Bruce Norris is joined this week by Sean O’Toole. Sean is the founder and CEO of PropertyRadar.com, the only company that tracks every foreclosure in California with daily updates on all foreclosure auctions. Sean is also experienced in flips, having done over 150 with both residential and commercial. Using his extensive background in the software industry, he has revolutionized the foreclosure auction process as far as getting information and making it easy.
PropertyRadar is working for a much broader audience now. Regarding his clientele, he still has all the people in the foreclosure business frequent his site. When he first got into the foreclosure business, neither ForeclousreRadar nor PropertyRadar existed. There was just the process that was in place. If he wanted to check on a trustee sale that was going on at 10:00, there were a couple of websites that existed for this. However, the majority of the updates were not available on the web, and you had to make phone calls. At the end of the day, to be sure you got everything you really had to show up on the courthouse steps every day for a year before having a complete list of everything. This was because things could be postponed for a year. It was very difficult to do part-time because you really needed to be there to get complete information. If you were part-time and just following a third of the properties, you would always be sitting next to somebody who was the only bidder on the killer deal of the day. You would not have any clue that it even existed.
Sean’s website has evened the playing field very quickly for somebody who is new. There are still certain risks, especially with trustee sale auctions, and you have to really know what you are doing. You can show up and be as informed about what properties are coming as well as transaction history as any expert. This is a big change from when PropertyRadar first started. The cost of it was also a big change at the time prior to it becoming a commodity. Lists cost many thousands of dollars a year for expanded counties, not hundreds. There were definitely local providers dealing with the same things Sean did, not necessarily with the software, but it was much more expensive. For those who worked with only a couple counties, they could charge a lot.
Bruce asked what additional things PropertyRadar provides. Sean said it is some of the same things he learned when he first started in the foreclosure business. There were 1/10 as many foreclosures as we have today, and there are 1/10 today as there were at the peak. He quickly found that he needed to look for other opportunities, both as a real estate broker and an investor. This depended on whether he was an agent and wanted to farm an area, find the owners, and market them; or as an investor target absentee owners, people on their house free and clear, or other specific niches. He needed a way to create the lists and forms depending on the terminology. This is one of the core pieces of the new PropertyRadar. The next one is property information, which tells who the owner is, their lenders, how much debt they have, and anything you would want to know quickly about a property when thinking about doing a deal. This could include when people call asking for information on a property, looking at target properties, or driving down the street and seeing one that is vacant and abandoned and you wonder who owns it.
When Bruce started back in the 90s when he was doing HUD auctions, if he wanted to map something he would break out the Thomas Guide, make copies of every page, and put the properties on it. If he wanted to do research on a property, he would call the title company and get a property report. He does not know if the group of investors today has a real appreciation of how easy the access to information has made them competitive so quickly. One of the people who mentored Sean early on to track all of his properties would take a polaroid of each property, write his notes on the back, put the address across the top of the polaroid. He would keep these in a shoebox and order them by date they were scheduled for sale at a trustee sale. Now you can do all this on your phone, including taking the photo and attaching it to the property.
Big changes have also been seen in the costs. Bruce asks what it costs to have access to the information on the website. Sean said it starts at $39 a month, and their package deals are $59 a month, including all the foreclosure tracking. It is crazy cheap, yet once in a while Bruce will look at a blog and be surprised about the $59 price. At the end of the day, the information and public records PropertyRadar is providing free down at the county and available. It really comes down to how you value your time. If your time is worth nothing, you can get all the data yourself for free. Since everybody’s time is valuable, however, then it is a no-brainer.
As somebody who competes in the trustee sales venue, it is difficult to have so many competitors be competitive so quickly. Before, there were times you had three people in a county doing it. Sean no longer buys foreclosures for this reason, he just provides the information. He actually did show up in 2008 after a year after launching the site when bids were dropping and there were amazing deals. He showed up at the courthouse steps, and all the people he convinced to try the software early on. People asked him what Sean was doing there since he could not compete with them. They were putting in their bid information, photos, notes, and title information in his system, and they were afraid he could use it against them.
