Will the Real Estate Investor Please Stand Up?

After the housing market crashed, we are now in a period of pointing fingers in order to assign blame. Was it the homeowner’s fault for overstretching his / her abilities? Was it the mortgage banker who made loans that he / she shouldn’t have? Was it the guy on Wall St. who repackaged the bad loans into derivatives that no one could understand? Or was it the investor who rushed into areas like Florida, Nevada and California, flipping houses, banking on price appreciation going up and up, while running up the prices and making real estate unaffordable for homeowners and other investors, and thus forcing them into these exotic loans? Methinks that all of these are the root cause. We all collectively did our part. And some are guiltier than others. But we needed to educated ourselves a bit more, and anticipate these results, including the homeowner.

What concerns me is that our media, which is always overzealous to skew public opinion, places the blame on some parties more than others. And lawmakers have to respond, as their constituents beat themselves into a frenzy. Yet the Wall Street guys get a bailout package, and homeowners don’t get a whole lot of anything. And some states are now passing laws that make it illegal for investors to rescue homeowners in default. For example, New Jersey is looking to pass such a law now. According to the proposed law, it is illegal for anyone other than a nonprofit organization to counsel a homeowner and negotiate for a short sale with a bank. This is just stupid. Homeowners need all the help they can get, in order to get up from under these loans and resetting ARMs. Banks are overwelmed with shortsales and other workouts, and things are slipping through the cracks. Investors who are skilled with foreclosures and short sales are in a unique position to help the homeowner and the bank to deal with this overwhelming situation. Not all investors are honorable, of course. While many investors craft a true win-win all around, some “investors” are true scammers (I put “investors” in quotations, because they are not investing, but rather conning people out of their mone). And now these bad apples, who are in a minority, are screwing it up for everyone els, because for an inexperienced homeowner, it’s hard to tell if the investor is a good guy or a bad one.

But the investors who will survive the real estate calamity of 2008-2009 are a creative bunch. They are setting up non-profits or aligning themselves with non-profits, to help them carry out these deals. Good for them! If an investor can craft a deal that gets the homeowner out of foreclosure without messing up their credit, while keeping the bank from having to take back the house that they don’t know what to do with, there is no reason why this investor shouldn’t profit. Remember, you will always get paid in accordance with the value that you produce.

I bet it would be impossible to find a real estate blog that didn’t post anything about the mortgage mess today / over the weekend. It’s not that the credit crunch / mortgage industry collapse hasn’t been on everyone’s mind since a year ago. But a new wave of panic is sweeping us today, after IndyMac failed on Friday, and Freddy and Fannie are so unstable (after a precipitous slide in their stock price) that they need to be propped up by the government. So naturally, I ponder what that means for the real estate investor.

First of all, let’s take a step back. Why did IndyMac fail? Well, because like other banks in a similar situation, a large portion of their business was subprime loans. If you make loans to people who can’t afford the house, as long as they say they can and state that they make enough money to buy it, which part of this approach is sound strategy, exactly? Unfortunately, the mortgage markets weren’t too concerned with the future.

So as the market started crumbling and the bottom fell out from under, why did the banks still refuse to do short sales? (A short sale, for those who don’t know, is a deal that a buyer (retail buyer / investor / etc) negotiates with the bank, for a sale of the property for less than what’s owed on the property). This was a very necessary step, in my opinion, as values had dipped under the amounts that were owed. If only banks worked with these buyers to do these short sales, along with mortgage workouts, it would have largely mitigated the mess, and banks would be straddled with a lesser inventory of houses. And as we all know, banks need liquidity, not houses, to exist. The idiotic thing is that these same properties, if no one buys them, get foreclosed on (huge expense for the bank), get seized and get auctioned off for less money than the proposed short sale. If I have an outstanding loan of $10, wouldn’t I rather take $7 from a buyer today, than sell it for $5 tomorrow? Duh! Instead the banks made it so difficult for an investor to do these short sales, with the process dragging on for months. With such an abundance of foreclosures and deals to be had, no wonder so many properties end up going to auction. From my personal interaction with real estate investors, the frustration with the banks’ loss mitigation departments (those who end up working out the short sale deals) has been palpable. I spent some time perusing blogs and blog comments written by investors, who lamented that IndyMac exhibited many of the same behaviors. IndyMac had a chance to recoup some of the money they ended up losing due to the bad paper, and they squandered it. I am not, in any way, suggesting that short sales are a cure-all. I believe that it was important to pursue all avenues, one of which is short sales, one is mortgage workouts / loan modifications, and other steps. Hopefully, the next bank straddled with foreclosing properties, will be a bit better at short sales.

