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.

There has been quite a bit written in the blogosphere about the “bailout” of our crumbling financial system. I don’t much feel like rehashing what’s been written, but I would like to state my opinion and cite some of my favorite blogposts on the topic, as I have had some time to ponder the issues. And finally, I would like to explore how this affects the real estate market and real estate investing.

First off, when I first heard about the proposed “bailout”, my gut reaction was that a bailout of any sort goes against the notions of free markets and capitalism. You mess up, you pay the price. You do well, you get rewarded. Isn’t that why immigrants come to this country? It sure is why my parents and I came here when I was 14: the opportunity to make something of yourself and your life, regardless of your connections to the KGB. What kind of message are we sending to corporations and other entities? It’s OK to fail. Your job is safe, the taxpayer will bail you out. Corporate greed is OK too.

Then I thought about it, and perhaps some kind of action plan is necessary (well, it was necessary a while ago, but our leaders were too busy telling us that the fundamentals are strong). What we need is not a bailout. Something different. Not sure what, yet. If the financial markets keep spiraling down into this vortex, the impact on the country’s economic health could be catastrophic. But how catastrophic? Would it be more damaging than the $700 billion + bailout is to the taxpayer’s wallet? It’s hard to say. But what if this bailout still doesn’t solve the problem? That’s entirely possible too. To ensure that it works, there needs to be a stronger plan of action vs. a fuzzy “blank check” approach. I find Robert Reich’s blogpost the most illuminating writing on the topic in terms of a strong action plan and concrete rules and oversights to be put in place.

Finally, Paulson’s connections to the Street make the whole thing appear just a bit too fishy for my taste. And the Section 8 is just the last straw. It reads exactly like this:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Did that make anyone else’s hairs on the back of the neck stand up? Eeeekkk! We are headed towards something very very bad in this country. We are allowing an ex-Goldman guy to have unilateral control (without being reviewed by a court of law!!) to make decisions on the Wall St. bailout. That would make it very easy to cover stuff up, wouldn’t it? Hmmm…. And no one can investigate…

When did it become OK for the American public to give up all control of their lives and decision making to folks who supposedly should be acting in the interests of the public, but have way too much conflict of interest to actually do so? How did we allow ourselves to be scared into Patriot Act and the Iraq war? And now we are being scared into passing this piece of steaming shiitake? Are we still a democracy? Sure doesn’t feel like it. Feels like we are headed towards a dictatorship, a military state. I am exceedingly concerned for this country and the ease with which the American Dream and Democracy are being annihilated in front of our very own eyes. Our founding fathers must be rolling over in their graves.

So… I must somehow bring this back to real estate and real estate investing. How does this affect real estate investing? Well, in the same way as this whole mess has been affecting real estate for the past year or so (this mess started in real estate, if you remember). It is close to impossible to get a mortgage for an investor (and now, as of Dec 1, Fannie won’t allow to finance more than 4 properties per person, including primary residence). So forget about conventional channels. If you want to take advantage of good deals, you must learn and implement creative real estate investing (seller financing, subject-to, private lending, etc.)

Everyone is cautious, however; homeowners and investors are waiting for the market to hit bottom before moving. And now that the sky is falling, and we seem to be writing a blank check signed by the American Taxpayer, Joe Investor who is hoping to work the foreclosure market and get some cashflow properties is a bit more afraid of his future and is a bit more hesitant to act. Investing for cashflow, if you follow creative real estate strategies, remains a viable strategy. As far as other exit strategies, it’s a bit more dicey…  Jim Homeowner to whom Joe Investor hopes to sell his rehab is also more hesitant; he is more concerned about keeping his job than straddling himself with a new liability in the form of a new house. And now that Jim Homeowner is funding a bailout of epic proportions, well, there goes his saved up 20%+ downpayment that he now needs to buy a house.

