California Foreclosure Experts Steve Silva, Mike Novak-Smith, and Lance Martin #290

Steve Silva

On Friday, October 19, the Norris Group proudly presents its fifth annual award-winning event I Survived Real Estate. An incredible line-up of industry experts joins Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds for the event benefit Make a Wish and St. Jude’s Children’s Research Hospital. This event would not be possible without the generous help of the following platinum partners: ForeclosureRadar and Sean O’Toole, HousingWire, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops, Invest Club for Women and Iris Veneracion and Bobi Alexander, San Jose Real Estate Investors Association and Geraldine Berry, Fry Wiles, MVT Productions, and White House Catering. Learn more about the panel and how to attend at

Today on the show for the second week are three special guests. Lance Martin has been in the real estate business for 24 years as broker/owner of Coldwell Banker Pioneer Real Estate, which serves the Inland Empire. Lance is an expert in residential REO foreclosure sales and owns offices in several Southern California counties. Mike Novak-Smith is not only one of the largest REO agents in the Inland Empire but also 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. He also specializes in the Inland Empire as well. Steve Silva owns several businesses including Market Point Realty and Las Brisas Escrow. Steve is an expert in residential REO sales as wells as being a real estate investor. Bruce goes back with all of them back to the ‘90s.

In the last segment they ended with the topic on appraisals and how the appraiser’s hands are tied. The problem in the boom years from 2003-2005, an appraiser was sometimes met by an agent or seller wanting a refi, and the pressure was on to tell them if they did not come up with a certain number they were not going to get any more of their business. Bruce wondered if it has flipped the other way to where there is such pressure on an appraiser to be conservative that they do not come out and say, “It is worth less than this other person appraised it.” This person will not receive an assignment anymore. Lance said this certainly appears to be the case. He does not really know what the inside baseball is with the appraisers and the manager they are working with, but there certainly appears to be a reluctance and hesitancy to take a look at a property where the comps are 150; but there are 40 offers on it, all of them above list price and interest rates are at an all-time low. People want comps. If you give them three comps that justify that price, then that’s that. There does not appear to be any recognition of the fact that the market is heating up and what appears to be accelerating. Everybody who is looking at these numbers is seeing that it is impossible for the properties not to appreciate in value significantly with inventory levels being as low as they are.

The appraisers probably won’t be making that decision much longer because the cash buyers are going to come in and set the cash anyway. As soon as closes, then you have the new numbers. Cash buyers are willing to pay above retail. They are stating the retail number that is not yet realized as truth. Lance said he qualifies cash buyers as the investor buyers or the cash-investor buyers who traditionally buy it at some sort of discount. This is happening all across the country. Bruce said he happened to be buying and selling some things in Florida with a friend of his. He has a particular area that they concentrate on and where they had a property in escrow for $79 grand that rented for $1100. The appraiser came in at $71, a 3 ½% interest at $71 grand. In this case the payment was actually half the rent, and you could not get the other $8 grand to be acceptable, especially using the income approach. In a way you think you may need to adjust what the appraisal process is because the answers are not really making sense at this point.

Mike, Steve, and Lance are in the resell side of the business. Bruce wondered when somebody loses a home in foreclosure how long the lenders will make them wait before they will be able to buy again. Mike said he heard it would be about 2 years, which seems to be the magic number. Other times it could be three, but it really depends on the loan type and who is doing the loan. It changes, and it seems the cycle time is becoming quicker. If somebody has bad credit, it seems to be recovering more quickly than it used to, at least how Mike sees it. Bruce said Philip Tirone owns a company that deals with the credit people, and he said it used to take a couple years to go from a big problem like that to a 720 credit score, and now it can be accomplished in seven months. However, if you have a 720 credit score or were in a foreclosure seven months ago, you are not going to be buying something. There is a common misconception about how long people are out of the game once a foreclosure has happened. Bruce said if he speaks in front of a realtor group and asks this question, the dominant answer he gets is seven years. The consumer also has this in their heads, and you have a lot of people thinking they cannot buy when they really could. If you have a group of realtors who thinks it takes seven years, then that is indicative of the problem. Consumers could see this, possibly not understanding the process.

