still paying for this today. If home values would continue to rise, part of that pain will go away. They are raising premiums on future borrowers, so people that are getting FHA loans now and into the future are going to be paying higher mortgage insurance premiums because of the decisions that were made in 2009 and 2010.

These fees used to disappear after a certain equity appeared, and Bruce wondered if this was not true anymore. David said on an FHA loan the monthly mortgage insurance was there through the life of the loan, and there was an upfront fee you could either pay or finance. Most people financed them, so there was actually two MIPs still in place. You can have more insurance on a conventional loan once you can prove you are in a 20% equity position and 80% LTV. You can ask for it to be removed, and in most cases it is.

One of the things that is very different in the California market that it is benefitting from very well is we are at a median price, and in Riverside we have an FHA loan limit around 500 whereas it would be 730 in higher end areas like Orange County. When we were at a 350 median price coming up in the 90s, the FHA loan limit was 160. Even in Bruce’s area it is three times the amount of ability to borrow from FHA than it ever was in prior years. Bruce wondered if there is any discussion about that changing since it used to be a percentage of what Fannie and Freddie were. Now, it is almost its equivalent. David said there is still a lot of discussion on this and MBA is fighting to keep those loan limits higher.

David’s personal opinion regarding the loan limits is that part of the problem is everybody went to refinance, even the higher loans, into FHA. This is not why FHA was established or why it was there. It was there to help load and meet moderate income first-time homebuyers. However, in order to help bail everybody out they raised loan limits, and people rushed to refinance through FHA. They had lower credit scores, so people with big loans and lower credit scores were allowed to go to FHA. When home values dropped, this was when the problem occurred.

There have been a lot of programs to help the underwater homeowner refi. Bruce wondered if the program was HARP and if we have another hybrid of this that is about to come out. At one of Bruce’s speaking engagements, somebody asked him about HARP #3. Bruce wondered about the ability for somebody to refinance something that will not appraise but for which they can get a loan anyway. David said this is true and that they are looking at doing a mortgage bailout through HAPR, HAMP, and a couple other acronyms. The Obama Administration and several of the senators on the Democratic side want to help people refinance their mortgage with another refi bailout plan. David said it is time for people, based on their decisions they made with the best information possible; to stand on their own two feet and either make it or fail. It is not the government’s responsibility to bail you out. Bruce remembered losing some money in stocks, and he did not have a person to call. David said this is just the way it should be and that it is a risk you take.

A lot of principal is being forgiven in California now. There are mailers going out to people telling them your credit line is being forgiven. Bruce said he knows this is part of the foreclosure settlement totaling about $25 billion. Bruce wanted to know if lenders were compensated for some percentage of the debt they are forgiven and if this is part of the process. David said he is not sure.

Bruce and David next discussed the topic of shadow inventory. This is one of the things people are most fearful of, and it has changed in what it means. Originally in 2008 and 2009 it really referred to properties the lenders had foreclosed on but had not put up for sale. It then grew to include the people who were delinquent and have not yet been foreclosed on. At some point it also started encompassing upside-down owners. Bruce wondered what David’s sense is from talking to lenders if they are looking at very hard times in the future as far as dealing with losses from the properties or if they think the worst is behind them. David said it is a combination of both. When you hear that home sales are up, you know that cash is king. People have started to step back into the market, and a lot of these purchases of single-family residences are people who are investing in them. They are not single-family owner-occupied homes; so people are buying them up and they will end up being sold again as they continue to bet on values to rise. Another option is they will be rented out to others. This is not a bad thing since they are at least coming off the market and being fixed up while property taxes are being paid. It’s good somebody is buying them, but there is still a surplus of housing out there in some geographic markets. It’s geographic across the nation.

If you are on the East Coast right now, such as North Carolina and Pennsylvania, you will see things are picking up as far as where you can buy a house. Employment is strong here. Texas is off the charts as far as employment and people in jobs. When you look at it, the states that are doing very well are the states with very low or no state income tax; they just have high real estate tax. When you drive around, you get to contribute every 1/10th of a mile. In the California market, what is happening is a little disconcerting for somebody who is really a free-market person. Wall Street has shown up in California with some serious money, so you have 6-10 hedge funds each armed with $500 million to $2 billion. They are buying virtually everything in sight that they can buy. This is basically a scenario similar to what happened two months ago where an REO agent gave The Norris Group a call about a listing he had that was reasonably priced in an as-is property. It got 94 offers in the first 24 hours; and the high offer was from one of the hedge funds with proof of cash of $194 million.

This is what is happening to almost every property. It does not even have to be underpriced; if it is just priced at market and offers are coming in from all-cash buyers as well as hedge funds with an MO where the interest is in any house between 1,000 and 4,000 square feet built after 1970. In this area, this represents a good 80% of the entire inventory you could possibly have for sale. The problem is if you are a private buyer with the need of a mortgage, the seller is often saying that is an iffy sale and they are just going to sell it to a cash buyer. This comes back to Dodd-Frank, CFPB, onerous regulations, and fear of the market place.

David said he has a very good friend who put her home on the market in Washington D.C. last week, and she had eight offers the first day. David remembered telling people this is where it had to be and people are coming in and bidding. She sold it for $70,000 more than what she paid for it. This is a hot market, and there is no recession in Washington D.C. Rather it is full employment. If you have the difference between a cash offer, maybe even at a little less price, as opposed to somebody who has to go get financing who has not been pre-approved, you are going to take the cash offer. Oddly enough, the cash offer is not for less than asking price in some areas. Where the aggression comes in regarding the price is that it is often for higher than you are asking and is multiple offers.

There was a transformation during 2012. The Norris Group buys and sells houses, and they usually have around 50 houses available at any one time. In January of 2000, they went from having a pretty normal market where they would put a statement into the MLS saying they would fix the house in a certain manner and get to fix it, put it on the market, and sell it within two months. By mid-year, they were getting offers to buy it as-is at the price, so they did not have to do the work. By the end of the year they were getting half a dozen offers that were aggressively pursuing the property as is and willing to pay, in some cities, 10% over any possibility of an appraisal reaching that number. They put in an addendum when they went into escrow under those circumstances that the appraisal would no longer determine the sale price. People that went into escrow being the winning bidder closed on that sale adding cash over and above the appraisal. This is what has been moving the market so aggressively since there is nothing for sale. Overall this is good news from the standpoint that this is taking up excess inventory and the people who are investing believe we have reached a bottom and the market is coming back. Overall this is good news unless you are the person trying to buy your first house.

As examples of properties not available in a marketplace, during 2009 Bruce pulled up properties in Moreno Valley for under $100,000. Since he could not accomplish this search, he had to lower the price to $90,000. He got about 480 properties available for under $90 grand. A couple days ago he did a search for under $150,000 in Moreno Valley and found twelve houses. If you go to a thirty days of inventory search, have twelve properties available, have 150 pending, and you have 150 closings in that thirty day period, you have tremendous demand now lighting on twelve houses or moving to the 150-200 category next.