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Real Estate investing has historically been fraught with so-called late-night infomericial “gurus”. “If you only pay us $10,000, we will show you how to get rich in 1 month, and you will never have to work a day for the rest of your life.” Yeah, right! Few things in life are this easy, and there are no shortcuts to a solid real estate investing education. I came across this video today, and was appalled at the advice given to the poor woman in the video by Russ Whitney. He and his instructors recommended to flip the investment property. Well, anyone with half a brain can see that today’s market is fit for anything but flipping.

And yes, real estate conditions vary from state to state, city to city, and even neighborhood to neighborhood. Per my neighborhood real estate broker, my neighborhood in Jersey City only experienced a 5% drop in prices, while the less affluent parts of the city and Bayonne have dropped about 10% (of the new listings there about half are in foreclosure). But still… Even in Manhattan, the hotbed of real estate activity, unsold inventory is starting to build up, making a flipping decision tantamount to financial suicide.

Check out this video! (unfortunately, I am having technical issues embedding the video, so you will just have to click on this link)

Enjoy!

HomeVestors (the “We Buy Ugly Houses” folks) has named the top 10 cities for real estate investing and 10 junior markets for real estate investing in the first quarter of 2008 (Junior markets are cities with a population of 150,000 or more). They are as follows:

1. Dallas, TX
2. Houston, TX
3. Atlanta, Ga
4. Fort Worth, TX
5. St. Louis, MO
6. Philadelphia, PA
7. San Antonio, TX
8. Denver, CO
9. Minneapolis, MN
10. Phoenix, AZ

Top 10 Junior Markets

1. Columbus, GA
2. Panama City, FL
3. Springfield, MO
4. Brevard County, FL
5. Greensboro, NC
6. Lubbock, TX
7. Columbia, SC
8. Ft. Walton Beach, FL
9. Kent/Sussex Counties, DE
10. Michigan City, IN

These findings are based on the number of houses bought in each market by HomeVestors in Q1 of quarter of 2008 (source http://www.homevestors.com/inthenews)

As the Dallas-based franchise company specializes in buying, rehabbing and selling single-family houses and rescuing homeowners from ugly houses and ugly real estate situations, the current downturn in residential real estate makes for a fantastic acquisition environment. As I mentioned in a previous blogpost, this climate of falling prices, inventory oversupply, and resulting homeowner desperation to get rid of their houses, is a prime time for smart investors to go heavy on property acquisition. As long as your exit strategy is to buy and hold, and not to flip (which is going to be very very difficult in today’s climate), and as long as you can afford to hold the property for at least 5-7 years, you should definitely take advantage of these conditions.

I have to admit that I don’t completely trust this data. I mean, I do not doubt that these are the areas where some of the best bargains can be had: HomeVestors does enough volume to observe significant trends. But there are so many other factors that make a city a hot investment market, which can not be ignored; the HomeVestors press release doesn’t address those factors explicitly. For example, the city’s economic development plans, jobs growth outlook, and other macroeconomic factors must be considered. Also, the rental outlook must be considered. As you buy a property, the low acquisition price is only one factor that determines whether you will see positive cash flow (or at least break even). Rents must also be strong and in demand. Overall, there is strong rental demand right now across the nation, as many homeowners lose their homes to foreclosure and many other hopeful homeowners can’t get a mortgage due to tougher standards. But some cities are definitely hotter rental markets than others. If people are fleeting a city due to lack of jobs, rental market will suffer. The HomeVestor list seems to be very TX-centric. By a sheer coincidence, the company is based in Dallas. Hmmm….. I would be very interested in hearing from our readers what they consider to be the top cities for investing.

Another question for the readers: would you consider investing away from home? What are some factors that you consider whether or not you feel comfortable with investing away from home? What resources do you use? Do you work with another local investor to show you the ropes? We are working on a tool that can connect investors to each other, based on area of interest, as well as other investing goals. As various areas of the country may become attractive to investors than their own home turf (Gulf Region GO Zone, for example), we see more and more people venturing outside of their own backyard. And we would love to help investors make the process a smooth one.

