Sources:

C.A.R. Pending Home Sales Index

June Existing-Home Sales Slip on Contract Cancellations, but Prices Stabilize

Zillow is the first single letter ticket on NASDAQ

Home Sales on Pace for Worst Showing in 14 Years

FDIC Failed Bank List

Fannie Mae Seling Guide Updates

Gov. signs SB 458 into law

Federal Trade Commission issuing nearl $108 million in refunds to Countrywide borrowers

B2-2-03, Multiple Financed Properties for the Same Borrower

NAHB Study Finds Loan Limit Declines a Discouraging Prospect for Recovering Housing Market

Today’s News Synopsis:

In this week’s video, Aaron Norris of The Norris Group gives the news of the week in the world of real estate and other big events. Fannie Mae released a report that showed a more optimistic view of the housing market for 2012, despite low home sales in the second quarter of 2011.  The Obama administration is in talks to take foreclosed homes off the market and rent them out to buyers.   

In The News:

Housing Wire- “Fannie Mae sees light at the end of housing tunnel” (7-22-11)

“Home sales in the second quarter of 2011 were bad, according to Fannie Mae. Home prices also remain volatile, moving with gains and losses, over the past two years.  However, according to a housing forecast report card released on Friday from the government-sponsored enterprise, 2012 is likely to be a different story.”

Bloomberg – “Banke Foreclosure Practices Deal Said to Be Held Up Over Liability Releases” (7-22-11)

“A push by U.S. banks to win broad liability releases has become one of the main obstacles in talks to resolve a nationwide probe of mortgage-servicing and foreclosure practices, two people briefed on the matter said.”

Realty Times - “30-Year Fixed-Rate Mortgage Ticks Up To 4.52 Percent” (7-22-11)

“Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), which shows mortgage rates changing little over the previous week following mixed economic and housing data. The 30-year fixed average 4.52 percent and the 15-year fixed averaged 3.66 percent.”

DS News - “Administration Considering New Housing Policies” (7-22-11)

“The Helping Responsible Homeowners Act (S. 170), which aims to help underwater homeowners refinance their loans at historically low interest rates, is gaining support.”

Housing Wire - “HUD extends unemployment aid deadline in some cases” (7-22-11)

“The Department of Housing and Urban Development extended the Emergency Homeowner Loan Program deadline for some agencies that have not received the maximum number of applications.”

Los Angeles Times - “California adds jobs in June” (7-22-11)

“Employers in California added 28,800 jobs to payrolls in June, a surprisingly positive number amid a weak labor market nationally. The state’s unemployment rate rose slightly, to 11.8%, from 11.7% the month before, the Bureau of Labor Statistics said Friday morning.”

Wall Street Journal - “Mortgage Rates Stall” (7-22-11)

“Mortgage rates were mostly flat in the past week amid a series of mixed reports on the health of the U.S. economy, according to Freddie Mac’s weekly survey of mortgage rates.”

Realtor Magazine - “Gov’t in Talks to Rent Out Foreclosures” (7-22-11)

“The Obama administration is considering a plan that would take foreclosed homes off the market and rent them out–in a move aimed at clearing the glut of unsold foreclosed homes and preventing home values from falling any more, The Wall Street Journal reports.”

Inman - “Program glitch inflates real estate prices in Chicago” (7-22-11)

“A program used to analyze housing data has been identified as the cause of inflated median price calculations for the city of Chicago, the Illinois Association of Realtors announced today.”

Realty Times - “Existing-Home Sales Ease” (7-22-11)

“Affordability is at a record high, yet home sales are lower than expected for these conditions. Partly to blame is limited access to credit, which is keeping many potential buyers on the sidelines.”

Looking Back:

CAR reported California home sales decreased 4.2 percent in June 2010. Statistics from the NAR showed existing home sales 5.1 percent in June 2010. Ascension Capital Group predicted total bankruptcy filings would top 1.63m in 2010, and increase nearly 10% in 2011. Eight million homeowners were not paying their mortgage.

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.

Tom Anderson Chairman and Founder of PENSCO Trust Company (Full Bio)

This week Bruce is joined again by Tom Anderson. Tom is the chairman and founder of PENSCO Trust Company. He is considered by many to be the national expert on the topic of self directed IRAs. He focuses on how investors can increase their wealth-building potential with real estate and private equity investments. He has written articles for nearly all the nation’s and financial magazines. He was recently invited to Washington as part of the “Future of Finance Initiative” for the Obama Administration.

You can loan money to your IRA if you attempting to protect the existence of the IRA. You cannot loan money to your IRA to buy new lots. The loan must also be interest free. If it did have an interest rate, the loan would be considered self dealing, because you would be taking profit out of your IRA. Lastly, if the loan extends more than 60 days, you must provide the custodian with a note explaining that the IRA owes you money.

Tom recently spoke to a member of the Department of Labor who created this exemption, and the member confirmed that you could loan money to your IRA to bail it out of mortgage delinquency.

There are some IRA investments which may or may not be considered illegal depending on which government official is reviewing the investment. For example, Tom once heard of a man who used his IRA to buy a classic car. Because the car is a classic, there is good reason to believe the car will appreciate. However, a government official might consider this self dealing, because they may or may not perceive the classic car to be for personal use. If the government perceives the car to be for personal use, then the car purchase would be labeled self dealing. Depending on which day the car purchase was reviewed, and depending on who reviewed the purchase, this may or may not be a legal IRA purchase. You can perform a large variety of transactions within your IRA, but you must be careful not to purchase anything that the government might perceive as self dealing. If the government believes you are self dealing with your IRA, then your IRA will lose its tax-deferred status.

Bruce’s business is set up to buy and sell real estate. Bruce asks Tom if there is a limit on how much money, or how many houses, he could use for his IRA. Tom believes that this is up for interpretation. In Bruce’s case, he owns a real estate business, so if he performs many transactions through his IRA, the government may possibly perceive Bruce to be running a business through his IRA. All businesses must pay taxes, and if the government determined that Bruce was running his business through his IRA, then he might lose the tax-deferred status of his IRA. Tom believes that if Bruce was both working in his IRA for retirement investments, and out of it for business use, then it would be hard for the government to label Bruce’s IRA as a business. However, if Bruce was retired, and he only purchased and sold properties through his IRA, then the government may perceive Bruce to be running a business through his IRA. You should consult with your CPA to determine whether or not you will be subject to taxes.

A disqualified person is a term in the Internal Revenue Code 4975 which defines certain entities as people you cannot perform transactions with. The government does not want you to touch your IRA assets, because they want your assets to be there when you retire. So you cannot buy a condo in a vacation spot with your IRA, and then use that condo on the weekends. Disqualified persons include yourself, your spouse, your children, and the spouses of your children. Most people in your family are considered disqualified persons, except for siblings, nephews and uncles. If you deal with a sibling or nephew, you should not offer them less than market rates. Giving a member of your family the benefit of low payments through an IRA asset could be considered self dealing.

