Trouble In The Real Estate Markets: Any Silver Lining In This Cloud?

It’s a no-brainer that credit in both the residential and commercial real estate markets is a bit, shall we say, tight right now and that there may not be any drastic improvement to the situation anytime soon. But how bad could it be? After all, we’re the U-S-of-fricken-A. We’re the dominant economic power in the world. Right? Maybe not. After about a week of mentally digesting what I’d been reading and hearing, I’m thinking that we may not be such an economic powerhouse anymore, like we were back in the good ol’ days when I was a kid getting beat up daily in school, and when gasoline was just 50 cents a gallon and a bottle of soda pop cost only a dime.

China is now the largest holder of U. S. debt and I don’t see this changing for many years unless we come to our senses and start taking this whole budget thing seriously. But right now, I’d like to take some time to say, “ni hao”, to my future bosses and landlords and let them know that, deep inside, I always knew that Cato could kick Inspector Clouseau’s a$$ any day of the year. I actually cheered for him, so if any of my future bosses are reading this, please remember this when you give us our Christmas bonuses, okay?

On a more serious note, our residential markets are bad enough. There are some pundits, like Freddie Mac Chief Executive, Ed Haldeman, who think that the worst is almost over in our residential housing markets. These geniuses may be in for some very unpleasant surprises soon. Haldeman, as recently as January 26 of this year, stated, “From home sales to house prices, it appears nationally we may have approached the bottom”, shortly before Fannie Mae just recently asked our government for another $15.3 billion in bailout money to keep it afloat. This from a guy who is in charge of one of our major institutions that is supposed to help stabilize the mortgage markets by expanding the secondary markets for these loans. Now I realize that one of Haldeman’s unspoken duties is to keep the public from panicking as well as keep us from pulling our money out of the banks in favor of stuffing it in our mattresses and burying it in our backyards, but it strikes me as a bit strange that a person in such an influential position could be so delusional as to ignore what is going on around him at his job every day. I’d sure like to know what Ed was smoking when he made that statement because it must have been some really good ganja.

While there may be a temporary leveling of, or even a slight rise in, the residential markets because of artificial and temporary means such as the First-Time Homebuyer Credit, I’m going to venture the guess that as soon as these programs for buying homes run out of money, this Titanic of a real estate market will probably go right back down beneath the waves of our economy for several more years. As a sign of the times, I’m now working four short sales in Florida on residential properties owned by one seller, and for two of the properties I’ve already gotten verbal agreements from the loss mitigators at the banks to discount each property by about 64% from the debt owed by the seller. I’ve never been particularly good at short sales and can only conclude that these banks are getting more motivated to let properties go for bigger discounts now rather than risk getting stuck with them by taking them back in foreclosures.

This brings us to our commercial real estate markets. The financial statuses of many commercial properties seem to be very much up in the air as loans come due and more than $1 trillion in commercial debt must be refinanced or paid off in the next few years, according to Andrew Bogdanoff, Chairman of Remington Financial Group Incorporated. I used to think that $1 billion was a lot of money but now we’re talking about trillions of dollars, not just billions anymore. I don’t even know for sure how many 0’s are in a trillion. The U. S. capital markets aren’t liquid enough to handle even half of that amount.

Although things look bleak in the commercial real estate markets, I don’t think that the commercial markets are really as in as bad a shape as this quoted “$1 trillion plus in necessary impending refinancing” makes it appear, at least not for those who didn’t get caught up in the euphoria and speculation that occurred prior to 2006. As I mentioned in a previous blog post, debt service coverage ratios, which are indicators of the ability of income properties to service their own debt, are in healthy ranges for stabilized properties throughout the country. For the most part, banks don’t want real estate, they want money. Especially for performing loans, I seriously doubt that the banks will refuse to allow the refinancing or modifications of many these commercial mortgage loans. The commercial properties in danger are most likely the ones where the owners bought them primarily on speculation in the good times or where some cataclysmic event seriously changed the properties income or characteristics, such as a fire causing enough damage to require that the tenants of an income property move out and stop paying their rent.

