Bruce Norris is joined this week by Tony Alvarez. Tony is the owner of Evergreen Properties. He buys and sells, buys and holds, manages his own properties, and has become one of the most sought after speakers and trainers.
Bruce asked what part of his schedule is now taken up with training and teaching or speaking in front of clubs. Tony said he has actually not been doing a lot of this because there was a moment in time when he realized he became a bit of a distraction. He was not focusing on his core business. He took some time off and reevaluated how his time should be spent. He refocused it on his own acquisitions and revamping his own management. A lot of things go sideways when you put your attention no something else, and teaching takes a lot of your focus and attention. There is also the follow-up. You teach a class, and there are students who come back and want more. Tony is the type who does the teaching and feels obligated to stick with them and explain everything to the last minute detail. Right now about 0% of time is being dedicated to teaching and 100% to acquisition. Their acquisition shifted into high gear now.
The year 2012 was split between training and gradually getting back to buying properties. Bruce wondered what Tony’s deal source was in 2012. He said it was primarily real estate agents. Going back to when Bruce spoke and showed a diagram displaying what was happening to the deals, he showed 40% of the transactions were falling apart. In Tony’s area it was more than 50% of the deals. Tony zeroed in on this and designed a whole marketing program to go after agents. It was not so much deals, but rather agents and asking them to consider Tony’s group. That marketing campaign included detailing a specific property they had pending and reminding them it was pending. There could potentially be a pending property that would fall apart over the course of 12 months. By the end, these agents were completely frustrated, especially in Tony’s area where the commission checks were not big bucks.
Tony even added a special Christmas advertising where he tells people he can save their Christmas money. If a deal falls apart, they will close it by the end of the year. He did it with humor, so a lot of the agents were responding and are still responding. He received a call on Thursday from Sabrina, his acquisition person, who told him to check his computer. He was told to punch in an address in Google. He typed in the address, and sure enough it popped up on Google. Sabrina told him to click on the house, and he saw a house built in the 1950s that was perfectly restored. He looked at, and before he could even get the words out Sabrina told him it was owned by the city. He asked her why she told him to look at it. Typically a house that has a market value of $100,000 will be listed for $165 or $170,000. The agent called Sabrina telling her the city had been sitting on it for over a year, and someone had just broken into the back and caused damage. They were looking to sell the house that very day. Tony asked what they had to do, and she told him they were going to drop it to $65,000 and want somebody to buy it that day. Tony did not want to pay $65,000 for the house, so she said they would have the agent make an offer and asked him if he was on board with it. He said he was, and she said she had already made the offer.
This is the kind of situation they are getting a lot of today. They are getting calls from an agent where something shifts, and the next thing he will do is have someone contact the city and ask what else they have. Tony focuses his attention on getting leads from agents, specifically the deals that fall apart, and that has been enough.
Bruce wondered if the REO agent has translated their abilities to the short sale world. Tony said they have, and in particular one guy will identify himself in the office as the REO guy. All his understaff became REO specialists at one time, and now their card says “Short Sale Specialist.” Tony no longer looks at the source of whether it is an REO. He calls himself the REO Mentor, but he never really looked at it as REO. He always looked at the agent. He wants the person who understands him, understands what he is trying to accomplish, and then makes the deal happen. He wants someone who can help him accomplish that close.
Usually the agent who ends up helping Tony is a repetitive source for a long time. Tony wants them to have these niches and wants them to be the REO, short sale, or probate agent to where they always have those motivated sellers who are not after your only home in the world for a sale house. Rather they should have these niches of as-is properties that would make perfect sense to get out of in time. Tony identified long ago that there is a very small group of agents that handle all of these stress situations, and in markets such as Riverside you have agents who do mostly probate, although some of them do it all across the board depending on the time of the market. Some of them specialize in one more than the other, but they also know each other.
Oddly enough people think there is a lot of competition between them. The real pros who have been around for a long time did not experience that feeling, even when they are starving. Instead, what they do is try to cooperate more. This year Tony received calls from a couple agents who said someone recommended him, so the agent called him in case he had something to sell. These are some of the agents who are representing some of the larger equity funds. Now they are looking to bulk buy, and they are looking with tenants. Tony wasted their time as long as he could and sold them nothing.
Tony has no complaints in the acquisitions part; he still swears by his relationships with agents. Bruce was actually the one who introduced Tony to marketing at a certain point in the real estate cycle, including going after deals absent the owners. In his career, these were the most profitable deals besides commercial, and they came directly from an owner/seller. Tony said they are structuring things now; and since they are a really small office with not a lot of people, he is trying to figure out how to not bring things into his office as much. The people who work with Tony are his girlfriend Dana, who handles all the bookkeeping, and Sabrina, who manages all the properties they have. She is also learning and helping Tony with acquisitions; and when she had called Tony earlier regarding the property she had two court dates to appear.
In one court case, Tony’s group actually sued a tenant in small claims for a back-rent. Another case involved an eviction. Tony said this has been his highest eviction year in probably two decades. Half of the two evictions he had this year was a Section 8-10. They had a problem with Section 8 and were going back and forth. Section 8 was trying to drop their portion and try to get them to pay more. Since the tenant was not paying them, Tony said they were seriously holding her feet to the fire on her end of the deal.
Regarding hedge fund buyers, Bruce wondered how they have affected the rent market in Lancaster. Tony said he thinks they have an over-abundance of rentals right now. Thankfully, they do a terrible job of managing their real estate, so you see several houses for rent in which the houses are actually terrible. Tony would love to record the people who come into his office to rent from them because they tell him they love the house, even though it’s older than the house they are in currently. They have seen a lot of older homes, but the condition is unbelievably atrocious. They are not managing that said really well since they probably have so much inventory. However, this has affected their rents, especially in Orange County. He has not seen any articles about rental increases in the Antelope Valley since 2008. If anything, it has declined.
