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
“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.”
California REOs are available for $130,000? Which corner of Death Valley is he talking about?
Well, the article says Riverside and San Bernardino counties. Check out this clunker for sale in San Bernie for $130k, but the Zestimate is only $107k. Trippy.
http://www.zillow.com/homedetails/893-San-Jacinto-St-San-Bernardino-CA-92408/17363512_zpid/
There goes my chance of easily buying a property from a bank in the next year or so at a reasonable price
Right.
I’d rather the speculators stay out of the market so regular families could buy their own homes, and fix them up to their own liking.
Sometimes, it’s okay to have a $65,000 run-down house. That might be all a family can afford. Does Bruce think these families should be homeless just so that he can make a profit flipping homes?
Yes, and that’s fine with me. If he over-improves a property, he’ll just lose his own money. The market will bear what it will bear. There are many speculators in the market; blame demographics for any of that.
Many are boomers who have never known a down RE market (or a sizable down market). IF they can flip them, good for them. If they can’t, they’ll be starving to death. The real kicker is whether California can survive in its present form. I’ll stay a renter, thank you.
In the end, there’s nothing that can be done about speculators other than not provide the same benefits… personally, I’d like there to only be a Prop 13 exemption for a personal homestead like some other states have worked with. In addition, limit or eliminate deductions for depreciation. If the whole world “knows” that real estate only goes up, why does our tax code believe it only goes down?
Or, why not let individuals also claim depreciation?
Chuck Ponzi
Absolutely agree on Prop 13 restrictions and no depreciation. I’d also like to add elimination of mortgage interest deductions on non-primary residences.
First off, I think his numbers and scheme are not tasty enough for me, I want the $65,000 dollar home and wonder why the owner would not put this out in the market in the first place.
2nd, the 100k after remodel is hard money, you have to have the 35k to pay your suppliers and subs.
3rd, 30k is not profit, anyone here know what fees are required locally to transfer real estate in California, I would guess there has to be 10K to 15K paid out at transfer out of the 30K..
And for me, 15k to 20K of potential profit is not good enough with a 100K hard bet.
Greedy capitalist pig!
He puts his ’sales cost’ at $10,000. That may include the transfer costs.
The volume guys out here do that a lot…10-25k for them is a solid deal but then they are selling anywhere between 10-25 properties a month…
Here’s my thing:
It looks to me that prices have not yet hit bottom, even in San Bernardino and Riverside. But if these dudes are getting a super cheap deal on the purchase, fixing them up, then selling them quickly, then they might still be able to make a little money.
I think it will be easier to do once the market hits bottom (maybe this winter or next year for the worst parts of town), but apparently it can be done today too.
The other problems with the article:
I tend to look at Calculated Risk to gain a better understanding. While this guy (Norris Group)is talking a good game it still speculative BS about what price levels should be.
If you look at the large number of vacant houses, bank owned properties, speculator properties exc… there is still a huge over supply. Combine that with a decreasing houshold formation rate and the current demographics…. ugly.
The big problems with a lot of that inventory out in Riverside/San Berdo is that it is zero value. There aren’t a lot of jobs that can support a 130K per year mortgage. I believe we will see the same thing with Vegas/West San Diego exc.
The area is very far from LA. It esentially just part of the vast desert that stretches all the way to Texas in one vast wasteland.
Several other things… there is the “its a great time to buy” statement with dragging his family into it. Also the “California has never been cheaper” line. Honestly, if anybody wanted that property in Riverside back in the 90s, they probably could have just taken it.
I know people that lived as squaters and got squaters rights to houses back in the 80s. These people live off the grid in the middle of nowhere in abbandoned subburbs. They were artists so they didn’t need to be near other people for work. Just needed shelter. Different kind of lifestlye.
Also, the government of our grand old state is bankrupt on many levels. So, expect downward pressure to continue.
Figure as the Alt A catastrophy continues in the costal region, it will pick off more of the higher end buyers and that wave will roll out further. It will probably come to things like, why live in Riverside when you can buy cheap in Cerritos.
Further, remember the lessons of Japan. They tried to do exactally what we are doing now. Prices dropped in a low rate enviroment for 20 yrs. Old rule was that more people lose money on the way down in the bubble than at the peak. Take a look at what happens to your equity position on a 30yr loan if you lose only 1-2% per year and then factor in repairs.
This is going to be a very long depression.
james
Great post. You said it all, and so well. Thank you. I told my egocentric bil and sister the facts of life, but since they both studied it for 3 weeks, and I just did commercial for 20 yrs (plus a formal education in Accounting), I was just too conventional in their eyes.
That’s too funny. I am almost an old fuddy duddy. But I could not tell my bil and sister anything either. They did not even know what an unbrella insurance policy was. But there they were betting like lunatics on RE. My bil even told me several years ago that his $900K house (10x income was my guess) was going to be worth 2 - 3 million in five years. It took all my will power not to ask how he knew that both gold and oil would be discovered on the property.
I’m quite happy that I persuaded my BiL NOT to buy an investment property that he could ill afford about three years ago. I pointed out the we live in a recourse state, and if the bank forecloses, they can go after you for the REST of the money you promised them. Of course I didn’t mention that they almost never DO try to collect the ballance, so I was a little dishonest, but it worked and he didn’t buy at peak.
Well said, James.
The dead giveaway is that he is working so hard to fund others to buy foreclosures. If he has the funding, why not just buy them himself? It certainly isn’t hard to find foreclosures, any monkey with internet access can do it.
“This is going to be a very long depression.”
+1 Yup. Slow going in, and even slower on the recovery.
When big bubbles pop what happens? They form little bubbles too numerous to count. Watching the bubbles form is fun isn’t it?
This new age flipper is going to get buried in the avalance of foreclosures coming soon. Crushed!
First, I appreciate an investor willing to interview with the HBB. That takes Juavos! Bravo!
Most of the artilce I did not take exception to. Except…
If HVCC continues to drive prices down, then this real estate market will crash even worse than even I thought was possible.
HVCC is designed to price a home at what the 2nd greatest fool would pay for it. If a market has no 2nd greatest fools… then the market must be priced at what has sold within the last 3 months. Obviously in today’s economy, older comparables are not comparable.
My prediction for the bottom hasn’t changed in a long time: February 2011. While some will bottom earlier and others later, due to the death of the trade up market… this is going to be a *slow* recovery. Think about it… how many buyers are trapped? How many have the down payment?
This winter will be brutal on the house market.
Got Popcorn?
Neil
February 2011 for what area?
National.
I also think for Coastal CA.
Got Popcorn?
Neil
Have to see what happens with the banks. They are sitting on inventory and enriching themselves on government sponsored bonus money. Can’t keep that up for much longer. Couple of year before blowback in the elections.
Republican hard money guys might have a significant camp by then… democrats will have to react… messy.
james and gang-
Did you see this article?
Mark-To-Market Is Back: With A Vengeance!
The Alantic http://business.theatlantic.com/2009/07/mark-to-market_is_back_–_with_a_vengeance.php
Believe it when I see it.
I highly doubt the Goldman Mafia will allow this to happen.
The Financial Accounting Standards Board (FASB) is a private, not-for-profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the United States in the public’s interest. [snip]
The FASB is not a governmental body.
From wikipedia..
It ain’t gonna happen.. mark to market will undo whatever efforts the govt has already invested in keeping things running smoothly.. The FASB has no power to force the issue..
I’m not saying the proposal is right or wrong, good or bad idea.. just that it’s got less chance of happening than.. than.. i need to look up some clever cliche’ .. brb
Republican hard money guys might have a significant camp by then.