Bruce heard an unusual example of someone who was taxed for self dealing. An investor owned a commercial building, and his IRA owned the let next to it. The investor would park in the lot next door, and that was considered illegal personal use. You are not allowed to gain a personal benefit from your IRA while the IRA is growing. If a mistake like this occurs, you have 14 days to correct it. However, if the custodian was the cause of the mistake, then you can argue in court that the custodian should be held responsible.

Tom’s company will not accept any member that is not a part of a regulated institution. If he did not check to determine whether or not his members were being regulated, many bad people would have the opportunity to deal through them. A non-regulated company may enter into an agreement with a bank who is a custodian. All banks, credit unions and trust companies are automatically qualified to hold IRAs. If you are not one of those institutions, then you must be authorized by the IRS. There are 257 mutual fund companies, insurance companies, and broker dealers that are licensed by the IRS.

It is good business to protect the consumer, and the government supports that mentality. PENSCO will not help someone enter into a prohibited transaction. If a lender was involved in a prohibited transaction on an IRA, then they would be subject to a 15% tax on the amount of the transaction. So a lender that made a $100,000 bill would receive a $15,000 bill. If the lender was not aware of the prohibited transaction, then they may be exempt from the tax.

When an investor is told that he cannot buy a property from himself with his IRA, he may get the idea of having a friend buy his property, and then re-buying from his friend. However, this is still considered an illegal transaction. This is considered a linked transaction by the IRS. You will not go to jail for performing a transaction like this unless you fail to pay the penalty taxes. However, the IRS tends to not inform you of your mistakes until 3 years later, so you can get caught off guard if you are not careful.

If you buy a property through your IRA while using your brother as a lender, you will not be taxed so long as your brother does not receive more than his regular fee.

A Prohibited Transaction Exemption (PTE) is a request submitted to the Department of Labor when you anticipate that your potential transaction may be prohibited. A PTE is usually granted on the basis that there is no increase or decrease in value because of the transaction. You cannot submit a PTE after the transaction takes place. The exemption comes in writing, so the Good Day rule does not apply.

There are some custodians who offer check book IRAs. Tom believes this practice will probably be extinct soon. There are only two custodians Tom knows of that will do check book IRAs, and PENSCO is one of them.

Tom’s website is www.penscotrust.com

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.

Tom Anderson Chairman and Founder of PENSCO Trust Company (Full Bio)

This week Bruce is joined by Tom Anderson. Tom is the chairman and founder of PENSCO Trust Company. He is considered by many to be the national expert on the topic of self directed IRAs. He focuses on how investors can increase their wealth-building potential with real estate and private equity investments. He has written articles for nearly all nations and financial magazines. He was recently invited to Washington as part of the “Future of Finance Initiative” for the Obama Administration.

Tom has been in the banking business for 41 years and in the self-directed investment business for 22. The government is paying more attention to retirement issues, because there is concern over social security. Unfortunately, we are still in the dark ages in regards to knowledge of self directed investments. Many people are surprised by the idea that you can buy mutual funds with your retirement account. Many Americans are unhappy with being locked into their 401Ks, other pension plans, and other IRAs. Those retirement plans only offer a limited range of investments, and most of the options are related to Wall Street, which many people have lost a lot of money on recently. The only commodity that hasn’t taken much damage is gold, but Tom thinks most people didn’t get into Gold until after it had already experienced increases, so gold probably won’t be a good long term investment.

When Tom was in Washington, he was surprised by how interested the government was in hearing about his industry. The Retirement Industry Trust Association, which represents 90% of the self-directed custodians in the U.S., was invited to write a white paper on the need for more diversification in retirement accounts. Unfortunately, many of the government workers that Tom was speaking to before have been replace, so he has some influential ground to recover. He does feel though that the government in general has become more open to new ideas on improving retirement savings. As the president of the RITA, it is Tom’s goal to use any opportunity to discuss retirement issues with the government.

IRAs were created in 1974 as part of the ERISA Act. You could self direct an IRA back then. You could buy real estate in New Zealand if you desired to, but most people weren’t aware of that, because the securities and mutual fund companies began lobbying against real estate as a prudent retirement investment plan.

Real estate is a great long term investment. Real estate generally out paces the stock market on a long term basis. In California, you can buy properties that cashflow. When there is a down turn, it’s a great time to take advantage of real estate and ride the curve up.

Before 1974, there were pension plans but no IRAs. One of the reasons IRAs were created was because trustees were abusing their privileges. The trustees were spending the money they received to buy yachts and they would frequently lose the money given to them. Because of this, the government felt it was necessary to allow people to save on their own.

Self-directed is a frequently misunderstood word. IRAs are IRas regardless of where they are held, and the rules are dictated by the IRS. Depending on where the IRA is held, the custodian may limit what an investor can do with their IRA. There are two types of self-directed IRAs. The first is known as a self-directed brokerage account. With a self-directed brokerage account, you can pick from stocks and mutual funds to invest in, but you cannot invest in real estate or private equity. The other type of IRA allows you to invest in anything permitted by law. Some of Tom’s clients have bought companies in Spain and properties in New Zealand. When you buy outside the country, you have to consider the exchange differences. If the foreign monetary value increases against the U.S. dollar, then you can profit from both the investment and the monetary change.

There is a level of sophistication required to invest in certain categories. Tom encourages people to stick to what they know. If you own a gas station and know about gas as an investment, then you may want to use your IRA to invest in another gas station.

There are some laws regarding who and how you can deal with your IRA. There is that limits one’s ability to work with more than 3 unaccredited investors. In some cases, you cannot work with any unaccredited investors. To be an accredited investor you must have a minimum net worth of $1 million, and at least $200,000 in income for the last two years. The SEC may change their definition of “accredited investor”. Tom believes the requirements for an accredited investor will increase, because many people have lost money in stocks and private equity.

If someone wants to buy a trust deed or rental unit, they are free to do that, even if they only have $80,000 in their account.

Tom believes that IRAs are a great form of capital formation in the U.S. PENSCO started out with no assets and now has $3 billion worth of assets. PENSCO is also now funding thousands of companies that could not be started without IRAs, because they couldn’t get funding from traditional sources. There are about $4 trillion in IRA accounts.

Tom had a client who opened a $300 ROTH IRA. His company charges a $375 fee, so Tom knew the client must have had a plan. The client instructed PENSCO to send a $10 check to a lawyer in order to consummate a real estate option contract. This contract gave them the right for 30 days to buy property from a developer. The developer needed cash for $350,000. While the contract was being negotiated, the client found a buyer for a property for $525,000. Once he took the $525,000 from the buyer, he paid the seller $350,000, and moved the profit into his IRA account.

A ROTH IRA offers tax free growth for life and a great rate of return. One of Tom’s clients started a ROTH IRA with $1,800. This client used his ROTH IRA to develop a successful venture, and in 2002, that client cashed out with $32 million. He then took that $32 million and invested in other start ups. He has now increased his IRA holdings into 9 digit levels. Bruce thinks it is hard to believe that the IRS isn’t suspicious of this kind of tax free profit. Tom explains that this client helped create thousands of jobs. This fortunate client stimulated the economy and created tax revenue. 40% of new jobs are from start ups, and 70% are from small, private companies.

