Investment or Speculation?

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CALIFORNIA HOUSING STARTS DOWN 45 PERCENT

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This headline was recently seen from the California Home Builders and it's is interesting to me because it reminds me of all the people that jump in. They see others doing something, emulate it too late, and "miss" the market. I know I am guilty of this in the stock market. Everyone was making money in tech stocks in the late 80s early 90s. Being a finance undergrad, I felt like I should be showing them how to do it. I watched the market for over a year and nothing made sense. The P/E rations were insane but, everyone else was doing it so, I jumped in. And lost 42% of my portfolio. Ouch!!

Now, when I look at investments, it needs to be an investment. Not just some rumor or wish that it'll continue to climb. I believe this last real estate wave was fueled by folks that wanted to be "investors" but had never analyzed an investment much less balanced their checkbooks. It's my assertion that they never entered their purchases into a spreadsheet and considered the true cost of the investment or the long term gain or loss.

I think they did just what I did in the 80s; they closed their eyes and jumped.

Why I LOVE the San Francisco Bay Area

Just like a long term relationship, when you've lived somewhere for a long time, it's easy to forget all that you love about it. At least it is for me.

I've been working on investments in Dallas for a few years now and, although I love Dallas, I have a new appreciation for San Jose.

1) The hills are gorgeous. I was out in Almaden Valley this week. I lived there from 72 to 76 and it's been built up a lot since then but, the hills are still gorgeous.

2) The light here is bright and beautiful without washing everything out.

3) I went running at Rancho San Antonio. This is my favorite running trail. It starts out along a huge meadow with a large basil tree and tennis courts at the end. Then up along the base of the hills until you get to a small farm. There are patches of basil and corn and lettuce. There are pens of goats and sheep. There is a covered area with picnic tables underneath that's framed to look like a barn. It's very charming and brings a lot of families. It's about a mile to the farm. Once I pass throught the fence and head up the hill, the families disappear. The forest gets quiet and I can hear my breath and an occasional bird. The deer sometimes peak out from the underbrush. As do wild turkey, quail, bobcats and snakes. It's about two more miles to the top of the hill. When I hit the top I can see Moffatt field and Shoreline straight out. It's a beautiful clear day so I can see all the way up to the low rolling hills of South San Francisco. I run along the ridge here, along the back side, until I get to another ridge where I can see the wide lanes of 280 heading into San Jose and the skyscrapers of downtown and the rolling hills of east San Jose in the distance. I take the long way back, winding down the side of the hill and along a long rolling path along the valley floor. I hit the farm and settle into the last mile of my run. It's about a six mile run all together. It takes me about and hour and 20 minutes but, it feels like a mini-vacation, a little rest, my time with god.

4) I have shopping within 5 minutes of my house. I have strip malls of restaurants and groceries and drugstores and Starbucks. Then I have Westgate Mall - which is at the interesection of Prospect and Saratoga and each corner has something. From the big boxes of Target and Office Max and Barnes and Noble to the medium sized REI, Nordstrom Rack and Ross to Amarin Thai Restaurant, Pier One, Red Robin, Mimi's, Pete's coffee, Trader Joe's, etc.

Five minutes in the other direction takes me to Valley Fair & Santana Row - Macy's, Nordies, Gap, Pottery Barn, Cheesecake Factory at Valley Fair. Santana Row houses some great restaurants like Left Bank, Blowfish Sushi, Sino, Yankee Pier, Consuelo's, Maggiano's even Pasta Pomodoro.

So there you go - it's about balance. Lots of eating and lots of running :-)
Welcome to the Bay Area.

Declining California Markets

Interesting info I got this morning:



This lender has reduced it's max LTV by 5% for these areas. That means that if you used to be able to borrow $90,000 on a $100,000 purchase, you now need to come up with another $5,000 because they'll only loan you $85,000.

I wonder if 5% is a reasonable expectation, some areas are expecting double digit declines. hmmm.

More About Short Sales

I have a friend, in the middle of a divorce, that's liquidating everything. Unfortunately, his investment property, that he bought for appreciation, was underwater and he asked me to help him sell it.

It started off like any listing; here's where we should price it, I'll put a sign out front, is there a tenant there now? This is where it starts to get interesting. His soon-to-be-ex has been living in the property with her new boyfriend and oh-by-the-way she hasn't paid the mortgage for six months! Crap!

I took the information and started getting in touch with everyone; the almost-ex, the lenders, the Home Owner's Association. The ex was civil to me. The lenders passed me back and forth and the HOA never called back.

