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 once again 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.
Bruce Norris was in the foreclosure business years prior and did everything on his own. When Sean started ForeclousreRadar, there was a certain group of people that were natural clients for that information. Bruce asked Sean if this expanded beyond what he thought it would as well as who the new batch of clients would be for PropertyRadar. Sean said there are some surprises. The biggest thing he would say about ForeclosureRadar is that he started there because he had the data already. He was in a market where there were about 40-50 auction investors at that point. He started the company in 2006 where realtors could care less about foreclosures since there were not that many at the time. He really saw foreclosures as a way to get started, and he planned to essentially move onto PropertyRadar fairly quickly. Instead, the whole foreclosure market really blew up. He expected there to be a lot of foreclosures, but it was a lot more than he thought when he was first starting the company.
PropertyRadar entails a lot more properties and potential. A lot of folks in the construction industry have to give notice to properties within 300 feet. They have a really nice radius search where you put the center of your circle on the property you want, type in the number of feet, and it circles all the properties and gives you a list you can use in your next mailing. You can just do the mailing right from within the software. People from the Department of Transportation who are trying to figure out what property owners they have to reach out to in order to run the road through a new spot. They also have to consider what would be the least expensive place to run the road since there are fewer houses. Cell phone tower people and oil lease people who used to have to go sit down at the county clerk’s office can now sit at their computer. It is going to take a while to develop the right marketing for everyone, and they are mostly focused on the realtor and investor customers.
One of the things Sean has that is pretty robust is his blog interaction. He has lots of topics and exchanges from people that need answers. Because of the nature of his clients, he has a lot of smart people giving input. Sean said this is especially true on his forum. They have one user who set all the case law on foreclosures in California. He bought what changed all the HLA foreclosure laws and the right of redemption. It was literally his transaction that lead to changes in the law. He is on there regularly, so it is great to see posts from him that say the reason the way something is the way it is because of a case from 1975 in which the Legislature changed the law for something they did not like. They have had some really amazing users on their forum. There is one thread that talks about wiping out a trustee sale, and there are 150 responses, answers, and interactions.
They do a monthly property report as well as a foreclosure report on the trends. All the stats and trends are at the top of the site for PropertyRadar.com, then at the bottom you will find guides they have written as well as webinars. All of these things are free. Even with the webinars where they are simply talking about the products they give tips and tricks about how to do the business as well. Bruce’s website, thenorrisgroup.com, is very worthwhile to anybody in the industry. You put together PropertyRadar and thenorrisgroup.com, and there is a lot of information for which you did not have to pay too much. Aaron Norris does an amazing job with it all. They had to redo the talk for a speaking engagement Bruce was doing that night, and he was standing right by his computer while he made changes to about 60 pages. Aaron just ripped through them in seven minutes. As Bruce left Aaron’s desk, he asked him if this was normal. Aaron jokingly said he was a little bit on steroids.
Something else that is fun and adds validity to a lot of things is that the longer you are in business, you have a base of information to draw on. In the boards on his website, they keep getting smarter and smarter people. Bruce said they have been in the business longer and longer, so you are now looking at 40 years’ worth of information through which you lived. You can look back and remember, for example, 1970 when you were that young consumer. This really starts adding to the validity of your conclusions because you are really are not guessing since you lived through it. It is kind of fun to have gotten there. Bruce has been able to take what he learned and lived through and pass it on to others. His son Greg is one of PropertyRadar’s toughest customers. He actually has called PropertyRadar giving them advice, which they have taken. He knows how to get it done and that he wants it, so he has some computer guy do it.
Short sales have been very prevalent. However, just looking at the last percentages of how transactions are going down in California, he sees that equity sellers are 82%, REOs are 5%, and 13% short sales. Short sales certainly became more acceptable, but now with price increases Bruce wondered if Sean thinks we are in our last year of that being a big piece of California. Sean said no and that they still have a couple million folks underwater in their homes. Roughly 5% of folks need to sell each year. Life changes happen, and even those folks who are sticking in there and making their payments and are deeply underwater have been forced to go a different route even if they could afford to make the payment. This in turn forces a sale, and you really do not have much choice other than to come up with the cash if you are in this situation or a job transfer/change. Whether they will be at the same level they were last year when we had the banks all making a big push in short sales to fulfill their AG requirements is not likely. They dropped pretty much after the first of the year from around the 10,000 mark to the 6-7,000 unit mark in California. However, Sean said he sees them staying a pretty strong part of the real estate business and how we have made a lot more progress on the folks who are underwater. You take 5-10% of those a year, and you are still talking 100-200,000 sales a year.
Bruce asked about homes in California. We have 2 million people underwater, and he wondered how many loans or homes they have. Sean said it is only at about 10 million total houses, 6.8 with loans. This means it is still almost 30% who are upside-down. However, Bruce wondered why there is such conflicting information on this. If he looks at CoreLogic that shows it has gone down from 30% to the high to middle teens. Sean said he thinks we actually are around 20% right now. We say there is 8% severely underwater and 5% still significantly underwater, and another 5% who are moderately underwater, which all adds up to 18%. We also have another 4% who are barely underwater, which puts us at 22%. If you add the near-negative equity with the folks just barely above water, you get to 28%. It is a 2 million mark, and you are talking about folks who are not likely to default because they are so close to being above water.