David asked if MBA’s forecasts are true and rates go up from where they are today to 4 ½%, then what would this do to your particular market environment. Bruce said oddly enough, the last time this happened it adds impetus as long as people can actually qualify and get a loan. You now have a twin engine, both a price progression and a payment progression. Both of these adds aggression to the buyer. This happened back in the ‘70s when Bruce was the buyer patiently waiting for a deal. As he would go to see new housing tracts, it would go from 59-69, and interest rates went from 9-10. It really put the pressure on Bruce to make the decision since he was losing on two fronts instead of one. David has been through all the interest rate increases and decreases since the 70s, and he knows that as rates start to tick up buyers look at that and you realize you need to get off the fence and go buy a house. David looks at it as a motivator in many cases and markets.

What really ends up ending the cycle is when the lenders eventually say no more often than they say yes. Bruce heard a lot of people doing presentations saying interest rates are at the lowest in fifty years, so he did some research. He and Sean O’Toole went back to Washington D.C. to the Library of Congress and looked in the microfiche. They went back to the 1850s and began looking once a month on a Sunday for rates available for real estate. It is a fact that there is no one alive who has ever seen these interest rates. This is what is allowing for aggression of price to happen so quickly in some of these markets. There is not a big monthly cost for a $50 grand change in price. This is a manipulated market by the Federal Reserve. David said even though he is a free market kind of guy, we don’t have free markets. One of the things you have to realize is that unless policies change, we are going to have price progression that could get us right back where we were very quickly into a bubble situation where we will have losses again. We need to learn from our mistakes, let rates rise and let the market find its own level. They also need to reduce regulation and get out of people’s way. We are way overregulated right now and the pendant has swung way too far this time.

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.

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The Norris Group Real Estate News Roundup 3/13/13

Wednesday, March 13th, 2013


Today’s News Synopsis:

The Mortgage Bankers Association reported mortgage applications decreased 4.7% from last week.  The number of Fannie and Freddie mortgages refinanced through HARP was at 1.1 million, exceeding expectations for 2012.  Storm victims in Mississippi are being offered relief by Freddie Mac.

In The News:

Mortgage Bankers Association- “Mortgage Applications Decrease in Latest MBA Weekly Survey” (3-13-13)

“Mortgage applications decreased 4.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 8, 2013.”

Bloomberg – “HARP Surpasses 2012 Estimates on Homeowner Refinances” (3-13-13)

“Homeowners with underwater mortgages in U.S. states worst-hit by foreclosures are leading refinancings after the government expanded programs to aid borrowers, strengthening the weakest link in the housing recovery.”

DS News – “No Signs of a Slowdown for Prices; Market Poised for Supply Increase” (3-13-13)

“Housing inventory is now at its lowest level since January 1994; home sales have exceeded listings for the past 25 months; and the upward trajectory in home prices starting at the end of last year continues, according to the latest “US Housing Market Monthly” from Capital Economics.”

Realty Times - “Borrowers Step Up Pace to Obtain Low Mortgage Rates” (3-13-13)

“Recent economic data has been consistently showing signs of improvement, especially in relation to the housing sector. While this is good news, it often leads mortgage rates to move higher. With this in mind, borrowers are stepping up the pace to obtain low mortgage rates while they are still available.”

DS News - “Freddie Mac Provides Mortgage Relief to Mississippi Storm Victims” (3-13-13)

“Freddie Mac announced it is offering mortgage relief to homeowners who were victims of the storms that swept through Mississippi in February.”

CNN Money - “The wealth effect might be shrinking” (3-13-13)

“The Dow keeps hitting all-time highs and home prices are rising.  But many Americans do not feel any richer. That could be bad news for the economy.”

DS News - “Gasoline Sales Boost February Retail Activity” (3-13-13)

“Led by a surge in gasoline prices, retail sales rose 1.1 percent in February, the Census Bureau reported Wednesday. Economists had expected an increase of 0.5 percent. In January, retails sales rose 0.2 percent.”

Bloomberg - “Lenders Expand HARP Loans to More Borrowers as Rules Change” (3-13-13)

“Lenders are becoming more willing to offer new loans to borrowers who don’t have any home equity after changes to the rules of the U.S. government’s Home Affordable Refinance Program.”

Hard Money Loan Closed

Lancaster, California hard money loan closed by The Norris Group private lending. Real estate investor received loan for $70,000 on a 4 bedroom, 2 bathroom home appraised for $120,000.

 

Bruce Norris of The Norris Group will be presenting his newest talk Poised to Pop: Quadrant Four Has Arrived at NORCALREIA TOMORROW.

The Norris Group will be holding their Distressed Property Boot Camp from March 26-28, 2013.

Bruce Norris of The Norris Group will be presenting How to Make a Million Dollars Maximizing the Next 24 Months on Saturday, March 6 in Sacramento.

Looking Back:

As part of the robo-signing settlement, Ally Financial offered more principal reductions than they were required to pay by lowering principal to 85%.  The unemployment rate decreased in 45 states in January 2012 according to the Labor Department.  The FOMC decided by a 9-1 vote to keep Fed Fund rates at record lows after announcing that the housing sector continued to remain low despite a moderately expanding economy.

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.

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Vice President and Chief Economist of CAR Leslie Appleton-Young Joins Bruce Norris on the Real Estate Radio Show #318

Friday, February 22nd, 2013


Vice President of C.A.R.


(Full Bio)


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Bruce Norris is joined again this week by Leslie Appleton-Young. Leslie is vice-president and chief economist for the California Association of Realtors, a statewide trade organization with 155,000 members dedicated to the advancement of professionalism in real estate. Leslie directs the activities of the association’s member information group. She oversees the analysis of the housing market and brokerage industry trends.

Bruce and Leslie discussed financing and FHA, which was less of a factor in 2012. They were still a big factor and way above what they were in 2000-2006. However, they did less percentage of loans in 2012 than they did in 2011 and 2010. Leslie thinks this reflects the inventory situation. You have your FHA buyer at a disadvantage in this market, so inventory has fallen and competition has intensified. It is the all cash buyer and not the low down-payment buyer who will win in those multiple offer situations. You have at least half of the properties selling in California with multiple offers. There were situations where a property was 25% over list with forty offers on it. Leslie hears about these kinds of things all the time and knows how it is very competitive out there.

We got used to very easy financing in 2000-2006, however it is much harder to get a loan. However, one of the things that is a lot more generous is the loan amount for FHA. Right now we are at a 366 median price. Back in the 90s when prices were at this number, the loan amount for FHA maxed out at 160,000. FHA was just not a factor because most of the properties were priced above that limit. Bruce said he always liked when they raised the limit in Riverside since back then whenever the median price bumped up the prices ran to meet it. This was because the sale was most likely going to be an FHA buyer.

Right now, FHA’s loan limit in Riverside is 500, double what the median price is, and 700 in Orange County, double the median price of the state. This is very generous but not an announcement he would want to see. Leslie said it is a very attractive program but not effective in the marketplace we are facing right now because of the competition from all cash. The buy and hold investor is keeping most of the inventory. They would have sold to an FHA buyer left and right. However, right now it is more profitable to hold it. Another big part of it is we are buying less of the inventory. The Norris Group does a fair amount of loans, and half of their loans now are people who want to hold the same inventory that they would have sold. Some of the big companies who are their competitors and buying a lot more than them buying none of those. This has been a big change.

