On Friday, October 16, the Norris Group proudly presents its 8th annual award-winning black-tie event I Survived Real Estate. An incredible lineup of industry experts will join Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds from the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event could not have been possible without the generous help of the following platinum partners: HousingWire, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association, San Jose Real Estate Investors Association, InvestClub for Women, MVT Productions, and White House Catering. For tickets and information, visit isurvivedrealestate.com
Bruce Norris is joined this week by Sean O’Toole. Sean is the founder and CEO of PropertyRadar. Prior to launching PropertyRadar, Sean successfully purchased and flipped more than 150 residential commercial foreclosures. Leveraging 15 years in the software industry, Sean used technology as a key competitive advantage to build his successful real estate track record. He has been using his skills ever since to really change the accessed information for the trustee sales business and now for everybody involved in any types of property.
Bruce said one of the things that is frustrating to him is when he sees people respond to a very paltry amount on a monthly basis for accessed information they have no idea did not exist ten years ago. The landscape has changed so radically, and Bruce does not know if there is a way to have an appreciation if this is all you are used to seeing. Sean definitely feels this having built the tools for himself to solve the problem. For all it cost to do that, to have people complain over a little bit of money is tough. However, it is the nature of it since people expect more. There was a great article 20 years ago in BusinessWeek about how technology ultimately goes free, and there is some truth to that. We expect more and more for less and less.
Bruce said this is something we all experience. When you buy a computer, it does many cool things and you are buying it for half price. Bruce just changed out his copier last year. It is better, cooler, and half the cost of the one previous. You are surprised, but in building a website there is years of experience built into it and thousands of pages of material. When you are trying to talk to somebody, instead of spending the $5,000 to take a set of materials home, you can spend $30 a month and have access to it. The transition is not as easy as you would think it would be. Sometimes charging more makes people think it is more valuable. But for people like Bruce and Sean who are trying to keep things cost effective and make it available for more people, they work against themselves in this range.
What is interesting is the amazing amount of shows on tv for the flipping business. Bruce has asked to be on shows about flipping 3 or 4 times. One show called The Profit is about a man who takes a business, looks at it, and if he likes it he will invest money and turn it around. There are so many of these shows, and once somebody gets that exposure they are able to enter into the education space with high dollar things. This is the trend. The only reason you want the show is so you can charge $15 grand for your things. However, it does not necessarily make it more valuable.
The clientele Sean had when he had ForeclosureRadar.com was really geared toward the trustee sale buyer who was about to do what Sean did successfully. PropertyRadar has really branched out to every scope, not just the trustee sale buyer. A lot of other people are now accessing that information, so Bruce wondered who his clientele is and what they are typically searching for when they go to his site. Sean said it used to be they had a more equal mix of realtors and real estate investors. They definitely have predominately more investors now since the market has changed and gotten a little easier. Realtors do not want to do the work of reaching out and marketing to folks even though they can help them find people now, not just in distress but all phases of homeownership. There are still a lot of folks working with foreclosures and distressed properties, but you can also look for free-and-clear and non-owner occupied homes.
A lot of folks are also doing interesting things like HELOCs resetting, and this is a big reset. You go from an interest only payment to a 20-year amortizing payment, and this is almost a triple payment increase. Any home equity line that is ten years old will be resetting and fully amortizing, a lot over the next couple years. They also have people using them for things where they do not necessarily have the list. If they are doing probate or tax sales, they will go get the tax sale list from the county and use PropertyRadar for the research and tracking their photos and notes. They get a lot of direct mail and door knock users, and they have really branched out quite a bit.
However, they still landed where the investor is the primary customer, which Bruce was not expecting to hear. Sean thought they would be equal with this. They still have government and realtor users, so they still have a broad set of users. Over the last couple years that investor base has grown relative to the others. It is true that when things get easy and you don’t have to try as hard to get a listing or form, realtors will probably not do what will explode their business if they are satisfied with what they have. Bruce has only dabbled talking in front of realtors with a few specific companies. In general, it has been a hard group of people to have support them since sometimes they will do it but most of the time but most of the time they don’t.
Bruce asked Sean how 2015 is playing out differently than he thought it would. Sean said he thought volume would be flat to down, down to about 10%. It really seemed at the end of last year we were pushing the bounds of affordability. January and February actually played out worse than he expected, the only worst months they had. However, they had a good month of March, much better than last year. It was about on par with 2012 and 2013 but much better than 2008 and 2009. It was a big jump over February as well, one of the biggest month-over-month increases. It is normal for March to jump, but it really popped a lot. Surprisingly April popped even more, then May declined a little. Afterwards June popped and July went down a little.
July is normally down so the big picture is year-over-year may see property sales up 5-10% instead of down 0-10%. This is on higher prices as well. We have gone from a $385 to a $416 median. PropertyRadar’s median is a little different from the California Association of Realtors because they look at every recorded sale-on-sale in the state, and they look at a sample within the last sales. PropertyRadar’s median is lower because they are looking at a broader sample. Bruce asked Sean how far back his data goes, which he said it depends on which data specifically. Generally they start around 2000. They have some data before this, but for complete records it usually starts around 2000.
What Sean did not fully appreciate was the search for yield. We have had more worldwide turmoil with financial markets than he expected to see this year. He thought we would see it at some point, but we are seeing more than he thought we would see by now. The result of this is people seeking safe investments, and this is driving dollars to the U.S. to keep mortgage rates down and drive real estate investment. We are seeing more investment activity in buying houses as well as more people searching for some better than the rate they could get in their bank account. When you look at a chart, it is almost like you need an asterisk on the bottom saying this time it is different. When you look at a volume chart, this is probably the highest stretch we have had other than the occupant owner being a high participant. There are a lot more second home and vacation home buyers, and a lot of times the vacation homes are less about the vacation and more about putting their money some place safer than the stock market and other places.