We still have 35 days to take advantage of a one time opportunity. Your IRA is now a portable pension plan, and can be converted into a ROTH IRA regardless of your income. Before 2006, this was not allowed. Before January 2010, if you made more than $100,000, you were prohibited from such conversions. You also have the opportunity this year to do the conversion to ROTH IRA and defer the taxation on the converted amount to 2011 and 2012. This means that if you convert in 2010, then in 2011 you must claim 50% of the converted amount on your income. The other 50% of the 2010 amount must be claimed in 2012. If you are expecting to be in a lower tax bracket in the future, this is a great opportunity for you. The government is very supportive of these conversions, because they get to collect the tax upfront.

If you bought assets that are currently depreciating, and if you have these assets in your IRA, then you can convert to a ROTH IRA and pay tax at a lower amount. This can allow those assets some time to recover. It is much better to convert a depreciated asset than an appreciated asset.

Capital gains rules do not apply within an IRA. When you take money out of an IRA, that money is taxed at a normal rate. However, if you have a ROTH IRA that has existed for 5 years, and if you are at age 59 and a half, then you can take out all your money tax free.

If you have a traditional IRA, at age 70 and a half, you have to take out minimum distributions. However, if you have a ROTH IRA, you can leave the money in the IRA as long as you want, and you can leave it to your children after you have died. There is also no estate tax, because the taxes have already been paid.

The use of leverage to purchase real estate is allowed with a ROTH IRA. It is possible to borrow up to 70% on any income producing property types on an IRA. You must put at least 30% down on the property though, because if the loan is recourse, then you would be self-dealing, which is prohibited. The 70% limit is according to bank policy, and they have had great success with this limit. They have very few foreclosures. Rates for loans are generally two points above prime. Many things can be negotiated as well.

There is actually a rule which allows you to bail out you IRA. If you got a 70% loan on a $100,000 house, and you put $30,000 down with your IRA. If you lose your tenant, and you do not have enough money in your IRA to make the payment, then you would typically be foreclosed on. In this kind of situation, there is a Department of Labor provision called AD-26, which allows you to lend money to your own IRA without limitation, so long as the money is being used to bail out the IRA account.

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.

Tony Alvarez Veteran Investor (Full Bio) Mike Cantu Veteran Investor (Full Bio) Rick  Solis Veteran Investor, Appraiser (Full Bio)

This week Bruce is joined by Mike Cantu, Rick Solis and Tony Alvarez. Mike Cantu has been an investor in the Inland Empire for over 25 years. He has been a builder, rehabber and property manager. Rick Solis appraises all of The Norris Group’s loans, and he is also an investor. Tony Alvarez has been an appraiser, residential and commercial property buyer and author. This is The Norris Group’s 200^th radio show.

Bruce begins by asking Mike about what he learned from the 90s that helped in the most recent down turn. All things come full circle. A good market will eventually become a bad market. The down turn took longer this time, but it hit much harder. Sales dropped off the cliff, but fortunately, Mike began preparing for the down turn in 2004. Tony agrees with Mike.

During the evening of Obama’s election, a newsletter was put out, which was titled “Obama Administration Sings New Tune on Foreclosures”. The article is laughable. The media went from saying “no foreclosures” to “foreclosures are the answer to this problem”.

Rick began investing in 1989. He was not very active in the 90s. The main thing he learned from the 90s was that you can miss many opportunities when you ignore the market. A lot of people are afraid of the market right now, but Rick won’t let that fear control his investing plans.

Bruce believes that fear certainly is affecting the market now. People are afraid to buy properties despite the fact that prices have dropped 50% and interest rates are historically low. Its hard to believe that not buying could be perceived as a rational decision. Rick Solis has never seen a better time to buy houses since he began investing. Bruce definitely believes that it is the best time to buy and hold.

Tony just bought a completely rehabbed duplex. In 2007, it sold for $175,000, but he bought it for $35,000. The saddest part is that the duplex sold with multiple offers. The reason why so many people are afraid of buying is because they are paying too much attention to the media’s opinion.

Mike knows many investors, but only a small number of them are still investing. The number one problem that caused them to fall out of investing is their overly expensive life style. A lot of people learned how to make money in real estate, but not many people learned how to keep it. The investor pool has shrunken significantly. Many people would like to invest in real estate right now, but they made bad decisions at the top of the market, which handicapped them from buying. Mike agreed with Rick and Tony when they said that now is the time to buy.

Mike is a fairly frugal person. Bruce laughed when he saw Mike’s 1998 Toyota truck. It has 441,000 miles, but it runs like a champ. When a dog gets old, you don’t get rid of it, you just take better care of it. Mike has a hard time spending money on a vehicle when you can get a rental house for the cost of a new car. Every time Mike sets money aside for a new truck he ends up spending it to buy a new house, and he realizes that his truck is just fine.

Mike’s daughter recently began investing in real estate. Mike helped her develop a 5 year plan for buying cash flow houses in good neighborhoods. Their goal is to help her get $3,500 of cash flow per month, and they are half way there.

If Tony could have done anything differently throughout his career, he would have focused harder on one segment of the market place. He wishes he had been more aware of the value of his time. Tony spent a lot of time driving to deals that didn’t have much potential.

Tony prefers to buy and sell, but he currently owns 40 rentals. Before the peak, he had 100 homes. He wanted to get out before the peak, but Bruce encouraged him to not sell for another 3 years. Bruce’s advice helped Tony gain an extra $3 million in profit. Tony is now buying some of the same houses that he sold near the peak. In the past, Tony would buy almost any property he could. Some of the properties he bought and sold were in such a terrible condition that they have now been destroyed. He doesn’t buy properties that are that terrible any more, but he is still willing to buy wood structure homes and other properties that people tend to stray away from.

If Rick could have done anything differently in his career, he would have sold all his properties by 2006. Rick has accumulated quite a few properties, and he is glad to have them, but he is not looking forward to managing them.

Mike chose not to sell his properties despite the fact that values were sinking, and he does not regret that decision at all. Mike got into real estate for the cash flow, so that all his expenses would be taken care of. He knows people who are struggling right now and have to make a deal every month to keep food on the table. The value of his rental properties is immaterial to him. He has not had to reduce rents by any more than $50, and he has had no difficulty in keeping them occupied.

Mike was the person who introduced Tony to the concept of exchanged junky homes for quality rental homes. Exchanging for quality rental properties allows you to keep rentals in competitive areas, and it helps reduce the amount of time spent on property management.

Bruce has learned a lot from observing the business models of other people. When Mike told Bruce that he wanted to obtain 10 rental properties, Bruce decided to try and do the same. Having free and clear properties gives you sanity when making investment decisions. If you are playing catch up on equity, or if you are relying on today’s deals to pay tomorrow’s meals, you tend to make riskier decisions. Bruce and Mike don’t have to make potentially risky decisions because they both have enough cash flow to get by.