Let me get this straight: The same Republicans who’ve been whoring for Wall Street and the corporate cartels who are benefiting from the bailouts, and signing off what whatever K-Street drafted, help-us-loot-the-productive-economy legistlation placed in front of them, are going to have a road-to-Damascus conversion into a bunch of Ron Paul disciples?
BWAHAHAHAHAHAHAHAHAHAAHAA! Keep licking those hallucenigenic toads, my friend.
Wrong. Only when a strong, well-organized third party or movement emerges to challenge the Republicrat stranglehold on power, will we see a return to sound fiscal policies.
It’s not a one or two or three party thing, it’s a money thing. Any number of parties can be bought just the same as the current two. Money has to be taken out of the equation.
Money will never be taken out of the equation. But principles have to be added in. Along with true character and concern for the nation’s future, not bogus “values.”
+ 1 Sammy…
Let me see if I get this right:
One cause of the bubble was caused by too many people purchasing homes that they never intended to live in. (This caused an extreme excess in supply. Remember that there were too many SFHs built, plus too many condos built for those who couldn’t afford a house, and too many apartments built for those who couldn’t afford anything.)
And here, four years after it popped, what do we have?
Too many people purchasing homes that they don’t intend to live in!
Yeah…this thing is over…right…
Not to mention, if these flippers flop, they’ll just walk away from them just like the previous group of “investors”.
It is not a matter of if, but when.
“Think about it… how many buyers are trapped? How many have the down payment?”
Amen, Neil. If you don’t have equity, you can’t sell and trade up, trade down, trade over, whatever. You’re trapped. And if you walk, you trash your credit score for the next few years and can’t buy.
So the pool of remaining, qualified buyers just gets smaller by the month as prices continue to fall. And all of the false market pushes ($8K tax credit, silly low interest rates) will only create the next wave of FB’s.
I keep hearing about trashed credit scores and not being able to buy for years. When, only a couple of yrs ago, the banks didn’t care about job/down pymt/etc.. in the very near future, don’t you think credit scores will be ignored also?
Ignored how? Private money has a choice on who to lend to.
The government might decree that credit scores shall not be used when determine someone’s credit worthiness..
How’s that gonna work out? Will I lend money to people who have proven they probably won’t pay me back because the govt says I must?
Section b) of that decree would have guarantee me that if the borrower doesn’t pay, government pays… with interest. But even that’s not good enough, imo. I’d rather take my chances and go with a credit report.
Not on the rebound.
A few years ago there was the secondary market for mortgages. The return of the secondary mortgage market is required for poor credit risks to be loaned a large mortgage amount. Due to the Trillions destroyed in the secondary mortgage market, its going to be at least three to five years before people even begin to talk about Alt-A/subprime.
Oh yea… we still have that Alt-A thing ahead of us.
Its started, but is only slowly grinding down the market to date.
I know too many people who have gone a year+ without paying the mortgage. There is no market until they’re kicked out of ‘their’ McMansions…
Got Popcorn?
Neil
Spot on Neil…
After yesterdays visit @ open house in RanchoMIrage, builder-owners wife was showing prop. Builder-owner is part of investment grp,one of which was the Big $.
Daddy Warbux arrogantly wanted $2.5 on prop over yr ago, turned down $2.4 yr ago. Wife said, they have been following mkt down since then.Last Oct, DaddyWarbux lost his WS portfolio and they are still following mkt down. She all but begged us to buy one of their properties, 2.5 acre-fenced,2.5 fence estate-theirs, and this one.
Looking at the fancy grocery story 4 color mags, you now see lots of ads where they state, Reduced $2mill, $1m, 100k and so on. Never before would you have seen price reductions in Print.
“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.”
“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?”
Is anyone else confused? Who exactly is he thinking will buy these properties, or does his investment pool really want to be landlords for the next decade??
“Who exactly is he thinking will buy these properties, or does his investment pool really want to be landlords for the next decade??”
My impression was that his business model is to renovate and then sell the property to _investors_. He believes that investors can buy-to-let and make a reasonable return over the next 10yrs.
But it is interesting to me that he is pushing/proposing/selling a business model that is not HIS business model. If it’s such a great time to buy-to-rent, why isn’t that the business that he is in?
I would argue that the recent RE boom produced too much renovation, and that investors should be buying some of these $65K properties to rent as-is. Not everyone needs a perfect/beautiful house to rent. Some would prefer to rent something cheaper that is a little less nice.
Since his investment pool is investors, then yes, I suppose quite a few of them do want to be landlords for the next decade. As far as the people he sells houses to, I suppose they would be the same type of folk who have always bought houses. They have jobs and need a place to live at a reasonable price, and think that buying is a better deal than renting over a few years time. Today, that price might be $130k. Next year, that price might be $100k.
Like I said before, I don’t think prices have hit bottom yet, but if ppl are buying houses for 30% of what’s owed on the loan, then it’s not inconceivable that some profit might be made on the deal.
Like PB said, where in Death Valley are those $135K houses? Can’t buy a crapshack in Compton for that.
Dude, I posted a link to a house in San Berdoo that is on the market for $130k, with a Zestimate of $107k.
OK, I stand corrected — you can get houses outside of Death Valley for $135K, but San Berdoo might as well be Death Valley!
Got the death part right
There are all sorts of cheap houses all over California once you get away from the coast. Not sure what the magic distance is, but I’m thinking 50 miles or so. Then property gets to be pretty inexpensive, except maybe for Napa.
Lake Elisnore (smells more), Desert Hot Springs exc… not bad areas but are desert. Go to zip reality and you can find inventory under 140K. Nice houses too.
In fact it looks like it might be hard to sell a house at 130K in Riverside County with all the under 100K inventory.
Same thing with San Berdo. Plenty of pick a value homes there. In conjunction with socal, might be able to rehab houses for a lot less than 30K. More like 10K.
Plenty of stuff right near the bays that is under 200K near San Francisco, aka Vallejo.
Of course the people up North don’t like to mention places like Stockton… plenty of other places up there I just don’t know well. Pittsburgh and Antioch… still high by midwest standards but you can buy for under 200K.
Plenty of stuff has shown up in compton for <150K. Not that i’d even want to deal with a rental there.
Yes, you can…now you can….certain segments of Los Angeles can now be purchased at 3 and 2 roughly 1400 sqft +/- for 150k or less…
It’s interesting and you can actually see the manipulation in the market via the MLS…it’s not a natural market…anybody buying now whether it’s Morris or a Joe Sixpack is going to suffer some losses in the L.A. market…
Actually, Redfin shows 18 crapshacks in Compton with 3 or more bedrooms with asking prices at or below $135k.
I am thinking that many of the properties he is buying may have “issues” with them, cabinets removed, missing toilets etc that would disqualify them for FHA financing. His company probably goes in and re-habs them so that they are habitable by FHA standards. A lot of the foreclosures in the low end out in Riverside and San Bernardino are not eligible for financing due to the condition of the property, and how many end users in the 100k price range have the funds to do the repairs? So I can see where his business model makes sense and why HVCC would create a hurdle for him. If you are not comparing apples to apples, what good is an appraisal? A habital home is certainly worth more than one that is not but the appraiser may not be abe to make the proper adjustments due to HVCC. You can have multiple offers on an a property at above asking, and the appraisal can still come in much lower and kill the sale. But you have multiple offers, so the market is saying the sales price is reasonable.
How does HVCC prevent the appraiser from making the proper adjustments? As far as I know, there is nothing in the rules forcing anyone to use inhabitable houses as comps for habitable ones.