This went on for a few months before the mortgage meltdown hit. The few buyers that were in the market couldn't get financing now and the number of sales dropped 75%. The Seller and I sat down to have a heart to heart. The only people buying right now are sharks looking for blood in the water, you aren't getting any money out of this property anyway, let's get this thing sold before it's a REO. He agreed to a DRASTIC price reduction and we got an offer within two weeks.

This is where the real work begins. We had submitted short sale packages to the lenders showing the Sellers insolvency and the market conditions for the subject property. The lenders had done their own valuations and their appraisal came in 10% higher than our sales price. I worked and negotiated and reasoned with both lenders for a month before lender #1 refused to take a short payoff.

Then the Notice of Sale was posted. Now I had great ammunition for lender #2; if you work with me you'll get some money back, if you don't you'll lose it all.

They finally saw my point and agreed to the shortsale - after reducing my commission and if you can get it done in 10 days - including the holiday.

I was pissed about the commission. I feel like I have been working twice as hard on this as any other listing and now my paycheck is a revenue source! When I calmed down I realized the truth is I have been blessed with lots of great clients that have gone overboard to get me a commission. Now, here is a buddy that needs my help, so I conceeded.

We got the Seller signed off, loan docs in title and then the payoff came in. We were $1500 short to close - and we were 4 days from sale.

I went back to the second lender, begged for their help, and got them to take care of the shortage. The new lien recorded, the payoffs were sent and my client won't have a foreclosure showing up on his credit report for the next 15 years.

It's a lot of work, you never know if it's going to fall into place or not and you don't get paid well. Welcome to real estate.

How to Buy a Short Sale

Being in California, I have had very little exposure to foreclosures - until the last few months. Now it seems like everyone I run into needs help selling the home that they owe too much on.

I remember the pyramid schemes of the 70s, if you were in first you got your money back. If you were a late adopter, you got the privelege of paying the early adopters. This translates over to real estate of these last few years as the stragglers finally jumped on the bandwagon just as it was going off the cliff.

So, in a short sale, the owner owes more than s/he can sell it for.

As the Realtor®, I get to market and sell the property as usual, then I get to negotiate with the overwhelmed bank for 2-4 weeks only to get a proposal back from the bank either accepting or rejecting the offer. And, oh by the way, the bank often thinks the realtor commissions are a profit center for them so, I get paid poorly or not at all.

Why would any business person deal with this kind of sale? Simple, I do it for my clients. As the buyer agent, we can negotiate some rockin deals. As the Selling agent, I have a client that is in trouble and I am much more skilled at negotiating a decent resolution that the client/owner.

California Wildfires and Lending Delays

This morning I woke up to this notice:

Effective immediately due to current fire activity in California, XXXXXXX Bank will temporarily cease funding loans in the following California counties until further notice: San Diego, Los Angeles, San Bernardino and Orange.

Wow!

When the earthquake happened in '89, lenders reacted by requiring additional inspections and limiting lending in certain affected areas. So, how does a lender mitigate their liability while still serving their clients?

Unlike the earthquake, which was a relatively measurable, one time thing, raging wildfire liability is literally changing with each tick of the clock.

While the above lender reaction is an attempt at mitigating lender liability, think about all the people poised to close on their home loan - lives packed into boxes in the back of moving vans - who are now unable to close their home purchase.

For me, this notice reinforces the sheer magnitude of the damage. Not four cities, or neighborhoods or four areas. Four counties! Millions of people, their lives and their homes.

We have you in our prayers.

Trees and The Socialist Republic of San Jose

My neighbor has a huge tree in her back yard. It's a gorgeous tree and she has tried to save it but, the trunk is hollow and is a huge liability because it could fall on her or her neighbors at any time.

Welcome to the land of fruits and nuts. The city of San Jose made her post a sign in the front of the house to "alert" anyone driving by that she was going to cut this unsafe tree down. She's had this eyesore in her front yard for six weeks. There was a public hearing, in case anyone wanted to dispute the tree removal, and now they are going to be removing the tree.

I am a tree lover. I enjoy their shade and beauty and peacefulness. However, I value a person's safety over a tree. To me, this latest tree fervor is just craziness and as a property owner it puts me at risk. If something happened and this tree fell on my neighbors 3 year old cutie pie of a daughter, the property owner could be sued. But, if the property owner cuts the tree down without the proper red tape, the city could severely fine the owner.

How do I do the right thing while living in the land of catch 22?

Boomers

I've been watching a friend's business while he's been on vacation. He gets a call off of one of his cards. They are friendly and engaging. They tell me they have been in the house for 40 years. They are the original owners. They bought it for about $25K and now owe over $500K. They have refinanced many times and now have just about maxed out their line of credit. They have been living off of the house for years and have about one more payment worth of equity line. After speaking with these folks for about an hour, it sounds like they need to sell their house before they get behind on their payments and loose what equity they have left. So, I make the appointment.