One of the big differences that Tony has noticed between 2010 and 2009 is that many investors have left his market. Also, approximately 80% of his purchases went from being new listings from agent calls to pending deals. Fifty percent of the deals occurring in Tony’s area fall out of escrow 1 to 3 times. This has caused Tony to become more cautious when buying. He has dropped his rents by 20% in the last 12 months. He has also lost some of his tenants.

Rick noticed that when the stimulus program was going on, entry level properties experienced up to a 10% increase in value. Moreno Valley and Corona had a big increase in activity. That 10% increase has now disappeared. Rick will not buy a house right now unless the deal can work as a rental. Many investors have recently bought homes they thought would easily resell, and they are now stuck with them. Bruce will not buy a home on leased land.

From the beginning of 2009 to the end, we went from a period of market uncertainty to confidence. In 2008, Mike decided not to do a retail deals unless he could keep those houses as rentals. Mike does not use any July comps any more; comps must be within the months of August, September and October. There is a 5 to 20% difference between homes being sold now and homes sold in July.

Mike believes there are still a lot of people who will not accept the fact that their home values have significantly decreased. A lot of the private market is still in denial.

Rick invests primarily in Rialto, Hesperia and Victorville. Rick and his business partner work with rehab properties. He rents his properties slightly below market value and they are in good shape, so he has a lot of demand. Many times he has a security deposit and a tenant lined up before he closes escrow. He does not have any trouble with rents dropping. His typical house is a 3 bedroom, 2 bath. He loves it when he can squeeze a 4^th bedroom into the house by cutting the living room in half. He usually rents the 3 bedroom houses for $1,000, and the 4 bedroom houses for $1,100.

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.

Christopher Thornberg Founder and Principle of Beacon Economics (Full Bio)

September 17^th, 2010, The Norris Group returns with its award winning event I Survived Real Estate 2010. The Norris Group has assembled an incredible line up of industry experts to discuss the state of REO from the inside. Topics will include regulatory intervention and aftermath, bulk buying, myths and facts, and opportunities emerging for real estate professionals. 100 percent of the proceeds support the Orange County affiliate of Susan G. Komen for the Cure. This event would not be possible without generous help from the following platinum partners: Foreclosure Radar and Sean O’Toole, the San Diego Creative Real Estate Investors Association and Bill Tan, Investors Workshops and Shawn Watkins and Angel Bronsgeest, Invest Club for Women and Iris Veneracion and Bobby Alexander, Claudia Buys Houses, The Business Press, Frye Wiles, MVT Productions, and White House Catering.

This week Bruce is joined by Christopher Thornberg. Christopher is the founding principle of Beacon Economics, and is widely considered to be one of California’s leading economic forecasters. He is an expert in economic forecasting, regional development, real estate dynamics and labor markets. He was one of the earliest and most adamant predictors of the housing crash and the recession that followed. In 2008, he was appointed chief economist for the California State Controller as well as the Controller’s Council of Economic Advisors. He serves on the advisor board of Paulson & Company Inc., one of Wall Street’s most successful hedge funds. Dr. Thornberg holds a PhD in business economics from the Anderson school of UCLA, and a BS in business administration from the state university of New York at Buffalo.

Public sentiment tends to wander between optimistic and pessimistic. No one wants to believe that this recovery might be too slow. Instead, people either hope for a rapid recovery, or they panic over a double dip. Earlier in the year, people were far too optimistic about a rapid recovery, and now they are in a state of unwarranted pessimism. Thornberg does not believe that either of those beliefs are true. He believes that slow growth is most likely going to occur.

Expectations can have an economic impact. Forecasters tend to think that the stock market is a leading indicator of the economy. Paul Samuelson once said “The stock market has predicted 9 out of the last 5 recessions.” We must remember that when we see market swings, it has a material impact on the economy. When the market dumps 15 percent, you are literally talking about a couple trillion dollars in wealth disappearing from the U.S. economy. That does have an influence on spending, particularly at the top end of the income scale. From that perspective, unwarranted worries can create a self fulfilling prophecy and slow the economy.

Over the last 20 years, we have seen unprecedented volatility in the equity markets. We would help ourselves by putting in some rules to dampen that volatility. Thornberg describes the problem as “the tail controlling the economic dog”.

GDP growth in the 90s was caused by stocks. In 2000, it was from real estate equity withdrawal and profits. Currently, our limited growth seems to come from stimulus money. Thornberg does not believe there will be any sort of big driver, and that is part of the reason we will have a slow recovery.

In the mid 70s, there was a consumer let down with the oil shock. Consumers responded to the loss of jobs, high energy prices, and the overall pessimism by cutting back on spending, and that caused a down turn. At the back end of that down turn, consumers who were under-spending started to ramp up their income. They then bought the car they would have bought during the down turn plus another one. That caused a huge surge in consumer spending growth.

Similarly, in the 2001 down turn, we saw a cycle in business spending. Business spending was very high, and then it collapsed. When business spending came back in 2002, we pulled out of the down turn and we got back to normal growth in 2003.

This time, there is no single great source that will cause us to bounce back. The economy was vastly overheated in 2008, and the pain of the down turn was severe, because the pull back occurred in multiple markets at one time. The government got massively involved in both monetary and fiscal policy. In their attempt to stabilize things, they prevented our imbalances from returning to a steady state.

Consumer spending should represent about 80 percent of income, and the other 20 percent should go to savings, taxes and a couple other things. In the midst of the asset bubble, we went from 80 to 84 percent. That extra 4 percent represents approximately half a trillion dollars in excess spending. Savings rates have popped back up in the midst of the crisis, which is good, but the pain of that decline in consumer spending was profound on the economy. As a result, part of the stimulus package was a huge cut in taxes. Right now, Americans are the lowest tax rate in 65 years. This has steadied consumer spending at 82 percent of income. The government is running a deficit of $1.4 trillion per year. At some point, the government will have to raise taxes. When they raise taxes, consumers are going to have to cut back on spending, and that will slow the economy.

We have a lot of deleveraging going on. 23 percent of Riverside is not making a house payment. Because so many people aren’t making their house payments, Bruce believes that people will have plenty of money to spend. Thornberg disagrees, because he does not feel that the money saved from not paying mortgages will amount to that much. Mortgage payments in the U.S. amount to 15 percent of income. Thornberg believes the non-payment of mortgages only adds up to .5 percent of personal income. That is a much smaller number than what happens to personal income as a result of the rise and fall of the unemployment rate.

Bruce explains that in California, a house payment typically represents 40% of someone’s gross. When they don’t make mortgage payments, that saves money, and that fuels GDP. Thornberg understands this, but 1/3 of homeowners in California homeowners own their house free and clear. Of the 2/3rds that are left, the majority are still making their payments. You only have 10 percent of the people in the state that aren’t making their payments. Thornberg does believe that this will make a small difference in the economy, but it is not as significant as people make it out to be.