As with my apparently higher success rate with short sales in the residential markets, I may have an indicator showing that the banks are becoming more motivated to get rid of their commercial liabilities. In the past, I would call a bank and ask for their REO’s, i.e., their “real estate owned” properties, and would usually get a loan officer on the phone who would tell me to take two drop-dead pills and call back in the morning. But now, some of these loan officers are at least pretending to take my phone number and email address for future reference. Two banks even called me last week with commercial paper and properties to make offers on. This is very promising for those of us who want to get more into commercial real estate, whether it be by purchasing the properties or purchasing the debt on those properties.

As long as the strategy is sound, there is probably never really a bad time to invest real estate. Successful companies, such as Microsoft, CNN, and General Electric, were started in The Great Depression or a recession and they are still in business as some of the most dominant companies in the world. Likewise, recessions, or even another Great Depression, can be great times to invest in real estate, if done properly by paying close attention to the numbers and the markets.

Right now, we’re focusing mainly on residential properties with little or no equity, as well as commercial REO’s or other commercial properties that have appraisals, we don’t care how old the appraisals are, and that can be bought at wholesale prices. If it is commercial and can be bought wholesale, we have financing in place for as low as $500,000 and as high as $50 million. In case you’re curious, there is a silver lining to the cloud hanging over the real estate markets but it is just disguised in the color green, as in greenbacks. This party’s just beginning and our friends, Washington, Jefferson, and Benjamin, will all be there.

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“Junk” Financing For Real Estate And Business: History Always Repeats Itself

The Spanish philosopher and author, George Santayana, once said, “Those who cannot remember the past are condemned to repeat it.”

Apparently, we haven’t remembered much from the past, especially in real estate and business finance. If you review market history, you'll see the same things occur over and over again, just under different disguises. It’s laughable whenever some real estate or business “guru” makes a statement saying that his or her boot camp, home study course, or other products and services will teach us how to take advantage of these “never-before-seen” conditions and “Why Never Before in History Has There Been a Better Time to Buy Real Estate”, or other such nonsense (disclaimer: I don’t know whether the writer of this linked article is a scam artist or not, I only know that I sure wouldn’t trust him without some extra-careful due diligence on his background). These statements are typically made by people who only want to make a quick sale and who don’t care to cultivate long-term client relationships. These people are not true, ethical practitioners in our industry. They will surely make a few sales just from the sheer numbers of eyeballs they get to read their bold statements, but the information from these kinds of people will most likely be outdated crap that doesn’t work anymore, if it ever did.

I firmly believe that history repeats itself so if I ever make a statement saying that “this is the best time” or “this is the worst time” for anything, I always follow this up with a time frame such as “…in our generation” or “…in the last xxx years”. This being said, it may be unwise to ever say that there is a “best” or “worst” time for anything involving financing, even with a time frame on it. For example, there are now courses, boot camps, and seminars popping up out of the woodwork that teach people how to tap into private-equity financing and private lenders to fund real estate deals now that conventional bank financing is more difficult to obtain than it was several years ago. The organizers and presenters of these events claim that “this is the best time ever to obtain private funds and give your investors high rates of return” since people are supposedly tired of the anemic returns presently paid by bank Certificates of Deposit (CD’s) and money markets.

One such organization that seeks to capitalize on the private funding fad, Cash Flow Depot, even has an online seminar completely devoted to teaching ways to obtain private-equity financing now. One of the presenters claims that people who have 1031 Exchange funds are the most motivated to lend money to you since they are under a time deadline to get this money into other real estate investments and that she will teach you how to get this money to fund your deals. She is correct in that people who have 1031Exchange money are motivated by deadlines but I don’t really think she is in the business of real estate and raising capital anymore, if she ever was, since it is a real hassle to use 1031 Exchange money to fund your deals. If she really is in the business of raising private funds for real estate deals, she would know this well enough to not just blindly use this as the main selling point for her products and services. One of my mentors who I am in a joint venture deal with now, Dave Lindahl, will no longer use 1031 Exchange money to fund his apartment deals because of the hassles associated with it. As you might imagine, I have a great deal of respect for Lindahl and don’t hesitate recommending him to anyone who wants to learn about the apartment investing business. I also have another mentor in Atlanta, Georgia who teaches me to invest in commercial real estate but I am reluctant to mention his name without first getting his permission since he is a very private person.