Bruce wondered what the agents are feeling out there. He wondered if they are feeling that there is an upswing coming and the buyers are excited, or if there is only frustration that they cannot get anything for their clients. Leslie said they are definitely in a much better state than they were a year or two ago. However, it is a challenging market to work because it is so competitive. It is really competitive to receive listings and appraisals tend to lag in any turn of the market. Because of this you will have appraisal issues coming up where there is financing involved, the appraisal is not coming in, and yet the buyer and seller have agreed on a significantly higher price. Leslie said there are a lot more short sales happening much faster at about 25% of the total market. While there is still some frustration, it is definitely better and the lenders in general are doing a much better job of moving things through quickly. It is not a perfect market, but it is a market that is moving.
One of people who is in the news a lot is Robert Schiller. He recently quoted, “If you think investing in housing is such a good idea, why not invest in cars? Buy a car, mothball it, and sell it in twenty years.” He really thinks housing is not a very smart investment, although Bruce said he would really love to challenge this one. Bruce wondered if there are people who buy into this. Leslie said she was just listening to an interview Robert did recently, and he was called upon to defend himself in terms of being so negative given how strong the data has been. He also really clarified that he is not negative, he is just being cautious and looking at long-term trends. He is wondering how long rates are going to stay this low as well as how long investors are going to be engaged in the market. He is just urging caution given the long-term perspective he has had over the last twenty years and what has happened in the market.

When Leslie was at the Federal Reserve Bank of Philadelphia, she was Robert’s research assistant for a while. Robert is someone you really have to pay attention to because he is thoughtful. You look back at his irrational exuberance quote, and you see how he was pretty much right on the money. The issue is not that the market is strong and very responsive right now. The question is as you look out over the next 2-4 years, what will happen to the properties that are owned by investors as well as what will happen to housing prices. Leslie is more optimistic and positive as she looks at California and the demographic trends, pent-up demand, the fact that housing starts are still relatively low in this state. She could point to all kinds of reasons, but the economy works in strange ways and we do have to pay attention to some of the new things in this cycle that we have never seen in prior years. One of the issues is the data is not very clean and aggregated in an easy way to be able to answer the questions of who owns what, for how much, and for how long.

When you talk about being cautious, for Bruce this means you have a chance to lock up a payment to reside somewhere at an all-time low, then do this for thirty years where it does not change. This would seem to be very cautious, and he said he does not care what happens in the short-term in that sense. One thing he can predict pretty well is rents will not stay stagnant for the next thirty years. This is why it seems that irregardless of price, if your payment is fixed then you will feel less of that weight over time. You will be able to have a better life having discretionary money far in excess of somebody renting at the current rate every year. It is very frustrating for people to do what he is describing and are not able.

Bruce wondered if people are receiving different lengths of loans than normal. You would think everything would be 30-year, but then you listen to the radio and it is a ten-year or a “yourtgage” (Create your own mortgage). Leslie said there is more of this because you have people refinancing who are looking at their retirement horizons, so you have more of the 10 and 15-year loans especially at these low rates. For a while some of this was at less than 2%, so if you have a lot more diversity in terms of timeframes than you did in the past. This makes a lot of sense for people who are trying to prepare for their future.

Bruce said we are not thinking about how fantastic this is going to play out twenty years from now when people have these low-interest rate mortgages and have been able to participate in more spending in the economy. They then end up with no house payment much sooner than they ever would have in prior years. It is a big country and markets are behaving differently depending on what areas you go to, so the concern would be the areas where you have a very high investor-owned percentage and do not have a strong economic base to prop it up. This is where Leslie sees the weak link. The question is when we are going to see this economy really kick in and start to create jobs for this next generation.

One of the factors that has to happen in California is you have to have prices accelerate to where it pencils to construct something. Bruce thinks this is what 2013 is about and what we will likely see this year. It is hard to see past what you are feeling right now, and one of the things that is happening simultaneously with this is developers are developing 5% of the amount of lots in Riverside and San Bernardino than is normal. There is no way building will catch up until they create building lots. Unfortunately, building lot creation has not gotten easier, but rather more involved. They are 2-3 years away from a building lot; so when you look at Riverside normally creating 35,000 and see they are creating only 5% of these, that number is stunning. This is going to affect economic development if people cannot live close to take advantage of the jobs.

We have existing lots, and once we go through those they are going to be surprised at there being a gap. This is why Bruce feels like the prices of existing homes will accelerate since there will not be whatever percentage normally the new home market will be. It will be hamstrung because of no building lots being created for five years.

One of the charts that surprised Bruce was the one that showed the percentage of sellers losing money reached an all-time high in 2012. This is due to the emergence of the short sales. You also had an acceleration of the proportion of short sales out of the total amount, so this almost skewed this number. Leslie guessed we are going to see this start to go down as the appreciation that we saw last year continues to accelerate very dramatically. The assumption is that all the people who lost money on their home cannot be buyers. However, this is not true; and they are going to be back in the market or just stay where they are. We are seeing a lot more principal reduction loan modifications happening as wells as people deciding to stay put. When you are looking at over 2 million mortgages, there is a lot of room for a variety of responses. However, there is no doubt that the price appreciation that we are seeing is going to push some of them out as well as push some of them to stay in for the time.

Bruce asked if he decided to do a short sale but was current on his loan, would he be able to get an FHA loan right after the closing. Leslie said he absolutely can, and if we see the Boxer bill go through the you would be able to be current on your payments and take advantage of a refinance, even if it is not a Fannie/Freddie loan. If we see that go through, which was alluded to in the State of the Union address, that is going to help people as well. The stabilization of the housing market is indisputable at this point. It has been that way in California for the last two years, and looking at last year you can say that for the nation as a whole.

What is also important to the short sale business and getting it finally through the end of this crisis and on to a normal market is the fact that they extended the mortgage debt forgiveness. You have this extended through the end of 2013, so this was the one part of the fiscal cliff negotiations that were being pushed very hard. However, now that this is done we are going to start looking at tax reform. The next issue that will be back on the front burner will be the mortgage interest deduction. This brings up a broader topic of representation for our industry. The National Association of Realtors, the California Association of Realtors, and the Mortgage Bankers Association are all going to bat for a specific industry during a time where a lot of people are looking at real estate and saying they can take a lot of goodies from this segment. Bruce is looking at it and trying to say they maybe should not do this.

Leslie said the argument is really strong that the housing sector is back and leading the rest of the economy, so do not do anything to put on the brakes. This does not make any sense at all. With all this said, the political reality is when they go behind closed doors and look at tax reforms, everything is going to be on the table. Leslie said as they have gone to Washington and talked to the California Congressional Delegation, she sees that there is tremendous support for not touching it. However, you go in and, for anyone who remembers 1986, the last time we had this situation we were good until the final hours. All of a sudden, you had a $1 million cap. We have been mobilized, and we will be even more so as we go into this session. However, the imbalances between revenue and expenditures are significant and are going to require some creativity to get through it. Real estate does seem to have some of the goodies from which they can make revenue.

One of the rules Bruce has always been surprised has stayed in place is that you can make $250 and $500,000 on the sale of your residence every two years and tax-free. When you have tax increases for people that are making a lot of money, Bruce wondered if it has a chance to skew people by an expensive residence for the sole purpose of it being one of the few ways you can make a lot of money that cannot be taken. Leslie said it depends on how you are projecting price appreciation over the time period that you are going to own the home. It would not be a short-term strategy, but would rather take a long time to gain that much equity in a home bought today. Clearly what we saw at the end of last year was the December sales were inflated at the upper end as you had high net worth individuals pushing to close transactions before you had an increase in capital gains or the thought that it would happen. Financial decisions as big as homeownership are impacted by tax rates. Looking at the exclusion on capital gains is going to be a longer-term strategy.