Sean thought seriously at this time about shutting the site down and only using it for himself. He had an investor in one county reach out to him for $1 million to shut the site down in just one county. It was very tempting to see how many phone calls he would get to sell counties for this amount. The reason he did not do it was he had just signed a deal with the California Association of Realtors and contractually obligated to provide the service. However, the offer was definitely something he considered.
The number of foreclosures mentioned were down considerably, so Bruce asked if Sean considers the overall direction to be decreasing. Sean said if you look at the chart, it has definitely flattened tremendously. The reality is there are still a lot more distressed sales than they have ever had in the market and a lot more folks still underwater. They have a lot of home equity lines of credit that were made in 2004-2005 and are hitting that 10-year point where they become fully amortizing and you have to pay the whole thing off over the next 20 years. This a huge jump in payments. There are also all the HAMP loan mods from 2009 and 2010 that are resetting right now, and people are starting to see these payments come up. There are plenty of sources right now for folks to get in trouble despite all the government efforts to try to stop foreclosures. Unfortunately they have been a lot less successful at actually solving the underlying problems, so we will likely see the level of foreclosures we are currently seeing as well as see them decrease some for some time to come.
Off air they had briefly talked about vacation sites Bruce uses, VRBO, when he goes out of state. He usually takes a look at the coolest house he can possibly rent. There is also Airbnb, which Sean thought was the dumbest idea when he first saw it. Through this you could also rent a room in somebody’s house or share a room. Sean has now seen they have done a really great job. Last year they served 25 million guests, a 275% increase over the prior year, and saw 75 million room nights. They are also really becoming competitive more now with hotels. There are $5 ½ billion in bookings and they have a $13 billion valuation. It is really amazing how much it has taken off, and at this point it changes the game for investors. Investors need to pay attention to this because, where there might not be a market with monthly rentals there may be a market here. This could have an impact on prices in areas where there is demand for that type of housing.
Sean was up in Tahoe at one point where he was tracking a 3-bedroom, 2 1/2-bathroom, 1700 square foot house. He was able to locate the house from pictures posted in Airbnb, and he estimated the market value of the house to be at $429,000. He likes to look at value a lot of different ways. The first way he looks at value is what the median income can locally afford. A 3-bedroom house would be perfect for your typical truckee family. The median income here is $72,000, so it qualifies roughly for $387,000. This house is a little pricey, but this is not surprising considering all the Bay Area money that goes up to buy second homes. If he was to buy the house as a rental and want a 7% cap rate, it would rent for about $2300 a month and the value at about $285 after expenses. Clearly this is not a good buy as a rental.
Sean had been particularly watching how often this house rents out on Airbnb. The nightly rate for the house is $260 a night plus a $150 cleaning fee. Therefore, you are getting back the money to take care of cleaning. This house typically rents for 20 nights a month, 15 on average. This is monthly rents of $3900. At a 7% cap rate, that house is worth $479, $50,000 more than it would cost to buy the house. As an investor, he could go in and pay full market value for the house and get a better than 7% return. Airbnb charges per night they place somebody into the property, and the buyer pays the fee. It is like a fee at an auction where the buyer pays. There may be more than one way to do this, but he has only stayed at a couple places through Airbnb and still figuring it out. There are a lot of Airbnb experts out there who would understand how the expenses work. The numbers mentioned earlier cover globally and not just the United States since Airbnb operates all over the world.
Google and Facebook allegedly have full-time people booking Airbnb rooms for their employees and visitors coming into town. It is also being used to replace hotels at the corporate level, and they are really going after those corporate accounts. Bruce asked if they differ from VRBO in that instead of having a one-night stay, they are after a week-long stay. Sean is surprised VRBO has not kept up and been a stronger challenger. Airbnb has anything from one night to a vacation home for a week. Some of the homes do have a week minimum, while some are available full-time. For some people, they are going on vacation for two weeks and the company wants to help pay for the vacation. They put their own home up while they are off on vacation and they get a friend to help keep an eye on things. It is a more diverse model, whereas VRBO tends to be full-time vacation rental homes. This is a lot more about the sharing economy where you are enabling individuals to enter a business.