So now that IndyMac failed, and other banks with similar patterns are likely to fail, for the same reasons as stated above, the credit problem is only going to get worse, and the panic is going to get out of control. Which concerns me as an investor and as a technology entrepreneur building a web-based resource for investors. If there are no funds available for investors to buy investment properties, the investment industry is going to go the way of the mortgage industry. But not so fast! Investors, the good ones at least, are extremely creative, nimble and entrepreneurial ; they find opportunities at times when everyone runs and screams that the sky is falling. The deals are abundant. And yes, prices will likely keep decreasing, especially as the mortgage mess shrinks demand (many homebuyers who were in the market for a house, now will have to go back to renting, because they can’t get a loan). However, an investor who is good at doing the short sales, and other such strategies, can max out the deal anyway by getting it at very low prices. To finance these properties, a creative investor will look to non-traditional avenues, such as seller financing and private money. As far as my business, MeetMOJ,O is concerned, we are going to do just fine, as we extend our matching model to private money lenders and other alternative sources of capital.

So next time someone asks me what I am doing, and I answer “I am building a web-based community for real estate investors”, and that person looks at me like I am insane, I am going to insist that this is a great time to be an investor. If you know what you are doing, of course.

A colleague has shared the following blogpost by Seth Godin with me. Even though it talks about how to stand out from the crowd as a real estate agent, I found it quite applicable for us, investors, as well. Especially in this tough real estate market, when sellers abound and the battle for buyers’ attention is only getting fiercer. How will you stand out as an investor wholesaling your property, flipping your property, or even trying to get your property rented. It’s through focus, says Seth. Become a super-expert in what you do: specialize in a zip code, in a particular property type, in a particular investing strategy. Possibilities are endless really, in creating a niche that is yours and only yours. Become that person that everyone will think of when they think of, say, a short sale, a lease-option, etc. Raise your visibility by giving talks, seminars, blogging. Seth gives a great idea in his post: have relevant clubs and organizations meet in your office. That’s one other way to become the hub and the absolute authority. Simply awesome! In short… Get creative. Do what others aren’t doing. And become an expert.

At the risk of sounding unoriginal… Use the current technologies to help you. Get out in the blogosphere. Get on Facebook. Get on Meetup. It amazes me how few real estate investors I know are on Facebook. Think about it.. If you are renting your apartments to the 20-somethings and 30-somethings, that’s where they are. So you have to be there too. And it’s a great way to spread your message very quickly and virally. (And besides, Facebook is no longer for folks under 35). Become the blogging / Facebook expert of lease-options in zip code 12345.

Here is to your wealth in 2008!

Well, project Lifeline was formally announced today by Treasury Department and the Department of Housing and Urban Development. As mentioned before, it halts for 30 days foreclosure proceedings for homeowners in default for over 90 days. The idea is to give homeowners and lenders some additional time to work out better loan terms.

It looks like so far it’s a pilot involving 6 of the largest players in the mortgage industry: Bank of America, Citigroup, Countrywide, JP Morgan, Washington Mutual and Wells Fargo. The hope here is that the rest of the lenders will follow suit. These 6 lenders have already been involved in the Hope Now alliance, an effort organized by the Bush administration, to keep subprime ARMs from resetting. The Hope Now alliance states that it helped 7.7% of 7.1 million subprime borrowers (or 545,000 borrowers) during the back half of 2007. This was done through permanent loan modifications (such as lower interest rates) and negotiation of repayment plans.

