John Mauldin #127

This week Bruce is joined by John Mauldin from Millennium Wave Investments. John is a New York Times best seller author, and he is the writer of “Thought from the Front Line e-letter”, which goes out to 1.5 million readers every week. He is frequently interviewed on TV shows around the world.

Bruce begins by asking John what his company does, and who his typical client is. John helps investors find investment managers that will work best for them.

John has a new series of books called “Eavesdropping on Millionaires.” Bruce asks John what has surprised him most about wealthy individuals. John says that he was surprised by how many of them felt a need to be in the market, and how many of them have rode the market all the way to the bottom. They did not have a sense of preservation. They did not understand they had won the race, and that they could stop running. They could have lived a comfortable lifestyle, but they continued to invest, and they have lost a large amount of their net worth. This is unlike anything we’ve ever seen. From here we are creating a new “normal.” This time it really is different. We’re watching a new generation become frugal. Savings rates are increasing from 0% to 5%.

Bruce asked John if it is more painful to go backwards financially then to have never been there before. John thinks that it is. John found some stats from David Rosenberg showing that people 55 years and over have seen an increase in employment. John says that people need to be careful when they are listening to people who are anticipating what will happen in the financial future based on what has happened in the past because the underlying forces in our current market are much different than they were before. Statistics also say that the boomer generation has not accumulated any wealth for 12 to 15 years.

Bruce asked John if most people become millionaires because of earning power or investments. John says that everyone has their own path. A large number of people who become financially successful are good savers. Many of them save 20 percent of their earnings. Most lived a frugal lifestyle and saved diligently. The number of people who made money investing is not as big as you would think. John’s company has surveyed 17,000 people, and they have found that it is harder to become a millionaire through investing than it seems.

Ludwig von Mises once said, “It may sometimes be expedient for a man to heat the stove with his furniture. But he should not delude himself by believing that he has discovered a wonderful new method of heating his premises.” When Bruce looks at how we are solving the crisis that started in 2008, he wonders if we are hurting our future by what we are doing. John thinks that in the short term, the answer is “no” but people disagree with him.

The problem we have started 15 years ago when we started leveraging ourselves and we started selling securitized mortgages that were not going to be paid. We have a certain amount of deleveraging pain that we are going to have to go through in order to get through this problem. We can do it in one year or ten years. One year means 25 percent unemployment and breadline depression. If we work through this problem over 10 years then we will experience slow growth, 10 percent unemployment, and difficulty in recovering the stock market.

John would rather take the longer route. John thinks that the Fed did the right thing by stepping in and putting liquidity into the market. People associate credit with cash which it is not. The level of credit that the world is using is imploding. There is far less credit to finance our future. The Fed can print money right now without creating too much future inflation. Someday they will have to stop and they will.

John thinks that the stimulus package idea was not a bad idea, but the way that we have created it and used it is wrong. We used the stimulus package to finance political objectives rather than actually doing things to stimulate the economy. We are borrowing money that our grandchildren will have to pay instead of building infrastructure they can enjoy.

We are planning on going into debt $1 trillion dollars per year for the next ten years but you cannot finance that much money that quickly; there are not enough takers. We were running a $700 billion dollar trade deficit, but that money came back and was invested in some sort of debt. That allowed us to create a large deficit, but now we only have $300 billion dollars worth of trade debt, which means that we have to go out and find $1.7 trillion dollars of money to buy more bonds. John thinks that we will probably raise taxes.

John says we could suspend all these new projects like healthcare like Republicans but there’s no chance that will happen. If this were the path, the dollar would become stringer but we’d still have to work through deleveraging and the housing problem. But, it doesn’t destroy the dollar. John feels the current administration’s solutions will only work for so long. The bond market will implode eventually if this keeps up and it’s an ugly scenario. If there are a enough democrats that come along that agree that the huge deficits aren’t good, taxes will roll out to keep paying for these programs. As long as the deficit is growing as fast as the nominal GDP.

John thinks out of these scenarios the last solution will result.

Bruce asks John if he thinks that we have seen the bottom of the housing market. John does not think we have. He thinks that housing problems will continue through 2010. We have more foreclosures coming. If you are at the point where you would like to buy a house, this is a great time to do so.

More coming next week. Visit thenorrisgroup.com or John at johnmauldin.com.

John is a Fort Worth, Texas businessman, now living in Uptown Dallas, and the father of seven children, ranging from ages 13 through 30, five of whom are adopted.

He was Chief Executive Officer of the American Bureau of Economic Research, Inc., a publisher of newsletters and books on various investment topics, from 1982 to 1987. He was one of the founders of Adopting Children Together Inc., the largest adoption support group in Texas. He currently serves on the board of directors of The International Reconciliation Coalition and the International Children’s Relief Fund. He is also a member of the Knights of Malta, and has served on the Executive Committee of the Republican Party of Texas.

He is a frequent contributor to numerous publications, and guest on TV and radio shows as well as quoted widely in the press.