My bil bought a home in San Bernadino County, from the bank on the cheap. Well, his plan to fix and flip left them renting out the joint, after months of trying to sell it. My sister told me I didn’t know the game, and you couldn’t go wrong for what they paid, $40K. Now they own a p.o.s. they really can’t afford. Hopefully they break even on a monthly basis. Wait until they realize their loss when they finally sell it. It’s funny how they thought I was the crazy one for not joining all the fix and flipping. I’ll just be a party pooper.
This is the next round of REO in the making.
I guess the downside of buying a $40k property is that they probably paid cash, so there is no bank to mail the keys to, and no REO in the making. They’re stuck with it.
I’m going to take a guess, and say Miser is Combo.
The Maritime Housing Crisis
Although many aspects of the land and human based housing bubble have been explored, the REAL “underwater” mortgage holders should never be ignored. What about:
1. Is it dangerous to default on a home equity abalone?
2. Are they turning in their Florida Keys just for the halibut?
3. Are we all just prawns on a giant financial chessboard?
4. Just where is the brine rate headed?
5. Is the TARPon program succeeding?
6. How safe are the Grand Banks of Newfoundland?
7. Is Barney Frank trying to mussel the lenders into unsafe mortgages again?
Talk about swimming against the tide. Just fishin’ for some answers.
It’s August! Schools out! Serfs up! Enjoy yourselves!
Scientific factoid:
Bubbles get bigger as they rise to the top of the water, right before they burst.
Expand due to lack of pressure (regulation) as they rise?
They are all crab food, and the MSM is clamming up about the floundering underwater lemmings.
Wall Street is perch’ed catch the last of the geoducks who still have their heads stuck in the sand.
oops - perched to catch…I guess I was just too excited to make a geoduck post!
As an investor, here’s the reality of a typical transaction. I’m not going to be brief because this is so important.
We buy a house needing virtually everything. We have a formula; it is retail value times 70% minus repairs. Let’s say I believe I will resell a property, after $35,000 worth of work, for $150,000. That means I can pay $105,000 minus $35,000 or $70,000 for this house. When an investor buys a property that needs this much work, there are no loans available to them through “normal” channels. The investor borrowers what is know as “hard money”. This money costs about 5% in points and closing costs and is at 12% interest or so. I know this may sound ridiculous, but try borrowing money right now on a vacant fixer-upper as an investor.
The investor counts on having to hold the property for 5 months because FHA will not allow a willing buyer to buy using an FHA loan until the investor has owned the property for three months. So, after 3 months the property is put up for sale. It sells within two weeks and takes 45 days to close; there goes your 5 months. At 12% interest, it costs 1% a month to hold a property. Purchasing a property “as is” costs the buyer about 10%. Property taxes have to be paid as well as insurance for vacant properties, which is not cheap.
When I sell the property, a Realtor is hired at usually a 6% fee arrangement. When offers come in, the seller is usually asked for some concession in price or to pay some costs for the buyer. It is rare that you escape a sales transaction for less that 10% of the purchase price going to sales costs.
So, back to our example, after all is said and done, the investor stands to make about $15,000 for taking the risk of buying a vacant fixer in a declining market. Along the way, who has benefitted from this transaction?
We buy a lot of materials from Home Depot. We hire contractors and pay all the appropriate insurances and taxes. The neighbors like the fact that we have taken the worst house on the block and made it like a model home.
When it sells for $150,000, it represents the top retail price. Off of that number, other owners can obtain a refi based on the $150,000 if their property is in great condition. The city collects taxes at a higher level and is able to keep people employed. Lenders find a “floor” for their “as is” inventory at $70,000 because it has been profitable for this investor to get involved.
What happens when an appraiser comes in at $120,000 or 20% off of the agreed upon sales price? Someone mentioned that HVCC is set up to allow the second greater fool to buy the property. What is happening in reality is we get a dozen offers in the first few days for a great looking house. We rarely go with the highest offer; we go for an offer that is acceptably high with the buyer who has the best credit picture. So, the property has had 12 “fools” simultaneously, who are supposed to be able to look out for their own best interest and apparently cannot…enter HVCC.
If you do no reward an investor for taking on this rehab project at $70,000, they have no choice but to leave the business or find a price level that is acceptable. So, back to the formula. If the new number is $120,000, then their offer to the lender is $120,000 x .7 = $84,000 - $35,000 = $49,000.
Isn’t it interesting that by making sure the next loan is super safe the lender has inadvertently devalued what they will get for the inventory they already own. Now, the lender gets only $49,000 instead of $70,000 for this fixer-upper house; a 30% discount.
The city tax base continues to erode; the lenders take back yet more and more properties. It won’t be long before cash buyers will be buying the properties for 15% of what the lender was owed. I don’t see how that benefits anyone.
OK, so what you’re saying is that the appraiser has to value the property correctly, right? If it’s a POS, then it should be appraised at a lower price. If it’s all cherried out, then it should be appraised at a higher price. That much makes sense.
But what I don’t get is how HVCC prevents appraisers from doing their job right. Why would the bank need to talk to the appraiser in order for that to happen? Seems to me that appraisers would be just as likely to make mistakes today as they did a year ago. The only difference with HVCC is that the mistakes will now happen on both the low side and the high side, instead of just the high side (which was previously being pushed by the securitizing bank).
“The only difference with HVCC is that the mistakes will now happen on both the low side and the high side, instead of just the high side (which was previously being pushed by the securitizing bank).”
Great point, Big V!
One possible solution to the griping about the HVCC might be to move to a “concensus”-based approach. We could get several different appraisers to give an opinion on the valuation, and take the median value. Throwing out high and low outliers should provide a more accurate assessment, I would think.
Of course, the buyer would have to pay for all those extra appraisals themselves.
And it is still an essential element that the appraiser is not getting blackmailed by the originating broker to encourage them to err on the high side.
” The only difference with HVCC is that the mistakes will now happen on both the low side and the high side, instead of just the high side (which was previously being pushed by the securitizing bank).”
How about this. The prospective buyer step up the the plate and pay the out of pocket difference between the agreed price and the appraised price. Now we have a true market value sale, not more of this smoke and mirrors crap presented here!
Wow, so many things I want to reply to in this post that it is hard to decide where to start!
“What is happening in reality is we get a dozen offers in the first few days for a great looking house.”
This is one of the things that convinces me that this mania is far from over. When the mindset that allows for bidding wars is gone, then we may be within sight of the end of the housing bubble.
“So, the property has had 12 “fools” simultaneously, who are supposed to be able to look out for their own best interest and apparently cannot…enter HVCC.”
You are mis-characterizing the purpose of the HVCC. It is not intended to prevent fools from over-spending on housing; they are welcome to overspend by as much as they wish to using their own money. They are not welcome to overspend with MY money.
The HVCC exists to protect the interest of the lender (most likely an MBS bondholder), not the buyer. The appraiser is certifying that the property is good collateral up to a certain valuation. And in the face of massive losses and an uncertain future, lenders want more reassurance and more conservative valuations.
I don’t understand why you blame the HVCC; it is not the HVCC that is driving values down–it is merely recording what is already happening in the market due to fundamental forces. It’s like blaming the stock ticker for the value of your stocks going down.
“Isn’t it interesting that by making sure the next loan is super safe the lender has inadvertently devalued what they will get for the inventory they already own.”
Yes, this is interesting, and ironic; it was also imminently predictable, and was discussed here at length years ago.
“It won’t be long before cash buyers will be buying the properties for 15% of what the lender was owed. I don’t see how that benefits anyone.”
Um, it certainly looks to me like that would benefit the cash-buyer! That’s who I’m hoping to be in a few years.