In 2005, Bruce read a report that had to do with the reason people bought in 2005. At that time, it was to make a profit. In 2012, the reason is homeownership. Unless you were just surveying investors, then the reason would be yield and cash flow. The market is 30% cash buyers and is very high historically compared to what we have had in the past. It feels like there is more cash than you could ever imagine waiting on the sidelines to do something.

Bruce asked Leslie what she thinks of the future of Fannie and Freddie. Leslie said we do need some things, so whatever the GSEs do needs to be done very slowly. In 2012, 87% of the new originations were bought by Fannie or Freddie, so they are the mortgage market. Any transition away from the GSEs is going to be at significantly higher rates. There is probably no one who can say what this will look like, and there is not even a proposal on the table. There have been a couple white papers that have come out over the last couple years, one from the Treasury and one from the FHA. It is a big complicated issue, and Leslie does not think anything is going to happen in 2013. Going forward, it really is the issue of this era for the future of the housing market because if you do not get a mortgage, you really will not need the mortgage interest deductions. The availability of capital at a reasonable rate is currently insured by the construct with the GSES and is going to have to be dealt with very carefully. This is the biggest policy concern looking ahead for Leslie.

Bruce asked if we know what Dodd-Frank now entails completely. He wondered if it is all done and will be implemented. Leslie said she thinks they are still working through some things, although other things such as QM have already been released. However, there are other things that are still being defined. It is still a little bit of a work in progress, obviously very political and contentious.

Bruce wondered if we are solving yesterday’s problems sometimes with policies that are no longer necessary. Leslie said there are a lot of people who would agree with that. Dodd-Frank was negotiated and developed in good faith. However, everything you attempt to do to regulate and avoid what happened in the past creates new challenges for the future. It is something you have to think about very carefully since there were a lot of things that led to the crash, and maybe the biggest one is not an issue right now. This issue is that you need to be qualified today to receive a mortgage. This was easy back in 2003-2005, but this is certainly not the case today and could possibly make the biggest difference of all.

When they look back, they have probably written the safest book of loans in 2011 and 2012 without a down payment of 20%. You look at all the issues with FHA right now, and you see it is certainly not the book that they have for the last 2-3 years. It really is what came before; and what they have done recently looks fabulous. You just don’t have a market typically that goes down the way we did.

One thing that could impact California a lot is if we have some kind of immigration forgiveness like we had during the Reagan era. Bruce asked Leslie if she sees this impacting California as far as households that are all of a sudden capable. Leslie said yes and that the general economic analysis of immigration reform is that it is positive. You are going to have people investing in education, paying more taxes, and being more engaged in the community. They are here already, so the net outcome for immigration reform is going to be very positive for the future and the economic growth of the state.

To find out more information, you can visit CAR’s website at www.car.org. This site contains fantastic information to keep you updated on all of the current statistics on sales, price, and affordability.

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.

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Cary Pearce, Sales Production Manger for Provident Loans, Joins Bruce Norris on the Real Estate Radio Show #316

Friday, February 8th, 2013

Cary-Pearce


Cary Pearce

 

Sales Production Manager for Provident Loans

 

(Full Bio)

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Bruce Norris is joined again this week by Cary Pearce. Cary is the sales production manager for Provident Loans, and he has been involved over his lifetime involved in loans and about $ 1 billion and a half in closings.

One of the things Bruce and Cary began discussing was trying to qualify somebody for being a buyer. It is one thing when a loan does not close for somebody who is the lender; but when you have a hard money loan and are making a payment at 12% interest that falls out, there is a real hurt there. It is one of those situations where you would like to not have too many dry runs unless you happen to be a in a pretty bull market where you can say it is no big deal and you will make it up in price rises. This is something we have not had the luxury of in a while.

Because unemployment has been such a big factor, Bruce wondered how long somebody has to be on a job in order to receive an ok from the lender. Cary said generally with most any loan they want to see a two-year work history. There are some exceptions where if you have a college student with a four-year degree in his particular field and they get a job in that field, then you may be able to receive a loan on less than two years. Cary said in some cases they have done it with only thirty days of pay stubs. However, with a conventional loan this would never fly. The idea that improved employment will immediately help the real estate market is really not true. It is going to have a big lag affect. There are some people who had a two-year work history, were laid off after a year, and are now one month back on the job and wanting to buy a house. This is not going to work since the people at Provident want them to be back on the job for at least a year.

There are some overlays that still overwrite FHA’s 4155 and still do a manual approval. In cases like these it does not have to go through the automated system. However, most of the lenders are doing everything automated and have the overlays where they want the minimum FICO score and employment.

If you are self-employed, it is still required that you have two years of work experience. This means two years average of net income off the tax returns. Usually people try to be aggressive in their deductions, and it does not work so well nowadays. That is the biggest problem with a self-employed borrower, and that is why at Provident they would love to see the stated income loan come back for them because of the fact they write off a lot.

Bruce also asked about the down payment required by FHA since there was some talk about it increasing. It is still at 3 ½%, although they are hearing rumors that they are trying to get it to go up to 5%. However, Cary said he does not know if they will pass this or not. Cary does not think this was originally part of Dodd-Frank, but with a lot going around FHA right now there are many saying they are financially in dire straits. They have to make changes, and this is one of the things they are talking about changing to try to make their program a little bit more stable. Bruce wondered how down payment would help them financially. It may be safe for paper, but that is not much safer. What they are looking at is overall foreclosure ratios with a higher skin-in-the-game and less chance of default.

The safest loan in the country for the last 50 years is a VA nothing down loan. Down payment has nothing to do with it. You could not tell a VA loan from a Fannie 20% down loan. Bruce was able to present in front of Fannie and Freddie in Washington D.C., and they pointed this out. When they showed them the chart, they were surprised. It’s all nonsense about Dodd-Frank being the big saver for the mortgage industry. Whatever VA does must be good enough for the underwriting process. Obviously their percentage is not as high as FHA’s or Fannie or Freddie’s, but they are still doing a fair share of loans. It is the percentage, not the number of foreclosures historically. It is the nothing down borrower with whatever they are doing as far as underwriting, which apparently produces a fairly successful loan. They do scrutinize this package; so it will be full doc and they have to meet the ratios to make sure it is a quality loan.

Bruce asked about cash reserves for an occupant buyer. Cary said FHA does not have a reserve requirement. They have plugged some in where they have $500 left over after all their down payment in costs, and it was still approved. There are some exceptions on investor overlays that come into play. For instance, if the seller or a buyer is going to keep their current home as a rental and also want to buy a new primary residence, then in this situation the overlays will come in and they will want them to have at least a couple months of reserves on both houses. Conventionally it is even worse where in that same example they want them to have six months of reserves for every property that they own plus the new property.

Regarding property condition, Bruce wondered if there have been inspections recently that are really not so critical. Cary said they are still seeing repairs on a lot of their FHA approved appraisals, not so much on conventional. FHA flips are probably the worst only because you have to have two appraisals, a home inspection, and after reviewing the home inspection the underwriter will add any and all health and safety items to the appraisal as repair items. Those typically come in with more repairs, but those are usually the cleanest houses in the market.