A lot of this just adds to the frustration. We have been in this cycle for five-six years. Had we pushed the process through as we should have, so many of those people that are now still tied up into this problem we have not dealt with could have been through the process, rented for a couple years, saved a little money, and now enjoy the opportunity to buy properties at nice values and return rates. Unfortunately, we wasted at least four years of recovery time by operating a pain avoidance strategy of ignoring the problem and delaying it. In the beginning this was not the case. In 2008 and 2009, there was a large amount of people who went through foreclosure, but the system worked. This inadvertently has produced excess buyers right now, so they have already gone through three years. Whether they know it or not they could buy something if there was anything to buy.

The quantity is so large, approximately 25,000 properties being sold in San Bernardino County and 50,000 buyers who used to be able to qualify who now can again on top of normal investor demand. You really could have a whole lot of lenders decide to foreclose on properties, and you would have demand in such quantity that you would not have price damage. The fallacy is that this would cause a price damage like it did in 2007-2009. There is too much demand, and the price range is already so reasonable.
The government and lenders have done their job of inflating the prices by holding the inventory back. They have done their job, so now it is time to let the water seek its own level, and it is not going to go down. It could end up going higher.

Bruce said the three speakers are sometimes at the forefront of these decision changes, and he wondered if they have noticed with note purchases not showing up after they have told it was coming. He wondered if they see this happening often with things in the bulk world with the sale of the property or sale of the notes. Lance said he has seen this happen on the note level, although there is a lot of discussion on that. His fear is that we are already seeing and coming close to the first bulk sale pilot rental initiatives that are supposed to be closing within the next thirty days if not within the next week. He said he was definitely affected by this and has at least two properties that are in this system. The other properties he was unaware of were in some sort of rental program and disappeared. The bulk sale items have certainly affected the market, especially the Inland Empire. About 500 properties in Southern California were in that bulk, which we would all love to have in the inventory today. He said he definitely could see the effects of at least the discussion of the bulk sale and the current one that is underway. He does not know so much about the note sale, although he does hear talk about it. However, he cannot quantify whether or not it has impacted our inventory or not.

Most of the large companies Bruce has talked to will buy at trustee sales, buy out of the MLS, or buy note pools. A lot of the money is actually being spent on the latter where they will sit down and re-negotiate the terms of the loan since it has such a running start at a good number. However, that will prevent inventory from actually showing up as an REO. The only way anyone could know would be if the notice of default or notice of sale has shrunk significantly or because the notes went somewhere else.

Bruce wondered if any of their businesses have been affected by the emergence of the people who are backed by Wall Street money where you have $100 million or $1 billion. Bruce wondered if this has become a prevalent client. One said he had a group in his office last week that claimed to have north of $100 million who wanted to buy 100 properties a week in the Inland Empire. They are very specific on what they want and where they want to be. Even though he has inventory challenges, it has not affected his business one way or the other yet since he has not bought anything. If they do buy, then the question is where they will find 100 properties a month to buy since they are not there. However, they do want to buy retail, and these are investors with a buy-and-hold strategy who are willing to pay 105% of retail value. If people are REO agents, they are not going to get the inventory.

Bruce said being on a front line of all this, it hits them first to where they see what is significant. When they go to trustee sales where everybody is buying properties at numbers you know you cannot resell at, you realize the game has changed and you wonder what it is. You then realize that the people are going to start accumulating 1,000s of properties. Bruce said what will be interesting is if he was a builder or a developer, he would want to know their game plan of an exit because if he just bought a piece of land, for example, in Perris, he would like to know if there is going to be 3,000 houses for sale some day and decide to load everything. Bruce said he would have to think about that. This is why the bulk sale with the rental restrictions is troublesome because if it is a government-imposed bulk sale with an investor purchasing who cannot sell that property for a certain period of time, for example 3 years, then you have a 3-year artificial bubble in that market. You then would have to sit back and ask what happens on your three and ask if the investors will liquidate the properties at large numbers or not.