Please don’t take the above as criticism, Bruce; it sounds to me like your business provides value in the marketplace. And I’m glad there are buyers like you are helping to ascertain values while we’re on the way down. Without any transactions occuring, there would be zero information.
But don’t be surprised that your business model is getting squeezed, and it becomes harder to do your renovate-to-flip business profitably over the next few years. That is a necessary part of the market wringing out the excesses of the past decade.
I also call BS on the 6% realturd commission — you mean to tell me you’re paying full price for someone to put something on the MLS when you’re getting multiple offers? Unless you’re doing that in-house, it seems to me you’re paying a couple of points more for nothing.
He needs to move inventory, can’t afford for it to sit…everyday it sits he loses money…
I used to work for a guy that did the same thing he does…he’d pay 6% plus a bonus if it meant it moving faster…would also pay a bonus for deals…
He doesn’t have time to babysit and sift through offers…it’s a time and money killer…if you do what he does
You can always find an agent to list at ~1% if you have numerous properties to feed him. Full 3% for the buyer’s agent (plus a bonus if you like) is always acceptable. Paying full 6% commission with multiple properties is pretty much unheard of around here. Unless the developer owns the real estate firm and wants to spread around his profit.
Those relationships never work and usually cause the investor more trouble than what they are worth…the agent is always distracted…trying to chase a bigger piece of the pie and usually resents the other agents making more than him, especially when he’s working harder and spending more money to service this one client…especially if he’s not getting an introduction to your contacts, money sources…etc etc…
By the time you train the guy to work it the way you want he jumps ship and you have to start over again with another guy…more of your time wasted…
I agree mrincomestream….As the saying goes; If all your going to pay is peanuts then all your going to get is monkeys…
I often work with a couple of RE people who run around all over the place checking out properties and neighborhoods for investor/rehab syndicates. They might check out dozens of properties before for every properties that actually gets selected as a good candidate. For this service, they get the listing once it has been re-habbed. Good value.
I’m having a hard time understanding this. You say the economy has created way to few qualified buyers and now you are going to buy fixer-uppers on the cheap, rehab them, and put them back on the market for twice the value to a dwindling pool of buyers, especially on the low end. Seems you help more people get back on their feet being a ’slum’ landlord by just making it livable. It’s the people on the low end that need the cheap rent to get back on their feet.
I love the fact that they can’t be flipped for 90 days as that will sink a lot of the speculation crap that just wants to keep the game going, going, going!
Hmm, if in fact the houses need “everything” you could easily kill 90 days doing the renovations slowy and correctly unlike some of the questionable slap dash work we’ve all seen on “flip that house”
Seriously. 90 days is nothing for any serious rehab. Hell, getting the permits might take you that long!
If it takes you 90 days, you should get out of the business…it takes most investors with a crew 2 to 4 weeks max to put a bare-boned 1500 sgft house back together…
On the money again mrincomestream….
ron:
What about trailer parks? That is a good way to build up cash.
At least Bruce is talking real numbers, and it makes sense. There are so many costs to buying selling a home, that even buying on the cheap may still be too costly after a decent rehab for the average buyer. $120K house…$40K income = $20 hour job
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Seems you help more people get back on their feet being a ’slum’ landlord by just making it livable. It’s the people on the low end that need the cheap rent to get back on their feet
“What about trailer parks? That is a good way to build up cash.”
Nothing wrong with them but most in the big cities were forced out during the boom.
My dad sold his house in the early 90’s and bought a trailer for $30K cash in a park with a $300 mo. rent and it was a great deal. No problem selling for more when he moved when he needed more medical care.
Where does the “hard money” come from ? I see no mention of becoming a hard money investor on the website.
Are there still people left with “hard money” that are willing to invest third-party for 12% return? Didn’t most of them already get burned with 2nds and CDO’s?
Answer: yes.
There is still a lot of money out there if they get a favorable enough position and can be convinced that the investor/rehabbers know what they are doing (and plenty do know what they are doing).
What no one has mentioned, is that the big problem out there is that there are more houses than people to live in them, regardless of price point.
If you purchased or built 100 homes, when only 50 were required by population trends, it doesn’t matter what happens, it doesn’t matter what price, you are screwed.
It won’t be long before cash buyers will be buying the properties for 15% of what the lender was owed. I don’t see how that benefits anyone.
Oh, I do. It punishes lenders for reckless lending. It creates affordable housing for the deserving and creditworthy. It gives me a house that I can fix up and use as my home, not a speculative investment. And since it’s MY home, I have every incentive to fix it up right, even when that’s a lot more work and cost than what most flippers - let’s call “investers” what they are - are willing to expend. I can bring something to the equation that flippers can’t and won’t: pride in ownership, which is the root of desirable neighborhoods and neighbors.
So yeah, I’m just fine with lenders getting an 85% haircut. It might re-introduce the surviving lenders to responsible and prudent lending standards that discourage speculation, er, investment.
Morris-
You got impatient and moved to early…too much shadow inventory, too much bail-out money for the banks, too much manipulation…this is not the free market at work…it’s fool’s gold and prices are still sliding…don’t get caught with your hand in the cookie jar…you’ve been around too long for that…the mouse-trap has been set and your nibbling at the cheese…
30 cents on the dollar was too high…during the last downturn in which you participated in they were selling bad paper and R.E.O’s for .10 cents or less on the dollar in bulk deals…and this time is way worse than the last time…
Stack your cash….because if you keep it up you’re going to need a bailout or a BK court is in your future…reminds me of the last downturn…you would see whole blocks of inventory, they all had the same color paint from the sale bin at Home Depot…and they were being sold for half of what the original investor paid for them in bulk from the bank…falling knives my friend… falling knives…
Again, thank you for interviewing.
I agree if you have multiple bidders and are sellecting the more credit worthy borrower, then the appraisal should come out near the transaction price.
You point out a scenario I personally do not want to see repeated (I went to college in South Central). There needs to be a reasonable enough appraisal process.
My point with the ‘2nd greatest fool’ is that there must be a ligitimate backup buyer who *could* secure a loan in this environment if the property appraised. By legitimate backup buyer, I mean ok FICO, Debt to income, a small down payment, etc.
Do note, I’m keeping to the $150K scenario. I bought (and had to sell at a loss) a home that was just over $150K after securing my first job. So that is the level of home we are discussing. Actually, due to inflation, $250K would be what someone in my field could buy today (1st job!), so $150K is a very modest home.
I’m a bear. But there are working people out there who can afford $150K. The question is, how do we improve appraisals at $150K but not create the appraisal creep that was infamous during the bubble?
Got Popcorn?
Neil
Ben suggested on the BB thread that the interviewee may be reading and responding on the thread; I hope so!
“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. ”
Bruce, I agree in part and disagree in part with you on this. I think it is really a function of the condition of the property, and not whether it is REO or non-REO. If you are selling it as a like-new after renovations, then other sales of like-new properties are good comps; clearly a distressed property and needs a lot of work does not make a good comp.
But for other distressed properties in need of work, the REO is a great comp, and _should_ be used by appraisers.
Alternatively, the appraisers can use a property of any condition as a comp, and make adjustments up or down based on the condition of the appraised property vs the comps.
But the sales are sales, and they do represent the current valuation of the market, and that is information that appraisers should be paying attention to.
I really appreciate your input. Yes, if we are comparing apples to apples, reo’s are as legit a comp as any other sale.
Here’s another issue. When REO sales are created, they often are auctioned off by the hundreds in front of an audience. Do any of those sales meet the definition of market value? I believe they do not. Here’s the definition of market value that’s on the appraisal form in California:
“The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeable and assuming the price is not affected by undue stimulus. Implicit to the definition: 1. Buyer and seller are typically motivated 2. Both parties well informed and acting in their own best interest 3. A reasonable time is allowed for exposure to the market.”