John is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered in multiple states. John Mauldin is President of Millennium Wave Securities, LLC a FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB).

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Leslie Appleton-Young of CAR #122

Bruce Norris is joined once again by Chief Economist for the California Association of Realtors, Leslie Appleton-Young.

Bruce begins by asking Leslie about the CAR payment protection program. Leslie says that C.A.R. has a housing affordability fund, which was developed around 2002. It is a fundraising arm, run by a group of members, which gets proposals from local associations for various projects. Since the downturn, the committee has decided to do something that has potential to impact the market by putting people into homes. The committee has developed a $1 million dollar program, which can be used to pay a premium on an insurance policy for a qualified first time home buyer who uses a California Realtor.

The criteria for this program includes someone who has not owned a home in 3 years and you have to have been employed for a minimum of four months. The policy does not begin to pay on a job loss situation for six months, and then the policy will pay for $1,500 dollars of the mortgage payment for six months. If there are two buyers then the second buyer will get $750 dollar benefit. The application does not take place until the close of escrow. The buss has been tremendous. Leslie is hoping that this program will be able to help 3,000 home buyers.

Bruce asks Leslie if the funds given from this program need to be paid back and she says no. She says that it is an insurance policy that does not need to be paid back. She is hoping that this insurance policy will encourage 3,000 people will make the choice to buy their first home. Hopefully it gets people off the fence.

Bruce asks Leslie what encourages her most about the current California market. She has seen a tremendous amount of resiliency within the last year and a half. The damage that we have withstood since the beginning of the downturn can be compared to a forest fire; things get damaged, but in time you begin to see the green seedlings come up. Seeing 7,000 people attending the first time home buying fair was very gratifying to her. People are starting to look at homes as a place to live and a long term investment which is very important. The motivations and expectations are changing.

Bruce has studied migration for years, and he is sure that California is losing migration right now, but he believes that when California gains more job stability that we will receive more migration from all states, because we are a very desirable place to be, and our monthly payment will be lower in ratio of earnings here than in other places. Leslie says that it is difficult to predict what will happen to California because of all the socioeconomic and demographic changes going on in society. One of the things that will have to happen is making more livable cities. Technology allows you to live and work anywhere. It has been argued that the younger generation will be more mobile because they will have 8 jobs in their career, rather than just 1 or 2 like the boomers. Location isn’t as relevant because society is becoming so mobile.

Bruce believes that the retiring baby boomers will be attracted to California. They will have the choice to pay a $300 dollar gas bill, so that they do not freeze during the winter, or they can move to California where you can survive without a heater. Climate is huge.

The traditional buyer, which is the person that hires the Realtor that they knew or the person that drives by the for sale sign, has been replaced with the online buyer. Leslie says that 78 percent of home buyers use the internet during their selection process, and most of them say that they found their agent on the internet, but different surveys produce different results. The only explanation that she can come up with for the different results is that people are being exposed to more advertising and different types of advertising, which is why she tells her members that they cannot do only one kind of advertising. Only 20 percent of home buyers have claimed that they use print in their home search, and 75 percent of that 20 percent said that they looked at the weekend supplements for open houses.

Bruce believes that Realtors have to understand that customers are always looking for and up to something new. Leslie says that she knows a lot of Realtors who team up with people of different ages, so that they can appeal to a larger number of people.

Bruce says that there are two factors, shadow inventory and a large pile of notices of default that will affect trustee deeds and more REOs. He believes that inventory levels are giving us a false indicator, and that the REOs are going to greatly affect the market before the end of the summer. Leslie believes that we will see a second wave of foreclosures during the 4th quarter of this year. The notices of default are going to affect the market, there are Alt-A and option ARMs that are typically a five year fix, and there will be a continued loss of jobs. Lenders are saying the inventory is out there but clearly there is a bottleneck.

There are now three times as many foreclosed properties in comparison to normal listings compared to last cycle. That is the one ration that Bruce believes must rectify itself before a normal price environment can return. We have to get through the bulk REOs. The Norris Group used Krunching.com to track trust deeds back to the lender when they could not find the inventory reemerge as a grant deed or a listing, and they discovered that there were many cases like this.

Obama claimed that the government would give $75 billion dollars to loan modifications, and that not one dollar of it will go to investors. This worries Bruce because he fears that Obama may have been speaking about all investors, rather than just speculators.

Bruce believes that many of the problems in the 90’s were solved because of the 203K loan that investors could use, but this loan option has not reopened to investors yet. It allowed investors to buy a fixer upper and include their purchase price plus the repair cost in the loan. Bruce hopes that they will reactivate that loan for investors.

Bruce asked Leslie, “How do realtors view investors?” She replies investors are a very important part of the market. They are one of the forces behind the current market strength. One of the issues that she has heard is that first time buyers are having difficulty competing with investors. In defense of the REO agent, Bruce claimed that investors get offers when they protect the owner occupant from a failure. The inventory will not work for a conventional loan at this time.

