There is a lot of interesting events taking place in the foreclosure real estate market, at least in Southern California.

Right now, there is an obvious and blatant lack of inventory.  We’ve been hearing “multiple offers” now for months now, but yesterday we heard a new record….52 offers on a 3/2 in Desert Hot Springs!…holy cow!

Now, yes, I know, “it’s coming, it’s coming, just wait, another massive wave is on its way”….and I do believe there will be another surge at some point.  However, there are some peculiar behaviors on the part of the lenders that control whether or not the foreclosure sales go through.  A very large percentage of the foreclosure sales that are being put on delay are happening on the lender’s own accord, NOT because it is mandated by the moratorium…why?

Sean O’ Toole, creator/founder of ForeclosureRadar, has a fascinating observation, “

“While many complain that lenders are foreclosing too aggressively, and others claim a wave of foreclosures sales is imminent, the data actually shows that lenders are doing everything possible to delay foreclosure…The reality is that we have very few homeowners being foreclosured on when viewed as a percentage of those scheduled to be foreclosed on, in default, delinquent, or upside down in their mortgage”.

I wish I had an answer for you that was not conjecture.  It could be that the lenders are being very cautious that they are not construed of running afoul of new legislation.  Maybe it’s because they are waiting to see what plays out?  I don’t know, but what I do know is that there are many areas where a quality house (with equity) that is available for sale does not exist.

So, the important part is what does this mean to investors and wholesalers, and what should the strategy be right now?

…Well, here’s the thing, when inventory is this scarce,

IT COULD NOT BE BETTER for retail flipping!

Yes, you can get deals.  But because there are so many multiple offer situations, it’s almost like we are all bidding at the trustee sales, so you need to put the deck in your favor AS MUCH AS POSSIBLE.  The rules of offer making have changed.  You have to be able to read a little bit between  the lines.

I am going to give you a list of strategies that we have used to still come up with some great flip deals.  We currently have 3 fix up projects…2 of which are in escrow, 1 is almost finished and will probably be sold the minute we are done.

But first, a few more comments on what’s happening so the tips make more sense.

First of all, just like in all of 2005, 2006, and 2007 the market was LOWER than the common perception, right now I suggest to you  that the market is actually HIGHER than the common perception…why?

Let’s look at the dynamics of how this works with an example:

Rewind to 2006-  you are about to sell your house, and you know your neighbor’s house sold for $325,000  just 5 short months ago (and of course your neighbors just have no taste in paint color or landscaping so surely yours will sell higher).  So you put your house up for sale for $340,000….nothing.  Nada. Zip.  Not even a nibble.

So, of course you are stubborn because you are sure it’s a fluke.  So you decide to drop it to $329,000….again, silence.

This continues until 8 months later you are at $265,000 and still nothing!!…remember, the most common method for evaluating property is “running comps”, i.e. looking at what has previously sold.  Well, because there ARE NO NEW SALES, because everyone is refusing to drop their prices enough, we base prices on the last available comps, which in this example is $325,000.  Well, it’s not even selling for $265,000 which is an indication that prices have taken a tremendous hit, but it’s impossible to know where to place the market because it’s all guesswork until we start getting actual “Solds” again.

Sellers had to keep dropping prices until finally the buyers started to come back in.

In January 2008, volume picked back up and has been exploding ever since, gobbling up inventory.  This combined with the moratoriums and holding back of new foreclosures has creating a severe scarcity situation.

New homes that come on the market are experiencing bidding wars.   Properties that are listed for, say, $135,000 are closing at $150,000, just as an arbitrary example.  What can we imply here?  You got it, prices are going UP at the low end and the driving force is scarcity!

Here is another point, just as before, there is becoming a lack of brand new “Solds”, not because no one is buying, but because there is NOTHING TO BUY!

I’ve seen this in a few neighborhoods now, namely Fontana.  Can you see how this is just like the example except in reverse?  I really think that if we had some more inventory, prices would actually reflect the pent up demand and would demonstrate these price increases, but

…until you have actual “Solds”, you can’t PROVE prices are higher.  USE THIS UNCERTAINTY TO YOUR ADVANTAGE.