Aaron Norris was the first one to mention UBER, which is a cab business you run yourself. You have a car, someone calls you, and then you go pick them up. If you are in the cab business, there are licenses you have to have, and UBER is free of all this. Sean thinks this will change over time, and he thinks most of these will become a platform as a service company. They are providing finance to the customer, collecting the money, and providing the overhead as well as the customers. Now you can walk up and be in business much more easily than if you had to do all of that yourself. When they offer the whole platform as a service for you, then you can go in and have a business underneath. It is like the future of franchising.
We talk about unemployment going down, while the number for those in the workforce is also decreasing. You have a lot of people being permanently displaced from the workforce, and these things trade opportunity for those folks. Bruce asked if the service Airbnb provides would take rentals away from the month-to-month rental and if this market will have less availability since there is more revenue doing it another way. He asked if the value of the properties stay high since the revenue exists. Sean said it is true that the values will stay high; now we just have to add “in certain markets.” In areas where people are not coming to vacation or as a business destination is not going to have any impact. In areas where you have a fair number of transient visitors, whether for vacation or business, it should definitely have an impact on prices in those areas.
Aaron and Bruce flew to Washington for a meeting on Sunday, but they stayed in a regular hotel since they had not checked out Airbnb prior. In a lot of these cases, you end up meeting the owner, especially in a shared room. People are also using this as a social value. Bruce said he can learn a lot about the future by talking to Sean. They were in the limo on the way to the Nixon Library event back in October, and they talked about the idea of robotics and an economy where a lot of people do not have to work. Bruce went on the website that night and found part-picking robots on Amazon. He was astonished to look at it because they used the same computer Sean talked about that would have the car next to him unmanned and drive better than himself. When he saw all the shells passing within an inch of each other and 1,000 of them doing the same thing, he was amazed.
It is interesting when you look out at the future and say the field of real estate is going to be different. You have to figure out where it is going to land and be amongst the first people to get there and know where it is headed. Sean loves real estate because it still moves relatively slowly versus other things. He believes right now the market should correct 10%, but he does not think it will happen this year. He thinks for sellers and other people involved, it is pretty sticky and slow to move and adapt to the changes. Bruce asked Sean if we are too high right now, to which he said we are and have an affordability problem.
In 2014, Sean’s predictions were much more accurate than his. He asked Sean what he saw at the end of 2013 that would lead him to say we were not going to have a very aggressive price year. The volume of sales surprised him as a pretty boring price year as well. Bruce asked Sean what he looked that caused him to see the likely outcome. Sean said affordability and the drop in the last few months in volume of sales was what lead Sean to these predictions since it was most comparable to the drop they saw at the end of 2005. This was when Sean decided to exit the real estate market. He does not want people to think the same thing will happen that happened back in 2007 because the market is not as inflated. However, the signal was the same. Bruce looks at affordability, specifically in California in 2006 and 2007, when it went down to 11% and is currently at 30. Bruce wondered if the only reason we got to 11 was because of the complete nonsense of the financing world. Sean said this was true as well as the complete nonsense of the affordability index. Both of these are true, and both the California Association of Realtors and National Association of Home Builders/Wells Fargo’s Affordability Indexes are innate. They should not exist and serve no useful purpose since they fail to take into account real changes in financing.
Bruce looks at this chart and sees it as one of the few predicting charts there is. In the next segment, they will talk about the charts Sean looks at and sees what will likely occur when one thing tips over. For more information on PropertyRadar, you can visit them on the website at www.propertyradar.com. You can also reach the support team under the support tab and sign up for a free trial. Tune in next week as Bruce continues his discussion with Sean O’Toole.
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