Part of it involves the pricing structure and a 3 ¼% interest rate, which would certainly make ownership a lot cheaper than rent. Tony said the typical rent that they were getting about $1195-$1200 for is now renting for about $995. Section 8 has reflected this as well, although Tony would say it has been more dicey. Less than 15% of Tony’s inventory is Section 8 rentals, but he did this because he got concerned after he saw that they were getting letters saying they were reducing rents for Section 8. This goes back about two years. Tony immediately thought that maybe their budgets are cutting back or they are looking to do some things toward the future. They then pulled themselves back to get away from this. If they are going to have to charge lower rent, he started thinking in terms of qualifying the tenants a little bit more hard. You have to be careful since you cannot discriminate when renting to different people, especially regarding their sources of income.
Bruce asked what has happened to the supply of homes as far as month’s supply. Tony said the last time he checked they were at about a month and a half. Bruce asked if this inventory has changed in type, if it has gone away from REO to short sale. Tony said it has and that REOs are the smallest piece. They probably still have ten times as many REOs as everybody else does, but you are also talking about 12 as opposed to 1200. The short sales have definitely increased and are still increasing, and this is definitely the dominant part of the market. They have seen some standard sales, but the short sales rule.
Bruce asked Tony if when he drives through neighborhoods now it is still really obvious there was a problem where you have constant vacancies and see that the neighborhood has a vacancy problem. Tony said they do see a lot of vacant homes in the area, although this is not typical in all neighborhoods specifically in the Antelope Valley. Going back about two years ago, it was the newer things that were more vacant. Nowadays it has dropped to more of the older houses. These are homes that are not for rent or sale; they are just there. Tony noticed these since he is always writing down addresses, following up, and seeing who owns them. The number of rentals is definitely a marked increase, and you see these sings everywhere.
With a month and a half supply of inventory, Bruce asked Tony if he has started noticing any price aggression. Tony said there has been price increases, but it is not consistent. It really depends on some markets, for example in the Antelope Valley, and what is going on that month. It is very inconsistent. You may have very few, if any listings; or you may have a lot of attention for these couple listings. The next month you may have the same street where the price was $105,000 for a house that would typically be priced at $100,000. A couple months before they may have been in the 90s, and now all of a sudden there are four or five houses for sale. These houses are all short sales and are all within a couple blocks of each other, and you see these prices start to constrict. Across the board we have seen some increase in pricing, although not very much, because of this situation. As soon as the house goes up for sale in the neighborhood and closes escrow, you seen an increase in listings within a month. They are not necessarily at prices they will be able to sell at, so you know things like this are silly. Tony thinks agents are out there marketing to the owners, telling them what they sold and how they can do the same for them.
Bruce asked what prototype house Tony had in 200-2006. He wondered if it was the same inventory he just rebought. He also wondered what the homes are worth at the peak of the price in 2007 compared to the peak the prior years. Tony said at the end of the last market, he was reminded by Bruce that too many people were fighting each other over inventory stuff and to keep an eye on newer tracts as well as look to the market as a source of inventory. This was difficult for Tony because he had never bought new homes. However, at the end of the market he went out and bought some 2,00o square foot brand new homes, and the developer was dying to sell them out so he could go take care of another tract. Tony did not quite understand the reasons behind it, but the developer was explaining how he needed to sell these out first before he could get the financing he needed on the other properties.
Tony ended up buying four one-story, four-bedroom, 2 bathroom homes for $237,000. He ended up selling these upside of $350,000, and the prices were just crazy. He also rented the houses out for the two-year period and made a killing on the rents. He mostly rented them to engineers. A $350K house in that neighborhood today would be about $200,000 tops, past the 50% point. Those houses did not go down in that neighborhood lower than $165-$167. However, this is really not his prototype inventory for his rental. The rental is more 3-1 or 3-2. He owns a lot of properties that were built in the 1950s, the 3-1s being less than $1100 square feet. He also owns some 4-bedroom, 2-bathroom homes that are about 1200 square feet. He also owns some properties that are from the 1980s, with tile roofs. However, this is a smaller part of his inventory.
When Tony sold his inventory it was around $250-$300,000. He can’t even believe most of the houses he sold, especially when he is buying them back. He bought some of them back that he sold for $280-$290,000 at a prices of $45-$60 grand. Now they are probably not even half of the former value. Someone just made him an offer an a 1100 square foot house for $125,000 for which he paid only $60 grand in 2008. He did not buy it from him.
Bruce asked if anyone was still building anything out here. Tony said they are not and the city is the only one that actually even tried to develop some lots that were not finished. This has been a disaster. Bruce thinks there is a really healthy price increase for most areas, but Tony’s area really has not taken off yet. When Tony and Bruce met, one of the things that was a stark difference was that Tony was about to exit his inventory while Bruce was looking at his set of charts and had not even started to build yet being 9 miles away. We are almost in that same situation where it doesn’t pencil to build, so it sure isn’t time to sell either. This is going to go aggressively up before these people start creating building lots.
Tony said he was considering selling this year. Sometimes he will wake up in the morning, and the last thing he wants to do is buy another house. He was enjoying himself at home drinking pretend coffee when the phone rings, and it’s Sabrina asking him to buy another house. How good of a negotiator does this make him that he would have to have it at 65%. She told him she was going into the city after she got out of court, and Tony told her to have at it. He couldn’t even get worked up about the thought of going down and talking to them about it, even though he is friends with them.
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