I get to the house and the first thing I notice are the foot tall weeds and the old cars in the driveway. Walking up to the door, I wonder what this lattice contraption is really for. I know it's a seating area but, it's not a simple bench, it's almost a gazebo except that it's not round or well made or attractive to look at. hmmm

The couple is charming and funny. They have lots of stories and want to tell them all to me. They have such great memories that I want to keep them there if possible.

We go through the finances and when the reality starts hitting home, the woman says they have to go, they have another appointment. I don't move and continue gently going through their options. Even if we can rent out rooms - which really worries me with older folks, I think they need to feel safe and if there are problem tenants IN their house it is anything but safe - they will have maybe $2000 per month to live on. So, we go through their bills and there is not a lot left for food after the basic bills - and minimum payments on their maxed out credit cards - are paid.

The husband realizes that they need to sell. We start talking about options; what to do with stuff, where they will go, and how to get it all done before a notice of default is filed. It takes a while but we get through all the paperwork to list the house and as I leave I drop them off at the local shopping center so they can get their errands done.

I get home and work for about an hour and a half - opening escrow, entering the listing, finding retirement communities and service providers.

The next morning I get three calls at 7:30 saying they want to cancel.

Actually, this is pretty normal. Especially for older folks. The morning comes and fear sets in and they want to run.

I return their call all day. No answer and no voicemail.
I go by the house, no answer.
I send them a note.

On day two they shoo away the sign company. I send them a list of items I am working on and ask them to contact me.

Day four I get a message from the son.

This is actually what I needed to happen. After a few days the folks reached out to their support system - luckily they have one - so the son comes in to help. The son will be my measure of reason. My sounding board for what is really going on.

I chat with the son. He's kind and good - a great reflection of the parents - and he lets me know that there are other options. His folks won't be losing their house and he is aware of the situation.

Now I can let it go.

I know that many real estate licensees [do you know the different between a licensee and a realtor?] just need the next paycheck. While I live on my real estate income, I also need to feel good about who I am and what I do. I could have dropped the listing when they wanted to cancel, or I could have played hardball and worked to enforce the contract. For me, I needed to know that the people would be ok. For me, the real estate business is not about the house, it's about the people and how I can help to make their life the best life possible. That's why I love this business, for me it's about helping people.

Seller DisService

I interviewed for a Listing about six weeks ago. I presented very well but, the Sellers chose a less experienced agent because their suggested sales price was $31,000 higher than my suggested list price. To further complicate this issue, in this submarket, the prices are dropping.

For the last six weeks I have been watching this Seller and Listing Agent. They did shoot themselves in the foot but, so far they have dropped their price $44,000 and the property continues to sit.

It is still the most expensive property on the market and the Listing Agent is working super hard but, this listing is just helping to sell all of the cheaper listings around it.

My guess, at this point, is that this listing will expire, the Seller will chose another agent to sell it - probably me - and I think that the final sales price will be about $25,000 less than my initial suggested sales price.

I've seen this issue many times over the years. I'm still working on a way to overcome this issue in my listing presentation but, in the meantime, it makes me crazy watching this Seller shoot himself in the foot.

Does "Investor" = "Sucker"

I was chatting with an acquaintance this morning. She didn't realize I was a Broker and she didn't realize I understood income property. It turns out she really could have used my expertise a couple years ago.

She had bought this property in Fort Worth because it was "cheap" and it was brand new. Sounded great.

It was sold to them based on an anticipated rental income of $850/mo - which seemed like a good return because she'd be able to cover all the expenses and have a little cash left over. She also made the assumption that the property value would increase over time.

After they purchased the property they worked to rent it. They didn't hire a professional manager because they "forgot" to figure that cost in and that would erode their cash flow. It turned out to be very difficult to find renters. My friend had not researched the local market and expected renters to line up to rent her property, just like they did here in Silicon Valley.

The property went unrented for one year. It was broken into and vandalized, which cost money to repair on top of her monthly payments. She did finally find renters when she dropped the rent low enough, it's rented at $700/mo. Which just covers her payment.

It sounds like she is one of the lucky ones because, some of her neighbor investors still have vacant units. Many are looking for any way to bail out of their units. So, her expected appreciation doesn't look promising.

If she pays it off over the next 30 years she will eventually get a little cash flow and she does get to depreciate the property - which may offset her current income.