What does this mean to us as investors?  It means that flipping is fun again because if you can get your hands on a deal (which is the trick now), it will sell, and sell fast!  Of course, it is harder to get a deal, but it’s not impossible.  There may be bidding situations, but some investors are not reading the trends and are actually being too conservative.

Here is a real world example.  On one of our wholesale flips, our investor buyer was getting gun shy because of the existence of some low “Sold” comps.  However, we demonstrated a “bird’s eye” view, and pulled up EVERYTHING in a 3/4 quarter mile radius.  There were 25 “Solds”, 19 “Pending Sales”, and only 2 on the market!! And guess what?  We called the agent on one of those properties and….you guessed it, 10 offers and it was about to go pending.  We didn’t bother checking the other active listings because you can pretty much deduce that it was the same situation.

When our investor “read between the lines”, he couldn’t close on it fast enough, and he will undoubtedly make a nice, fast profit on that deal because it will sell instantaneously when he sticks it back on market (again, because it will be the ONLY thing money can buy).

***A word of caution*** How long will this drought last?  I think it’s impossible to say…and yes, it is possible that if you take too long to get your property rehabbed inventory will come out and torpedo your deal…I said “it’s possible”, but I wouldn’t overly worry about it too much at this stage…

There is SO much pent up demand, especially for clean and fresh houses, I believe that we will have a little bit of a warning period, BUT DON’T GET TOO COCKY…don’t mess around, get your flip cleaned up and on the market quickly.  Take advantage of the market while the iron is hot- move FAST.

Bottom line, we will get a little bit of a warning because excess inventory will be bought right away as it hits, and it just might even help your case by providing higher comps that will help your appraisal! ….but like I said, if you see inventory coming and you still have the entire fix up job to do….GET BUSY, you’ll be okay.

Next, do NOT over improve your house!  If you have the only clean house in the area available for purchase, there is NO reason to go overboard.  This is in stark contrast to a few years ago where the market was FLUSH with inventory, and you really had to give your buyer a big reason to choose your deal….not so much anymore, at least at the time of this post.

Another even more important and paramount reason not to over improve is APPRAISALS.  Excuse my Latin, but appraisals are horseshit right now..  If you are actively trying to flip a house or you are an active Realtor, then you likely have encountered this scenario….eg. 5 people want to buy your house for $225,000.  It’s beautiful, head and shoulders above anything on the market.  There are 5 comps in the area that are completely trashed and sold for $160,000 – $170,000….(and sold in 7 days nonetheless), you guessed it, appraisal on your property, EVEN THOUGH THE MARKET IS BEGGING TO BUY IT for $225,000, gets appraised for $190,000, making it  difficult to sell your house with financing.

The market is in a precarious situation- just as it is hard to find supporting comps on the upside because there is simply not enough solds, a new asinine House Bill has put the fear of God into licensed appraisers regarding coming out too high so it has made it even tougher….we are ARTIFICIALLY stunting the market’s growth!  This is a fiasco in light of our economy and how much we would benefit if we could let the damn market recover.  Yet that is another story for later.

…(more on this House Bill later, my post is already too long)

Now, I realize that the appraisal issue appears to contradict what I said about flipping being a piece of cake.  Well, it’s a hindrance and makes life more challenging for flippers (along with the 90 day anti-flip rule), however, these houses ARE getting sold, sometimes it just takes going through a few buyers.

The benefit of scarcity is that all the buyers get concentrated on your property, including the cash, and conventional (those with 20% to put down) buyers.  So don’t pass on a great deal for being in fear of not being able to sell….if you can get your hands on a property where there is nothing available, you WILL be able to sell it.

….Study comps, study comps, study comps

Okay, so that’s enough ranting for today- let me get to some “Bottom Line” tips for you that we are seeing work for our investors/wholesalers.