Unlike Hope Now, Project Lifeline addresses all mortgages, not only subprime. Project Lifeline does not apply to vacant properties, investment properties, or homeowners in bankruptcy proceedings or facing a foreclosure date within 30 days.

So the whole thing makes me wonder: If this actually a viable solution or is this a “photo op” for our politicians? After all, perception is everything, especially in this election season. And we are, after all, headed towards a recession… So it’s important to at least look like we are doing something.

Project Lifeline just may be a logistical nightmare for the lenders. How will they handle all these homeowners calling them over the next 30 days? And how will anything actually get resolved in 30 days? Borrowers and investors negotiating on their behalf have already been having a difficult time getting lenders to respond; short sales take “forever and a day” to negotiate. There are just too many foreclosures. And there will only be more.

And will homeowners actually take action? The real issue here is that there is limited incentive for those in foreclosure to do anything about it. Now that home values have plunged, many homeowners are “upside down” on their mortgages, owing more than their homes are worth, and having withdrawn all equity during the “boom times”. It’s becoming easier and more rewarding for the homeowner to just walk away. The proverbial ATM is empty.

As we all know, “what goes up, must come down”. By some accounts, home values are down for the first time since the Great Depression. Home values had skyrocketed over the past number of years, growing at a rate far exceeding average salary growth. So to afford the American Dream, citizens of America had to get into mortgages that overextended them, often getting into ARMs with low initial rates that were scheduled to reset, only delaying the inevitable. All for a chance at the American Dream! Can we blame them? And can we blame the lenders for trying to help (not saying that all lenders are selfless).

Even more disturbing is the natural propensity of our culture to use home equity as an ATM, forsaking all reason. It is not all lenders’ fault, even though it has become popular to point fingers at these “unscrupulous” bankers. These are just some of the reasons why we are in this mess. Call me cynical, but I really doubt that a 30-day time-out will do a whole lot.

Hello fellow real estate investors. We are MeetMOJO. We are two real estate investors and one techie, who are passionate about bringing about change in real estate investing, making things more open and transparent, and empowering investors to partner and collaborate more efficiently, with the help of online tools. So we are building a couple of tools to help the investing community out. I have to admit that my partner Stan has many many more years of experience than me. I got into investing a couple of years ago, and was overwhelmed with lack of online resources. So I decided to solve these problems for beginning investors, to reduce confusion and increase efficiency.

Companies like Zillow and Trulia provide some valuable information as far as property valuation, comps, and other neighborhood info, as well as available MLS listings. But there are so many other data points that investors look at. And overall, this information seems to be extremely disaggregated. So we are looking to aggregate all the information relevant to investors, into one place, and package it into useful analytical tools. So as we build our product and release various modules, we encourage you to contribute feedback, so that we can “hit the nail on the head” and provide the most value to the community.

Despite the current state of the economy and real estate in particular, we know that savvy investors are thinking ahead and going out and finding cash-flow-positive deals now. As the market continues to decline (in many, but not all, areas), the next couple of years are going to be instrumental in creating wealth for real estate investors. With foreclosures on the rise, banks are stuck with more housing inventory than ever before, and are more willing than before to do short sales. Also, due to the glut of houses on the market, properties are competitively priced. Since the main principle of all investing is to buy low and sell high, while receiving cash flow in the meantime, this is a great time to buy low-priced properties. This is the time for all investors, beginners and advanced, to either start or expand their real estate portfolios. Which is why we are here, to put the right resources within an arm’s reach for investors, as well as to empower partnerships and enhance collaboration.

So please add your thoughts about the market in general and ask questions of us and the investing community that we are in the process of building. And don’t forget to tell us what tools you would like to see more of online. MeetMOJO is for investors, by investors!