When a lender sells a property they own in 2009 in California, either via the MLS or an auction, they are not “typically” motivated. At best, the lenders At an auction, they also have not allotted enough time for market value to occur.
To your point about adjusting for condition, here’s what occurs. We have multiple offers at $150,000. We really put $35,000 in repairs into the house. Keep in mind; we have done hundreds of these. It would cost a home owner $50,000 easy to do the same work. The appraiser has a very difficult time convincing the lender to credit more than $15,000 or 10% of the value of the property for “condition”. Well, who would willingly spend $35,000 to get $15,000 back? Who would spend the money and take the risk to get just the $35,000 back? If there’s no profit motive, why repair the house?
If the lender chooses to ignore the “voice” of the buyer making a market value statement when they make an offer, then this city will have many more vacant properties and far fewer repaired ones.
Keep in mind, this buyer, looked at the $70,000 “as is” listings and decided, {acting in their own best interest} to buy a property in nearly perfect shape instead for $150,000. Why would the buyer do this? Because they do not have the expertise or the willingness to do the work themselves. Because the loans for a property in great shape are plentiful, the loans for a house without a kitchen are tough to find. Because they get immediately what they want with the repaired one and will go through months of difficulties fixing the un-repaired one.
If you say it’s not worth the price difference, the margin of profit disappears and with it the group of investors willing to solve the problem.
Some good points there, Bruce…
It makes sense to me that auction sales probably should not be counted as comps, since they did not have the same exposure in the market as MLS-listed properties.
It also makes good sense to me that buyers would pay you a delta over what it costs you to do the renovations (to avoid the headaches associated with living in a remodel, the carrying-costs if it is non-livable, etc)–and that you can do the work more inexpensively due to experience gathered doing many of them.
Also, the point about lending differences is an excellent one. Since it is hard to find loans for houses that are not currently livable, you are providing a valuable service by moving a house from the non-livable category (a market where there will be few buyers since there are very few cash-buyers) into a standard conforming category where the purchase loan is easy to come by.
Thanks to your for both giving the interview, and being being here to talk on the thread today, Bruce! Much appreciated!
I don’t find the argument that REO’s are not market sales particularly persuasive. As a bank seller has the same motivation as any other seller, namely to maximize the amount of money received in the sale of the property. The fact that it is not economical for them to remain as price sticky as a potentially unmotivated homeowner seems immaterial. After all you wouldn’t suggest that a homeowner attempting to sell their current home after purchasing a new home would be a non market value transaction.
“The appraiser has a very difficult time convincing the lender to credit more than $15,000 or 10% of the value of the property for “condition”.
yea thats a problem. maybe photos before and after would help your case ? And I agree no normal lender will lend on a 70K striped house anyway so it seems “broken” that they would use the 70K beat up house price as a legit comp.
I wonder whats going on in Poway CA ? N. San diego County. probably no 70K homes? How about Ramona ?
I recently spent some time in Ramona, in the nicer part of it (San Diego Country Estates). I didn’t see any trashed-out junkers, but I saw plenty of houses for sale and for rent, not moving, no lookers, for way too much money.
Eventually, I think some of these houses will become trashed out. Some of the FB LLs will get their houses trashed by tenants who are pissed because said bitter FB doesn’t treat them right. Other houses will be destroyed by fire when a heat-intensifying beer bottle is thrown into the dry tall grass in the back yard, and might even take out some of the neighbor houses. Some embittered FB will destroy the house themselves when it goes into foreclosure.
Most people who live in the “desirable” estates can’t imagine any of these things happening in their “exclusive” enclave (we’re talking freaking Ramona here), but it will.
Keep in mind, this buyer, looked at the $70,000 “as is” listings and decided, {acting in their own best interest} to buy a property in nearly perfect shape instead for $150,000. Why would the buyer do this? Because they do not have the expertise or the willingness to do the work themselves.
If I do it myself, or use reputable tradesmen to get it done, I can rest assured the work was done properly using quality materials and workmanship, with an eye toward enduring value and liveability. A friend bought a flipper-owned property against my advice: the flaws in the workmanship and materials, and deliberate but well-concealed corner-cutting, became all too aparent over time. I would never buy an investor-owed property.
Absolutely, Sammy.
We’d much rather do all the “fixing” ourselves so we can enjoy a house suited to our own tastes, and we’ll know the quality of materials and workmanship are top-notch (that means “well-done”, not “expensive”).
Whenever we look at a flipped house, we discount the cost of tearing everything out and doing it over again.
Desire is not the same as demand. The purchaser may be willing to pay $150K, but if he doesn’t have $150K then there is no demand for that house at $150K. Just desire. That and $6.95 will get you a coffee at Starbucks.
This all seems like you are trying to be in a “cost plus” business. You present us with the cost of your inputs and what you believe is reasonable compensation for your capital at risk and your effort and want that to be the price of your product. Not the way the real market works. That business model is for defense contractors. I think you are in the wrong game.
If the buyer is handing you 150K in cash, then you don’t need an appraiser. So what you should do is stop taking offers from anybody who needs financing for more than 50%, or quit complaining about the rules put in place to keep lending sane.
And looking at year over year data, that house you sell for 150k right now could be worth 120k in two years. In a declining market, a bank would be foolish to not be extremely conservative.
So why should the bank stretch itself to lend a lot of money on a declining asset that could wind up just as trashed as it was before you rehabbed it?
You should thank your lucky stars we haven’t had a mandatory 30% down on all loans show up for freddie and fannie. Because that’s what needs to happen to protect them from the market. If 20% down (with no funny business) had been required, there wouldn’t have been a housing crash in the first time. Overreaction could move those requirements to 30% pretty easily.
Yes, these are government (taxpayer) subsidized loans. The fact that they’re a pain in the ass to obtain is for a good reason.
“But the sales are sales, and they do represent the current valuation of the market, and that is information that appraisers should be paying attention to.”
Totally agree. Many houses in my old hood were beaters selling at a premium (basically selling at what should have been the fixed up price) since the market was so hot a few years ago. Those were used as comps. Why wouldn’t the opposite also be true with beater houses now selling “under market”?
It is the market price for a given house in its current condition. Why wouldn’t it be a comp? If it can be fixed up to “new” condition and sold for twice the value a few months later, then that is a comp as well.
“It is the market price for a given house in its current condition. Why wouldn’t it be a comp? If it can be fixed up to “new” condition and sold for twice the value a few months later, then that is a comp as well.”
What happens when the so called ‘new condition’ house exceeds the state of repairs of all houses in the hood. Some neighborhoods are going to have a limiting value just by the nature of their location which in turn should be a part of the comp value.
The max return value I have ever seen attributed to repairs is about 80%. Maybe it is higher for things like rehabbing foundations, but I don’t see any mention of that sort of work. It sure is lower if you are raising a houses amenities way above the ones in the neighborhood. Why is your cost of purchase plus your cost of rehab plus a profit a good measure of market price? I just don’t get that. If you had cash buyers lining up for the houses at your price it might be, but that must not be the issue if you are pricing to get multiple offers because many of them aren’t credit worthy.
I’m with you, Polly. I’ve seen stats on the ROI of various remodeling projects, and it seems that none of them pay out more than 100%. ‘Bout the best you can do is around 90%, which, IIRC, is for kitchen and bathroom remodels.
The only positive return you get is when you do what these guys are doing… buying an uninhabitable house. You can’t right now buy a fine but old house, slap in granite and walk away a millionaire. But you can buy a house so trashed nobody will lend on it and buy it at a discount, fix it up, and sell it.