1.  Actives are MORE IMPORTANT than “Solds”. Study comps from a bird’s eye view….low sold comps are not so bad IF they have very low days on market (less than 2 weeks) and there is no inventory sitting on the market unsold.  If something IS sitting there NOT selling you MUST investigate..check property history, ignore it if it is a short sale, and don’t hesitate to call the broker and ask questions.

This is where you can get an upper hand b/c most investors haven’t figured it out.  You always want your flip to be the best value on the market, and that’s pretty easy when it’s the ONLY house on the market.

2.  Screen out the active short sales…they can make actives look very low, when they are artificial numbers that rarely have anything to do with the real market.

3.  Look at the trend…days on market, unsold inventory…if you see days on market shrinking over the past two months, inventory shrinking.  These are all signs that you have a very HOT area on your hands.

**Very important** you need to look at property history.  For example, let’s arbitrarily say a property will show 190 days or more on the market and looks like a horrible comp.  When you look at property history, however, it may tell a different story, it could appear to be sitting on the market with no one interested when in reality:

a)  it fell out of escrow multiple times, and in reality has gone into escrow within days before falling out

b) it’s a short sale that JUST got approved (after being on the market for 180 days!)

c) it experienced a drastic price reduction (it was on the market for $210,000 or higher for 180 days, then it got dropped to $175,000 and sold in 10!)...this is the stuff that will mislead the less savvy investors and cause them to be overly conservative-

…KNOW the REAL story! …’ya gotta dig, but it can pay handsomely

3.  Relationships!! – Don’t even think about sending in an offer to a broker without calling him or her!..Sometimes a great conversation can literally put your offer right at the top!  Close one with a broker and they may just bring you one before it gets listed!

4.  Although this is tougher to do for my wholesalers out there, increase your deposit amounts, and shorten your escrow periods in your offers as much as possible.  If you are a cash buyer, you have a big upper hand.  If you can team up with a cash buyer it definitely helps.

5.  Take MASSIVE before pictures and save every receipt.  Make it look as horrible as possible in your before pictures.  Get a statement if possible from a contractor or appraiser saying how horrible it is.  This is so that when you go to resale it and you put on your boxing gloves with appraiser (and you will), you will be fully armed with documentation of your improvements.
I literally decided as I wrote this post that this would be a great time to do a webinar on how to read comps and make offers in this market.  Join us and learn how to outbid the competition on these REOs that pretty much ALL have multiple offers now.

Join us Thursday June 25th online at 7PM Pacific time for an online presentation on how to get an unfair advantage by reading “in between the lines”…Be Happy and Prosper!
Kurtis

JOIN HERE, REGISTER BELOW:

https://www1.gotomeeting.com/register/932610377

I’m not a big “Ra Ra” guy.

At some real estate seminars, I get quite irked when 30% of the material is motivation.

I have two shelves of personal development, spiritual, and motivational books (not including what I’ve given away) and when I go to hear about how to make money in real estate, that’s what I want to learn.

THAT BEING SAID, forgive me if this post is a little bit “Ra Ra”, but I was cleaning out files recently and I came across something I had written 3 years ago during the hardest period of my life, and  I humbly share it with you just in case you might be struggling right now in the hopes that it may help.

In 2005 and 2006, when the onset of this crisis hit us personally, Cindy and I watched our savings and equity in our rehab projects evaporate.  We had a newborn, and my best friend since 8th grade passed away.  We lost two of our investments to foreclosure, and I really thought real estate was over for us.  At one point we had to yell at the kids not to open the refrigerator because our power had been shut off.  I had no idea what we were going to do.

Still, I did and do believe that a focused mind combined with bold action presents resources and genius that will create results that are mind blowing, even in the midst of dire situations.   The hard part, I think, is to stay focused on what you want when challenging times tend to pull our focus on what we DON’T want.

(At race car driving schools, they have a mechanism that disables the vehicle and causes it to start veering.  The instructor trains the driver to look forward in the direction he or she intends the vehicle to go, rather than looking at the wall, which is directly where the car would be heading!)

I had read  “Think and Grow Rich” by Napolean Hill more than once, so in the early part of 2006 sometime I dug it out and I took one his famous quotes and printed it out and taped it to my wall.  It said,

“Every adversity, every failure, every heartache
carries with it the seed of an equal or greater benefit.”