Is it the beginning of the end for the U.S. real estate downturn? Mark Zandi, Chief Economist from Moody’s Economy.com certainly seems to think so (CNN interview aired earlier this week). This discussion comes on the heels of the NAR report stating that existing home sales have actually improved from January to February 2008, but the median price is more than 8% down vs. last year. Methinks that inflection point is happening right now, because prices are finally low enough for people to get back into the market.

Zandi points to this latest increase in sales as the point where homes are starting to stabilize, putting us at the beginning of the end of the downturn, a process he still predicts to be very long. Home sellers are now “capitulating”, lowering listing prices to be in line with the market, and making the deals more attractive for the buyers. Additionally, the mortgage rates are low enough to stimulate homebuying activity. Finally, after decades of home prices outpacing salary growth, homeowners can somewhat afford to get back into the game. According to Zandi, “prices have been declining for two years. I think we’ll see another year worth of declines. We are down 10 to 13 percent from their peak. I think they’ll decline another 5 to 10 percent between now and the spring ‘09 selling season. So it’s not over. We’ve got a ways to go. ”

So here you go. There is one good year left of rock-bottom housing prices, after which they should continue to climb back up. We as investors haven’t had an opportunity like this in several decades, to get into a property at a price low enough to produce positive cash flow. This is an opportunity not to be missed. I would like to re-emphasize from my recent blog post, that this real estate environment is a perfect time to acquire a property that you hold for the long term and rent out, and not designed for a short-term flip.

Selling a house in today’s market is not for the faint of heart. But if you are one of those investors who loves to buy shabby houses with lots of problems and rehab them into beautiful homes and sell to retail buyers, these quick pointers ought to help.

1. Price to sell
2. Market and advertise the heck out of it
3. Hire a super-duper agent
4. Consider curb appeal
5. Be frugal, don’t overimprove
6. Instead avoid deferred maintenance
7. Don’t forget the driveway
8. Keep with neighborhood style and current style
9. Have open houses
10. Staging is key

1. Cash is king

Setting the right price is key to selling your house quickly and maximizing your profit. Price is more important than ever in today’s market, which is characterized by inventory that just keeps stockpiling. But each house has that magic selling point at which it becomes more attractive than the competition.

The trick is to price it well from the beginning instead of starting high and dropping the price. Most people selling property, even in today’s market, have an unrealistic expectation of the selling price. Research has found that houses whose prices had been changed sell for less than homes whose prices had never been revised. The longer a house sits on the market, the more it becomes stigmatized in the minds of buyers–and the harder it is to sell.

So you must do your research. Study comps (check out online resources like zillow.com and trulia.com), ask a few realtors whom you trust and who are real experts on the local market. Figure out what your competition is charging.

2. Become a marketer

Marketing and advertising are super important right now. You must capture the buyers’ attention. Place lots of ads in the paper and on the web, as well as post your property on sites like realtor.com, zillow.com, etc. Whatever everyone else is doing, do more of it. Put signs in the yard and around the community, talk to everyone you know, leave flyers around the places that your target demographic may frequent: bars, cafes, restaurants, grocery stores, gyms. Figure out the profile of the buyer. Is your house in a “B neighborhood”? Then your target market may be someone moving up from a “C neighborhood”, because finally the price is right. Leave some flyers around some of those neighborhoods. Are you targeting renters? Leave some business cards on the premises (but don’t break any laws or upset the landlords). Join local investment clubs and send notices through them. And don’t forget about Facebook and other online venues where your target demographic may hang out.

3. Hire a super-duper agent

Yes, you may need to hire a realtor with a proven track record for success. In a market where houses are selling like hotcakes, you may get away with selling it yourself. But today, you must pull out all the stops. Make sure that the realtor can get the job done, ask your investor friends for referrals. You want to partner up with someone who understands real estate investors and what your objectives are vs. a homeowner. And pay them. Pay them more than your competition would. Guess whose property they will show first?