Bruce asks Leslie how she feels about the cram downs. She says that CAR has been opposed to cram downs because cram downs increase the cost of financing for every one else. Bruce thinks that is a scary thing to start because it gives bonuses to people who declare bankruptcy. Usually that is something you do not want to do because it prevents you from getting a loan, but in this case it can help you.

Bruce asks Leslie what she believes will cause the market to become healthier. She believes that inventory and foreclosures are the most important factors. The future is unknown because it all depends on how quickly the economy reinvents itself.

Bruce asks Leslie if she thinks our current interest rates will remain low for a significant amount of time. Leslie believes that interest rates will increase significantly in a few years. The price and interest rate combination are an amazing bargain right now.

Leslie Appleton-Young is Vice President and Chief Economist for the California Association of REALTORS® (C.A.R.), a statewide trade organization with members dedicated to the advancement of professionalism in real estate.

Mrs. Appleton-Young directs the activities of the Association's Member Information Group. She oversees the analysis of housing market and brokerage industry trends, member communications, and membership development activities. She is also closely involved in the Association's strategic planning efforts and is a well-known speaker in California’s real estate community.

Before joining C.A.R. in 1984, Leslie Appleton-Young was a consultant with Telesis Inc. in Rhode Island. She also spent several years working as a research associate at the Federal Reserve Bank of Philadelphia and as an instructor at the University of Pennsylvania.

Mrs. Appleton-Young earned a Bachelor of Arts degree in economics from the University of California, Berkeley, and her Masters from the University of Pennsylvania.

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Leslie Appleton-Young of CAR #121

Bruce Norris is joined this week by Chief Economist for the California Association of Realtors, Leslie Appleton-Young.

Bruce starts by asking how many members C.A.R. currently has? In 2009, she estimates there are 160,000. Peak membership was in 2007 when there were 211,000 members. The numbers are better then both originally thought they would be.

Things have really changed and people are doing very different things than they were two years ago. More work is out there for REOs, working with investors, and first-time buyers.

Bruce asked if the membership encouraged by what you were able to say for 2009? Leslie says the market, in terms of transactions, has seen the worst. The market bottomed, in terms of sales, in the fall of 2007. We had over a 25 percent increase in sales in 2008. The problem is that there is a lot of uncertainty right now about everything, but particularly about the economy. That is what is hard to gauge right now. There has been a lot of initiative coming out of Washington that has not yet had a chance to impact on the street. It is easy for an economist to say “jobs are a lagging indicator”, which they are, but this restructuring could go on for a while, and it could get a lot worse.

Leslie says she is able to carry a message that the distressed REOs and short sale component of the market is bottoming, and slightly improving, with respect to prices. Sales have gone up sharply in the regions of the state, such as the Inland Empire, where you have a significant amount of the listing inventory falling into the distressed category, so that housing is extremely affordable. There are parts of the state where homes are selling below replacement cost. I think that is very encouraging, but there is a cloud over the country and the world, because it is uncertain how long this recession will be. That will have an impact, and I do not think anybody knows.

Bruce says that the hardest part about this real estate downturn is you have to consider so many factors that you have never had to contemplate before. The local, national, and global economy comes into play. Leslie says we have political issues, we have environmental issues, we have swine flu, and we have the economic issues that are really difficult. Housing is just one part of it. Clearly, subprime started the ball rolling about 3 years ago. There is no doubt that this is a systemic issue related to risk taking, transparency, fee driven events with no accountability, and so on. In order to rebuild confidence there needs to be some major changes in how these industries are regulated. That is happening in Washington now.

Bruce says typically when you start down the path of regulation there’s a danger of over-regulation. Leslie says that is possible, but there needs to be more regulation now so that people know what they are getting when they make an investment. That is what is really crippling the lending market. Investors do not want to have anything to do with mortgage backed securities, because they do not trust the paper. There’s no way around it because you need this intangible item called confidence and trust, which is not going to come back on its own.

Leslie says she never thought she would never see the statewide media and home price drop 38 percent in one year. Bruce says he agrees. Investors are buying properties right now at prices we have not seen since 1987 because of the REOs. The median price is probably not highly accurate because there is a mixed inventory.

Leslie says that is absolutely true. She debates average versus median with people all the time. The issue is the fact that it is the moderate and low end of the market that disappeared in 2006 and 2007, and the high end was maintaining until September of 2007 when you could not get a jumbo loan. In 2006-07, the market contracted, in terms of transactions, by more than 20 percent during each of those two years, and yet the median home price was at a very high point.: The high end was still going strong, but that all changed in September 2007. One of the themes, in remarks to C.A.R. membership is “leverage your local market knowledge”, because a national, statewide, regional, or county statistic is not going to be enough. It will not be accurate for the decisions that your clients are making with respect to a particular neighborhood.