Bruce asks, “What does seeing a 2.6 10-year T-build tell you?” Thornberg laughs and exclaims that the t-builds are in a bubble. You got to call it as you see it. Sometimes that works and sometimes it doesn’t. A few years ago, Thornberg claimed the housing market was going to crash, and he was right. One of the worst forecasts Thornberg ever made happened 3 months ago when he claimed that interest rates would never go lower. Thornberg has seen some crazy things happen lately. He never could have forecasted this. He believes these things have been driven by worries about sovereign debt in Europe, and a potential for a double dip. This is why Bruce asked his question about Thornberg’s expectations for the t-build, because people’s fears have skewed a lot of categories.

The raw ratio of prices to income will show you that we have not seen a level of retraction that brings us back to the levels we were at in 2000. Prices are still high in comparison to income, but once you adjust for interest rates, affordability levels have never been this great. We have never seen such an affordable housing market when considering current interest rates. Thornberg does not believe that the current interest rates will be maintained. They are going to rise, but he wonders when they will rise and how fast they will rise. If we are on the path to recovery, we could have problems if the credit bubble pops rapidly. If interest rates increase 4.5% to 6.5% in 6 months, then it will severely damage the housing market.

Fannie Mae is planning to hire 1,000 REO agents in Southern California. This tells Bruce that Fannie intends to release inventory; perhaps as soon as the 4^th quarter. FHA has 73,000 REOs and 555,000 people that are 90 days late. There are a lot of properties that the bank has not released, but we also have to be concerned about the properties that the banks are not foreclosing on yet. There are probably 4 to 5 million homeowners that are behind on their payments.

Because affordability is so good right now, there will probably be some demand for the shadow inventory. One thing that distinguishes California from states live Nevada, Florida and Arizona is the fact that we did not over build. Nevada and Florida have years of home supply.

Rental vacancies typically stay high after a recession, but vacancies are actually starting to drop quite quickly, especially in California. Thornberg does not believe there will be enough inventory in California, so when the shadow inventory gets released, it will probably be easily picked up. Thornberg believes we will have a stronger housing market over the next couple years because of the inventory levels in relation to the population. It surprised Bruce to hear Thornberg speak so positively about the housing market.

Bruce and Thornberg do not believe we have pent-up demand, but Thornberg does believe that we have a lack of overall supply. When you look at permits over the past 20 years, the numbers show that we have not built enough housing relative to the population growth since 1995. Even in the midst of the bubble, Thornberg believes we were only building an amount that was appropriate for our population growth.

The builders do not have many vacant unsold homes right now, but their competition, which is an REO, is going to be much to competitive. This competition will force them to build smaller houses. Going forward, Bruce believes that vacant homes are going to increase a tremendous amount. Thornberg does not believe prices will come back a lot.

The kind of building going on right now is on the basis of already finished lots. The inventory of finished but unused lots is disappearing rapidly. In the peak of the housing bubble, local economies ramped up fees. Given what people were willing to pay, there were enormous profits to be made in the sale of a new home. Now that the bubble is gone, cities need to reduce their fees, but they probably won’t. Right now, local governments have a lot of pressure placed on them because of the down turn in revenues. Thornberg believes we will have crowded housing, because many people will not be able to purchase new property due to the excessive fees.

In a down turn, people tend to start living together rather than moving out. This is actually starting to change, which is part of the reason why apartment vacancies are going down. We are not in a strong recovery, but it has been a year since the recession ended. Things have stabilized, and fears are beginning to lift.

Overall, jobs are down right now, but that is mainly due to losses in the public sector. Construction jobs actually bounced a decent amount from June to July. Thornberg does not believe the construction industry will come roaring back to what is was like 5 or 6 years ago, but we are seeing more stability in that sector.

Here are the pros and cons of our current situation: On the con side, we still have problems in the housing market. Many people are not making payments and many are underwater. California has some of the worst unemployment rates, which means we have more to recover from. On the pro side, prior to this down turn, this state was driven by internal demand. This means that our demand was coming from consumers with excessive amounts of false housing equity. At the same time, our external sources of growth were getting hammered. The dollar was over-valued and housing was too expensive, which made it hard to run a business here. Those internal sources of demand will not come back. On the other hand, with a weaker U.S. dollar and cheaper housing, other things will begin to improve. Despite our high unemployment rate, people are beginning to migrate back to California.

The percentage of homeownership is probably headed down. Thornberg does not believe that this is a real concern. He does not believe there are any particular benefits for owning vs renting.

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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Video Blog Sources:

Mortgage News Daily – “Mortgage Rates End Losing Streak After Reprices for Better” (8-19-10)

Wall Street Jounral –  “Redfin: Less Than Half of All Home-Sale Attempts Successful in ‘09” (8-16-10)

Housing Wire – “Bankrate: Loan Closing Costs Jump 36.6% Year-Over-Year” (8-17-10)

Housing Wire – “TransUnion: Housing Begins to Stabilize as Delinquent Loans Fall in Q210” (8-17-10)

DQ News – “Southern California Home Sales and Median Price Dip in July” (8-17-10)

Wall Street Journal – “Mortgage Delinquency Runs Slightly Higher in Dems’ Districts″ (8-19-10)

Today’s News Synopsis:

MDA Dataquick’s monthly study shows 6,773 new and resale homes closed escrows in Northern California last month. In the entire state, 35,202 new and resale houses and condos were sold. The California State Assembly approved SB 1178, which will extend anti-deficiency protection for consumers who have refinanced their original mortgage loans. The Census Bureau reports the number of people who own their homes free and clear has decreased, and the number of people in reverse mortgages increased 59 percent.

In The News:

Los Angeles Times – “Professional investors move into flipping foreclosed homes” (8-20-10)

“Hoping there are big profits to be made in the aftermath of California’s housing collapse, professional investors are flocking to the business of buying foreclosed homes at distressed prices. The investors, primarily private equity funds and groups of wealthy individuals, purchase the homes at public auctions, which are held daily on the steps of local courthouses. They refurbish the properties and try to sell them for quick profits.”

DQNews - “Bay Area July Home Sales Down Sharply; Median Price Slips From June” (8-19-10)

“Last month a total of 6,773 new and resale homes closed escrows in the nine-county Bay Area, down 19.1 percent from 8,373 in June and down 22.8 percent from 8,771 in July 2009, according to MDA DataQuick of San Diego.”

DQNews - “California July Home Sales” (8-19-10)

“An estimated 35,202 new and resale houses and condos were sold statewide last month. That was down 19.9 percent from 43,964 in June, and down 21.9 percent from 45,079 for July 2009. California sales for the month of July have varied from a low of 30,596 in 1995 to a peak of 71,186 in 2004, the average is 47,093. MDA DataQuick’s statistics go back to 1988.”