Bruce asked what the theory is behind two appraisals. Bruce wondered if the right one or the low one wins, to which Cary said it is the low one. Although he already knew the answer, Bruce wondered why the low one is always right. Cary said it boggles the mind because when they order an FHA case number, you would think that the FHA appraisal should be the go to value. However, the second back-up appraisal is typically ordered conventionally. If it comes in lower, that is the number they are going to go with. There are some people out there who, on the flips, can still get it done with one appraisal. However, most people doing the flips have to have two. Bruce thinks this is insulting, and if he were an appraiser he would be asking the people why they even have a license if they cannot trust the number.

Bruce also asked about down payment gift programs and if any of these exist anymore. Cary said most of them do not. The Nehemiah, Heart, and others all went away because it was seller-driven. However, they knew the money was coming from the seller, and the market just did not like it. Bruce also wondered if there are still a fair amount of gifts coming from relatives now. Cary said they do see a lot of gifts on their FHA loans, approximately 30-40%. He also wondered what percentage of loans were multi-generational or multi-family qualifying. Cary said it was not a whole lot, but there are some out there. There are some other down payment programs, such as Cal FHA’s program Chittap where they do a 3% silent second. This is still a very popular program and helps many first-time buyers as long as they can meet the income limit.

Bruce also asked about fourplex limits. In Orange County it was around 1.2 million, although Cary said generally for a fourplex the number is a little over this number. FHA on Orange County is 1.4, and this is still with 3 ½% down. On multi units 3 and 4 they do a special calculation to make sure you go through an extra procedure and run all the numbers to see if it will still qualify for the 3 ½% down payment. There are some cases where it will qualify.

Bruce wondered if the deals Cary sees come through are mostly purchases or refis. Cary said last year their percentages went way up, and typically their branch runs at least 70% purchase to 30% refi. Sometimes they have been higher than that at 80/20. Just this last year they were about 55-60% with a higher concentration of refis, but this is only because rates were so low. Bruce said it occurred to him that there would not be much of a refi market once we leave this era since no one will touch a 3 ¼ mortgage. They will just keep it as a rental or leave it alone.

Bruce wondered how sensitive he thinks due on sale clauses will be. It is a very attractive niche to say you will sell a property and just wrap it. There are no assumable loans anymore, so it is a due on sale situation. A VA loan has a clause where you can swap the entitlements and someone else can take it over as long as they qualify. As to whether the lenders will actually exercise that due on sale and if somebody does take it over and start making the payment is not known. If they are making their payments on time, they may not ever touch it.

Bruce asked Cary if he gets a sense about where prices are headed over the last six months as far the local market. Cary said they are definitely increases. He and Bruce had talked earlier about how the appreciation is hopefully going to be at least 10% or more. We need this because Riverside alone was down 40-50%. What is interesting about the reticent saying they will have a price increase is they forget they are pairing it with a 3 ¼ to 3 ½% mortgage rate. You start calculating how much the price movement means per month, and it just disappears. At the height of the market there were 2 bedroom, 1 bathroom homes in the wood streets going for over $400,000. Today they are around $220,000. Regarding the interest rates back in the day, if they had to get a fix it was around 5 ½%. You start looking at the payment difference, and it is just night and day. That is why when it goes from $200-$260, which is a big move up, then you take $60 grand and compare it with 3 ¼% mortgage, you see that it is no big deal.

Bruce asked if there is any concern for the industry on the direction. The lending world is getting hit and blamed, some of it deservedly so, New York being an exception. Bruce asked about the changes that could be enacted by Dodd-Frank qualified residential mortgage, to which Cary said the biggest thorn in their side is the whole appraisal process. They used to be able to pick any appraiser in their local market and have them do the appraisal. Today, they have to go through a panel. As the loan officer, they have no say so in who gets the appraisal order. It goes to the corporate office, then they randomly assign it out to someone. Once the appraisal comes in the find out who received the order.

What is interesting is there is not really the same due diligence on the quality. It may come down to if you can do it faster and cheaper. Cary said when they were at National City they went for a short time through one of the national appraisal companies, Street Lengths. Here they would get some really low appraisals because the people there were just trying to get the reports back as quickly as possible without showing any concern about the comps. It was because they were only receiving half of the fee. This was a huge problem, and there is only so much due diligence you can do for $200. Thankfully with Provident’s philosophy, they paid appraiser the full fee, and the management company involved is only paid $25 to help them through the ordering process. However, the appraisers do receive a high quality report, and they are not seeing nearly the number of low appraisals they used to see.

Bruce wonders if Cary sees any evidence of lenders loosening standards. Cary said he does not see anything yet. Stated income is a program they would love to see come back, but it is not on the horizon as far as they know. Bruce wondered if that was always a conventional product that was outside of Fannie and Freddie, to which Cary said it is. Mainly things such as World Savings was very popular with that as well as Downey and a few others. Provident had broker relationships with them and sent them that type of loan.

Bruce asked how changes in loan policies usually take place and who the deciding body is that says when things will be okay. Cary said it is usually Wall Street and whatever they are willing to buy. In Cary’s experience when he was with Home 123, a company owned by New Century, he saw how fast things change. New Century was closing $4 billion a month in mostly subprime loans. The paper division was maybe 10-20% of the overall volume. In late 2006/early 2007 when they took $8 billion to market, Wall Street said they were not buying it. New Century was out of business in two weeks.

Bruce remembered early news articles that said we have basically gone back two decades in loan programs in ten minutes. It was so fast, and it was amazing how quickly the programs started dropping off. He immediately left Home 123 because he was forced out when he was told they could not fund loans or originate new loans. They took the whole team to National City, and slowly but surely they started pulling back all the programs. They took construction financing off the table as well as home equity lines. The alternate A products, where you had a lot of jumbo loans, were also pulled. The lenders and people working for the lenders had probably never even done one. The speed at which everything happened was just a matter of a few months, and it was just amazing how many programs died.

Coming back to today, Bruce wondered how Fannie and Freddie differ in regards to if you are an investor trying to receive a loan. Cary said typically you are looking at at least 20% down to do a non-owner occupied loan, but Fannie and Freddie both have their standard program where you can only have up to four financed properties which has to include the subject you are trying to buy. However, there is an overlay where they will go up to 10, and with that program you have to have 25% down and heavy reserves for all your properties. On this one they will let you go up to ten finance properties. Bruce asked if this is now for both Fannie and Freddie. Cary said he is not exactly sure who they are selling them to since Corporate does not really inform them of it. Bruce and Cary both think it is only for Freddie, but the sad thing they both found out is that they will not do cash out refis on them. Cary checked around with a couple sources in the industry, and they both told him their program would only do purchase and written terms as well. Thankfully for Bruce they found a source out in Orange County, so hopefully all goes well there.

What is interesting is you wonder about a cash out refi from a free and clear property and how yes answers either come about or don’t about in the lending world right now. You just look at the reasoning behind some of the programs and see that you are missing a lot of very safe loans just because you cannot do them. The investors would definitely help the market come back since there are so many of them out there. It is not only the Wall Street crowd buying them, but also the local investor who is really forced to write a check and hopefully get his money back.

