This week Bruce Norris is joined by Sean O’Toole, founder and CEO of ForeclosureRadar.com. Prior to launching ForeclosureRadar, Sean successfully purchased and flipped more than 150 residential and commercial foreclosures. He leveraged 15 years in the software industry. Sean used technology as a key competitive advantage to build his successful real estate investment track record. Now he has brought all these skills to ForeclosureRadar.
Bruce talked about how Aaron has a favorite word for websites, robust. If you say this about a person, it is not a compliment. However, if you say it about a website it is a good thing. This is how you can describe Sean O’Toole’s website. There is a lot to real estate and the real estate business, and Sean tried to make a tool that would work for all kinds of different things. They try to find new ways to use the site, go after new types of business, or have customers tell them something they had never thought of. The goal was to create something that would allow people to find a way to use it that works for them. Sean has a short sale section on his site now where the people that are actually trying to get them accomplished are able to communicate with each other and lenders who are easier to use. There was even a recording recently done that was shared with others, and this is a useful forum to which someone can have access. In their learning center they call it the short sale report; and it is free and right off their own website. They try to post information about each bank and links where you get the packages and letters as well as have a comment section where users can share information about each of those lenders, how they are to work with, and tips and tricks.
One of the general things about the internet is the nature of it is so inexpensive to access such a ridiculous amount of information. A lot of what is at the website is free of charge. When people pay for websites, they probably do not have an understanding of how much easier Sean has made the business. Bruce wondered if Sean even gets comments from people in the business or who have been in the business for a long time. Sean said he usually gets a double-edged compliment, especially from the ones who had been in the business before Sean’s existed. Half the time people are thinking they were saved a lot of time and allowed them to expand. Last year they may have brought 50 properties a month and made millions of dollars, and it is an awesome compliment that they used Sean’s primary system. However, it is also followed by people telling him he reels in the market and brings in a lot of other people. He gets both ends of it.
Bruce was never really a full-time trustee sale buyers until Greg figured a lot of it out along with a lot of the tools that were provided him. You go to a sale, and you see the same three or four people there every day. Now you go, and there are probably 50-75 people, and they change a lot. People can get up to speed a lot quicker than they used to, but they do not really have any appreciation of how much work has gone into getting them there. Sean said a lot of it was an issue of the times. People shift to where the market and the opportunities are. We went from a market where foreclosures did not matter to one at the peak where they make up the majority of the market in quite a few areas. Sean said he was looking at some stats he ran where in San Bernardino you went from 90% of the market being traditional market sales with 6% being flips and investor-run deals with 2% short sales to 46% REOs and 31% regular market sales in 2009. A lot of it was most likely out of necessity since we had a lot of builders who were pushed out of the building business and went into the foreclosure business. A lot of commercial brokers whose business was dried up also went into the foreclosure business. A lot of it was just natural, and Sean said they were fortunate to be in the right place at the right time.
Being an investor, Bruce looks at Sean’s website for these reasons, but he wondered what the government would use ForeclosureRadar for if Sean had them in his customer base. The first thing Sean said he saw them use ForeclosureRadar for was mosquito abatement. By finding properties that were not necessarily being maintained in the pools, the government was using their website to search for swimming pools in foreclosure properties so they would know to go treat them for mosquitos. Later on, a lot of cities get active to try to keep light down with code enforcements and the extension of the foreclosure process that we have seen over the last couple of years. Once somebody stopped making their payment, a lot of times they stopped making repairs too. In some ways it is great that they slowed down the foreclosure process as it has kept inventory off the market and kept people in their homes longer. However, at the same time their homes are not getting repaired, so code enforcement officers are using ForeclosureRadar to go look for these issues and try to be proactive about it.
Whether the code enforcement comes into play after the trustee sale or in the middle of the process usually depends on the county and the budget. He has seen some start off at the NOD stage. They will maybe take photos of the property at that point and continue to monitor it. If it goes downhill at any stage during the foreclosure process, they will start enforcement actions.