Bruce talks about a recent survey where the customer was asked, “What will the direction of prices be in 1, 3, 5, or 10 years?” The dominant answer was “I do not know”, and yet they still bought and Bruce was surprised. Leslie says there are a lot of things going for the market right now. The federal government is buying rates down to 4.5 percent, there is an 8,000 first time home buyer tax credit, there is a 10,000 dollar state income tax credit for construction, there is the FHA financing, there is conforming loan financing that is fairly readily available, and you are looking at prices that are half what they were 3 years ago. Bruce says that interest rates are also 2/3 and the affordanility number is way high.

Leslie says if you look at PITI in the last two years, you can see that it has been cut in half. Bruce talks about his 24-year old daughter and purchasing her first house. It is a big thing when you have your first chance to own a home. It’s an FHA purchase, in which she will have $4,000 or $5,000 dollars down, will receive an $8,000 dollar check from the federal government. She previously rented a room for $700 in another area, and her payment on a perfect fixed house is $804. Bruce says most families have two incomes so he doesn’t think there has ever been a time where California real estate has been this affordable.

Leslie says she challenged an audience last week to examine what their assumptions are about price appreciation over 3, 5, and 10 years, and to make sure that was not driving their decision. It was important for them to understand that housing prices come down.

Bruce says that is part of this issue. There were a lot of realtors, investors and home owners that were very accustomed to just owning a house that created an extra $50,000 to $100,000 dollars whenever they wanted it. Leslie says homes won’t be seen as a piggy bank any more.

Leslie challenges everybody to look back at the past 3 or 4 years, and study it, and be engaged in the public policy debate that is going on in Washington. Look back at the post World War II period up until 2002, you can see that housing debt was different. People treated the home ownership process very differently. It was hard to get a mortgage. Foreclosure and getting into trouble was not viewed as an option. That did not happen unless there were extraordinary circumstances. The fact of the matter is there were a significant number of people who refied out of reasonable loans into risky loans. Many of the deals that went on during the boom were cash out, so people were put in harm’s way.

Bruce says important is the velocity of this downturn. Leslie uses a slide from the late 70s that shows it took 5 years for the market to shrink about 60 percent. In the last 80s and early 90s it took 5 years for the market to shrink. This time it has taken 3 years for the market to drop 44%. Prices are typically sticky on the way down because if the market is not good then why would discretionary sellers decide to sell. In the last couple years there has been a lot of nondiscretionary sellers.

Bruce says that the job issue doesn’t look like it will be solved immediately. Leslie says the big question, in regards to the housing market, is the economy. The problem resides within job losses and confidence. The problem is not that people cannot get financing, particularly conforming financing and FHA.

Bruce says in Riverside, 45 percent of the buyers are under water. Then other people are out of work, or under employed. When you add up these pieces you realize that you need the new buyer to emerge, or you need to attract migration to California, and jobs play a part in that. We are going to have a challenge in the next 18 months while we find out who is going to buy all this stuff.

Leslie says she’s been floored by the first time buyer response, and the affordability is clearly the trigger, but there were a significant number of people who were on the sidelines waiting for this to happen, and they timed it right.

Bruce says there is a definite shift to the type of buyer. It’s really geared towards a first time buyer.

Leslie says she thinks most buyers are getting fixed-rate loans. She doesn’t know why anyone wouldn’t get a fixed-rate loan.

One of the things said in a recent survey was that 56 percent of people qualifying said that on a scale of 1 to 10 of difficulty in getting through the financing they had a scale of 9 or 10, over half the people found it pretty tough to get that loan closed.

Leslie says it was a survey that was done in the middle of last year, so it will be interesting to see if the scale changes when we do it again this year. Leslie’s hope would be that the Obama initiative helped that. Another issue with difficulty is not that the funds are not available, but you have got to document everything. You have got to have a very strong FICO score, and you have got to have your W2s. The problem is not that the money is not there, it is that they want to make sure that they are going to get their money back, and who can blame them?

Bruce says you have to set up the next set of loans to be safe, so when there is another mortgage backed security in our future that it is actually as advertised. Leslie says transparency is critical for us to get our market back. She said on many occasions that rapid price appreciation trumps underwriting. She does not think we can count on that any more. It is an incredible risk to take.

Bruce said the projected median price for 2009 was around $250,000 and he wonders if that is where we’ll end up. Leslie says $250,000 is a reasonable number. When CAR calculates a statewide median for the entire year it is recalculated from scratch. It is not the average of monthly median. They include everything that is sold during 2009 into the bucket, and then get the median. What I am seeing in the market today is that the price softness is at the high end. It is not a huge factor in the market right now because that is a small part of the overall sales. I thought it was very interesting in our March data that we saw an increase in the median home price from one month to the next. It is likely that we are bouncing around the bottom in terms of prices. There’s a lot of talk about multiple offers at over asking price.

Join Bruce and Leslie next week as they continue the conversation.

Leslie Appleton-Young is Vice President and Chief Economist for the California Association of REALTORS® (C.A.R.), a statewide trade organization with members dedicated to the advancement of professionalism in real estate.

