On Friday, October 18, The Norris Group proudly presents its 6th annual black tie 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: PropertyRadar and Sean O’Toole, HousingWire, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association and President Bill Tan, Investors Workshops, InvestClub for Women and Iris Veneracion and Bobi Alexander, San Jose Real Estate Investors Association and Geraldine Barry, MVT Productions, Wilson Investment Properties, RODA Construction , and White House Catering. For event information and tickets, visit www.isurvivedrealestate.com.
Bruce Norris is joined this week by Sean O’Toole. Sean is the founder and CEO of PropertyRadar, and he was the founder of ForeclosureRadar. Their website literally changed the foreclosure industry and made it much easier for people to compete against very large companies. He started buying and selling his own properties, dealing with 150 residential commercial foreclosures, and he used 15 years of software industry experience to make the job a lot easier.
Sean’s new website for PropertyRadar is described by Aaron Norris as “robust.” Bruce said the first thing that occurs to him is that people have no idea, if they started the business a year ago, how much is there that did not used to be there. Ten years ago when you were doing anything like this, you had to work really hard. Now, you don’t have to work really hard. Bruce asked if people really appreciate it or just brush it off as something that is supposed to be there. Sean said it is expected at this point, and they wonder why they cannot get it for free. Bruce did have a big laugh one time when there was some blog that kept asking about the price, “Why $49?” In the years when you were just getting the foreclosure lists by mail, we were paying several thousand dollars per year just for the list.
One of Sean’s favorite stories was that one of his customers was doing business in three different counties. He had two full-time people just tracking postponements in three counties, which was about $4,000 a month between the two full-time people. He did not let the people go, but he was able to re-purpose them and have them go do other things. He saved $4,000 a month in exchange for $49.95. Sean said in addition to the foreclosure lists they did all the postponement tracking as well, which was a full-time job. Anybody who was ever in the trustee sale business realized the biggest time consumption was going to sales that were not really going to happen. You were trying to spend your time seeing if it was or was not going to go, and then you would get 100% recordings most of the time all with disclosures saying it may be inaccurate. Things were much more tedious and difficult.
PropertyRadar encompasses much more now than foreclosure properties. Sean said what they did was, for investors, they took how hard it was to do foreclosures to seller financing deals, deals that are free and clear, and non-owner occupied. It really comes down to a handful of techniques that involves finding a list of data. Now you can do all these things and even combine them in ways that was impossible before this product existed as well as time-consuming, tedious, and expensive. This was because you had to have a custom list created, and you did not know if the list was going to be any good until you got it and already paid for it. Here you can preview various settings until you find what suits your needs and desires.
Bruce was on the site and played one of the 4 ½ minute tutorials, and it said to take a look at a short sale. If you look at everybody who has negative 20% equity, further define it into an area of interest, and pick the lenders in which you are interested, you can then look at the website and see who sold their house and how often. It is unbelievable; and Bruce said he does not want people to lose the fact that it is pretty special. When Sean was in the foreclosure business as a buyer, he did not have competitors who had that ease of access of information. Sean confirmed it does lower the entry barriers a little bit. For some of the experienced people who have already figured these things out, they are now always super happy with the new releases that make thing easier. Even though it makes it easier for them as well, it also makes it easier for their competitors. Sean said they do get some of that feedback to stop creating new software.
Bruce said there are some things that will be really interesting to see in the next few years since the trustee sale business years ago was a handful of people who were there every day, and once in a while someone new showed up. Since foreclosures have been so prevalent, 50-100 people are showing up and foreclosures have been higher than ever. Now that those numbers are declining, so Bruce wondered what the landscape is going to look like 2-3 years from now when the foreclosure numbers are very normal. Will there be a big group of people chasing what little there is? Sean said it is interesting how this shakes out. Sean said it is funny when people tell him there are no foreclosure anymore. Back when he was buying foreclosures, there was 200-300 a month. Even though they peaked at 8500 and are down to 1420, which is a huge drop, it is still 5-7 times what was coming to sale. Sean said out of about 3,000 a month, 1400 is being bought by third-parties. Before, it was 200-300 a month, and only some of these would be bought by third parties. It is still 10x what it was in 2002-2006 and prior to this as well.
The year 2002 was probably a very typical good year for California, so you would have to look a long ways back to have an aggressive foreclosure number like 94-96. It is not that often that foreclosures are really a dominant part of the real estate landmark. This is something that will probably change again. Bruce also asked what is going on with the margins that people are experiencing. When Sean bought something, it was a pretty healthy margin, and now Bruce does not even see a margin. Sean said the interesting thing that happened here was when a market starts moving up quickly, AVMs tend to lag a little since the market is moving up quickly. It is the same when the market is headed down. They are all looking in the rear view mirror at past sales. Even if they try to add a fudge factor for how fast the market is moving, they tend to be a little lagging.