I had also read of a little exercise that helps keep you focused on what you want, versus what you DON’T.  The exercise is simply to write down every possible benefit you can think of about a problem you have.  The purpose is to help your mind loosen up a little and perhaps spark some creative solutions.

I asked myself, “What are the benefits, advantages, and opportunities in being flat broke right now?”

At first I drew a complete blank.  Then, some answers came to me.  Here is the exact unedited result that I banged out on my computer 3 years ago:

March 15, 2006

“What are the benefits, advantages, and opportunities in being flat broke right now?”

1. It forces us to find a way to make big money now!
2. It compels us to scrutinize our expenses.
3. It compels us to pay attention to what we spend on.
4. It makes it more exciting and meaningful when we become wealthy.
5. Gives us a deeper understanding of managing money.
6. Brings us closer together as a team.
7. Gives us even deeper knowledge of real estate and how to make money in good markets and bad.
8. we can share our experience with others who are struggling.
9. we can help others one day, and even sell a book or something
10. builds character.
11. Teaches us humility.
12. Teaches us to not be wasteful.
13. Teaches us how to be better about hanging on to money when we get it.
14. Stories to tell our kids and grandkids!
15. Will give us confidence that we have the ability to get out of tough situations.
16. Make us better people.
17. Compels us to take action on a lot of different things.

I wrote this in March 2006, almost exactly 3 years ago.  At that point there seemed NO WAY OUT.

We scrambled like crazy, I tried many different things including:  getting my RE license to broker hard money loans for investors, internet marketing, a foreclosure processing company, a “staging” homes business so that homeowners could sell faster, and running auctions for homeowners trying to sell (we were getting pretty damn good at it trying to auction our OWN properties!).

After a lot of flailing and picking up a check here and there, but not nearly enough to support us, Cindy and I sat down and said, “Now what the heck are we going to do about this situation?”.

We went over our strengths and realized that finding deals was our greatest strength, and deals were starting to crop up.  We had no money to do rehabs any more, so we put our entire focus on finding deals for other investors we knew, and I used what I learned about internet marketing to turbo charge finding buyers, and things turned around for us.

I really believe that things changed because as hard as it was, we kept asking the question of ourselves, “How can we not just survive this, but prosper in a way that is fun and offers value to others?”  If you are struggling right now I ask you to just try this exercise, and keep asking the question, “How?”, NOT “Why?”.  Our minds come up with just amazing answers, if the right questions are put in!  I believe this with all my heart, even more now.

Now, this doesn’t mean that I believe that if you sit in a room and think very hard about you want but not take any  action or give no value that the universe will ring your doorbell and the objects of your desire will be special delivered.

Write down every benefit you can think of about the challenge ahead of you, even when it feels like there are none.

Put it where you can see it and everyday ask “How can I improve my situation?” You will find your solution no matter the odds, if you keep focused on what you want, not what you don’t, do what you have to do when the answers come to you, even if it’s scary, and don’t give up.  It will not happen overnight, but it will happen.

If you would like the audio to “Think and Grow Rich”, by Napolean Hill, you can download here.

http://www.farbelowmarket.com/thank-you.asp

Hang in there……and be NICE to yourself.

Kurtis

We’ll be doing an question/answer telecall next week.  Just email any questions you have about our wholesaling operation or real estate wholesaling in general…we will answer ALL questions.

The exact day is not specified, but we’ll post the exact time and contact info within a few days.  If you want an email alert make sure you sign in to http://www.flipforeclosuresforprofit.com.

Just send your questions to Deals@FarBelowMarket.com. 

Kurtis

I’m sure you know by now there is a major crisis in the mortgage industry, but if you don’t really know what the fuss is about other than it’s something bad, here is a layman’s explanation in plain English of what the HELOC is going on.

What Exactly Are Subprime Loans?

First, what is a subprime loan? Wikipedia defines subprime debt as loans to borrowers “who do not qualify for the best market interest rates because of deficient credit history”.