The whining about appraisals coming in too low is sour grapes, though.
Yeah. If prices are being undercut by too low appraisals, then buy and hold. When the market catches up, you’ll be all the richer.
Here’s a sampling of some of our homes we’ve done over the past two years in Southern California. There’s a compilation of several before pictures and then a few sets of before and afters.
http://thenorrisgroup.shutterfly.com/
Very Nice Bruce….
This is exactly what was so wrong about the bubble, you couldn’t find a basic upgrade anywhere, everything was top end luxury.
Landlords here even put in $3000 commercial stoves in 6th floor walk up apartments, instead of the $300 sears special.
Perfect example of what I was talking about below. Go look at the before and afters on the La Jolla Street home. I’d say there was a bit of an improvement and I would never have bought the before but would have been very happy with the after (at three times income or less of course.
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I did a little research here in Orlando and there is a project housing the likes of Tiger Woods and Mark O’Meara et al. There are now 49 multimillion dollar homes on the market at greatly reduced prices. This project usually had 5-7 homes available at any time.
In the 2006 time arena I had many requests for IO option arm refi appraisals called in on this project and more than a few of the homeowners told me they were going to borrow a million dollars or more, pick a low payment and invest the money knowing the investments would outstrip the costs of the mortgage.
“How’d that work out for ya?”
Excellent info, dimedropped. Thanks!
“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.”
Does it make sense that a change of ownership of the vacant houses will increase household formation ?
If the new owner bought the place for 30% of what was owed, then that owner can now rent it at a cheap price to some kid who otherwise wouldn’t have been able to move out yet from the parental unit.
Exactly. Cheap housing will encourage new households. Similarly, cheap rent will encourage new businesses. Cheap housing will give people more pocket money to spend at these new businesses. Once the python digests this pig, the future may not be so bad.
Not to split hairs, but what fraction of that 70 percent “owner-occupant” figure actually owned their own homes? As in, not making mortgage payments? Until you’ve made that final payment, you don’t own the home - the lender does. A fact that all those walkaway FBs are all too willing to exploit.
“WASHINGTON — Former Fed Chairman Alan Greenspan said on Sunday that signs of stabilization and increased confidence in the economy could be dashed if home prices were to take another turn downward.
Greenspan told ABC’s “This Week With George Stephanopoulos” that he didn’t believe that a steep drop was in store, but home prices had stabilized only temporarily.
“It is possible that could get a second wave down,” Greenspan said. “Under those conditions, we would get a very significant change in the underlying confidence in the consumer area,” as foreclosures rise and more home values fall below their mortgage levels.”
i watched that interview.. there was a time when Greenspan could sneeze and the market would react. I guess he feels a lot less pressure nowadays.. using words like “It is possible that could get a second wave down,”..
I don’t think he’s correct in his assessment of the publics reaction to a continued fall in property values.
“Consumer confidence” means?
Consumer confidence is the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. How confident people feel about stability of their incomes determines their spending activity and therefore serves as one of the key indicators for the overall shape of the economy. Wikipedia
I think the public is pretty much burned out as far as RE goes. They are far and away more concerned with keeping their jobs, and home values aren’t directly related to employment.
http://www.gold-eagle.com/editorials_01/seymour062001.html
Please see the 1927-1933 chart of pompous prognosticators from the Great Depression timeframe. You’ll see some uncanny similarities with the reassurances of such discredited “experts” as Greenspan, who should be working in a prison laundry together with Chris Dodd, Barney Frank, and all the other villains of the housing bubble.
gold bugs tend to be scaremongers.. most everyone else leans the other way. The truth lies somewhere in between.
Alan “there is no housing bubble” Greenspan, as always.
HVCC is very damaging to the lower to middle class neighborhoods. REO sales should not be factored into appraisals for move in ready inventory. The amount that it costs a first time home buyer on a monthly basis to buy a home in California is at the lowest ever. However, in order to get the large number of low to middle class homes ready to move in doesn’t make sense for investors right now. There isn’t a reliable profit to be made for taking the risk of buying, holding, and renovating each property. That’s because of the new HVCC appraisal method. It doesn’t allow for there to be a true market value placed on the home- what a willing loan qualified full doc buyer and a willing seller agree on. Therefore many homes will sit and collect more problems further damaging the neighborhoods.
Whether or not a house is an REO has nothing to do with it. What matters is whether or not the house is move-in-ready. A move-in-ready REO is a comp for a move-in-ready non-REO, and a trashed-out REO is a comp for a trashed-out not-REO.
The underlying false premise of your argument is that all REOs are trashed and all non-REOs are not.
+1, Big V.
Today’s cost to buy a house is absolutely not the lowest ever in California. The only way you could find such an arrangement today is to get yourself a 1-year exploding ARM at 3% interest. The exploding ARM is unsustainable, and therefore doesn’t count.
Using a 30 yr fixed mortgage. On a monthly payment basis in California, it has never cost less to own a home.
That being said. That doesn’t necessarily mean that prices won’t go lower.
“Stocks that are cheap and undervalued can get cheaper”- Warren Buffett
Prices have been much, much, much lower in the past in most parts of CA. Even in Riverside and San Bernardino, current prices are higher than those of 10 years ago. A person who bought their house out there in 1999, then refied at recent artificially low interest rates would have a much lower payment than a person who bought their house in 2009 across the street.
Sorry Matt.. give it a rest … you’re either just ignorant or a realtor… or both…. prices where I am living have been more than 25% lower than they are now… prices still reflect the fraud and lack of underwriting that got them there..
Our guest today (Mr. Bruce Norris) tells us he’s making a profit doing just that.
Yes, there’s a difference between a house being cash-flow positive and a house being (and staying) above water. A house can cashflow and still be sinking underwater.
Willing loan qualified full doc buyers / sellers don’t determine a fair appraisal. They might both be idiots. We just suffered through a few years of idiots setting prices..
You gotta set price according to what an efficient market will pay. An efficient market is aware of all the facts of the market. That includes little things like knowledge of millions of REOs , foreclosures and various flavors of the oversupply of inventory.
Just because “investors” can’t make money in this market is no reason to ignore the facts..
Thanks Bruce for a very logical and informative description of what is involved when working with foreclosures.
I just wanted to add my $.02 to the discussion. I’ve heard Bruce speak through SDCIA a number of times and went to his Cat 5 seminar earlier this year. Several things I would like to point out.
First, Riverside is not San Diego. Unlike us they have already had a massive downturn and ratios are much more in line with traditional numbers as they should be. I’m not saying they won’t fall further, I think they can and will depending on how the recession continues, but I don’t think they have anywhere near as much potential to fall as San Diego, New York City, Seattle, etc. which have not come close to declining enough. (At least in my view.)
Second, Bruce is able to make deals on properties the average person cannot even imagine. Some of the properties he’s buying are at 15% of their 2005 price. Most of us would agree that an 85% haircut is a pretty good deal. I think his average is something like 30% of the last sale, but even so a pretty good slice off. There’s always money to be made if you buy low enough.
Third, The Norris Group has a very specific way of rehabbing and remodeling homes. They do quality work and have (as far as I know) a very good reputation. The homes are decorated in a very similar fashion and you can tell when you’re in a Norris home. It’s a popular and clean look that can be easily updated to your personal tastes. Would you pay extra for a well rehabilitated home that was in move-in condition? OK, if you’re on this site maybe not, but in general most Americans would and as much as you want to bitch about staging it does make a difference in how fast something sells. Add to this a great reputation from the company and these houses do go fast and possibly even at a good bit of a premium.