Mrs. Appleton-Young directs the activities of the Association's Member Information Group. She oversees the analysis of housing market and brokerage industry trends, member communications, and membership development activities. She is also closely involved in the Association's strategic planning efforts and is a well-known speaker in California’s real estate community.

Before joining C.A.R. in 1984, Leslie Appleton-Young was a consultant with Telesis Inc. in Rhode Island. She also spent several years working as a research associate at the Federal Reserve Bank of Philadelphia and as an instructor at the University of Pennsylvania.

Mrs. Appleton-Young earned a Bachelor of Arts degree in economics from the University of California, Berkeley, and her Masters from the University of Pennsylvania.

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Appraiser and Investor Rick Solis #105

Bruce Norris is joined this week once again by appraiser and investor, Rick Solis.

Bruce and Rick start by talking about market value. Rick says market value is what a ready, willing, able, and knowledgeable buyer is willing to pay for a property. Bruce asks if this definition is being held up with lenders in today’s market. Rick says that lenders are not. Bruce talks about how real estate auctions do not reflect true market value compared to fixed inventory. The majority of the inventory needs fixing and must be sold in a certain time frame.

Rick says the market is very different from the 90s. In the 90s, Rick says that there used to be a box that said “declining market”. If that box was checked, the deal wouldn’t go through. Now, the lenders will do those transactions but lenders require more comparables. It becomes difficult to find similar inventory. The banks will want to see the appraiser adjust for the market. Appraisals used to be good for 6 months. With a declining market, comparables need to be 60 days or less from the day of funding. Lenders want at least 2, preferable 3, comps within 60 days of funding.

Bruce asks how long appraisals are accurate in today’s market. In some areas, Rick says prices continue to drop quickly so not long. Every area is different. Bruce says in the last 60 days, appraisals are becoming more of an issue. Bruce talks about a recent example of an issue with an appraisal on a property with multiple offers. Bruce asks Rick what will happen if lenders don’t change their stance on valuing properties and creating comps that reflect perfect condition.

Bruce heard recently that lenders are considering doing refinances without appraisals because of the price declines which Rick has heard as well. He thinks that’s an interesting way to solve the issue. Rick says they keep throwing whatever they can at the issue. Rick says they did the same type of things during the Great Depression. Bruce talks about similarities with policies from the Great Depression and now.

Bruce asks if before and after pictures on properties are helpful. Rick says videotaping properties before and after would be a great help but if there are too many repairs they may want to see permits. He says to document all multiple offer situations.

Bruce and Rick then start talking about the principle of substitution. Bruce says there’s a short supply of good inventory. There’s a glut of inventory that needs fixing. Bruce feels bad for appraisers who have to fight for real prices and they have to be careful. Banks are only looking at pictures and don’t really understand what’s happening in the area. Rick takes many more pictures than is required to show banks why prices are where they are at.

Bruce asks about arms-length transactions. Bruce asks about what would happen if The Norris Group carried its own paper and created higher comps. He asks if that would be a conflict because of arms-length transaction rules. Rick discusses the potential issues and uses the example of builders.

Bruce asks what percentage of sales has concessions in the current market. Rick says almost 100% of transactions on properties that are on the market for two weeks or more have concessions although it’s not always easy to figure out what those concessions are. Appraisers don’t always know the concessions.

Bruce asks what percentage is allowed for condition in appraisals. Rick says condition can be about 10%. If you adjust more, it can become and issue. It becomes easy with comparables but more difficult if the data isn’t there to support line item adjustments for over 10%.

If the appraisal comes in wrong in the eyes of the bank, you get blacklisted and there’s a possibility of not getting paid. Rick says review appraisals were not as common when the market was going up. Some did but they were way more lenient. Review appraisers typically do a desk review and never go see the property. They are looking at online information. These review appraisers are typically hired independent contractors.

Bruce asks Rick what he would like to see changed. Rick says not having the lender paying for the appraisal would be better. That way there would be no pressure and more honest appraisals could take place.

Next week is Christopher Thornberg with Beacon Economics.

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Appraiser and Investor Rick Solis #104

Bruce Norris is joined this week by appraiser and investor, Rick Solis.

Rick has been appraising properties since 1989. Rick says it was a perfect time to start because he got to see both cycles. In 1989, you didn’t even need a license. Education, Rick says, has not improved appraisals. Bruce talks about how he got his appraisers license and why. They both say much of the business is street smarts.

Rick got into the business because he purchased a Dave Delgado seminar. He started buying a lot of houses. He realized he needed to know how to evaluate properties.

Bruce asks if appraisers are under pressure to come in at a certain number. Rick says pressure is coming from several sources including agents, buyers, sellers, and banks. From 2004-2006 the pressure was for the appraisers to come in high. Today, banks put appraiser reports through many more hoops. They are looking for something wrong with it and they have review appraisals done. They also use an automated valuation model (AVM) to check numbers. In a down market, the AVM is not an issue. It’s a real problem in an up market. Everyone is just being much more conservative.