Sean said with the percentages in an upward-moving market, the margins are shown to be lower than they actually are. People are saying they are buying a property, but they are going to sell it in three months. The AVMs may be low too, but when they sell it in three months they will be a little higher. In addition, the margins may be bigger. The other thing that is true as well is that we had a lot of large institutional investors come in, and they realized that the market was undervalued. They were willing to pay above market value for the property because it still hit their return on investment they were looking for as a rental. For the flippers down at the auctions, the people coming in really upset the apple cart because you could not flip those properties and could not compete. Even with the MLS there were regular homebuyers who could not compete with those investors since they thought they had to pay $20-$30,000 over market, which a regular homebuyer can’t do since they need an appraisal. They were losing out to investors, but they were saying it still made sense because they were hitting all the numbers.
What is interesting is that if you look at the standard appraisal forum, one of the ways to figure out market value is by taking approach. This is completely ignored and could be very different. Your comps are below replacement cost, but at the same time it is producing a cap rate that is extraordinary. Sean said he personally thinks we should get rid of the sales and just use the income approach. We would have had no bubble in the 2000s if we had always used the income approach. This ties the value of properties back to rents and becomes a very stable lending market at that point. As a buyer, you should be able to pay whatever you want, but lenders should lend more than they are supported by rents. Bruce said this will be an interesting topic for the panel to talk about at I Survived Real Estate 2013.
The appraisal process as it stands is incapable of preventing another bubble and incapable of preventing a depression in prices way below market. If no buyers exist, you could have a house that costs $250 to build bought for $50 grand, which Bruce said they did. You could also have that house that costs $250 to build go for $1 million. Sean said you will never have this problem if you just stick to the income approach. People notice how they use the income approach for commercial, so what you have are ups and downs in the commercial market. They are smaller than in the residential market because of the income approach. What happens is you see a change in what is considered an acceptable return; so at the peak of the market you start having people saying 4% is still pretty good. At the depths of the market when it is bottoming out, maybe those returns on commercial will be around 8, 9, or 10%. You still get a range, but at the peak of the residential real estate market there is a lot of real estate that was essentially at a 1½% return. You are a lot better off putting your money in treasuries at that time.
In some areas of Northern California, such as San Francisco and San Jose, we are not back to these peaks. Bruce said this makes sense to him since you are dealing with a human being. They are very repetitive in what they will do. Bruce wondered if this means they have rationalized in their mind what was a reasonable price after all. Sean said when it comes to his home, he thinks the National Association of Realtors made a tragic mistake in calling the home an investment. He said at the end of the day, he wants to be an owner because he does not want to have to deal with a landlord. He also wants to live where he wants to live. If he can afford it, then would he really care about the value?
For a lender he would care, and maybe he those people should show up with more cash. This puts some constraint on the market that we did not have in the ’02-’05 timeframe. However, Sean said if it is his own home, it is where he lives, and he can afford it, then it is fine. Right now in the Bay Area especially, we have an amazing technology bubble going on. There are a lot of dollars and investments, and people can afford to be there and afford to pay the prices. Even though the CAP rate is very low, essentially making it a poor investment, it still may be a good investment in terms of both quality of life, being close to work, and having the peace of mind of ownership versus having to deal with the landlord. However, he said he wished people who were buying there talked about it enough in those terms. A reasonable decision would be for them to say it is a terrible investment and still want it.
Bruce will be speaking up there in a couple weeks for a seminar, and Geraldine Barry gave him a message warning him about the attitude of the real estate industry up there. Bruce said he is sure it’s wonderful and keeps going up, but if 2006 did not make any sense then why does it make more sense than 2013. It does not make sense either time, but it makes it more dangerous in 2013, and people are completely ignoring that this might be true. There were still some areas in San Francisco and on the peninsula through the last bubble. The tech bubble was going, and a strong tech industry was happening back in ’05-’08. Yet, prices in those areas fell 20%, and it is possible it may happen again as we get back up to where we are higher than we should be in some of those markets.
Bruce said foreclosures are down year-over-year, probably driven there by policies in the beginning. Bruce wondered if it is more legitimate now than it has been in the last few years. Sean said we have certainly cleaned up a lot of foreclosures with the attorney general’s settlement where a lot of short sales were done. This certainly seems to be slowing down, but short sales were acceptable 18 months ago a lot more than they were prior. They started letting people do short sales, even if they had never missed a payment. They definitely cleared out a lot of inventory, but there are still roughly 2 million Californians who are stuck underwater. He also estimated 300,000 people who are not making their payments in California. Those are the people who need to be foreclosed upon, especially when they have not been making a payment for 2-3 years. Here we have a policy problem for sure since if that was the case we would have more inventory. On the other side, if the goal is to push prices up, restricting foreclosures and slowing them down certainly had that affect.