Finally, Bruce is one of the good guys. I first heard him in 2005 when he was talking about how the California (he doesn’t deal with any other geographical location) was going to crash and crash hard. He shared his opinions and the research that led to these opinions with a lot of us who were still pretty clueless about what was happening. (It was interesting to sit in an SDCIA meeting and watch the “real estate investors” slump deeper and deeper into their chairs as people like Bruce and Robert Campbell gave their predictions. Of course, back then they still had enough time to get out but I think very few did.) Bruce did a lot of research on previous bubbles and looked at old articles and found the same spiel BY THE SAME PEOPLE in the two bubbles before this one. The same idiots saying real estate only goes up in 1991 and 1979, etc., as were saying it this time around.
Bruce is a true investor who understands the markets he is working in. I’m grateful to him because he is one of the resources I had at the height of the bubble to say, nope it’s all false. I’d like to thank him for sharing his info with us and hope to see him posting more often here as he has a great viewpoint and lots of info.
maybe i’m too skeptical, but the one thought that keeps crossing my mind when some big investor is high on the market is that he needs to encourage little people to buy the rehabbed properties from him..
Thanks for your more than $.02 worth, San Diego RE Bear.
I, too, have seen real estate investing done right, and let me tell you, it is truly a pleasure to behold. Happened right across the street from me, in fact.
Old fellow got sick with cancer and could no longer live in his longtime residence. I’m sorry to say that the place had fallen into disrepair, but that was the truth of the matter. Neighbor died in some sort of assisted living place, and, a few months after his demise, the family sold the property to a local investor. It was an all-cash deal for $100k.
The investor started work on the place in the spring of 2006. Into the summer things went. And the fall. And the winter. There was a fellow going over there every day, and what a meticulous worker he was. This investor really knew how to hire well.
Place was put on the market in the summer of ‘07. I’m told that the asking price was $200k.
In November ‘07, a middle-aged couple moved in. She’s an editor for a local enviro org and he’s one of those people who leads eco-tours. I haven’t seen him lately — they’re not terribly social — so I don’t know if he’s off on some expedition. Or if their relationship broke up and he moved out. (They weren’t married.)
I’m not sure how they swung the purchase price. I suspect that one of them is a trustafarian. But, except when one of their dogs is going ballistic at people walking by and minding their own business, they’re okay neighbors. Not great, but okay.
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.
The role of “investors” - flippers and FBs who signed mortgages they couldn’t afford in a greed- and NAR-driven expectation that “real estate only goes up” and the supply of Greater Fools was inexhaustable, bear a huge share of the blame in CREATING this problem. Let’s not overlook that salient fact. And few investors “left neighborhoods in better shape than they found them.” When their folly became clear, they simply walked away, having no personal stake in those homes or neighborhoods.
So forgive me if I’m hostile to the premise that “investors” will lead us out of the morass they helped create. Lending and zoning policies should actively discourage speculation. Pride in ownership - true ownership, not make-believe creative-financing and government incentive schemes - is the only way to create decent, stable neighborhoods and communities.
“So forgive me if I’m hostile to the premise that “investors” will lead us out of the morass they helped create. Lending and zoning policies should actively discourage speculation. Pride in ownership - true ownership, not make-believe creative-financing and government incentive schemes - is the only way to create decent, stable neighborhoods and communities.”
Hear, hear, Sammy. Jobs will lead us out, a stable economy, stable neighbors, productive enterprise.
You have every right to be hostle to the speculator. There is a major difference between a speculator and an investor. An example would be:
A speculator is someone who, while sitting on a couch in California, buys a yet to be built condo in Florida. His hope is someday, someone else, more speculative than he, will buy it from him. The speculator doesn’t do anything to create value; just the hope of an increase in price of the asset.
An investor buys a property and adds value to obtain an equity position. The person generally has a long view toward investing and eventually pays off the asset. This allows for a comfortable retirement with or without support from social security or anything else.
This market needs all the investors it can get to buy a house, repair and keep it for a long time.
To answer the question about buying and holding instead of buying and re-selling immediately.
Many investors would hold properties long term, however, financing for those properties is very difficult to come by.
To answer Joey,
Yes, a little too sceptical. I suggested my own daughter buy her first home this year. You could argue that the market still has room to move down and you may well be correct. But, her payment for a perfectly repaired property is $764 per month in the same neighborhood rents are $1,150. Plus, she qualified for an $8,000 rebate from the IRS. Plus, she got a 5% fixed mortgage for 30 years. I don’t see how that could turn out to be a bad decision.
If she were a speculator, it may not be the best deal. She is, however, an investor. Looking out a few years, this deal, once worth over $325,000 and bought for $110,000 will make a lot of sense.
When Matt said that prices have never been lower, he was referring to the ratio of payment to earning that currently exists in California. Affordability has never been higher in California.
I don’t fault anyone for making a living, as long as it’s legal. Except for a rare few altruistic souls among us, everyone encourages whatever situation profits them personally. Certainly you want to encourage people that buying now is the right choice.
Speculate, invest, buy, rehab and sell with my blessings.. but no
matter how “good a deal” might be available today, the general public’s concept of home ownership needs to come back to earth…. Sammy Schadenfreude spelled that out clearly and convincingly just above this thread.
With a couple more waves of mortgage resets heading for shore along with the huge back load of both known and hidden excess inventory, the current market is a mine field as far as the eye can see, imo. I wouldn’t encourage anyone to buy for at least a year or two.
Pros, investors and speculators are free to do as they please with their money. Joe6Pack had better be careful.
“A speculator is someone who, while sitting on a couch in California, buys a yet to be built condo in Florida.”
Sometimes they don’t sit on a couch in Cali. They actually come here. As a Floridian, I had the pleasure of bumping into a handful of speculators from the San Diego area, “snapping up” properties in Cape Coral because they “couldn’t afford it in California anymore”. One guy went back and forth between Cape Coral (where he owned three properties) and San Diego (his home). Anyone who bought in Cape Coral at the height of the bubble is a speculator, pure and simple, and never did their homework, otherwise they’d know Cape Coral (and Northport, etc.) has nothing of value except maybe to a retiree, and even then it’s a dicey market. And yet folks from San Diego, for some peculiar reason, were buying like mad in Cape Coral at the height of the bubble. Someone out there in Cali must have been pumping Cape Coral to the speculators.
“her payment for a perfectly repaired property is $764 per month in the same neighborhood rents are $1,150. Plus, she qualified for an $8,000 rebate from the IRS. Plus, she got a 5% fixed mortgage for 30 years. I don’t see how that could turn out to be a bad decision. ”
Without knowing anything about the specific house, I’ll just point out that the house could still dump value a lot faster than she can pay down the principal over the next few years, tax rebate included. The low rate is nice, but unless she’s planning on staying there a long time, a lower purchase price with a higher rate (ie, waiting) would be preferable.
“Looking out a few years, this deal, once worth over $325,000 and bought for $110,000 will make a lot of sense. ”
Just because something costs less now than it did at one point doesn’t make it a deal. If you think so, I’ve got a collection of Beanie Babies to sell you.
“Affordability has never been higher in California.”
We must not be looking at the same data. In my world, and I think most would agree, affordability is based on incomes and prices, which is certainly not at any sort of high right now.
Definitions for “investor”, “speculator”, etc are somewhat ill-defined, clearly with some overlap on the ol’ Venn Diagram.
Your business model- clearly successful for you- does NOT to me seem to be investing.
Rather, it is.. business. You are in the business of buying imperfect and priced-right even-as-imperfect housing and turning that into presentable retail product.
