Investors As The Solution
-by the Mysterious Flying Miser
Here on the Housing Bubble Blog, we get no shortage of statistics, observations, and calculations regarding the real estate market. But what we don’t see in these statistics is the numbers being created by investors who buy properties en masse in the most severely depressed areas. I interviewed Bruce Norris of the Norris Group to see what he and his clients are doing with Southern California foreclosures today.
Describe what your company does.
My company does three basic things. First, we buy properties, repair them, and immediately resell them for a profit. Second, we teach other California investors to do the same. Third, we provide funding for those investors.
When I see the market about to transition, I write a report and tell our investor base. In 1997, I wrote The California Comeback, predicting that California would double in the next 8 years, or by 2005.
In 2006, I wrote The California Crash, predicting price declines and an increase in foreclosures of some 3,000%.
Do you focus on a particular sector of the market?
Yes. We deal strictly with the California single-family housing market. We do not act as a broker and sell other people’s houses. We are investors who buy and sell our own houses.
Describe your typical client.
For the loan business, our client would be a self-employed investor who is capable of finding wholesale deals, but is not capable of funding them with their own funds.
For the seminar business, a typical client would be someone who has heard me speak and is interested in learning more of what we do.
Describe what’s going on in the foreclosure scene right now.
In California, a record number of both notices of default and trustee sales exist, creating a record price decline. Temporarily, there is a shortage of inventory due to a moratorium. The lenders have begun to lower the opening bids at the trustee sales far enough that we can buy some of them and resell quickly for a profit.
Is there one type of house dominating the foreclosure scene right now (high end, low end, areas with a particular type of employment available, etc)?
Over the past year, most of the foreclosures (and thus pricing pressure) has been on the lower end properties located in Riverside and San Bernardino counties. Next, there will be pricing pressure on Los Angeles and Orange County due to the resetting of the option ARM loans. The option ARM loans are $100,000 larger and are upside down nation-wide 75% of the time.
Have you noticed a shift in the type of house coming on the scene over time?
Yes, the foreclosures are larger and newer now, especially compared to the 1990s. Another change is that the land is now being foreclosed on by the millions of dollars.
Do you think it’s appropriate for sales of REOs to be included in appraisers’ valuations of other houses for sale? Why or why not?
No, not at all. We buy REOs and rehab the properties into near-new condition. The cost is about $35,000. Let’s say an REO is priced at $65,000. With repairs, my cost is $100,000. What would be my motivation to repair this property and improve the neighborhood if I could not sell the property for a profit? If I sell this property for $130,000, it would be double the REO price. My sales cost would be at least 10%, or $13,000. I would net $17,000 for taking on this construction project. If the appraisal came in at $113,000 or less, then I would have done all that work for nothing.
If HVCC continues to drive prices down, then this real estate market will crash even worse than even I thought was possible.
What is your favorite data source? Why?
I like the MLS. It’s the best indicator in my local market as to what is selling and who my competition is. I also like Foreclosure Radar. Sean is a former trustee sale buyer and has a great web site.
What is your least favorite data source? Why?
Something like Zillow, because of its inaccuracy.
Do you think now is a good time for investors to start buying foreclosed properties? Why or why not?
Yes. We have purchased a list of properties from lenders who had to foreclose in California. The lenders were owed over $10 million, but received under $3 million from us. I have never seen lenders more motivated or interest rates so low that buying a California rental property would create a positive cash flow.
Do you think now is a good time for owner-occupants to start buying foreclosed properties? Why or why not?
Yes, because the resulting payment is the lowest in relationship to earnings ever in California. Said another way, California has never been this affordable or this cheap monthly. I encouraged my own daughter to buy recently to take advantage of this and also get her $8,000 rebate check from the Fed government.
Is there anything else you’d like to say?
Thank you for the opportunity to share what we do with you. It is my hope that the Powers That Be will begin to look at investors as the solution to the current problem; not the problem itself.
We need 203K loans for investors, a 25-investor loan capacity funded through Fannie and Freddie, and removal of the 90-day rule that prevents a buyer from buying an investor-rehabbed house within 90 days.
If we fix and resell a property too quickly, apparently, in the eyes of FHA, we probably are doing something illegal.
The current housing market cannot be solved by finding the next qualified owner-occupant buyer. Where would they come from? In California specifically, 11.5% of them are unemployed and 9% of them are in foreclosure. There are duplications, but both are at record highs. This does not allow them to qualify for a new purchase.
Many people owe more on their house than it’s worth. These people can’t qualify for a new loan either. Others have signed up for loan modification, but 70.5% of them stopped making their payments and are being foreclosed on anyway.
Nationally, we went up to nearly 70% owner-occupant housing; now the number is steadily declining. I think it will continue to decline to about 63%, creating a huge glut of vacant properties (as if we don’t have enough of those already). The United States can’t create enough newly created and capable households fast enough to absorb this kind of housing glut.
So the answer to this real estate problem is, let investors solve the problem. We can buy dozens of these properties and leave neighborhoods in better shape than we found them. If financing were available, investors would keep the properties as rentals. As it is, most of the properties we have to buy, fix, and resell.
Thanks for your time!
-Bruce Norris