One of the speakers said that although in theory it would impact his transactional business and all of the business at the table, he would not have a problem with people buying at trustee sales. If it is a market-driven buyer who is buying and they are allowed to do whatever they want with that property. If they want to buy and hold or flip, then that would be fine. Some strategies are two years, others three, but some things are going to change. If you have an investor who says they are going to have a buy-and-hold strategy for three years, there will hyper real estate inflation over the next 6-12 months. If all of a sudden the numbers change, then that investor has the ability to say that the market has changed and they are changing their three-year strategy to a 12-month whole. They will want to get out of it by the summer of 2013. This is market-driven, and if it impacts his business, whether positively or negatively, then it’s something that can be lived with since it is at least a market force that is driving the market.

With the bulk sales, Fannie Mae is a partner in this type of transaction and has a piece of the ownership going forward. At least with the market-driven, there is a private company with a lot of money. Bruce said if he were getting beat by them, it would be legitimate. It is an open forum, and somebody decided to pay. However, when you have a pile that is only available to one group of people, then that is a much different feeling.

Bruce asked if they envision the day coming sometime next year where they will receive a call telling them to ramp up again since they will be foreclosed on. Mike, however, said he does not see this happening in the foreseeable future. They have been told this several times in the past, and it has never happened. If it happens, then it is going to happen, and there will be no phone call telling them to get ready since it probably will not be happening any time soon. Mike said any REO agent who has worked with volumes has lost some substantial money trying to stay ramped up for inventory that never arrived. They have all been there, and you do not want to have to lay off staff or cut back anticipating you may need them. It has been four years, and we are in a new election cycle. During the presidential election in 2008, the thinking was to get past the ’08 election before we see some sense of normalcy as it relates to the foreclosure process. It has been four years now of nothing even close to normalcy. Now here we are again three months away from another presidential election, and there is just nothing foreseeable that is going to change drastically. The business plan is hard to come by, and you really need more than just one tool in the bag. This was how Bruce met with Lance; it was by Bruce being an investor and him being a listing agent. He always had the tools to put on the investor hat when it was necessary or when it was profitable. If he did not have that tool, then he would to have had to open up several types of businesses in order to stay alive or to stay afloat. Many investors are relying on REOs, and you just cannot do that.

Some of the people from Wall Street are very arrogant about their participation in the market. He was told by one person who was well-meaning who told him he really felt bad for his company. He told him the reason was he thought he was going to be put out of business. Bruce responded guaranteeing him if he called his number five years from now, he would still be in business. Bruce told him he has a lot more flexibility than they do and understand how to do the business more than one way. However, they have a very big pocket and think that is the end of everybody’s business model, which is not true. They may get bored with their business space fairly quickly as well since they don’t think it will be as easy. Someone could come in with all the money in the world and tell them they want to buy 100 properties a month. If they end up buying only four, they may have a problem explaining to the investors why they are not spending their money. This is going to be all of them since they are all competing with each other, and now it is 105% of value. They more they pay, the less it will make sense when they have that rental check come in since that is not easy either.

The cities are also fairly picky about the condition of the property. If they have a three-legged stool, then it makes sense on their investment, where normally Wall Street or any normal investor has to buy at a discount. If it is worth $100 grand and they want to pay $65-$70, then this is not an option. There also has to be some kind of yield or return in relation to rents and such. The third leg is appreciation, which is really what this whole gamble is about. The Wall Street investors have seen so much upside as it relates to potential appreciation. They are really laying it on the line; otherwise why would they pay 105% of what was current retail value. With all the property management they do, one said he is really interested to see where rental values go in the next twelve months. Bruce wondered where they have gone in the last twelve months, which the answer is they have been stable. There may be a little slight bump here or there, but generally speaking things are and will be stable with no significant increase or decrease. Most of the properties Lance deals with are in the Inland Empire proper within a 25-mile radius of his Moreno Valley Office, and for the most part rents are stable. In some market places he has actually seen things backslide. There are some of the lower-end areas where they have a little bit more inventory or are competing against low-end departments. Now, they are running things at a discount from where they were twelve months ago.