More power to you. Nothing wrong with it. Beyond “nothing wrong with it”, indeed can be a very good thing. But, I assert it is NOT investing, which has a speculative ponzi-ish overtone, as in buying something because folks just will want to pay more for it, because it is so “special”. Speculation and Investing have much in common. What is “buy and hold” in stocks other than this?
No. You put money and sweat equity into a product using your skill to identify good candidates. That is smart business. Not investing.
I am a physician. Respectable salary with no need for “business” or of “investment”. But, I h ave a collectables hobby business on the side. Profit >$50k/yr last couple years. Sold 800 each year of my collectable. I buy them, have them restored, and resell them for profit. I consider none of these purchases to be an investment. They are business items. My profit comes from business not investment. I do not buy ANY of these 800/yr collectable items expecting them to RISE in value. Neither it seems do you. Your houses do not rise in value. You buy them undermarket and rehab them to market rates and have room for profit. Business. Not investment. That might be the source of disconnect in this discussion.
Clearly there is role for sensible “flipping” (shame to apply that now evil word to your process) when it is done by pros who are skilled at finding “well priced” beaten-down homes, who have access to skilled affordable materials and labor, who have sense of the current market, and who have sense of reasonable upgrades applied to problem homes.
A business to be respected. Not an investment though
regards
evildoc
“Clearly there is role for sensible “flipping” (shame to apply that now evil word to your process)…”
Actually, I think that Bruce’s renovate-and-flip business model is the more traditionally-common use of the term “flipping”.
The word got perverted to include the buy-for-very-short-term-appreciation specuvestor-crowd, which is not what it normally used to mean.
perverted..
What was wrong with “fixer-upper”? It defined the process a lot better than “flipping”.
Before we knew. Now we gotta ask what they mean by flipping… “Are ya trying to rob me or did you actually get off your butt and put some value into the property?”
When Matt said that prices have never been lower, he was referring to the ratio of payment to earning that currently exists in California. Affordability has never been higher in California.
Not true…the correct phrase would be affordability has never been higher in the past 8 years…..
Bruce, I’m appreciative of your interview and participation on this blog.
I think I might disagree a little bit on your definition of speculator and investor. To me an investor makes money when he purchases something, the speculator expects to make money at the time he sells something. Example:
A person knows a lot about an area, hobby whatever. Stamps, coins, bikes, houses, whatever. This person sees something for sale at 50% less than what they could immediately sell it for (for whatever reason - they know they can fix it up for cheap, they know something the owner doesn’t know). They buy it and they’ve just doubled their money. They’ve invested because they have an immediate 50% equity in the asset. Now, the speculator sees something, a stamp, coin, bike, house, whatever and says to himself: “this is gonna be worth a lot 5 years from now. I’ll buy and hold. In 5 years I’ll sell it and be rich!”
So, long story short, if your daughter bought that house as an investment rather than a place to live, she’s a speculator in my mind, not an investor. I have no qualms at all saying that buying a house she wants to live in is probably a fine deal based on the numbers you quote, but it’s not an investment. In fact, if she’s living in it, it isn’t even an asset, it’s a liability.
I disagree.
Investment and Speculation are somewhat ill defined and have significant overlap. Indeed often they are used to refer to the same actual process, save that “investment” is used to convey favorable interpretation, while “speculation” is pejorative.
Buying something at good price knowing he can resell it right away? Neither investment nor speculation. Simply business regarding merchandise stock, whether coins or houses.
regards
evildoc
The dictionaries i checked seem to agree that an investment is money committed with the hope of financial gain.. gambling is not mentioned… while to speculate is taking a gamble, and not necessarily with money.
To get technical and precise about it, nobody can be absolutely sure something will be resold at a profit. The pallet of milk ordered by the grocery store might sour before it’s sold.
It would follow that everyday business activities might fall anywhere between investment and speculation, since there’s no such thing as a sure thing.
What are your dictionaries? Because mine all make no mention of gambling in defining ’speculate’. They all just say it involves a risky investment with expectations of high reward.
oh jeeze..
I’m usually up for a good game of Battle of the URLs, but.. i got a steak on the griddle. Sorry alpha.
Yep. One man’s investment is another man’s speculation. The difference is their risk tolerance.
I have utterly no ill will towards those trying to make honest profits.
I completely blame the financial companies and the government for warping the credit markets, resulting in the credit bubble, and thus the housing bubble. House prices are based on how much one can borrow, it has been such for a long time.
RE: foreclosures and comps.
The rehabber implies that foreclosed homes should not be taken into account in comps, because of their poor condition. A response is that shouldn’t an appraiser take relative condition into account when determining comps?
A foreclosure may not be a willing seller, but in declining markets without forced sales what you get is holdout sellers, very few sales, and a market that doesn’t clear. So the occasional non-foreclosure sale doesn’t reflect a real market clearing price either, just a sucker.
Here in NYC a building permit contains the value of the work. Therefore, a quality appraisal would not the building permit for each foreclosure and take into account the money required to get it in salable condition when setting comps.
taxpayer subsidized loans for investors? no thanks.
I read this article and I agree with Bruce. I’m a bank REO agent, I sell properties for the bank. Most of the houses that we list are not in the condition for FHA buyers, they need work, lots of work.
Most people who write offers on them don’t realize that the banks want “for sure all cash deals” not hoping on financing deals. Most of our homes go to investors who can pay all cash like Bruce and fix up the home. I think that investors like this provide a valuable service. When the fixed up homes come on the market I am seeing them get multiple offers in the first week, most buyers want a clean house.
I’m not in southern cal (im in Northern) but guys like Bruce who clean the properties properly should be given credit.
Pardon me for being blunt, but you are nothing but a seller who’s losses mount day by day.. a seller with a ton of properties that need selling quick. Investors provide a valuable service to you.
No Tman Bruce should not get credit he should be a shining example of what should have been done at all the banks
Loans should have been given to a nice rehab, but banks gave out loans to everyone who wanted a LUXURY renovation or home and now we are stuck with the consequences.
Not everyone cares about LUXURY, Id rather live in my 60 year old house, with plaster walls real crown wood molding and basic appliances with a cheap under market rent, and a great landlord
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but guys like Bruce who clean the properties properly should be given credit.
Tman, any insight into how banks are pricing the properties? I haven’t seen any really good deals on foreclosures. Basically it seems as if banks around here take the maximum price they can expect, subtract what they feel is the approximate fix-up cost and set the price. There is no chance to make a profit as an investor. Perhaps the real profit sources are snapped up by insiders. I suspect Mr. Norris’ business is big enough and old enough to get deals most people cannot.
Insiders always make a killing…he’s paying for his share of insider perks…LOL
Hi Michael,
I have mentioned this several times before, but I worked with a woman who was very open about telling me how her husband (an attorney) got all the deals from a bank he was tight with.
Sounds right! Now…how does one become tight with a bank?
ummm…. be the mistress of a bank president? Be his kid?
Stick $14 million in a 0.25% Christmas savings account?
I have a pretty good friendship going with a lady at one bank.. it gets me a free cuppa coffee in the morning… unless the thermos is already empty.
I want to know where Oly Gal is. I am going to post this first thing in the morning too. As much as I love everyone here, it ain’t the same, without Oly Gal.
Very cool post, Miser! I’m really enjoying your guest interviews–hope they continue.
IMO, prices are still high in CA, although there are some more attractive deals showing up in the Inland areas, but what happens to these properties if as I suspect things continue over the next decade to unravel and prices continue to drop? Is there enough of a short term bump to quickly turn these properties and sell at a profit in the current “mini boom” which seems to have taken hold?