Another big thing is the hedge fund participant and the price being low enough where the investor can cash flow California properties. The sales chart usually reflected the majority of it was being bought by the occupant owner. Even though the majority is the occupant-owner, the chart shows a lot of participants at an unusually high rate. It is definitely different from 2009 where it was almost all investor, and the investors are coming back a little. This is something Sean has really been debating himself because if we are going into a Japan-style scenario with very low rates of return, in this temporary new world order where they are printing money and everybody is searching for yield a 5% return is a really good return compared to what you can get elsewhere. Sean worries about this and wonders how long it will last if it does happen.
One of the things Bruce had to do to compete in the hard money loan space and were getting refied out of millions of dollars of loans in place at 9.9%, they created a 6.9% loan for 3 years. There are tons of people who want to use it, but the question was whether they could fund it. Could they get the person to take the 6%? Gradually we are seeing this gain traction, and it depends on the quality of the inventory. They just got a pile of properties from someone who had bought and kept them, and they were clean as a whistle built and in 2005. They have not had any trouble funding that paper from the hard money crowd realizing their money is not being active at 6%. If they get 6, it is better than sitting there or doing something they do not normally do. It is interesting to see this transition even be possible.
When you look at the floating municipal bond at corporate, all these things you go to for less risk are not really less risk at this point. If the wheels come off the bus, then this is really bad. They figure they will just do the best they can do, but there are a lot of people who worry about this to the extent it is almost scary for them to live this way daily. With real estate, if you own something free and clear it will have a rental value of some kind of dollars. If you have a safe trust deed, the worst case scenario is you own a free and clear house you probably obtained at a discount. Bruce will wake up in the morning, turn on squawk box, see that the stock market is down 400 points, and hear why. If it goes up 400 points the next day, he finds out why then too. It makes him feel very uncomfortable that the explanations are 24 hours apart and almost opposite directions. If it does the same thing opposite the following day, you realize nobody knows why this is happening. Some of the explanation is because of something that is happening in another country. Bruce wants to have somewhat control in the world, and this is why real estate has attracted him.
If you own something such as a deed of trust, you can take it back if things go bad. You have very real control over that asset, so you can put your money into an EPS or something else. It really isn’t under your control if things go bad. If you don’t want to sell, they can’t not let you sell. This is a very different animal and is pushing real estate beyond where Sean is comfortable with it going price-wise because of that search for yield. The bigger world picture is really having an impact on real estate, but the question is for how long. If it is the next decade, then we are all dumb for not buying as many houses as we can right now.
One of the things that is scary to Bruce is you have pockets of prices that far exceed the peak prior. In places such as San Francisco, you have $1,350,000 when before it was $950,000. How can you account for a $400 grand increase, especially over what was probably a ridiculous price to start with originally? Sean said this is a lot easier for him to see because in that particular industry, you have had quite a bit of wage inflation. Where you have wage inflation coming through the prices, you are basically replacing one people with another. You have one group who wants that opportunity Silicon Valley provides, and you are pushing out people who cannot afford it. It is like a gentrification issue, and ultimately it is supported by incomes. All industries have ups and downs, and the tech industry has had downs as well. Things will probably be driven more by the tech industry than normal real estate sectors. Sean refers to this in his monthly report as a Google effect.
What they are paying kids right out of college is pretty crazy, including signing bonuses. There was a great article in Forbes challenging the current tech titans to do what past generations have done. This includes the Carnegies, Stanfords, and others who said we did not have the right university system for the workers they needed and built new schools. Schools like Stanford, Carnegie, and MIT came to fill that vacuum, and they were largely built and funded by folks who needed those workers. We are not seeing that this time around. We are not seeing the billion dollar donation to build the next generation of schools. Schools are not pushing out the workers they need, which is pushing up wages and this is not growing over into many other industries.
In Riverside, they have very mixed sales results. They have usually 35 houses for sale, and if they have something that is $250,000 or less it gets bombarded with offers. If they have a house that is $100 grand more, 1500 square foot larger, and 20 years newer than that, you can have it sit there for months and be the best value in the marketplace and still not have an offer. At 4% interest rate, that payment is not that different. It is interesting how that buyer is not emerging in large quantity.
You can visit Sean’s website at www.propertyradar.com. It is a very valuable resource that would benefit anybody in the industry who is in the property-buying business.
The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: Adrenaline Athletics, Capital City Wealth Builders, Coachella Valley Real Estate Investors Association, Coldwell Banker Town and Country, Elite Auctions, iMortgage, In a Day Development, Inland Valley Association of Realtors, Jennifer Buys Houses, Keller Williams Corona, Keystone CPA, Las Brisas Escrow, LA SouthReia, Leivas Tax Wealth Management, North California Real Estate Investors Association, North San Diego Real Estate Investors, Pilot Limousine, Orange County FIBI, Real Wealth Network, Realty411 Magazine, Rick and LeeAnne Rossiter, Southern California Chapter of the Appraisal Institute, Sonoca Corporation, Spinnaker Loans, Tri-Counties Association of Realtors, uDirect IRA Services, Westin South Coast Plaza, FIBI Pasadena, Scott Whaley, and SDIC FIBI
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