CBIA - “California Housing Affordability Declines in Second Quarter, CBIA Announces” (8-19-10)

“On a statewide basis, the HOI found that a family earning the median income could have afforded 58.4 percent of the new and existing homes that were sold during the second quarter, down from 60.8 percent in the first quarter.”

CAR - “California State Assembly passes SB 1178 protecting homeowners” (8-19-10)

“The California State Assembly today approved SB 1178 (D-Corbett) by a 49 to 14 vote, extending anti-deficiency protection for consumers who have refinanced their original mortgage loans and now are facing foreclosure. The CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) is the sponsor of the consumer-protection legislation.”

Housing Wire - “Commercial Real Estate Hit with 41% Price Drop, Soaring Delinquencies” (8-20-10)

“National property prices on commercial real estate dropped 9.1% in June from last year, according to Moody’s commercial property price index. The rate declined 0.9% over the first half of 2010, and while prices remain 4.2% above the current recession low of October, they are down 41.4% from the peak in October 2007.”

Housing Wire – “Census Bureau Reports 59% Rise in Reverse Mortgages as Overall Ownership Falls” (8-20-10)

“The nation’s homeowners paid a median of $1,000 in monthly housing costs in 2009, while renters paid a median of $808 per month, according to the 2009 American Housing Survey released Thursday by the US Census Bureau and the US Department of Housing and Urban Development (HUD). Compared to 2007, the number of homeowners that owned their home free and clear decreased 1.3% to 24.2m in 2009 from 24.9m. The amount of regular and home-equity mortgages increased 1.4% to 50.3m from 48.7 in 2007. Reverse mortgages increased 59% to 252,000 from 159,000 while line of credit options decreased to 1.7m from 1.8m.”

Housing Wire – “REO Listing Agents – The Helping Hand That Isn’t Always There” (8-20-10)

“In some cases, interested buyers have been ignored (as documented in ‘secret shopper’ campaigns). This is not to suggest that all or even most of the REO listing agents are doing a poor job, it is to suggest that as volume levels to some agents has increased there may be a direct correlation to declining service levels that should be understood.”

Inman - “Don’t buy Fannie-Freddie ‘Big Lie’” (8-20-10)

“While the Fed and the Obama administration insist that recovery is moving forward, the pattern of inbound data produces the same, queasy sensation as their denial in the fall of 2007 and the summer of 2008. New unemployment insurance claims hit a one-year high, to 500,000 last week. There was no dramatic spike, just steady deterioration. The Philadelphia Fed index yesterday stunned the remaining optimists: Expected to rise from a weak 5.1 in June, it fell to negative 7.7, weakest in new-order and employment components.”

Inman - “Mortgage rates go lower” (8-20-10)

“Rates on fixed-rate mortgages tracked by Freddie Mac hit new lows this week, with 30-year fixed-rate loans averaging 4.42 percent with an average of 0.7 point. That’s down from 4.44 percent last week and 5.12 percent at the same time a year ago, and is a new low in records dating to 1971.”

Looking Back:

One year ago, the delinquency rate for residential mortgages increased to 9.24%. A home buyer survey showed that 70% of women made up their mind to buy the day they first saw a home for sale, vs. 62% of men. 55% of women place more importance on living closer to extended family than to their job; only 37% of men felt the same way.

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 event 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.

Bill Shipp, California Real estate Investor (Full Bio)

This week Bruce is joined by Bill Shipp. Bill has been investing in Riverside real estate for many years. Bruce thinks Bill is Riverside’s best kept secret.

Bill believes it is important to be true to your word when doing business. Bill has been working with his contractors for 10 years, and he has never had a bid on a home repair. These contractors know that if Bill hires them, they will get paid at the time he specifies. This is even more important than having people skills.

Bruce has taught many real estate investors. Some of them have great people skills, and that is what gets them business. There are also people that are trustworthy, and that is also attractive to business partners.

In the last segment, Bill said that he is willing to do his job every day, and that attitude has allowed him to accumulate a wealth of knowledge. Bill’s knowledge of his market place allows him to live in Utah while still making good investment decisions in Riverside.

Bill has never closed an escrow with a person in it, and he has never bought a house at the steps. Bill does not want to deal with those hassles. This is why he uses the MLS and agents who know what they are doing. Bill gets over 50 percent of the houses that he makes offers on, because his realtors know not to call him unless a home shows promise. Bill works regularly with two realtors, but he receives calls occasionally from other REO agents as well.

Bill has a specific skew number for the paint which he uses on all his houses. Because he uses the same paint for his houses, it is easier for him to calculate how much repairs will cost when buying a new home. This also makes it much simpler for his repair men, because they know exactly what to do for every new job.

Bill discourages investors from traveling to see their investments. Do it for the first two properties, so you can figure out how to do the job. After the second, you should know what kind of property is worth your time, and trust your contractor to do his job. Traveling to your investment homes will cost you money and time. Also, Bill suggests that investors not bring their wives. His wife always has minor problems with his investments, such as the amount of flowers in the yard.

The typical repair cost for Bill’s investment houses is $15,000 or less. However, he has had home repairs that cost $100,000. In the early 2000s, he bought older homes. The oldest home he ever bought was developed in 1828. The house was so old that the home began to dissolve when the repair man tried to pressure wash it. Bruce once bought a home in 1898. Bruce had a termite investor inspect the home, and the inspector told him that there were no termites because the wood was petrified.

Bill does not have a construction background, but he has learned some things about that trade over time. When you buy a lot of older homes, you have to be creative to find a style that people will want to buy. In the late 1980s, Bill only bought homes that were 5 to 10 years old and did not need work, but Bill now only works with fixers built before the 2000s. Bill does not like to compete with home owners. When you are flipping new homes, you are not creating value. Bill thinks that working in the trustee market requires too much work. This is what Bruce’s company does, and Bruce agrees that the trustee market is too much hassle for Bill’s business model.

When reselling a property, Bill uses the listing agent that found the home for him, and he only uses two agents to keep the process simple. Using a large number of agents makes it difficult to determine whether or not those agents are doing their jobs correctly.

When Bill is selling his properties, he tries to control the escrow, but he never controls which lender is used. Bill’s buyers are always cross checked with the lender. Bill’s agent will not tell him that he has an offer until the buyer has been cross checked, and until he can know if he will get a good offer.

Bill is constantly educating himself in real estate. He reads many books, he has attended Bruce’s seminars, and he has been trained as a certified financial planner. Bill believes that many people know how to make a lot of money, but they do not know how to spend it. People do not often plan for downturns in the market, and their lack of planning ruins their financial health.

In the early 1990s, Bill had 40 rentals. It took 8 years to get those homes sold, and it was very frustrating because the market kept going down.

Bill began investing in Texas during 1989. He bought homes for $10,000 each and he owned them free and clear, but he was receiving negative cashflow every month because of property taxes. Repairing one roof could wipe out your positive cashflow for a year. In the end, he only made money on one of those homes. Do not buy real estate in other cities and states if you do not know what you are doing.