Bruce said something he had never seen on the website was a wholesale buyers list. One of the things Sean said he wanted to do from the beginning was they had a lot of incredible customers, the most knowledgeable foreclosure realtors and hottest investors, and they wanted to come up with a way to start connecting to those people. For all their customers, they allowed them to basically have a free advertisement out on their public website in something they called the marketplace. He wanted to connect folks and start allowing their customers to find each other and find services. They have investors who are willing to bid for others, so there is a bidding services section as well as people in property management, which some investors might be interested in. There are also a lot of realtors that are foreclosure experts and all get to advertise on this free foreclosure marketplace that is available to anyone. This section has not been updated as much since Sean said he tends to be more of a product-centric person than a market-centric person, which he said he is working on. He did say this feature has been around for a year.
Foreclosures have been a dominant player in the last five years, which is not typical California. Most typical California was the stretch from 2000 to 2006 where a trustee sale was rare. There were always a certain number of foreclosures, but Bruce wondered how radically this changes the business model that really concentrates on this. Sean said there is no question that foreclosures will play a less dominate role. It is already clear that REOs play a less dominant role now than they did even two years ago. There is no doubt that will even change and will continue to change. We went from 46% of the market being REOs in San Bernardino in 2009 to only 30% in 2011. That will most likely be lower this year. On the other hand, the motivators and players of who is in the foreclosure market changed in the timeframe from 2004-2006. You get some of the big consumer foreclosure sites, which he focuses on professionals rather than consumers. These sites had their best years in the years when there were the fewest foreclosures. They had less expense because they did not have to track as many foreclosures, and there were more people clamoring to invest in real estate and trying to find good deals. So there are really two sides to it.
Sean had mentioned how he thinks San Bernardino will have less of a percentage of REOs, and Bruce wondered if this is for natural causes or induced causes. Sean said he believes it is still largely from induced causes. You still have a lot of people underwater and lot of people in the foreclosure pipeline. However, it is becoming less and less politically correct to foreclose, so banks and looking for every other alternative possible. The latest thing is the REO to rental program. Banks all blame regulations for delaying these things and not pushing them through. At the end of the day it is all good for their bottom line to not foreclose and to delay the processes for as long as possible. We have seen this trend continue and grow. We are working through some of the problems as wells, so there are fewer people in foreclosure or underwater today than there were a few years ago. A lot of this is due to price increases.
One of the things Bruce has been studying about deleveraging debt is they are talking about the U.S. doing a really good job, but then in asterisks it said 86% of the debt reduction was just defaulting. It is improving, but it is not necessarily because we are having price increases. It is improving thanks to the strategic defaulters. Eliminating negative equity is a contrarian view.
Bruce wondered what the real estate debt was at the peak of the market. Sean said we have good numbers nationally, but not so well locally. According to the Fed funds, which the Federal Reserve publishes, we went from $4 ½ trillion in mortgage debt in 2000 to $10 ½ at the peak. We are now back down to about $9.8 trillion. This is a really good high-level gauge just to see where we are in the problem overall because if you think about debt as a percentage of income (in some cases the percentage of GDP), and you look at the number of new households and increase in household income from that time, the number should really be closer to $6 ½ trillion. This is where we should be back to if we want the same level of homeownership that we had in 2000. Unfortunately, we are a long way from being at that level, and Sean said he thinks this is the heart of the problem with the economy. Although, he realized that most economists would disagree and say it is jobs or something else. It is hard for him to see how you would have jobs when you have a consumer-driven economy where consumers are underwater in their homes. They have perhaps $3 ½ t o$4 trillion of too much debt.
What is interesting is that Bruce has talked to people who said banks have already written all this off. One of the interesting things about when banks write debt off is it does not write it off on the homeowner side. It is a one-sided write-off, so it does not improve the consumer position at all. Bruce has serious doubt that anybody has written off $1 trillion of anything, even if they put all their piles together. This is a lot of debt. The question is why you would want to model accounting that Congress put so much pressure on, specifically the Federal Accounting Standards Board. They say they have taken the write-downs, but it is the write-downs down to their fantasy values for these assets.