Why would a lender ever want to lend to such a cad?

The answer is simple, When real estate is hot, it doesn’t matter if the borrower gets behind on payments. Why? Since the house is appreciating, the borrowers can simply borrow more by refinancing or getting a second mortgage (even with a record of late payments), OR, the borrowers can sell it very quickly and the lender will get paid off then.

Even if the borrower becomes unable to physically refinance or sell (serious accident, drug problem, deceased with no heirs, etc) and the property goes to foreclosure sale (extremely rare in good markets), investors swarm over the foreclosure sales like sharks in a feeding frenzy to buy the property and the lender gets paid in full.

…this is why 2005 saw one of the lowest foreclosure rates in history for California

…After a few years of making big bucks (really big bucks) in subprime, all the lenders jumped on the bandwagon (read: greed).

This created an “upward spiral” because people who would never qualify for a house were getting approved, which increases demand for houses which causes values to skyrocket, which protects the lenders, allowing then make even more loans……and so on and so on and so on.

Final Answer: 1) There is virtually NO risk (as long as the market is hot!) for the lender because of the above reasons, 2) they get to charge very high fees and interest because the borrower has spotty income or credit.

How exactly does a mortgage company make money?

As the starting point, let’s look at the journey of a typical mortgage.

John and Mary wish to buy a house, so they go to a local lender/mortgage company or broker. A wholesale lender funds and closes the loan, and the borrowers make their monthly payment to this lender.

The loan is barely originated when the mortgage company sells it like a hot potato to replace the money they just lent out so they can lend the money out on another mortgage. They do this over and over.

Fannie Mae and Freddie Mac

Remember how we just said that these subprime loans were returning incredible rates of return and seemed to never go bad because the market kept going up like it would never stop?

..Well, the guys who wear pinstripe suits and work on Wall Street aren’t going to let those kind of returns get by them! Huge investment companies that create investment funds (mutual funds, insurance products, 401(k) plans, etc. – the kind of stuff we’re supposed to invest in for retirement) buy up (sort of, you’ll see) all those mortgages. This is called the “secondary market” for mortgages.

However, can you imagine billion dollar companies trying to buy little $250,000 mortgages and keep track of them? That would be like going to the bank to put $10,000 in savings and having to put $50 in 200 different accounts all with different interest and maturity dates!…it would be impossible!

So, publicly owned (not government) companies called Fannie Mae and Freddie Mac buy these mortgages and bundle them up into big giant mortgages called mortgage pools. These pools usually contain $50 million dollars worth of mortgages in them.

Then, they sell what amounts to big million dollar “I.O.U.s” to those Wall Street guys, and the mortgages are the collateral (these are called mortgage backed securities). Wall Street can then buy, sell, and trade those securities easily, just like a stock.

This makes it possible for big financial companies to invest in (not actually buy- but it amounts to the same thing) billions of dollars worth of mortgages, and that helps us because the competition for our mortgages keep our rates low. Mae and Mac make it possible for the mortgage companies to quickly and easily sell the mortgages off so they can make new ones, and this is a good thing.

Why Then Are Our Mortgage Payments Made To The Mortgage Companies?

That’s because these mortgage companies are actually just servicing (collecting the money and keeping track of payments after they sell them). They really don’t own them anymore (unless they got stuck with it after the meltdown and the secondary market turned its back on them).

What Happens When The Market Finally Stops Going Up? (scary music)

All the factors previously mentioned that made subprime loans “safe” no longer apply. Now, John and Mary cannot take more money out of the house, they can no longer sell quickly, AND if it goes to the foreclosure auction investors are no longer interested. When investors don’t show up to the foreclosure auction, the lender now gets the property back.

In Southern California in 2005, there were 3,000 foreclosure sales, almost none went back to the bank. In 2007, there are estimated over 50,000 foreclosure sales, and MOST of them will go to the bank. (100,000 in 2008?). See a chart of foreclosure sales in Southern Cal by year here:

http://farbelowmarket.com/trustees-deeds.asp

Can you imagine the losses all those Wall Street investors incurred buying billions of dollars worth of those I.O.U.s when the payments stop coming and the mortgages that back them up are becoming worthless?