It seems like the stories in the media have all been about investors making 300% profits with little or no risk but, the reality is, investing is risky. People lose their life savings every day. Investor property has two HUGE differences from owning a home. 1.)An income property without income is a liability NOT an asset. 2.) Investor loans are all recourse - meaning the bank comes after you for any losses - so, it's really hard to "walk away". My friend is one of the lucky ones, she found a way to hold on for now.

My clients continue to do well, even in a down market. We've structured their purchases so that their properties cash flow, we calculated expenses based on "worst case scenarios", and even accounted for the rents adjusting a little. We did the research, we knew the risks. We bought strategically and intelligently.

Find a broker that's been around, one you can trust, one that knows the ins and outs of investing and one that is an investor themselves. Your friends brother's cousin that just got their license is probably not a good referral for income property. The wrong broker can lose your hard earned money but the right broker can make you millions!

Chasing Appreciation

I got an inquiry today about investment properties.

This prospective buyer is being told to buy single family homes in Idaho and New Mexico. Hmmm. This always reminds me of the "secret stock" whispers I hear so much of in Silicon Valley. Or the "plants" on investor pages, working to inflate demand on the penny stock they own 5,000 shares of so they can reap the rewards and dump it before the fall.

As a finance undergrad, I learned how to value stock and spot undervalued stocks. For years I thought I had enough information, knowledge and training to play the stock market game. Some of my colleagues have done really well and I just never got the hang of it. I think it's the same with the real estate market, there are some that are good at seeing the trends, jumping in early and getting out before the fall. Then there are some who play real estate like I play the stock market, they get in late and watch in disbelief as the market falls.

The big difference between the stock market and the real estate market is that you have to make about 10% appreciation in order to break even. It's not a $7.95 trade fee but title and escrow and commissions and vacancies and reports and marketing and....you fill in the blanks.

I have always done better with my real estate holdings. Maybe that's why I have been in the business for 19 years! [still can't believe 19 years!] But, I think the way I play the real estate game says a lot about my conservative nature. I play real estate so that I feel in control and limit my risk. I set it up beforehand so I am never forced to make a move. If my properties are paying all their expenses, maintenance and management, then it really doesn't matter what the market is doing. I can hold on. I am not at the whim of Bernanke's latest change of heart or a mysterious stock market scare or hoping that that "secret stock" doesn't mis-state earnings and plunge 70%.

For Sale By Owner

There is a listing in my neighborhood that is being marketed through one of those for sale by owner companies.

First off, because I am a Realtor and am bound by the Realtor code of ethics, I can not approach this owner because they are "represented" by this other company and that would be interfering with their relationship. [wish other people had this code of ethics!]

I've been watching this listing for a few months. I walk my dog twice a day and on our morning walk we go by the house. So, I've been wondering what the problem is. One day, out of curiosity, I checked and the property is not listed on the MLS.

First red flag!

Yesterday, on the way home from church, I drove by an open house sign. It's the sale by owner that I've been watching. I kept heading home and then,on second thought, turned around.

As I drove up to the house, I wondered if it really was "open". There is a big SUV parked right in front of the door and there aren't any signs out front. I double checked the open house signs and walked up to the door.

Hearing voices inside, I walked in.

The first thing that literally hit me was the stench! Air freshener but, super industrial air freshener and a dirty entry carpet. Hmmm

I walked into the house and the sellers, a couple in their 50s, were both arguing with some potential buyers. The woman was sitting on the sofa with her big fuzzy cat in her lap. The source of the smells that were "covered" by the stench.

The sellers were both dressed in jeans for the weekend and I wondered how serious they were taking this "home selling business".

I walked into the kitchen and lying on the counter were the flyers. $710,000. No wonder it was sitting here. It's a $630-650,000 market if the house is in good shape - meaning fresh paint, new carpet/refinished hardwood floors and some upgrading.

The kitchen was livable but, judging by the grey tile counters, the last remodel was probably done in the 80s. As I walked through the house my mind wandered back to the songs of Bon Jovi and Mr. Big. I was twenty pounds lighter and Aaron was in elementary school then. The oak trim and gold detail almost had me in a rash. The coup de gras was the bright red floral wallpaper in the master bedroom. I enjoyed the 80s a lot but, the market for folks trying to relive the 80s is pretty miniscule.

I took a deep breath of relief and fresh air as I walked back to my car. I always wonder if there is something I can do to help folks. I am sure these folks are decent people and just want to get the best offer on their house.

If they spent $30-$50,000 they could get their close to their $710,000 asking price. Otherwise, they need to drop their price pretty close to $100,000.

Assuming I could talk with them, I wonder if I would have the patience and skills to help these people position their house to sell or if they would just keep singing Bon Jovi's "Come Back".