4. Don’t curb your enthusiasm

To be competitive, you must also make sure your property is easy on the eyes. Be sure your home isn’t an eyesore on the outside. At the very least, buyers visiting your home will expect a decent paint job. If the body of your house is in good shape, you may just need to touch up the trim. In addition to being attractive, a quality paint job (two topcoats) also protects against destructive effects of moisture, mildew, and the effects of the sun.

Clean up your yard as well; it’s one of the first thing potential buyers see before entering your home. Depending on the condition of the yard, you may also opt for some landscaping. But don’t go nuts; the NAR recommends that you spend no more than 1 or 2 percent of your home’s value on sprucing up landscaping before you sell. And if the season is right for blooms, place flowerpots around the entry and in the patio.

5. Be frugal, don’t overimprove

As you rehab the property, make it look updated, but don’t sink all of your budget into a state-of-the art kitchen and bathroom. I recently read (the source escapes me now), much to my surprise, that kitchens and bathrooms remodels, long considered the most profitable improvements to undertake, may return only 50 percent to 75 percent at sale–and only if you sell a year after the project is completed.

Making too many changes is a game of diminishing returns. Think twice before adding expensive upgrades, and ask yourself if it’s a “must-have” or a “nice-to-have.” Sticking to a frugal rehab budget will enable you to price competitively, pay your realtor well, and make a nice profit as well. So avoid expensive appliances and state-of-the-art systems. Even swimming pools can decrease resale value, as they cost a lot to insure and maintain, and many buyers don’t want the hassle.

6. Deal with deferred maintenance

Rather, spend your rehab budget on items that will protect the home from deterioration and damage, such as roof replacement, plumbing and electrical upgrades. These items will help preserve the property’s value, and you will be able to score bonus points with the buyer by showing them proof of recently completed work. Brand new equipment and warranties that are in place on move-in day will make the buyer feel secure about this significant of a purchase

7. It’s not your asphalt’s fault

If the driveway hasn’t been resurfaced in a while and doesn’t have major cracks, go ahead and reseal it. Just pick up some asphalt resealer and a spreader at the nearest hardware store. It’s a quick and cheap way to make it appear more attractive.

8. Don’t “One-Up” the Joneses

Make sure your house fits in with the rest of the neighborhood. You’ll get the biggest bang for your buck by keeping up with the Joneses, not by going them one better. So don’t add a third story on the house if all the other houses only have two. On the flip-side, if most houses have three baths and yours has only one and a half, adding a new bathroom will boost the value of your home. The same goes for bedrooms.

Also, remember to update your house’s overall style, if it looks like it’s stuck in the 70s or the 80s. But avoid making it too trendy to where the buyer will anticipate changing everything the very next year. Stick with the basics; simple white or beige walls provide potential homeowners with a clean slate on which they can envision their own personal touches.

9. Open your house to an open house

Hold open houses. A picture is worth a thousand words, but a house that the buyer can touch and feel is worth a thousand pictures. Make sure that your open houses are well-attended, even if you have to invite your friends and fellow real estate investors to make it seem fuller. If a homebuyer sees many other potential buyers in the room (i.e. their competition), she will be more likely to pounce on this great property.

10. All the world is a stage.

Let’s face it, home buying is an emotional experience. Some of your buyers may be buying their first home. Make them feel at home, appeal to their senses and emotions. Transport them to a happy time in the near future when they have already purchased the house and are moving in. When you hold open houses, stage the house: make it look inviting and ready for move-in. Furnish it to make it look like a home, and not just a house, but avoid cluttering up the property. Clutter can make a room seem smaller than it is. You can rent furniture for the duration of your open house. There are even special companies that you may hire that specialize in staging.

A bright, tidy home will sell a lot faster than a dingy one. So open up the curtains, show off the fresh paint job, turn on the lights. Hang guest towels in the bathroom, set the dinner table with the best china, and place fresh flowers in an attractive vase. Appeal to the potential buyer’s sense of smell as well. Clean carpets and drapes. Light scented candles. To make it seem more homey and to make your buyers salivate (literally), bake something right before the open house. You will be able to put out the muffins / cakes / whatever else you make to treat your visitors, as well as fill the house with the smell of freshly baked goods. Yum!

