This week Bruce Norris is joined by Mike Novak-Smith and Ted Boeker. Mike Novak-Smith is not only one of the largest REO agents in the Inland Empire, but the nation. Mike is in the top 1% of all real estate agents nationwide and is experienced in REO, short sales, bankruptcies, asset management, and negotiating. Mike specializes in REOs in Riverside, Moreno Valley, San Bernardino, Perris, Rialto, Colton, and Corona. Ted Boeker is the owner of the company that Mike is at and has brokered for RE/Max Results in Moreno Valley. Having started the company in 1989, Ted has vast experience in real estate and has been able to train and lead 35 of Southern California’s highest producing real estate brokers and agents to close deals quickly and efficiently for a variety of clients in commercial, residential, multifamily, and office real estate. Nationwide Home Loans Inc. and RE/Max Results escrow division are associated companies. Before that, Ted practiced law.
Ted opened a business in 1989, which was a peak year. Things changed radically after this, and Bruce wondered if this was something that as a part of his business model he saw changing very quickly or if it surprised him. Ted said he would love to say he foresaw a lot of things, but he really did not see much coming. He had come out of commercial real estate, which died after the 1986 Tax Reform Act; and he said there was nothing in commercial to do so he should look at residential. It looked attractive at the time, but he never dreamed they would see the ups and downs that they have. Ted said it was probably good to start when he did because it did steal him through some of the early tough times. The flexibility of a business model all of a sudden became absolute. You could not do farming and be surviving in the ‘90s, and you could not do it after 2006 either.
Bruce went to a meeting at Ted’s company where he talked, and remembered prior to the meeting when they were talking about volume of sales. They were talking about the number of closings that Mike had and the other people who were ahead. Bruce also envisioned a meeting he was not at in 2006 where everybody is doing pretty well, and he wondered how you tell somebody that is doing well that their model is about to radically change and they have to do it before it actually happens. Ted said it is not easy as real estate agents are a wide variety of people, some well educated and others not so much. The biggest example is 3 years ago Ted started harping on short sales, being able to hopefully foresee what was coming. However, agents two years ago said Ted was crazy and they were not going to do what he was talking about. Ted said today about 40% of his sales are short sales. The agents who refused it are probably gone, and the ones who embraced it are doing relatively well to the marketplace. There are not a lot of easy commission checks anywhere.
Mike has been involved in the REO listing side for 21 years. The first REO ever listed was in January 1991. He worked at a Century 21 Office where they could not give away the REO. It basically paid 5% commission instead of 6%. He made a referral, but he was number 9 one the list; so when they finally got to him he knew the economy was declining. The Persian Gulf War had started, and things were tough. He thought if he could do the deal at 2% he could still make the house and car payments and could eat another month. This was why he carried out the deal. Anybody that declined the deal at the time is no longer in the business. Prior to doing the REOs, Mike’s business model was to show up at a Century 21 office and try to live off the floor time and advertise, which he did well. People would just walk in and say they wanted to buy or sell a house and you wrote up the deal. It was easy. Mike also started in 1989 at the very peak year and then quickly transitioned into unknown territory. The 90s was not replicated and it was not the normal downturn. In the ‘80s we had the radical interest rate change, but we did not have a price decline because we were able to borrow the cheap financing and move it forward to other buyers. In the 90s we took a 5% gradual decline every year for a while, and this was news to everyone who owned California real estate.
Bruce wondered how the 2006-2011 downturns differed from what Ted experienced in the 90s as a business owner. Ted said he did not remember the 90s as well because they never really got up to speed. It took them ten years to get up to a critical mass of agents and holding on through the tough times. The early 2000s were good, and then the falloff was a real shock. When they saw the change in 2008, it was the big change for them. In 2008 and 2009 they had a lot of REOs, and then nothing for two years. This is the biggest challenge he has ever had. They have really been able to tighten up and cut out expenses, but that is the key.
As far as the cycles went, Mike said in the 90s he could predict better what was going to happen. He could see the start and the end game. Now it just seems like it is never going to end. It was easier back then to predict your business than compared to now. You get a lot of curve balls today that you did not get then. As far as quantity of listings in this current cycle, Mike said the peak year for him and for everybody in general was 2008. We did not have the government intrusion that we had in the last 3 years, and this is a big frustration.
Bruce wondered what the following years as far as percentages went after 2008 if that year was a 100% year. Mike said in 2008 it went down about 20% for him and 60% in ’10. In ’11, it picked up a little bit but still went down about 50%. Bruce also wondered if anybody on the lender side is saying to either Mike or Ted that they will not be releasing so many or if they are always telling them to step up. What he heard for a long time was to maintain the staff and not cut anybody back, and this was kind of a mistake. He carried too much overhead through a lot of 2010, and he finally decided he was going to have to cut it back. He is okay with not making any money sometimes, but he hates having to feed it. Now he has the right amount of staff, and if they pay attention and operate well, they can make money. When you talk to asset management, the general opinion of people is they do not want to sit there and say they are not going to have a job. They believe it is going to pick up and they are going to have REOs to sell so they will have a job. He believes this is what a lot of it comes down to overall, and he does not believe anybody can predict what is going to happen. They are probably not at the policy decision level. With someone in Mike’s position, one of the nation’s largest, he would probably feel that he has access to somebody inside actually telling him the real scoop. However, this does not happen. Mike said he does know some people way up the food chain from various REO organizations, and even they cannot tell you what is going to happen.