If they do in fact just buy a property and want to get their money back, Bruce wondered if it is okay for them if they use One to Four loans. Cary said yes and that they have a program for that called the delayed financing program where an investor would come in, pay cash, and immediately pull some of the cash back. They will go up to 70% on a cash out on a property that has been owned for less than six months. However, you have to document where your down payment came from, and it had to be your own money. It could not be any gifts, so there are some restrictions to it. However, there is a program out there for it.

Bruce asked if you have a credit line on your residence if it counts as one. Cary said it does, but Bruce wondered about if it was unused if the maximum amount you could borrow against it is counted against you as well. Cary said it does, so if you have a $450,000 equity line and have zero owed against it, they are going to count the $450,000 owed against you as if you owed it all. They know you could go out and write a check tomorrow for that whole amount.

Bruce wondered if the eleventh loan exists yet. Cary said it does not as far as he is aware. The only thing you could probably do is go to a commercial local bank to receive either a line or have a loan with a very short fuse. There are some investors out there who have their own equity lines at their bank and are able to go out and do what they want. This is an elective relationship, and it still has to be renewed every year. It is a whole different thing since this will not necessarily work if you want a whole group of rental properties.

The problem with these programs is they can grow out of favor. This was Bruce’s first experience when he had a credit line. He had a $200 grand credit line and it was not a big deal, and they basically used it to just buy trust deeds in the margin. The difference in interest was something they earned. However, at the end of the renewal it was not renewed, and Bruce wondered why. Bruce found out it had nothing to do with him, but that his whole industry is out of favor. Bruce is a perfect borrower, has perfect credit, managed it very well, and none of this mattered. Provident had clients who had the same exact situation where they had no balance on their equity lines, and they received notices in the mail that their line was being closed. This is a bad day because sometimes that cushion is your cushion. You have the $400 grand line for a reason in case something happens and you can float on the boat for a long time. When they eliminate the boat, then that is not good.

If Bruce had a rental property for which he was receiving $1,000 a month free and clear, he wondered what percentage of the income actually gets credited to his side of the table. He wondered if there is a certain percentage that goes to expenses if the people qualify. Cary said in the old days they used to take 75% of the gross rent and minus out any payment you had. The excess was then used as income. Today, at Provident they have a chart they go through where they take your tax returns from the last two years, whatever your bottom line income or loss was, and they start adding back depreciation, mortgage interest paid, and tax and insurance. After a two-year average, out of all of that they deduct the PITI payment. If there is a positive it will count towards income, and if it is a negative it counts as a debt. The old rule went out the window; and in most cases when they look at somebody’s tax returns it hurts them and it is almost twice as bad. They could even have a positive cash flow and have a negative net result.

Bruce also wondered about trust deeds income. Bruce recalled in certain guidelines from a long time ago that if you have a short term trust deed that is one year or less, they won’t use it. It has to have three years of life left on it. If you do have a one-year trust deed, Bruce wondered if it is an asset in addition to being non-income. Cary said they should at least count it as an asset, but they will not count it as income or cash. It doesn’t really make sense since it is like an asset class with no home.

Regarding VA lending to investors, this only counts if the buyer purchases a VA property. At Provident, they do not do anything non-owner VA. It could be on their own inventory they would allow it, but nothing else. Any new buyer coming in and trying to purchase a VA has to be owner occupied. Bruce also wondered about self-employed investors and if they still exist. Cary said they see a few out there, and there are a lot of companies out there where they are showing the strong bottom-line net and are fine. The challenge with 70% of self-employed borrowers is they write off too much, and it hurts them when they go to qualify for anything.

If Bruce had a property that has a pretty strong negative cash flow, he wondered if this in itself would not end his loan app but rather was a ratio of everything he had. Cary said as long as you ratio out you should be okay. They have had some situations where the payment was $1500 and the fair market rent was only $1200. At Provident they can only use 75% of that $1200, so you have $900 offset to $1500. Now you have a $600 loss on paper that will go against you in the debt ratio.

Bruce also wondered about selling immediately after rehabbing and what the guidelines are now as far as conventional and FHA. Cary said for less than 90 days they can still get them done conventionally as well as FHA. Conventional loans will usually require an appraisal and at least a field review just to make sure that the value is solid. If an FHA loan is less than 90 days, then with Providence overlay they have to have two full appraisals and a home inspection to both check the value and make sure the house is in good condition. Bruce wondered if they looked at anything like rehab estimates or margin of profit. Cary said there are some rules when it comes to the profit that fall into the overlay. If it is over 100%, they are really going to scrutinize it.

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.

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Sean O’Toole, President of ForeclosureRadar, Joins Bruce Norris on the Real Estate Radio Show #312

Friday, January 11th, 2013

Sean O'Toole


Sean O’Toole

President of ForeclosureRadar

(Full Bio)

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Bruce Norris is joined this week by Sean O’Toole. Sean is the founder and president of ForeclosureRadar.com, a website that has pretty much revolutionized the trustee sale-buying business.

Bruce wondered if there were any surprises at the end of 2012 Sean was not expecting to happen. Sean said he was expecting foreclosures to drop, which they did more dramatically. Sean was one of the few people who thought they would drop at all since there is always the big glob of something that was supposed to show up in droves that ended up never showing up at all. Sean said many have predicted foreclosure wave after foreclosure wave that have yet to come to fruition that they have still not seen happen. Sean can understand why they would predict it since it probably should happen or should have happened. It’s still not expected to happen since it is a political-driven market rather than an economics and fundamentals-driven market.

Bruce asked Sean if there was some reaction at the the end of the day when you remove foreclosures from the market. He said yes and that there is no question that some removal of so many foreclosures has left a lack of inventory throughout the state, even in areas where you would not expect a lack of inventory. Where there should be a lot of foreclosure activity, instead there is nothing to buy. It has really come about gradually and then increased. Bruce said he looked through the charts, and in the first half of the year it bounced along and was reduced by 20%. All of a sudden, six months ago it made a beeline from six months down to a month in most of the counties in Southern California. Bruce wondered what policy decisions drove this and what Sean’s policy decision for 2013 is that would reverse this trend.

Sean said there were a lot of things coming together, but the biggest thing that changed in 2012 was everyone realizing that yield, the income return from rents on real estate, was more important than price. That led banks to say that maybe they were disposing of things they should not have been or there was a better way to dispose of it or resolve it. This brought in some major new investor players, some that started in 2011 but really got underway in 2012 with large hedge funds coming in and buying up property. Those things conspired to both reduce inventory further and get the banks to question their foreclosure practices and look at other alternatives. This came with the policy decisions around the attorney general’s settlement and the Homeowner Bill of Rights.

A lot happened in 2012, there is no question about that. It seems like not one of the policies was responsible for a bulk of it. It has really been a historic disappearance of things for sale. Going forward, unless they change policies, Bruce feels pretty comfortable that we will have a hard time getting from one month to six months of inventory. However, he does not know where this will originate. Sean said for those predicting it will come from a foreclosure wave, they just have to note that it takes 6+ months for that to happen, and there is no sign of it happening now. The chances of it happening in 2013 are slim-to-none.