In 1986 Bruce was asked to speak on a panel of real estate experts. There were two well known attorneys on the panel, and all of their claims regarding out-of-state property ownership contradicted Bruce’s practical experience. When Bruce asked those attorneys how they came to their conclusions, he discovered that they had no out-of-state investment experience and were relying on theoretical knowledge. When people come from other states and tell you to buy homes in their areas, be careful. Why would someone travel across the United States to encourage you to buy their property if they cannot even get the people from their own state to buy?

If there are more listings in a region than sells, you should be nervous. On the other hand, if there are more sells than listings, then you should be happy. This is all Bill looks at when predicting whether or not he should be investing. Bill does not pay much attention to economic forecasts. He only pays attention to Riverside’s market, so he does not have to worry about general market forecasts.

The best deal Bill ever had was a wholesale in Corona. The property sold in 2 weeks and he earned over $100,000. If you want to find deals, you need to be watching the market every day. You never know why a seller might want to get rid of their property quickly. An agent once called Bill and told him that the seller was offering five houses and two lots on one street. The seller was the chairman of a bank who had stock options which were about to expire. The banker needed the money for those properties quickly, so that he could buy his stock. This deal shows that you never know why and when a great deal is going to show up. Bruce once bought a house from an agent once who was getting into the plastic extrusion business. The agent needed to buy an extrusion machine for $10,000, so Bruce bought two of his homes for that amount.

Bill has been approached with bulk buying opportunities over the last few months. The people offering these bulk buy deals told Bill that they have had bulk buys in the past that sold quickly. When Bill asked for an example of one of these bulk deals, he never received a response and he still hasn’t. Bill received a bulk buy opportunity from a company in Los Angeles as well. Because the company seemed professional, Bill had his agent check out the properties. The agent discovered that all 20 of the properties for bulk sale were short sales.

Bruce will be a moderator for Fannie and Freddie in June. These companies are putting together bulk sale divisions, so perhaps bulk sale opportunities will be available in the future.

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.

Elite Auctions Randy Grigg (Full Bio)

This week Bruce is joined by Randy Grigg. Randy is the president of Elite Auctions. He spent 30 years as a pest management consultant, and gained a large portfolio of rental properties during that time.

Bruce begins by asking how Randy’s auction properties get purchased, and what the sellers’ perspective is towards their property values. Randy is soon going to have his largest auction. He has two trustee sale buyers that his company is working with. These two people have 50 unsold properties in their inventory. Most of their properties are lower quality houses. Right now, nice properties in nice areas have more demand. Bruce has noticed that trustee sale properties are typically cleaner than REOs, but the trustee properties that Randy will soon sell are in moderate condition. Some of them are beat up, but their landscaping is still in decent condition.

Many trustee sales are still occupied when the sale takes place. Bruce has noticed there is a common perception that these occupants are beating up the property, but he does not believe this is generally the truth.

Randy has typically been a low volume auctioneer. There are 4 nice properties that he will be selling at his next auction. His two clients will be selling 22 properties with him. This auction will be taking place at the end of January.

The trustee sale business is a highly competitive market, and most of the competitors are educated investors. There is also a much smaller range of profit to be gained in a trustee sale, and this profit can easily be lost in overhead costs. Trustee investors will often buy at 80 to 85 percent of market value with all cash. This is the model that The Norris Group uses, but in order to do that, you must be very good at minimizing expenses. Sometimes a trustee buyer has access to a property on the day he buys it. This allows trustee buyers to quickly plan for selling through methods like auctions.

Advertising has changed since Randy began his auction business. In the past, Randy had to spend $8,000 per house, because the print advertising is very expensive. Recently, people have started searching for properties through the internet. This has made it much cheaper for Randy’s business. His business posts properties to about 100 websites, and then sends emails to 100,000 Realtors.

Bruce once tried selling his properties through auctions, but he discovered that it took a lot of effort. He tried advertising his properties using street signs, and it did not work well. Bruce thinks that he has never worked harder than the 45 day period he spent trying to set up his real estate auction.

When Randy heard that The Norris Group was going to try doing real estate auctions, he was worried at first. Fortunately for his business, it is not as easy as most people think to begin an auction business, and most people eventually fail. There is a costly learning curve that is required for setting up a good auctioning business model. Randy lost 20 percent on his properties when he first started, but that process of trying and failing helped him to learn. There are many ways in which an auction can fail to have a good result. The first phone call that a potential buyer makes can completely lose their interest if they do not receive the proper response. Many people call on auction ads, and they receive a recording.

Bruce attended an auction one year ago in which 93 stilted duplexes were being sold. The sellers had placed their ads in the wrong place of the L.A. Times. Bruce tried calling the company, but all he got was a recording. By the time he arrived at the auction, the seller was closing the gates. Bruce talked to the seller and he discovered that he was the only person who had ever showed up to this auction.

Randy’s auctions are held in front of the home being auctioned. He has to analyze each house individually in order to understand what kind of buyer he wants to attract. If he wants an owner occupant buyer, he always advertises the phrase “45 days to close”. He also tells buyers that if they can close within 30 days then the sellers will agree to pay their escrow fees. The escrow fees are $400, but the cost of holding the home for two weeks is much more. Randy offers a 45 day closing, a free home warranty, and a guaranteed clear title. A home warranty does not cover foundation problems, but it does help relieve some of the buyer’s concerns. People often worry that they will not have a clear title when they buy a property from an auction, so Randy always mentions that they will.

Randy does not invest much time in open houses for his auctions, because he has discovered that establishing urgency is the key. He has a two hour, two day open house which takes place on the weekend. The auctions always take place within the working week.

The key to getting a potential buyer to come to an auction is to make them feel comfortable with the process. Randy usually has a mortgage broker present at the sale. If the buyer has not been prequalified, he encourages them to do so. He tells them that an auction sale is just like a normal transaction except they get to choose their price. You have to make people believe that they can get a good deal at an auction. Randy also offers a cash prize for people who guess what the final auctioning price will be. Their guesses allow Randy to more adequately gauge a property’s true market value. Randy does not hold auctions on the weekend, because holding auctions during the week attracts more serious buyers.

Randy has discovered that his quality buyers in Bakersfield discover his auctions through paper advertisements, because there are a lot of people who read the news there. However, buyers from other areas typically discover Randy’s auctions through the internet. Knowing where your audience comes from will help you to know how to advertise.

Bruce asks Randy what he considers to be a safe number of bidders in each auction. Randy has found that his auctions do better when there are not a lot of bidders. When lots of bidders come, they become more competitive and over price the property. Unfortunately, the high bidder often realizes 3 weeks later that he does not want the property, because he will pay too much. Randy’s typical preference for an auction is 5 to 10 buyers. Having fewer bidders will cause the property to sell closer to market value, and it will more likely be a successful sale. High bids might make clients happy, but if their property does not finish the selling process, then the selling value does not matter.

When Bruce has sold his properties through auction, most of his failures came as a result of defects in the property’s location and condition. Sometimes Bruce’s own selling expectations have brought about his auction failures. Sellers must have reasonable expectations for their selling prices.