Bruce asks Rick how he compares this downturn from the 90s. Rick says this downturn is much worse. There was a more gradual decline over several years in the 90s. Prices are much more erratic in the current market and it varies from month to month.

Rick says areas with lots of new houses, where there are lots of first-time homebuyer inventory, and far out areas seem to have gotten pummeled. Sometimes 60% of the value disappeared. Rick tries to turn down appraisals for irregular products (dirt roads, manufactured homes, etc). It’s very difficult to find comps and arrive at a number.

Rick says in 2009 he expects to see drops in pricing every month for the Inland Empire. Rick says in his area in LA, sales seem to have dropped by 75%. Prices are still coming down there too. Bruce asks Rick what percentage of sales in Victorville were REO. Bruce says 92% of all sales in the area were REO. Reselling in that area would be very difficult. It would be very difficult to get an appraisal too. When 98% are vacant and need work and almost all sales are REO, it’s very difficult to get comps to substantiate a higher price.

Bruce asks what Rick is running into when working with investors. Rick says too many investors are going off the sales price in the MLS. The numbers are incorrect at times because of bad data entry or concessions. Some of the busy REO agents are having assistants enter in the data and they aren’t being careful.

Rick says he uses the MLS but confirms those prices with public record. He uses Real Quest and Dataquick to make sure his numbers are correct. Luckily, data is getting a little better and more complete.

Rick says listings aren’t so much calculated into his appraisals but he does spend more time on pending sales.
Bruce asks if the goal for appraising properties for an investor is different then doing to for retail buyers. Rick says working with buyers is different because the buyer is dictating the price. It becomes its own comp. The investor purchase is more difficult.

Tune in next week as the conversation continue.

Rick is the senior appraiser at Ace Appraisals. Rick has been a full time real estate appraiser since 1989 and a HUD approved appraiser since 1993. He has extensive investor and appraisal experience in residential real estate in the Los Angeles, San Bernardino, Riverside, and Orange County areas.

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Craig Hill with The Norris Group #103

Bruce Norris is joined once again by Craig Hill (hard money loan officer at The Norris Group) and Greg Norris (full-time property buyer for The Norris Group.

Bruce asks Craig about calls from first time investors purchasing homes with structural damage and mold. Craig says he steers newer investors with no construction background away from heavy fixer uppers. Houses don’t have to be a complete disaster. You don’t want their first house to be a bad experience.

Bruce asks Greg what he is doing differently from one year ago to buy and sell properties. Greg says he hasn’t changed that much but has gotten more efficient. At the very beginning he was doing cheaper repairs but now there’s a little more upgrades. Instead of linoleum we use tile in some areas and instead of tile on counters he puts in granite. We need to be the best on the market.

Realtors that deal with buyers are saying great things. One in particular isn’t wasting any more of her time on REOs and has decided to only show our homes because of the quality.

Greg says price and condition are really important in this market. Greg says the higher end listings have disappeared and TNG is typically the highest. Inventory is very low. Even though The Norris Group is the highest, the homes still sell. Consumers don’t want to deal with the fixers and want a nice home.

Appraisals are a bit of a problem. Greg says he’s having to set a top level. Buyers are wanting to see a top payment to be $1200-$1400 per month which is similar to rent if not a little less. Greg talks about the staging of the homes and how it helps with presentation. It helps online showings.

Bruce and Craig talk about the hold ups with selling. Craig says financing and appraisers are the biggest issues. There seems to be willing buyers for fixed homes. Craig says homes are being fixed better than they were in the 90s. More is being spent.

Craig is having to tell people not to chase the market and get very realistic on price. He often calls clients if a loan has been going more than five months. He wants to make sure the investor gets to the finish line. It’s difficult when prices are declining.

Bruce asks Greg about appraisal issues. Greg says the last 30 days has been much more difficult. Banks are so scared they are overcompensating. Appraisals over one month are considered old. Three months is considered too old.

Bruce asks about FHA transactions and the 180 day rule. Greg says he’s never been asked for a second appraisal. Bruce thinks maybe the review appraisal is the second appraisal. Bruce says that some of these appraisers are sitting 500 miles away.

Bruce asks Craig about loans that can’t seem to close. Craig says there is willingness on the side of the buyer but it’s the financing piece that’s causing problems for California real estate transactions. The checks and re-checks of the buyers stall closings.

Bruce asks Craig about the many new trust deed investors The Norris Group has had come on in the last 90 days and what makes them feel secure about doing investments. Craig says perceived safety is key. Craig makes small loans amounts, the investor is a special borrower, and typically the worst case would be the money lender ends up with a property.