Bruce wondered if there is ever a desire to turn a lot of REO listings into a short sale machine and do that business at the same level. Lance said there is a desire, but there is not willingness on the part of the short sale sellers. Bruce said confused him a little. He had heard of people who were offered to be paid $30,000 to cooperate with a short sale. This is actually what Chase does. One was actually closed just the other day: $30,000 in Mira Loma. It was a piece of junk property on two acres, and the investor walked away with $30,000 in her pocket. This was after she had not made a payment in 3 ½ years. They approached her, and in the same way this is how they are handling all of their short sales. He made the offer, they approached her, the process lasted 3 months, and it was bought at a fair market value. There was a little upside in it, and once they were done with it she walked away with $30,000.

Bruce wondered how this makes sense for the lender and wondered why they couldn’t have foreclosed on it two years ago. You wonder about someone not getting paid for 3 ½ years and then getting handed a $30,000 grand check. The speculation is that they can maybe afford to do it at this point in the game, but it is uncertain. It is unknown what they are really thinking or what their balance sheets look like. It is possible they are only allowed to lose a certain amount of money each month, then all of a sudden one month they are able to do the short sale.

Chase has a program that will pay certain properties $5-$30,000 on short sales. It is not across the board. It could be because of balances, delinquency rates, or possibly the type of loan. Lance said he was always suspect that the loans had some bad paperwork somewhere down the line. They knew they had a certain percentage of loans with bad paperwork, so it is easier to flush them in that regard. However, they are out there and those programs are definitely available with certain lenders. Mike said some are pretty generous; but the problem you have is that you can have somebody like Chase where they give one person around $30 grand, and the next guy gets $5 or $1,000. These guys are mad because one person received more. It is like the Cash for Keys when that started where someone’s neighbor was receiving more money. They don’t understand that the bank does not pay the kind of money they were expecting and they don’t understand loan servicing.

With trying to run an REO operation and convert it all to short sales, you are looking at two different animals and spill sets. With a lot of REOs, it is pretty basic work; it just has to be done repetitively. For the short sales, it is a lot more involved and requires a lot more skill to get it to close. You are never going to do the short sale volume that you can do with REO. You also have the emotion of the seller, which is the one nice part about working on the REO side. As challenging as it is, there is no emotion from the seller. Now you have a seller in the form of a Mr. and Mrs. Homeowner. Even though there is no equity here and there is a process, you still have an emotion. You have the frustration and are asking for financial statements, bank statements, are making phone calls, and it is frustrating.

Lance is also convinced that we have a new sense of entitlement in this country, and it is now the homeowner who is delinquent on their mortgage and feels entitled to be able to stay in the property for an indefinite period of time. They are not being foreclosed on, even if they may have had paperwork that has been filed over the years with no consequence of a default or a short sale. They have applied for loan modifications with limited or no success. Now here we are 2-4 years later knocking on people’s doors as former REO people, and the sellers are not participating. They are not interested possibly because they think if they sell they have to start paying someone somewhere. They wonder why they would have to do this because now they do not have to pay anything and there is no threat that they are going to have to start paying or that the bank is serious about finishing up the foreclosure process. The market is as broken as it has ever been, and it has been broken for four years. It is worse than it was in years prior.

There has been a recent suggestion that the way to solve this broken market is eminent domain. You use the government power to force the lenders to sell their loans at a discount and keep the borrowers in the properties. However, this is not likely to work. There are a whole lot of problems, mainly the fairness part of it. However, this will most likely be decided in the courts and the lenders will likely fight this one. The government programs have gone along with a lot, but this one they may not. Lance said it reminds him of the same argument as it relates to principle reduction. The question is who gets principle reduced and who doesn’t as well as who gets eminent domained out and who doesn’t. The question is also how you equitably do all that. You would have people arguing about why one person has more than they do. It is just fraught with peril. One of their reasons behind this is they are just going to deal with current loans. You are giving a lender a 50% haircut as if there is no cost to that.

This is what keeps on occurring for Bruce. He wondered if at some point society becomes tired of bearing the cost of all these free programs, and it could ultimately be a fairly ugly ending.




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