Bruce wondered when somebody wants to get into the business of trustee sales what are the typical rookie mistakes that he sees. Sean said the biggest mistake in terms of cost is to buy a second mortgage that you think is a first mortgage. The one thing Sean really encourages anybody entering this business to do is to really take the time to learn how to do title research. They regularly see their customers rely too heavily on their models. Sean said they guess what the positions are, and they give you that information. This helps with searching and the rest, but they do not intend for them to buy based on that information. They make things pretty clear with disclaimers and the rest, and nine times out of ten the models would probably work for the people. If your first deal is that 1 out of 10 where their guess is wrong or there is something strange about the title; that can be a very big loss. They will see other people who will call somebody, for example some junior customer service person, and they will ask them what they think is going on. They will usually tell them whether it looks like a first, but this is really not the way to do title research. If you cannot take the time to learn how to do it, you really should not be buying at auction. This is really not the place for somebody that is going to give it a shot and really not become good at it before they show up for the first day.
Bruce wondered what the likelihood is of somebody about to make a mistake having somebody there say not to bid on a second. With there being a lot more people down there, Sean said he sees helpful folks more often. Sean said early on in his foreclosure investing career he did this for a newbie and saved him about $150,000. He was still a relative newbie, having been down there 6 months, and the other regulars almost lynched him. They basically told him with more competition there is not really enough business to go around already, so by helping him out he saved him a lot of money. This means he was going to come back the next day. If he had lost the $150,000, they would never see him again.
Bruce said he prefers Sean’s route to the other people’s any day. Bruce actually did this intentionally one time to see if he had many friends and qualified intentionally for a second with his cashier’s check, and two other people qualified with him. However, when the opening bid came nothing was said. One of the regulars came over to Bruce and asked him what he had been doing, and Bruce said he just wanted to see if the person would tell him and see if he knew. In this way he made a really good point because you have to qualify to bid beforehand, and you will sometimes see the pros go qualify for things people might be confused about in order to try to suck them in. Sean has even seen pros knowingly bid to a point where they had a $50,000 loss against somebody trying to increase the other person’s loss because they realized the other person did not know what they were doing. Rather than letting them take the small loss, they actually took the risk of losing tens of thousands of dollars just to see that person’s loss be matured.
One of the things that has really changed is that before there was real equity, so when you are foreclosing in the ‘90s, people had older loans and there was equity. In this cycle, real equity is virtually non-existent, so you end up having something called a drop bid. If you asked somebody who attended trustee sales on a regular basis back in the 90s if they had checked out the drop bids, he would not have that vocabulary in his mind at all. Now, all of a sudden it is the entire business. Bruce wondered how somebody would find the drop bids before Sean’s site provided the service. Sean said it was largely by attending the sale or calling and checking ahead of time to find out. Pre-announcing opening bids is something that really started fairly recently. You would occasionally see it beforehand, but nobody even thought to enquire as what the opening bid was because up until 2008, the opening bid was the amount due. The years 2007 and 2008 were a terrible time to be in the auction business because everything had an opening bid that was above the market value. This was why the REOs were so overwhelming because they were taking back 95-99% of the inventory they could have sold to somebody with a cashier’s check. In the peak month, 97% went back to the bank.
One time in San Bernardino, Bruce happened to look in the MLS, and it was so ridiculous. There were 25 properties per $1,000 increment all owned by lenders. 101 had 25, 102 had 25. You had your way if you were buying through the MLS at that point. It was right at this time that we claimed the term shadow inventory and were talking about bank-owned properties. For all of those listed in the MLS, there were at least that many if not more that were not listed in the MLS. That bank-owned inventory was pretty short-lived because once the banks realized they needed the correct prices for what people could afford without the crazy financing, that shadow inventory disappeared. In a lot of places we went from 20 months of inventory to 4 months of inventory in a few month period.
Shadow inventory is still a very misunderstood term as the definition has shifted to talking about the REOs that were not being marketed to something else. Bruce was just in front of the mayor and city council in Riverside, somebody brought up shadow inventory, and his emphasis was the banks were holding onto a lot of properties. He was emphatic about it that they had not done what they were supposed to do as far as putting up for sale. It is a little hard to deal with somebody who is that emphatic with a chart, but he does make a point that there is something called shadow inventory that has changed definition.
If you want to check out Sean O’Toole’s website, visit www.foreclosureradar.com. He helps realtors, investors, and government agencies track foreclosures in California, Arizona, Nevada, Oregon, and Washington. The cost is $49.95, and there is a discount for members of the California Association of Realtors.
Tune in next week as Bruce continues his interview with Sean O’Toole.