Senate Democrats are attempting to push through a controversial plan to allow bankruptcy judges to modify the terms of troubled borrowers’ mortgages as part of a larger package of foreclosure prevention programs. Allowing judges to “cram down” loan modifications over the objections of lenders could raise interest rates on mortgage loans by 1.5 percent or more, industry groups fighting the proposed changes to the bankruptcy code say. If the bill caused interest rates to go up by 1.5 percent, payments on a $300,000 30-year fixed-rate loan would increase by $300 a month. The bill would also mean higher down payments for home purchases and increased equity requirements for refinancing existing home loans.

The above is certainly likely to make the real estate investing climate slightly worse off than conditions are now (low mortgage rates, depressed housing prices). On the flip side, there are some positive points that the new bill (S2636) is going to bring to the table, which hopefully can curb the foreclosure frenzy.

Some of these positive points include: $200 million for pre-foreclosure counseling, and giving the authority to the state housing finance authorities to issue $10 billion in additional mortgage revenue bonds to refinance subprime loans and provide mortgages for first-time home buyers.

Opponents of the plan say allowing bankruptcy judges to change the terms of mortgages after the fact will raise the cost of borrowing, in part because investors who purchase securities backed by mortgages will have less confidence in their ability to collect payments or foreclose on properties.

I have to admit that after I stumbled upon this website by John T. Reed, profiling various real estate “gurus” - the good, the bad and the ugly - I could not tear myself away from my computer screen for several hours.

Real estate investing has been historically infested with the “gurus” and infomercials that prey on the less-than-sophisticated novice investor. Even though I myself am not an advanced investor by an stretch of imagination, it is quite clear from the get-go what some of these gurus are all about. I find this list a must-read, especially for beginners.

In the world of real estate investing, it is important to separate the truth from fiction, the good advice from the bad, and opportunistic schemes from ways to build real long-term wealth. We at MeetMOJO are committed to becoming a resource for real estate investors, so we will be working on providing the most usable and transparent information to our users and readers. Please share your experiences with our community, so that we can all become stronger and better educated.

Here’s to your success, wealth and health!

As so many homeowners are losing their homes to foreclosure, and the real estate market is at the forefront of our economy and politics, investors like us are trying to understand how our worlds are affected.

Because real estate prices have plummeted, quick flips and investing for capital gains are no longer no-brainers of yesteryear. This is due to a confluence of several factors, such as: 1) an oversupply of inventory driving down prices (with new foreclosures predicted to keep flooding the market), 2) tighter lending standards reducing the pool of buyers and 3) general market malaise and impending recession making just about everyone apprehensive about real estate .

Again, the savvy real estate investors know that during difficult times is when wealth is created. Real estate will always be a great investment mechanism, but it’s the exit strategies that will have to change. Hence, investors with experience are focusing their attention on longer term rental investments. Because of plummeting prices, many investors will see positive cash flow from their properties.

As such, it is more important than ever before for real estate investors to understand the relationship between homeownership and rents. I stumbled upon this blogpost from the Curious Cat blog, which I found very interesting and wanted to share. It summarizes the following research paper which focuses on the relationship between rents and home prices between 1960 and 2006. The article focuses on the rent-price ratio as part of real estate returns calculation (the higher the ratio, the more expensive the rents are vs. home ownership). The rent-to-own ratio is basically the “dividend yield”, which must be considered in addition to the capital gains, when calculating the return on the real estate asset. This article is an interesting “rough guide” to the rent-to-own relationship. As the capital appreciation on real estate had increased more rapidly than rents between 1995 and 2006 (the housing bubble), this second part of the “ROI equation” had decreased, which is important to consider. With rents on the rise and housing prices falling, the ratio is likely to get realigned with its historical average.

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.