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This week Bruce is joined once again by Andrew Waite. Andrew is the founder and publisher of Personal Real Estate Investor Magazine. He has authored a total of nine magazines, is a recognized expert, and is extensively published in sales and marketing automated processes, sports marketing, and sponsorship.
One of the things Bruce does as an investor is figure out where to put his money. He read one of Andrew’s reports word for word when it came out two years ago titled The Invaluable Investor, and he wondered what Andrew found in the report that might surprise people. Andrew’s main concern with the magazine is when they chose the word investor as part of the title; they missed the majority of Americans that were investing in real estate because there is a vast class of Americans out there that own real estate other than their own occupied property. They’re generating income, managing effectively and responsibly, and improving neighborhoods, but the last thing they define themselves as is real estate investors. The word investor implies professionalism, a structure, an operational sophistication, and it really isn’t that way when you think about it. If you are inheriting a family home, if you have a relocation that goes bad or you have a slow sale and you decide to get into the rental as a bridge strategy that ends up working out since you have not lost your assets, all of a sudden you have a really big market. Andrew said the problem with all the titling was the fact they chose the word investor. It’s not. It’s average Americans with some holding in real estate other than their owner-occupied home. They typically buy a multi-family house, and they also buy and hold it, the greater percentage of them tending to hold it. Flipping is a very sophisticated business because you have to worry about financing, timing, managing contractors, the buy and sell side, the marketing. You have to have a margin that isn’t necessary for cash flow.
When you look at a lot of real estate data, no matter the economy, the relativity remains the same. One of the interesting things that occurred with Community reinvestment, Fannie and Freddie, and all of the secondary market that was pushing liquidity into the market was they moved the homeownership percentage up to 69%. If you look worldwide over major English-speaking cultures and at the homeownership of quantity or relativity, it’s constantly 64-65%. It’s this way in every market, whether the interest rates are good or bad; the American dream or middle class dream in every country is to own their own home, which settles at about 64-65%. What Andrew and his business partners had done was they pushed the market into an area where it was beginning to defy personal and national economic trends. As soon as the market dried up on subprime and all of the artificially low loans, you found that those with budgets were pushed out of the market and later dropped back. Right now we’re running at about 67%, and we’re going to see a little more contraction, which is going to end up at about 65%. In Bruce’s opinion, it might end up less than this only because we have about 8% of the people that are still occupant owners not making a payment. When you look at the numbers on a relativity point of view to the actual market as a whole, if 3-4% of the investors solved their problem, you look at what this percentage represents in terms of the 123 million houses out there. The pendulum will probably over correct on the downside, but then it will float back to a 64-65% number. We’re talking about human behavior here, not about economics. To Bruce, this is the missing link between when people collect data.
As an investor, Bruce always has to look at what’s next. On occasion, The Norris Group has written reports, and they created a “moodometer” that actually charts the history of the mood of the buyer. It doesn’t only track the mood of the buyer, but like a Case-Shiller case, your propensity to take risk, or herd behavior. You also get this in lenders, not only the buyer. The buyer wants it, and the lender says, for example, they can lend them 125% LTV, and loan programs facilitate the exuberance. You then get to an interesting place that you didn’t really want to go. Now the opposite is happening. You have a skewing way below the line where they’re saying no to loans that make perfect sense. The Norris Group just made 13 loans to a gentleman that is a well known investor in Southern California who owns about 44 houses free and clear and can’t borrow a dime. However, he has ten loans, so he had to borrow 13 loans from The Norris Group at 9.9% interest. It’s ridiculous that people would think this was a dangerous loan, but this is where we’re at. The very interesting thing is when you see this behavior based on what is the need of the financial institution and their quarterly reporting or the reserve rules of the summary promulgated by the comptroller of currency, you find they overreact. One of the most interesting things that Andrew saw that nobody else seemed to see because it was an FDIC change made in 2007 based what happened with the RTC from 1987-1990. At that time, they had decided to accelerate mark to market all of the assets that a bank had that were nonperforming. Everybody had to take a 100% loss then and there, which destroyed many banking institutions. This allowed no provision for the fact that when these properties were liquidated, they had value. The delta was really the loss and not