Bruce brings up the fact The Norris Group was very conservative over the past few years so some of TNG’s main money investors placed their money elsewhere. Bruce asks about some of the uh-oh stories Craig has heard about. Craig says money investors are attracted to the return and sometimes forget there’s risk, especially if they had been working with TNG who has a very good record.. He told some to be patient and that TNG would be busy again soon. Some of these investors didn’t wait, went elsewhere, and now have a small portfolio of non-paying loans.

Bruce asks Greg what the secrets are to keep good contractors interested in doing our work. Greg says that it’s important to be easy to deal with. We don’t stand in their way and we have work. Consistent work is a big deal.

Bruce asks if there’s red flags when dealing with contractors. Greg says when contractors ask for money before work is done it’s a red flag. Greg typically pays every two weeks. The Norris Group pays for the parts. TNG knows what parts we want installed and we’re really just contracting labor. Greg says contractors resisted his method of buying all the parts at first but later said they liked the system. It allows them to have less money out of pocket and actually take on more jobs. Home Depot was difficult to work with at first but now after dealing with them for a year, it’s really easy and everything happens over email.

Craig says repairs is still a big hurdle but they get used to it. Sometimes Craig forwards them before and after photos and videos of an investor’s work. He’s had money investors turn down a project but then they see before and after videos of an investor’s work and they sign up for several. Once they see what investors do, they feel more comfortable.

Craig talks about holds for repair money. Most houses are needing major repairs so almost all loans have money held for renovation. Red flags for Craig are investors who want money before repairs are finished. Draws are given after things are completed. This protects the money investor and also makes sure the investor stays on track.

Bruce asks Greg how he handles all the showings of the properties since he lists all of the properties for The Norris Group. Greg says he doesn’t show them at all. If interested buyers call, Greg used to tell them to call their local agent after figuring what they were looking for. Greg wants buyers to be pre-qualified and doesn’t have a time deal all of that. He really relies on buyers agents.

Bruce asks Greg how we protect ourselves during escrow. Greg says he does all of his due diligence up front now to make sure he doesn’t go into escrow with someone who can’t close. He wants all buyers to be pre-qualified and not just pre-approved.

Craig Hill has been in the hard money loan business for over 25 years. Greg Norris has been working as the Norris Group's full time property buyer for going on two years. More information about The Norris Group at thenorrisgroup.com and tngproperties.com

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Craig Hill with The Norris Group #102

Bruce Norris is joined this week by the loan officer for the Norris Group, Craig Hill, and the full-time property buyer for the Norris Group, Greg Norris.

Bruce asks Craig about how long he’s been in the hard money loan business and who the typical borrower was when he first started. Craig talks about buyers he used to work with and how it changed 20 years ago because of rule changes. Craig then talks about how he started working with Bruce and how it made much more sense to lend to investors. Craig says the investor has made not only more sense but are better at making payments.

Bruce then chats with Greg about his past year and a half as a property buyer. Greg talks about his early experience watching trustee sale buyers and what they liked to buy. Greg talks about loans available for investors and how conventional loans are currently at a liit of four.

Bruce asks Craig why lenders are hesitant to lend to investors. Craig says lenders have a false perception that investors are bad to lend to. An investor has more money down and has just as many reason to stay in a home as an owner occupant but lenders don’t want to be involved in that transaction.

Greg talks about how long ago he started making offers straight out of the MLS. Greg says making offers straight out of the MLS was not successful in early 2008 as the lenders wouldn’t budge. In the first six months of 2008, zero deals came out of the MLS, most were coming from auction. Now towards the end of the year, almost all came from the MLS that The Norris Group purchased. Now, The Norris Group is buying about 5% of the offers made.

Craig talks about last minute funding calls and why these investors are in a rush. Craig goes into detail why people with money make these investor loans. Craig says our main target market are seeing loans being made of $85,000 to $120,000 where last year those same homes were being bought for $200,000. There’s been a big change in price. Money sources have become a little nervous.

The perception right now is everyone wants a cookie cutter deal. Everyone wants a $100,000 loan and money sources do not want to be aggressive. Those that want larger loans or are buying in areas out of comfort zone areas will need more in money in the transaction. Money sources in Northern California are wanting to invest in smaller loan amounts and also invest in Southern California where they feel TNG performs best.

Most hard money loans have to have investors put more money into the deals right now. Different sources have gone out the window because of the market.

Bruce asks Greg what he is looking for now as he is making offers on things inside the MLS. Greg says he is looking for anything within a $30,000 range where he thinks he can buy it and make a profit. Sometimes these are short sales and sometimes his offers don’t get accepted for months. Sometimes he gets deals because other investors fall out and he’s the only one left.

At this point, Greg is not being able to talk with people directly often. Right now, banks seem to be dictating to REO agents where before there was much more relationship involved. Greg says he sometimes gets no reaction from REO agents when making offers. Every agent reacts different. Some email when we didn’t get a deal and some do.

Bruce says between 2000-2006 most of our hard money loans came from investors purchasing from people directly. Craig says it’s now changed almost completely where 100% are bought out of the MLS, through auctions, and occasionally from trustee sale and probate. The MLS at this point is creating the most real estate opportunities.