Sean finds it a real oxymoron that we have a recording tax that California is trying to pass right now called SB 391. This will add $75 to every real estate related recording where there is no transfer for tax payers. If you want to put your property into a trust, it is going to cost you an extra $75 to record the document. They want to do this to raise $500 million a year for affordable housing. Of course, they are going to do it with a fee that makes housing more expensive, while at the same time most of their other policies like slowing down foreclosures are making housing more expensive. At the end of the day, the goal really isn’t to keep housing affordable, but rather the goal is to put $500 million into a bureaucracy off which they can feed their friends.
Bruce asked Sean about shadow inventory and if he feels it is still valid of if it will become a non-issue with price increases. Sean said no and that there are still a lot of people who are deeply underwater, around 50% or more. Sean said he has always felt there was a huge shadow inventory where he has disagreed with most of the people who talked about it, such as it showing up some day in some kind of wave and rock the market. A lot of people sat on the sidelines in 2008 and 2009 worrying about the shadow inventory, and we said then as we said now that this is not going to happen. If you jumped in back in 2008 or 2009, you would be set pretty well today. Sean said he felt bad for the people who were so paralyzed by the concept of shadow inventory that they did not realize the bigger political picture was not going to allow that inventory to come to market.
Bruce asked Sean what he thought of the price increases we have had year-over-year. California alone has gone up 30%. Sean said there are two pieces here. We had a big change in the midst of both distressed properties and non-distressed, and the banks were more aggressively foreclosed and short-sold on lower end properties than they have on higher-end properties. Part of that price increase is a shift in mix. If we had a whole lot of $200-$300,000 houses this last year that were 2 bedroom, 3 bathroom, 1800 square feet, this year we are selling more 4 bedroom, 5 bathroom 3,000 square foot houses. We have not actually had an increase in price, but we have had a shift in what is being sold.
One of the problems with median prices is they measure two things: change in price and change in mix of what is being sold. The good thing is that it has always been true. It is completely inaccurate; but it has been consistently inaccurate, which gives it some validity. We have had some unusual years here where we had a higher volume of foreclosures and distressed sales than we have ever had in history. This pushed median down a lot farther than the shift in mix did. On the other hand, this last year has seen foreclosures tail off quite a bit. We have had a pretty big shift that we have not had historically. Sean agrees that median has always contained both mixed prices; but mixed has always played a larger role these last five years than it ever has in the past. Sean thinks we do not have the math right now to really say what happened to prices.
Sean said it always scares him when people say that median is up 30% and therefore their house is worth 30% more. It does not mean this at all.
Bruce asked Sean what he thinks about interest rates. They are going up and have been going up quite a bit. This is probably just the beginning, but he wondered what this is going to do to where we end up in price. Sean thinks we will see prices flatten down through the rest of the year. We have seen sales volume uptick more than what Sean expected as more people try to make a move when they see interest rates increasing. He thinks we will see more of what we saw with the latest homebuilder and new home sales release, which showed sales volume going down. Sean thinks the interest rates are going to hurt a lot more than the wizards on Wall Street and the Federal Reserve expect.
Bruce said this will be interesting, even with the inventory levels that we have. Inventory levels are increasing across the state as the interest rate increased. Inventory levels can change quickly, and Sean thinks they are right now because you have sellers saying that it just got 20% more expensive. They are saying there are a lot fewer people to buy their house than there were a week ago, so they should have it listed for sale. You are hearing throughout the state that inventories are increasing.
The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate 2013: Adrenaline Athletics, California Property Solvers, Coldwell Banker Town and Country, Claudia Buys Houses, Elite Auctions, FIBI (For Investors By Investors), In a Day Development, Inland Empire Investors Forum, Inland Valley Association of Realtors, Investor Experts Inc, Keystone CPA, Las Brisas Escrow, Leivas Associates, Mike Cantu, Northern California Real Estate Investors Association, Northern San Diego Real Estate Investors Association, Orange County Real Estate Investors Association, Orange County Investment Club FIBI, Personal Real Estate Magazine, Pilot Limo, Primary Residential Mortgage, Realty 411 Magazine, Rick and LeaAnne Rossiter, Southwest Riverside County Association of Realtors, Sonoca Corporation, Spinnaker Loans, uDirect IRA, Tony Alvarez, and Westin South Coast Plaza.
See www.isurvivedrealestate.com for more on the event and all of our sponsors.