Mike’s REO business peaked in 2008 when we had about a 3.4% delinquency rate, and we went up to 11.2%. Mike’s peak of foreclosures resulted from a 3.2% delinquency, and then we tripled. The amount of REOs he probably should have been handling should have been some gigantic percentage above the peak and its decline. The shadow inventory term is real, but it is not where people think it is. Mike’s opinion of what shadow inventory is the process that is not being finished. There are a lot of defaults going on, but the timeframe between when somebody misses the first payment to the time they foreclose is probably in many cases 18 months to 2 years. He asks a lot of people how long since they made their payment and this is the answer he usually gets. He rarely gets anybody less than a year; but he thinks the whole process has just slowed down, and this is your shadow inventory. It is not like the banks are sitting on millions of houses they own; they just don’t finish the foreclosure. Bruce wondered if there is a valid reason why they don’t do this, and Mike said part of the reason is if they just foreclosed every which way they could, they would not have the capability to handle the property. He hears of agents telling him they are in a really bad situation and don’t even want to foreclose because they do not want the house back. They don’t want to be responsible for the code liens and the taxes.
Bruce said what is interesting to him is somebody always tells him that the lenders are too smart in regards to carrying out foreclosures, but in 2008 they did exactly what they should not have done. They foreclosed on properties aggressively, and we ended up with something like 17 months of inventory and a price decline of about 3 or 4% a month. Once you are there on that low level of price and everybody is upside down; it is much easier to make a decision to walk when you have negative 50% equity. When the civil Code 1169 came into effect in California, you could be fined $1,000 a day if you are the lender owning the property or a trustee sale buyer owning a property. They have someone come out and visit your place, and you have a week or two to fix whatever they are going to see.
When Mike resells REOs, Bruce wondered if there was a big problem with liens that had been placed on the property. Mike said they have a lot of problems with liens. He has a full-time employee whose job is dealing with liens, code violations, and HOA problems. Part of the problem with a lot of the banks is they do not have the internal staff anymore to handle these problems. It used to be they had attorneys on staff that would fix a lot of the code violations and a lot of the liens, and now a lot of that is not done. We do not figure it out until we start marketing the property and they come up. He said he fronts a lot of money to pay code violations and liens because typically the agents expect you to pay them and then be reimbursed. They are on it full-time, checking properties every day as he does not want any code violations and does not want to front the money for it. It is a lot bigger problem than it once was.
Bruce wondered what percentages of his listings were occupied by somebody at the end of the foreclosure process, which Mike said was about 75%. The attitude of the person behind the door is usually bewilderment as they wonder how something like this could happen, and most of these people are tenants of the former borrower. They did not know they were about to be asked to go.
On the topic of Cash for Keys, once this type of thing happens it becomes a street lore and urban legend. You can go ahead and ask for cash for keys, plus with some of the clients they are told how much cash for keys is going to be. A large problem Mike has is a lot of clients are very generous with cash for keys and some are not. Many of them ask why they only receive $1500 when their friend received $8,000. Bruce said if the Learning Annex was still in business, he could be almost certain there was a class held at night. The Cash for Keys is a big deal, but the offers vary a lot, and this can cause some problems. Bruce wondered if it has to do with the size of the loan or just the motivation of the lender, to which Mike said it is the latter. The more well known you are today as a lender, the more you want to pay.
Bruce wondered how big of a problem MERS robo-signing presented to California lenders. Mike said he has not seen much of it where it was a problem. He does believe with a lot of their deals a lot of the loans are in pools and portfolios, and sometimes they get slowed down because someone is going to check the whole portfolio, whether most of the loans are in Chicago or Florida. Sometimes this will slow them down. Something that was originally going to close, for example, in January will not close until March. However, the bigger issue is they are in a mix of properties.
On the myth of bulk sales and bulk REO listings, Bruce said he has only fallen victim to this one time as he went around an looked at 100 houses in two days to get his piece of the dream. However, there have been people who spent a year and ruined themselves by following something that seemed imminent that they were going to cash in on 100 houses. Mike does deal with a lot of REOs, and Bruce wondered if he has dealt with successful bulk deals in California only. He said Fannie Mae and several others do pool sales and advertise for it, but it is usually beyond the capability of the small investors. It does happen, but where he gets the calls is from some person who wants to buy ten houses in bulk, and the problem with that is with many of the lenders there are ten different investors on the deals. It is not the same real seller when you get down to the bottom line. Bruce wondered if he feels there are sufficient properties going that route that it affects the volume that they see, but Mike said this was not the case.