Why Are So Many People Defaulting On Their Loans And Losing Them To Foreclosure?

Let us count the ways:

John and Mary lied about their income/credit history.

The mortgage companies made it easy for them to lie (i.e. “stated income” loans).

The mortgage company/broker lied about John and Mary’s income/credit history.

Low teaser rates allowed John and Mary to get a really low payment (for awhile).

John and Mary got 100% financing. Half of the first time home buyers had NO down payment…”Can’t pay, walk away”…it’s not like they put their life saving into it.

Fannie Mae, Freddie Mac, and the Wall Street gang all turned a blind eye because the returns were so good, kept buying the loans, which gave the mortgage companies a reason to keep making more and lying about them.

House values stopped going up – no more 2,000 square foot adobe ATM machine.

Very little demand- John and Mary can’t sell. Even with a willing buyer they owe more than what the house is worth so they can’t sell without putting money IN!

What Happens When So Many Borrowers Don’t Pay?

Yikes! (Really Scary Music)

The mortgages become almost worthless, causing massive losses to the investors.

Investors have less money to invest, not just in mortgages (but ESPECIALLY not in mortgages!).

There goes our beautiful secondary market. Wall Street slams shut their wallets.

With no secondary market, the mortgage companies can’t sell their loans to make new loans (well over 100 national lenders bankrupt in 2007).

The mortgage companies can’t make any new loans so families looking to buy a new house need very good credit, regular income, have a big down payment, and be able to PROVE it this time.

This causes the pool of qualified buyers to evaporate.

Lenders get MASSIVE numbers of properties back which they immediately must put on the market. Drastically MORE houses, drastically LESS buyers!

*Banks have no choice but to sell houses for huge discounts to free up cash * (there’s a reason this statement is in red!)

Bob and Sally, who did not go into foreclosure, have to drop the price of their house drastically to compete with the banks.

Bob and Sally don’t feel as rich, so they stop spending (called the “Wealth Effect”).

The massive real estate industry (mortgage brokers, agents, escrow company, moving companies, builders, the workers they hire, the office space demand, their staffs, etc. etc.) take a hit and have less money to pump back into the economy.

As the economy suffers, more John and Mary’s make less income and can’t make their monthly payments!…can you say, “downward spiral”?

Not Pretty. This one is by far the worst. If it wasn’t for the government pumping in over a cool billion dollars, the whole thing would have shut down. If you would have had a house in escrow in the summer of 2007 there is a very good chance it would have never closed.

This cycle feeds on itself until houses fall to such crazy low prices Bill and Steve (Palm Springs) decide real estate looks pretty good- other potential buyers that were on the fence follow suit, demand rises, euphoria ensues, and prices rage out of control as people step over each other to buy real estate (unfortunately not anytime soon!).

Then, anyone who didn’t buy early decides everyone else is getting rich, buys too late and becomes the next John and Mary!!

This may be a over simplified, but it gives you an idea of how the cycle works.

…Next, how to capitalize on what is happening and buy from these deals from the lenders as the great “unloading” begins.

Be Happy and Prosper,

Kurtis

http://www.FarBelowMarket.com

http://www.FlipForeclosuresForProfit.com

We picked up a couple more deals, a 3/2 Coachella and a Cat City duplex.

One thing that we are seeing happening is that the banks did not counter our offers.  That is definitely a new deveopment-  wow, now is the time to get out there and hit the pavement…we’re now shooting 45 to 65 cents on the dollar, depending on condition and location, and hitting with more and more frequency.

The cool thing is that retail buyers are still actively buying- by the way, year-over-year sales volume in Riverside County is up almost 12% versus big drops of roughly 20% for LA and OC.

One more random observation, some banks are not taking cashier’s checks right now- only money orders…don’t know what that is about, but we’ll report back when we find out.

Kurtis and Cindy Squyres
http://www.FarBelowMarket.com