the 100% loan. They changed the law in 2007, but they went the other way. They allowed for the bank to keep the properties on their books, but in an Enron style offshore entity that was really part of the bank but not part of the bank. As a result, it made people hold onto assets in the shadow inventory, which when you watch the numbers and listen to Sean O’Toole at ForeclosureRadar, Sean will tell you that the banks have bought enough time to be able to liquidate enough. This way there is never going to be a huge thud as everything arrives on the market overnight because at least someone was smart enough in terms of liquidating the assets but not doing it in a precipitous manner. We have learned, but now we have a whole new set of lessons we have to learn again. We did forget back in 2006-2007 when inventory was dumped in California and properties were being bought consistently when inventory was at its worst. If for example, there was 18 months of inventory available in the MLS, it was being bought at $0.19 on the dollar from what the lender was owed. They presented the inventory as they got it, and that is what happened to the market. It dove like a rock. After that they pulled out the quantity of inventory, so the MLS then had about 4 ½ months of inventory. In Bruce’s opinion the inventory level is very phony. It could be a lot higher, so as an investor Bruce looks at this and sees that they are in an extended period of time where the lenders are going to present their inventory at a very measured pace. It will then be a contender for people to sell again for quite some time.
Bruce sees that there is going to be a real bend toward increasing down payments for owner occupants. One of the statements that was made by Shelia Bair was that when somebody makes a down payment of 20% they have more stake in the game and will perform a lot better. We have collected the data for this over a long period of time, and the payment history for somebody who puts 0% down VA, 3% FHA, and 20% of Fannie Mae or Freddie Mac, the difference in foreclosure rate is ¼%. They’re going to dictate all these policies based off a false assumption. With that model, they have retired sales, and its classic overregulation. Since Andrew is in the advertising business, he really understands what a control piece is. A control piece for the audience is you have a mailer or an advertisement you know gets a certain result. You don’t change the control piece but one thing at a time, and then you know if it would improve or not improve the results. It’s like doing diagnostics on a broken computer. You start with one assumption, and then when that assumption is not proved, you keep that assumption stable and then move to the next one. We have a 30-year history, a control piece of how not to have a national decline in price, and we are forgetting that all the way from 80-2000 we had a perfect record. We had some ups and downs that were minor, and the loan programs that created it are not getting the blame. What is getting blamed is the down payment, and it is absolutely ridiculous. This is dangerous because the timing of it couldn’t be worse. In California, we have a market in Riverside that is 71%, either short sale or REO, and what that means is when you have 1,000 sales you’re really creating only 290 buyers. All of the other people are credit damaged to the extent that they are not a buyer. You start multiplying this across the state of California, and it is a pretty big percentage. CAR did a study showing that when a seller re-buys something, they are usually re-buying something 33% of the time. When we have 500,000 sales in California, we’re producing 165,000 repurchasers and having to find 335,000 new buyers, which is impossible. To come from a new buyer list, it’s going to have to be investors, and that’s why numerically you’re going to have to deal with the fact that investors better buy these vacant homes and fix them. This is where Bruce hopes we end up as an industry, with an industry that has enough influence. The people will start looking at what The Norris Group does in a different light and see that they actually bring something to the party. The I Survived events are a class of industry event and industry interest where you’re combing the interest of both parties and let them all understand they have common goals and now speak as a voice. Andrew ran an investor provider leadership summit and brought several little companies from all over the country and put them in the same room. They were astounded at each other in that they all used common accounting standards. Those who didn’t were a problem because they weren’t comparing apples and oranges. They all realized that they needed to have standards and that they could stand up and say they were a housekeeping seal of approval style business, and all of a sudden even though they competed they realized that they were a singular voice for responsible investment and reaching a class of buyers that was the ordinary American looking for a better return than what was offered through traded assets. And this is the goal of I Survived Real Estate, to have leaders from different industries that have their own special interests think about how if they were to sit in front of Congress, then they will also think about how there is an investor base that can assist in the solution to the problem. But, if they all had the same mindset in how to solve the problem, then they would probably have a lot more power collectively than they would individually.