What is interesting about the group who is just about to have equity again is that Bruce is not buying that they are going to sell to be a renter. This would not make sense to him since of all the people who hung on and made payments for 6-7 years upside down, Bruce doubts they are just going to get 10% of equity and pay closing costs to be able to rent. However, you still have an extra percentage of folks every year where a sale is forced due to factors such as divorce, job transfer, or job loss. Life events still happen. Sean said the reason he could buy foreclosures in 2004 and 2005 was not because of a lack of equity or because people were underwater, but rather because life events happened. Even though they should be able to sell and walk away, sometimes that life event is so traumatic that they either cannot or don’t do it. You are always going to have foreclosures as well as some level of short sales.
The reason their percentages are so different from CoreLogic is because PropertyRadar’s percentages are a percentage of the total homes and not just a percentage of homes with loans. If you normalize these two things, then the numbers are fairly close.
Inventory levels are up compared to a year and a half to six months ago, but it is really not drastic since it is only at 10%. This equals only about 2 ½- 3 months if there was a change. Bruce does not understand how inventory levels go up radically because of what Sean discussed. You have people who are upside down, so you are not drawing from a full pile or foreclosing on people at the fastest pace. If they are behind for two years, then they are going to continue to enjoy that until it is over. Sean does not think we are going to see 18 months of inventory any time soon or any major change. Bruce wondered if we will see 6 months’ worth, since this would be a doubling of inventory. Sean said this is unlikely, especially between now and the end of the year. Coming into the spring selling season next year when interest rates are high, it might could happen.
Bruce asked if they could just turn around and buy something, to which Sean said this is a good question. It is like the refi question. How many people started to realize home prices and interest rates are low and are not going to stay this low forever, so you should get off the fence? A big chunk of transactions in California in the past were move-down buyers. The big question is how much house trading people are going to do. If you look at our grandparents’ generation, they picked a house, stayed put for 30 years, and paid it off when they were 65. Coming up to the housing bubble, it became fashionable to change houses every couple of years. Sean just wondered if at the end of the day people are starting to realize it is pretty expensive to be moving. With the moving costs alone and the loan fees of all the rest, if you can get yourself into a decent loan and a house then it would be better to stay put for a while.
Sean is curious to see how this will play out, whether people change their attitudes around that and build more equity. In this case they won’t put themselves quite as much on the line. You would think these lessons would be fairly recent. Sean said even with the high house prices in the Bay Area, he does not think we are seeing as many with 100% financing and interest-only loans. Even there where people are paying a really significant premium, it is not quite the same as it was in 2007. The lenders have not completely started to drink the same Kool-Aid, but it will be interesting to see if they do. Bruce drove around listening to the radio, and he heard there were 125% LTV loans available. It is kind of a “here we go again.” In some ways, what happens is your foreclosure charts that you follow are going to improve. What happens then is a lender makes a more aggressive decision, then a year later he checks the tea leaves and sees that it does not cause any losses. Looking at the last five years of data, their models suddenly say you can do things you thought you couldn’t.
Another thing that happens is the lender business, approximately half, has been predominately refis in the last many years. Now, the bulk of your business is going to be capturing purchase money. They are going to have to be more aggressive to capture it, so it will be interesting to see how this plays out. It was funny that Sean mentioned the term “with interest rates this high.” He and Bruce had made a trip to Washington D.C. where “interest rates this high” is a relative term to only the last year or two. They are back at a level now that is a lot closer to normal than they were. Sean jokingly said they looked at interest rates back into the Mesopotamian era, and at 5% you start to make a case for that not being that abnormal. Sean’s parents paid 18% on their dream house back in the ‘80s. This was as abnormal as 3% was here just a few months ago.
Bruce asked what topics Sean would like to see covered on the panel for I Survived Real Estate 2013. Sean said that even by October he does not think it will be clear how these higher interest rates will play out, whether lenders will get more aggressive. He hopes to get people’s take on this, especially when you are getting such a diverse group of people with different views. He could see people from some lending groups being a little more aggressive. He could see them saying they learned their lesson, so now they could be super aggressive again. Bruce said he has never been more excited than now to have the group that will be at the event.
Regarding hedge funds, Bruce wondered if they were market-makers as far as setting price levels. There is no question that the investors who came in and bought CAP rate instead of market value drove prices up. It is also no surprise that they are leaving the market now that prices are up to a point where CAP rates are not very good. We see that now, and we see them dropping as a percentage of total market sales. They will probably play less and less of a role going forward. These are other interest questions about the market if you look at the number of cash purchasers that were buying investments. As real estate gets to price levels that does not make it a good investment anymore, it may still be good to buy as a home. There are other intrinsic values of owning a home, but as we get back to that price point we lose that purchasing contingent. This is something we are facing over the next six months. A lot of buyers are saying they will purchase at prices that make sense, and since they don’t make sense they are going to stop. There were no buy and hold investors in California in 2005.
Bruce said he and Sean will probably disagree on the panel, but they respect each other’s opinion and honesty so much that when they do disagree they look at each other and say they have to rethink some things. Look forward to seeing Sean on the panel for I Survived Real Estate 2013 on October 18.
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.