Out of the 40 properties Greg has purchased this year, 30% of the deals were auctions, the rest were from the MLS. Greg is not looking forward to attending auctions. It’s a lot of work for sometimes no results. REDC and Hudson and Marshall have been mixed this year.

Craig says the inventory he is making hard money loans on is different form the 90s. In the 90s there were more 30s and 40s built home located in San Bernardino and Moreno Valley. This time, the investors are being savvier. Investors are buying a little bigger homes and newer homes. The inventory is much better.

Craig talks about why some investors get frustrated because they can’t participate in our money program. Credit issues aren’t the biggest issue. Liquidity is just very important right now. Most people don’t mind hearing “no” because we’re trying to set them up for success. Some investors just don’t understand the process.

Bruce talks about deals Craig turns down and investors coming back later thanking him for now allowing them into the deal. Craig finds that very gratifying. More next week.

Craig Hill has been in the hard money loan business for over 25 years. Greg Norris has been working as the Norris Group's full time property buyer for going on two years. More information about The Norris Group at thenorrisgroup.com and tngproperties.com.

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Nicholas Manfredi of the Short Sale Processor #59

Bruce Norris is joined once again by president of the Short Sales Processor, Nicholas Manfredi. Bruce and Nick talk about what attracted Nick to the world of California real estate investing, his background in data, if sales was important to being an investor, how the Inland Empire Investor’s Forum began, how his Southern California investor club has helped his business and skill set, what choices people have when facing foreclosure, what mistakes California investors are making when approaching people in foreclosure, how different short sale businesses are structuring their business, the ideal time frame to complete the short sale process and have the lender participate, where lenders are currently participating in the foreclosure process, the credit difference between foreclosure and a short sale, what someone facing foreclosure wants to hear when doing a short sale, lenders and their focus on BPOs, building relationships with loss mitigation departments, turnover in the loss mitigation industry, the BPO process, the amount of time per California short sale file, synergy with short sales and REO brokers, Nick’s upcoming short sale seminar, the structure of a successful California short sale business, doing what you’re good at, learning to set up a machine to do the most profitable things, percentage of response for short sale marketing, why education is always less expensive then learning the hard way, how long the short sale business in California will likely last, price adjustments in California, and his website theshortsaleprocessor.com.

Nick Manfredi is a real estate investor, speaker and corporate business owner. He has been featured in Fortune Magazine and The LA Times, and contributed to articles in the news media including CNN Money Magazine, The Press Enterprise, and RISmedia.

In 2002 Nick established one of Southern California’s most respected real estate investment club’s The Inland Empire Investors Forum. Focused on volume, he continues to wholesale 80% of his acquisitions.

Eager to capitalize on California’s changing market Nick co-founded The Short Sale Processor LLC. As CEO of Forum Real Estate Investments Inc

Nick continues buy residential & commercial property in California and Texas. Nick resides in Southern California with his wife Susan and 3 boys Gabriel, Nathan and Jacob.

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Nicholas Manfredi of the Short Sale Processor #58

Bruce Norris is joined by short sales expert and President of the Short Sale Processor, Nicholas Manfredi. Bruce and Nick discuss how hard prices have been hit in the Inland Empire, different ways to evaluate homes, why Nick likes Corona as an investment area, what areas of the housing market are safe, inflation and interest rates and their effect on investment decisions, percentage of homes in Corona in a negative equity position, what conversations are like with current sellers, the journey of someone facing potential foreclosure and the option of a short sale, California and a possible depression, rent drops in the Inland Empire, the choices for someone in default, what some home owners have been spending per month on a home payment, the willingness for lenders to really help people to save their home, misconceptions on short sales, Realtors and the misunderstanding of taxation and debt relief, the Debt Relief Act of 2008, if you need to be licensed to do short sales, retail value and short sales, working with a Realtor who understands the process, reasons why lenders decline short sales, the MERS system, lenders position on borrower being behind before short sale consideration, how to attract people to short sales if not through mailers, how the Short Sale Processor works, the money to be made by helping sellers and lenders, how brokers can make just as much money with short sales as they can with a regular transaction, and finally, theshortsaleprocessor.com.

Nick Manfredi is a real estate investor, speaker and corporate business owner. He has been featured in Fortune Magazine and The LA Times, and contributed to articles in the news media including CNN Money Magazine, The Press Enterprise, and RISmedia.

In 2002 Nick established one of Southern California’s most respected real estate investment club’s The Inland Empire Investors Forum. Focused on volume, he continues to wholesale 80% of his acquisitions.

Eager to capitalize on California’s changing market Nick co-founded The Short Sale Processor LLC. As CEO of Forum Real Estate Investments Inc

Nick continues buy residential & commercial property in California and Texas. Nick resides in Southern California with his wife Susan and 3 boys Gabriel, Nathan and Jacob.

Listen Now