It is average Americans who have sound belief in their country and how business and real estate work. It’s not an unusual or exotic asset, but it is something everybody understands pretty well. Investors or average Americans investing in investment grade rentals are not slum lords because if they let their property go and the neighborhood is affected, their investment declines in value. If these people are responsible or irresponsible as other people try to paint them to be, they’re missing the whole story because these people are really proud of their properties. The better the properties are, the more easily they rent, and the better rent they accumulate. It was the market that pulled Andrew’s magazine through, not him and his business partners saying smart things. In 2005-2006, the group that called themselves investors was probably a lot of speculators that are no longer here. There are more true investors in 2011 than there were in back in 2005-2006. When you run a magazine, the fear is you run a weddings magazine. In those cases, a bride subscribes to your magazine, and 6 months later she’s married. If she is subscribing to your magazine a year from now or go back to her and ask her if she wants to re-subscribe, typically you will find a very low number. Andrew found the same thing with real estate investors because he would go to several real estate investment clubs, and the clubs would find something they wanted to get married to/invest in, thought they could make some money, and would sign up for an association. Their expectations were high. However, after a year when you go back to re-subscribe to a “bride’s” magazine, you get two classes of buyers for the second year of subscription. There were a lot of people being drawn into the industry that weren’t coming in with reasonable expectations, a type of “millionaire by midday,” but soon they were all gone because they spent all their money on books and tapes. The class of persons that promoted “edutainment” was very bad for the industry and it created a lot of vestibule object that you’re seeing from the legislators. They remember seeing “Billy Tan” and his blondes on a boat in San Diego on midnight television. Almost everybody was a real estate investor in 05-06. Bruce lost three people who cut his hair during that stretch of time because they all became real estate agents. This is when Bruce knew he better sell his things, and he sold 100 houses in that time stretch. One of the things about investors and looking into the future is that it’s good to have a way to make non-emotional decisions. Charlie Dow was the inventor of the Dow Theory, and he contributed to a book in the late 1800s. He said, “You could always tell where you are in an investment cycle by taking the mood of the crowd that’s investing it.” He said if you want to get wealthy, sell to the (eager) and buy from the fearful. This is the marketplace we’re in right now where real estate has created such a fear around it that there are opportunities where any time you would look at each other and see something is wrong and too good to be true, there’s not an enormous amount of participation. Andrew’s magazine is really an outlet for this on a national basis since a lot of markets are local and it helps to have specific knowledge (of the market).
There are four parts to the magazine: Process, Principles, People, and properties. The process and principles are pretty universal. It’s the people and properties that differ on a regional basis because if you are investing in the northeast you tend to be dealing with a lot more older stock custom houses. When you’re dealing in the Sunbelt or in the newer states, there is a lot more production housing. As a result, that is a far easier market for investors to operate in because there is far more predictability in it. Andrew sees a lot of activity in the “smile” of the southern states, starting in the Carolinas and going up into Northern California. It’s weather, economic strength, right to work, and a whole lot of things that make the markets much more attractive for real estate investors than the northeast, Midwest, or the far northwest. For California, what we have is a double whammy of you getting emotionally damaged by real estate after losing money plus high unemployment and not attracting migration. In California it is a perfect storm. Andrew moved to California in the ‘70’s when he lived at Berkeley, and just after watching and plotting the path of progressive strategies, he has seen that the people who leave the state are the productive people.
If you want to find out more about Andrew’s upcoming event in September, the Investor Provider Leadership Summit, go to www.personalrealestateinvestormag.com. You can also find Andrew’s magazine here or download it onto your iPad.
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.