Another topic is bulk note sales, where you have big companies buy thousands of loans at a shot. Bruce wondered if this is significant in its impact in the REO listings. Mike said he is not sure he has seen them, even if it is possible they are going on. You do not see them in California has much as you see them in other places. In Orange County, there is a company in Irvine that buys very large pools, but the majority of the loans are not in California yet. Even if the purchaser received 60% off of the face, it would be hard to say that there would be a lot of room.
Bruce was a moderator of a panel on bulk buying that HousingWire.com had a couple years ago. He was very fascinated with the concept and thought it could really happen to somebody. Of the three, one of the companies that was on the panel was capable of buying 1,000 homes in a very short notice was Williams and Williams Auction Company. Bruce knew Tommy Williams personally, so he talked to him, the person he thought would really know. Having auctioneers all over the country, their infrastructure is such that they literally could get a 1,000 property listing within two or three days, legitimately see every one of them, and come to a number. They had not bought a property in a year, so they had the capacity, but there was not any inventory that was going that route in that kind of volume. Bruce just heard of another scenario yesterday about a bulk sale from one particular lender, so it is such a great theory. However, Ted said somebody actually has to go out and look at the properties to make sure they are even there. Ted said they have had REOs they have gone out to look at that are not even there and had burned down about a year earlier.
It seems one of the things RE/Max would really have a grasp on is how much infrastructure there is as far as capacity to move inventory already in place. They do not have to invent a thing. Bruce wondered how many more listings they could have, if they could have a multiple of 300-400% alone. This is replicated everywhere. Someone could drop a lot of properties into the United States REOs, and it would get absorbed by current staff. Another option is trained staff is added, and this would make more sense more than selling thousands of homes to a hedge fund. There were couple of things in a report Bruce read, and one of the things was doing a big bulk deal. A couple days later he saw a headline for a $650 million pool by one of the well known big companies that they were going to buy REOs and retain them as rentals. This sounds significant until you look at the numbers of how much debt there is in excess. You basically have a $3 trillion problem when you start throwing $50 million at it and see how it is such an insignificant thing. In short of saying they are going to forgive everybody, whoever owes more than their house is worth, we are probably in for a long haul. There is really no end in sight and no end game. Neither is there a change in the aggression of lenders saying they should cut to the chase and take all the REOs back. If a lot of the houses were sold to hedge funds, they would be a lot more aggressive because they would not care about their name being drug through the mud. They do not have a public name or a retail presence, and this is most likely part of the reason why things are slow in some cases.
One of the suggestions in the white report was getting a deed in lieu of foreclosure and giving the people right to buy the property back some years later. Bruce wondered what their thoughts were on the same owner returning as owner at a later time. However, Ted said this is silly. Once a person has given up on the property as we have seen and stopped making payments a year or two earlier, when you go to that person see them start making payments again, that person just laughs at the agents in charge. Bruce does not know how you rationalize this with the person next door making payments on the same loan. You start asking yourself if you can get the deal too. Mike and Ted said one of their clients offered the ability for the occupants to lease the property for a year. Mike and Ted said they have started a few of these, but they have yet to see anybody finish before they failed and ended up being evicted. For them, not paying is a good deal and they want it to continue.
Bruce read another news article where they were talking to a family that had not made a payment in a couple years, and it was a very positive experience for them as far as what it did for them financially. If you think about it, they have an expectation that this is okay, and there is an expectation that it is almost sad when it ends. Of the people who have not made a payment in two years, the ones who have saved all the payments is 0%. There is a statistic that 4,100,000 people that are 90 days late or beyond, including REOs, there is only a 1% chance that they will willingly write a check to make it current. 99% of the pile is going to go the route of a lowered opening bid at a trustee sale, a short sale, or an REO.
In RE/Max’s business model, the short sales have really aggressively gained momentum. Bruce wondered if they are ahead of REOs as far as closings. However, Ted and Mike believe they are even. Last year, roughly, they had about 20% normal sales and about evenly divided between short sales and REOs. Bruce has looked at charts for years, and he said he has not come up with a real meaning with what was just said regarding REOs and short sales until recently. When you close 100 sales, only 20 buyers emerge. This really hit Bruce that in the Inland Empire 80% of the closings are either going to be vacant or bought by someone new migrating here or someone in credit damage or investor for cash. This is not a lot of people. Unfortunately, it is many of the people who walked from their homes three years ago and now have repaired their credit and are able to buy again. There are very few of those, but it is shocking in today’s world that the person who did the wrong thing three years ago seems to be saving the system. Had we foreclosed on somebody instead of waiting, the people who are behind by 2 ½ years have not had one day of new credit.
Tune in next week as Bruce continues his interview with Mike Novak-Smith and Ted Boeker. For more information on RE/Max, visit www.remax-results-ca.com/.
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