Regarding the potential for people still in California, Bruce wondered how many people are 90 days late or in foreclosure. He wondered what numbers of people are in trouble and why this will probably not cause a problem because the policies to be foreclosed on at all. Sean said right now the number of foreclosures is roughly 180-190,000 homes. These either have notices of default outstanding in pre-foreclosure, are scheduled for auction, or they are bank-owned. It is about equal. 60,000 are pre-foreclosure, 66,000 are scheduled for sale, and 62,000 are bank-owned. None of these are terribly scary numbers if they had to deal with them. Sean said they sell 40-50,000 homes a month in California, so even that is not that much inventory.

The bigger issue is the people who are delinquent, which is somewhere around 450,000. A lot of these folks are in the process of a short sale or a loan modification, so some of them may make it into foreclosure while others won’t. Many have been sitting for an awfully long time. The biggest number, however, is the number of people who are underwater, but they seem to be hanging in there and continuing to make their payments. Altogether, it is a quarter of homeowners in California who are either underwater or in trouble already. It’s a terrible housing market if you think about it from a commercial standpoint. Historically, it is an unprecedented number, even if it has improved a ton.

A price increase of about 23% takes care of half of the underwater people. It makes a big difference and also encourages the other half to see that they are almost there and are about to get rewarded for hanging in there. To Bruce, what is important in 2013 is the strength of a price movement really starts solving a lot of these things. Shadow inventory all of a sudden becomes half equity sellers. There is no question in Sean’s mind that Ben Bernanke and the Federal Reserve agree with Bruce and are trying to create an asset bubble to get out of this problem. This will probably ultimately lead to long-term inflation even though they have never said this. It’s the easiest way to solve the problem of too much debt when you take control of your own currency. You devalue, and the debt becomes less because you have pushed asset prices up. Sean thinks it is absolutely the goal of the administration and the Federal Reserve.

Bruce asked Sean if he thinks 2013 will be a fairly significant price movement in California. He said he read Bruce’s prediction of a 20% across-the-board increase, and his only issue with this is he does not think these dynamics are exactly the same throughout the state. This is where he takes some issue with it. Bruce said whenever they do predicting, it was always a discussion on median price, which is an inaccurate number anyways. It is a 20% price movement and will probably include more high dollar sales than 2012. There is a fudge factor there where it makes sense you will end up with more move-up buyers since people are starting to have equity. There are fewer foreclosures at the low end, and the one place they were quick to foreclose was in the lowest end properties. These seemed to be foreclosed on much more quickly than the higher end properties. Having to move up in median because of this is reasonable, and having real price appreciation in areas where payments are significantly below rents in areas such as San Bernardino and Riverside, it makes perfect sense.

It is quite possible we will see a 20% median increase. What he would hate for a listener to take away is this means that their house is going to go up 20% when they could do better or worse. Sean is in Northern California and is familiar with more pricey areas than Bruce is, who lives in the epicenter of foreclosureville. Sean lives in an area that probably has a higher dollar median price by quite a bit. Bruce wondered if he is seeing price firmness or acceleration in these areas. Sean said it is a mixed bag, especially on the peninsula. Here we have a very strong technology market that is moving beyond the social media bubble as it were. Silicon Valley continues to be very strong on the employment front. There are still quite a few winners here financially putting pressure on that area. The Bay Area is very strong, and there is a lot of investment buying when you come into the Central Valley. There is an awful lot of investment buying, and prices are still low compared to rents. However, they are catching up pretty quickly, and he does not know how much room there is here. Sean said he does not expect much appreciation in these areas, and you will have a lot of different pockets. It’s almost hard to say by city since it is almost by areas.

The difficulty in predicting something is there are so many micro markets inside of the picture. Sean feels a lot of the price has been driven by a cap rate mentality that is about to get uninteresting. If you are willing to take prices up because you are willing to take a 7% return while the current market is 8 or 9%, prices will move pretty quickly. You don’t want to get to 7%, unless there is an appetite for 6 or 5%, he does not see any indication of them continuing to move up. Bruce feels pretty strongly that even though the Bull Run has been dominated by the cash buyer, the small guy, medium-sized guy, and giant guy, there is a very big underlying owner-occupant crowd that was foreclosed on in 2008 and 2009. This is now an overwhelming number of people that will carry on the boom even if for no other reason it saves them money monthly over rent.

Sean said he certainly hopes people are smarter than they were in 2004 and 2005. They may be willing to pay a little bit more than rent to have the stability of a home, but we had in some areas returns that were down to 1-2% when you looked at price versus rent. You would be better off putting your money into treasuries. Sean said he just does not see us having the kind of boom that we saw from the end of 2000 to 2006. Sean thinks what we are doing is recovering to where our prices should be, and this is really where prices should be given these artificially low interest rates. We will probably recover to a point where it makes sense given the low interest rates, but not where it would make sense long term. This sets us up for some longer-term challenges. Bruce completely agrees with the longer-term challenges, and he would feel a lot more aggressively comfortable with it getting to that uncomfortable number just because of the unprecedented rates.

Bruce and Sean went back to Washington D.C, did a little research, and saw that the interest rate has just not been seen since the 1900s. This is an unprecedented interest rate, so the question is what unprecedented dominoes fall because of that. Sean said on the one hand the low interest rate for purchases are certainly unprecedented as far back as we could find. On the other hand, Sean’s thoughts on what a reasonable return on investment was on real estate should have been 8-10%. Everyone is up in arms about these hedge funds wanting to come in and accept 7%. Sean does not understand the business, and the people don’t understand how hard it is to rent single-family homes. As we look back to that, even as far back as the 1800s, returns on real estate in the 5-7% range, are far more the norm than 8-10%. This actually made Sean a little bullish than when they showed up in Washington.

Sean mentioned inflation, which Bruce thinks is a very likely outcome. By fixing a payment, if you are talking about a premium today of your payment versus rent, that is one thing. But you are fixing that payment for 30 years. Your renter next door is not going to have that same rental bill ten years from now. This is where the wisdom of the decision kicks in. Sean said the problem he has with this is that the average person believes the Fed when they say we are in for a period of unprecedented low inflation and that inflation is not a problem or a risk. There is not a perceived risk of inflation to push them accept a significantly higher payment. It is up to the point where there is that really truly widespread risk of inflation. This will be offset by rapidly increasing interest rates. Only a handful of folks are smart enough to realize that we have this belief that there is not going to be inflation when in fact this belief is wrong. With these low interest rates, that is a pretty sweet spot that probably will not exist for a long period of time.

Being the normal guy rather than the investor guy, Bruce said he would want to control his own environment and pay premium for it. Whatever premium it is will be whatever the lender will allow him to qualify. It seems there is still a willingness to own something if the lender will loan them the money. Here there is an interesting transformation. Sean has some great charts that showed while prices really progressed, payment was amazingly consistent because the loan programs became so aggressive that the payment did not move very much at least for the first-time guy. We went from the median price of $250 to $550, and you could have the same payment if you were a median income earner in California. You could have the same payment at $250 and $550 six years later.

In a way, you do not have a loan program that is doing that, you have an interest rate doing this. Bruce said this is why he thinks there could be price aggression since never before has a $100 grand price increase meant so little monthly. However, this interest rate has been in place now for some time and will most likely not go dramatically lower over the ne t year. There is no emphasis for it to dramatically change over the next year. Bruce said this will definitely not be the case for interest rates, and Sean thinks this is also true for price. Easier lending will definitely not be a driver behind price increases this year.