There have been occasions when Bruce though his house would sell at a low value, but ended up selling for a much higher value. It is hard to predict what will happen at an auction.

When Bruce tried to hold his own auction, the only house that sold was the one in the worst condition. Two of his houses were priced very highly, and one of his potential buyers could not get financing. Bruce asks Randy if the property’s condition is a major factor in whether or not a house will sell. Randy usually makes minor repairs on his auction properties. He tries to make his properties better than the average REOs in that area. Bruce thinks that is a very smart decision. Bruce made many repairs and upgrades to his properties, but this caused trouble with appraisals, because his homes were in much better condition than the comps in his market.

Randy’s son Mike enjoys working as the president of the California Auction Association. He is still on the board for the CAA. Mike won the bid-calling contest this year for the CAA. He prefers doing charity auctions, because there are a lot of items, and that makes his job more fun.

If you are interested in doing auctions with Randy, his website is www.sellwithauction.com, and his office number is 661-325-6500.

The number for Elite Auction is 661-325-6500, and their website is www.sellwithauction.com

Elite Auctions Randy Grigg (Full Bio)

This week Bruce is joined by Randy Grigg. Randy is the president of Elite Auctions. He spent 30 years as a pest management consultant, and gained a large portfolio of rental properties during that time.

Bruce begins by asking Randy what gave him the idea that real estate was a good investment. Randy read a book by Mark Hearld which persuaded him that he could make big money in real estate. Bruce also owns Mark’s book, and he believes Mark did a good job at marketing it. Randy also received some training from Jack Miller in 1983. He started buying a couple properties in 1976.

Randy had a very slow method for buying real estate. He had a career when he started, and he continued investing as he continued his education. His beginning goal was simply to break even on his net cash flow. He always used the seller to produce the financing, because he did not want to frequently use the bank. That is very different from how Bruce got financing. Bruce thinks that, in the future, sellers will have to be more willing to carry paper for financing.

When he first started, Randy attracted offers through Realtors. Randy would make approximately 20 offers per week. Doing this, he would get one to three properties every year. Later on, he started using ads as his primary source for getting deals. Eventually, he also used letters to neighborhoods he wanted to buy in.

Bruce also used ads for quite some time, and it gave him a great education in dealing with people. He eventually learned what kinds of people were or were not worth his time. He also learned some patience, as he had to sit through 100 calls before he would get the 1 call he wanted. At one time, Bruce would not make deals unless he could personally meet the seller. He only had so much time for doing this, so he became very efficient.

What is interesting about Randy’s and Bruce’s philosophy is that Randy kept his, and Bruce sold his. Bruce believes that Randy’s philosophy for buying worked better. Bruce sold properties for profit, but Randy kept his properties for income. Randy learned this philosophy because the area he invests in (Bakersfield) does not have much price inflation. Mike Cantu has a similar buying philosophy and he is also happy about his outcome. Bruce has learned from Mike and Randy, and now he also keeps properties as rentals. Bruce feels that having rental properties helps his decision making process. People who have cash flow above their expenses do not have to make risky decisions. If you own 15 rental properties, you will be provided with a nice and steady lifestyle.

Randy and Mike started their auction company 8 years ago. It was easy for Randy to buy homes, but he did not like the unpredictable aspect of selling. Randy attended a public auction in his neighborhood, in which he tried to buy a property, but the people attending out bid him. This taught Randy that auctioning was an effective tool for determining a property’s market value, so he decided to sell his homes in auctions. He had a lot of trouble using auctions when he first started. He sometimes lost 20 percent of his equity on a sold property. He slowly learned how to better set up his auctions, and he discovered new ways to attract the buyers he was looking for. In 2004 to 2006, Randy’s typical seller was someone who wanted to capitalize on the appreciation that occurred during that time.

Bruce feels that most people do not think of auctions as a good way to maximize your selling price, but it is. When you sell homes in an auction, you place all of your potential buyers in direct competition with each other.

In 2004 to 2006, Randy’s typical buyer was either a speculator who thought that prices would increase forever, or an owner occupant. At that time, Bruce noticed that people were desperate to buy property. People were not concerned as much with appraisal values.

In 2009, Randy’s selling clients were people who had a better understanding of the cost of selling. During the downturn, some people felt that if they did not sell their home quickly, then they would lose the opportunity to.

Selling a property is not an easy or guaranteed to happen. Being in escrow does not mean that your sale will surely finish. In 2007 to 2008, if you had a 60 day escrow that didn’t finish, then somebody made you lose 5 percent. In 2009, selling was not as problematic, but it was still difficult for people to qualify for a purchase.

When people put money down in an auction, there is a better chance that the sale will close. If buyers cannot finish a sale, then Randy splits that down payment with his selling client.

In 2009, 25 percent of auction buyers paid with cash, and 75 percent paid with conventional loans with large down payments. Randy only had one FHA buyer in 2009. Sixty percent of his buyers are long term investors, and about forty percent are parents who are buying homes for their children or owner occupants. Bruce thinks that is amazing. Randy’s auctions sell for an average of 107 percent of comp value.

In 2010, conventional loan providers may change their policies to match FHA. Wells Fargo changed their seasoning policies, not long ago.

2009 ended much differently than Bruce envisioned, because many rules changed. The HVCC and the 91 day FHA selling rule made it difficult for Bruce to sell. Because of this, his business shifted from FHA inventory to conventional inventory. At the beginning of the year, Bruce was buying properties for 60 grand in the beginning of the year, but after June, he started buying properties for 250 grand, and selling them for 350 grand. Those more expensive properties were much cleaner properties, and they were easier to sell. This change made Bruce feel like he had died and gone to heaven. This experience has taught Bruce to have flexibility. When rule changes force you to change your business plan, there is always another way to make money.

In 2010, Bruce estimates there will be “big dollar” foreclosures. Randy is beginning to see Bruce’s estimation come to life more and more. For example, in Riverside, an 8,000 sq. ft. home, in a nice area, was being sold with $1.7 million worth of financing. The owner lost this property at a trustee sale. The opening bid at the trustee sale was 608 grand but there were no bidders. This property is now listed for 525 grand. It is $1,100,000 less than any other property on that street, and it is not pending. The problem is that people cannot get financing for these homes. This may be the next market for Randy, and he would be happy to deal with these expensive properties, because he earns a lot more per sale with expensive homes. His income has decreased dramatically because home prices have greatly decreased. Realtors have also experienced a great decrease in their income because of these price decreases.

Randy bought properties in 2009. 85 percent of these homes were bought through other auction companies who do not have selling models which maximize sale prices. The rest of them have been bought from private sellers and banks. These low-price auction companies deal with large sums of properties, so they do not spend as much time properly valuing them. Randy’s company sells fewer properties, so he has more time to properly maximize his sale values.

The number for Elite Auction is 661-325-6500, and their website is www.sellwithauction.com