Sean said he thinks the primary driver is going to be the two things Bruce touched on earlier in terms of median price. One is the fact that we are going to have a mixed shift to higher-end homes, which does not mean prices did not change at all. It just means the homes that are selling are higher-end because the low-end foreclosures have been going away. It is not a change in price, it is a change in median because of the mix of homes being sold. Sean thinks we have certain areas in the state, possibly half the state at most, where payments are significantly below rents. Those areas will most likely go up to at least match rents if not to have payments exceed rents as they traditionally have.

Bruce said one of the things that he noticed when he looked up loan programs is we will most likely not see anytime soon stated income variety, but we have a very aggressive FHA program in the sense of its available quantity of money. In Riverside it is $500,000, while in the most expensive counties it is in the ballpark of $700,000. We have a $340,000 median price the last time on our way up from the ‘90s when we got to $340,000 at the time when the FHA loan limit was $160. Bruce thinks this is a significant change, and he doesn’t know that we need the subprime world. We have FHA, who wrote the safest book of business ever in 2011 and 2012. They might be allowed to loan to some of these other people that had a foreclosure, even though we already know they will. This is where Bruce is looking at this huge glob of people that could get a loan with a 3 ½% down payment and improve their monthly cost. Even if it is a premium to rent, Bruce thinks they make the decision. We are so far away from this on a monthly basis, and you could have price aggression. 20% of $340 is $68, and if you back this off into a monthly cost, it seems a reasonable number to Bruce.

The only thing on the other side of this is FHA is under a lot of pressure because of their drawing share of the business to tighten their credit requirements and other things to tighten up. There are definitely some in Congress who are worried about the loans that they are making and creating in other bubbles. Whether they will be allowed to this time is the question. This is definitely the big question when we talk about things that matter. If there was an announcement saying that if FHA will now have a loan balance of the median price of California, for Bruce this would be a big uh-oh. Even this month they are making changes to if you have a lower credit score since you now have to have a lower debt-to-income ratio and some other things along those lines. Regarding larger down payments, there are also new changes coming in if you have a lower credit score.

What is interesting is in the credit world, what is starting to happen is you can improve your credit faster. Whoever has changed the rules here used to take 2 ½ years and now takes 9 months. It seems like we are bound and determined that somebody is going to be able to buy a house, and if it takes too long for their credit to improve we should improve it more quickly. If we can’t change it on one end, let’s change it on the other end wherever there is the political will. If you help people fix their credit score faster, then you are helping homeowners. If, on the other hand, you tighten up credit scores you are showing prudence. Prudence does not seem to be the fiscal cliff. The stock market had a big day when we basically completely ignored the fact that we have to at some point cut back.

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.

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Our Auctions Rely on Serious Buyers with Money to Determine the Price…not the seller or the appraiser by Randy Grigg, Elite Auctions

Sunday, December 23rd, 2012

Kaaren Hall, uDirect IRAIf you’re a control freak, it can be difficult to let the free market make the decision on what your “magnificent” rehab is really worth in a five-minute period of time. As a control freak myself, it took several auctions using our own inventory to realize sometimes the market said our property was worth more than I thought and sometimes less. When the market told me it was worth less than I hoped, it usually translated into either paying too much when we bought or spending too much to fix…or both…OUCH!

When we conduct our “California” reserve-style auctions, we feel it’s best to let the bidders provide the opening bid or start real low and then move quickly to the high bid using large bid increments. Using the traditional listing approach, on the other hand, many times properties are listed at 5-, 10-, or 20% more than similar, comparable sales in the hope that a buyer will pay more than value. When buyers don’t bite, the price is reduced slowly until a taker is found or the listing becomes stale and undesirable.

If an inflated FHA offer does surface, a rude awakening occurs when the appraisal(s) come in less than the proposed price offering. The buyer knows he is protected by the appraisal and knows the seller wants (needs) to sell…advantage to buyer. Because most FHA buyers also don’t have extra money to make up the difference from what they offered and what the appraiser said the property was worth, either the seller reduces the price or gives back the “contingent” deposit money. Bottom line: wasted time, additional holding costs, and more stress for the seller.

Other “net price” reducing costs include: the 3-4% closing costs many FHA buyers require, termite work, and/or home inspection-generated repairs.

When we sell by auction to an FHA buyer, it’s quite different.  First — to be a bidder at our auctions, the buyer needs to bring a minimum of $5,000 in the form of a cashier’s check. Second — if they are the winning bidder, their non-refundable $5,000 deposit is held in our trust account per the auction contract they sign. Third — if the appraiser says it’s worth less than they bid, they lose their $5,000 at the seller’s discretion. In reality, however, because there is a lot of real money at stake, they usually find a way to close. Tougher rules makes more people do the right thing (like what my parents kept preaching to my brother and me) Fourth). Fourth — the seller doesn’t pay for the buyer’s closing costs, termite work, and home inspection repair requests. Fifth — the buyer pays for title insurance (which is normally a seller’s expense).

These auction advantages gives the seller about a 5% “net price” advantage compared to a traditional list-and-sell transaction.

We really don’t want FHA buyers at our auctions because we don’t want to be in a position to decide how much of their deposit to put in our bank account when their most generous relative won’t make up the appraiser’s short fall. Also, most FHA buyers don’t attend our auctions because they don’t have extra money, can’t afford to lose their deposit, and they need the seller to pay for most or all their costs. SO… most of our rehabs in Bakersfield aren’t sold by auction because the price range we buy, rehab, and flip is FHA buyer territory. We sacrifice net price and hassle factor because of the market we have decided to play.

The best properties to sell through us by auction are properties where at least 60% of the potential buyers are those who pay cash or have a real down payment and utilize conventional financing. In Bakersfield, its houses are valued at 50% above median price (about $225,000 and above). We also have witnessed unfixed properties (wholesale flips) and multiple units work very well with our auction service in any price range.

Recently, we sold a rehab in the L.A. area (Highland Park) that involved $100,000 in rehab, and fit the guideline of 50% above median price value, so we sold it using our onsite auction method. Ten bidders showed up, all with $15,000 cashier checks. The house closed on time with the buyer using conventional financing at a price $20,000 more than we had anticipated.

In Riverside, we wholesaled a house for an investor where the auction turned into a bidding war with 37 bidders. The price went through the roof (retail) and it closed with a cash buyer.

We sold a six-plex for a seasoned investor in southern California who wanted to reduce his management responsibilities. We had nine bidders, each of whom was required to bring a $50,000 cashier’s check.  The property appraised for $150,000 less than the buyer agreed to pay — it closed because the buyer didn’t want to lose his $50,000 non-refundable deposit.

Elite Auctions specializes in assisting flippers and investors to sell their properties using an onsite auction with an experienced auctioneer and ringmen. We have revamped the cost to use our services, making it much easier to participate. Sellers are not obligated to accept the high bid (unlike an absolute auction), however, we won’t waste the effort if a seller is unrealistic with his or her price expectations. Buyers can bid live at the property, online, or by phone.

Now you know more about a great alternative to sell your property. Please feel free to contact me for additional information. Thank you.

Randy Grigg
(661) 325-6500
SellWithAuction.com

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