Teaching just anyone to raise private-equity financing is dangerous. In 2008, one such anyone in one of my target markets, Augusta, Georgia, raised millions of dollars in private funding from other people to fund her deals and she ended up losing over 40 houses to foreclosure as well as about $3.7 million of this private money, which included retirement money (think “Bernie Madoff”).

Back in the 1980’s, also known as The Roaring 80’s, there was a similar surge in private-equity financing that was pioneered by Michael Milken. Milken, also known as “The Junk Bond King”, did prison time for securities fraud and racketeering, but I think he actually did the business and real estate worlds a favor by taking the age-old concept of private funding to a new level and making it much more widely available to companies that couldn’t otherwise obtain the necessary financing to grow or even get started in the first place. Back then, such financing was more commonly known as junk bond financing, i.e., financing that paid its investors much higher rates of return in exchange for them being able to tolerate the much higher risks usually associated with lending to relatively unproven business and real estate ventures. Nowadays we use terms like “hedge fund”, “joint venture partnerships”, and “private-equity financing” to describe this kind of funding but it's just the same thing 30 years later using different names. It’s still considered to be “junk” financing. If you have any doubts as to whether or not we are seeing a repeat of 1980's-type financing, the January/February 2010 issue of CFO magazine points out that companies issued record amounts of junk bonds in the last three quarters of 2009.

I don’t like the term “junk” to describe high-yield financing for projects that carry supposedly “higher-than-typical” risk. In the right hands and under the right circumstances, these kinds of investments can have minimal risks but give the same high returns on investment often associated with “junk” investments. For example, there is a highly-specialized type of funding called “transactional funding” where you borrow funds for no more than 24 hours to flip a property and then return it with an enormous rate of return to the lender. For 24 hours of use, this return often ranges from 1% to 5% or higher, which equals annualized rates of return ranging from 365% to 1825% or higher, depending on the amount of “interest” paid for this 1-day use of the funds. The way this investment is protected is that the investor borrowing the funds must have an end buyer to whom to flip the deal immediately or else the funds never get released from escrow and the lender just gets the money back. Minimal risk with enormous returns…what a concept! This may still be labeled as “junk” financing but I’ll gladly lend on these terms any day of the year and anywhere in the country as long as the person to whom I’m lending this money is responsible enough to know how to use it.

For some reason, just because a blue chip company is large, publicly traded, and has a history of stable earnings, this company is perceived to carry lower risk to its investors than other companies and ventures. This may be true in the stock markets but, unless I have absolutely no interest in following the markets, I‘d prefer having as much control over my investments as possible without relying on some stock broker or other money manager to make decisions that affect my financial future while getting paid whether or not they do well with my money. Let’s not forget about companies that were once classified as “blue chip” companies, such as Enron and General Motors, that went bankrupt and lost hundreds of millions of investor dollars. Direct involvement with real estate is my preferred vehicle for growing my investments. Putting my money into the stock markets and hoping that it goes up in value leaves my finances too much in the hands of people who I don’t know or trust. I have learned, by reading and by personal experience, that the people running the deals are much more important than the deals themselves. If you have any deal to consider, even a seemingly great one, but an idiot is running it, stay away from it or pay the price to go to an expensive “seminar” to learn why you should have avoided it (one of my previous posts tells a little about how I almost got ripped off $160,000 by the smooth-talking developer of the failed Wesley Arms condo conversion in Augusta, Georgia).

Although I’ve posted about some creative ways to finance real estate and business ventures, it’s arrogant for me to claim these ideas as my own since they existed long before I even existed as an embryo. I only remind others that there are alternative ways to obtain financing when more conventional funds are difficult to obtain. But, in accordance with original intent of this post, I emphasize that the cyclical nature of the markets will continue to determine the best kinds of financing and deals to use as they disappear and reappear with amazing regularity with the passage of time. Perhaps the best way to prepare for investing in future markets is to become an objective and diligent student of market history and ignore those who hype things to the extreme.

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The Future Of Commercial Real Estate: Big Bust Or Big Opportunity?

While many people seem to think that residential real estate has hit its low point in the market cycle, there is plenty of publicity these days about how the worst is yet to come in commercial real estate. I believe that our country is in so much debt right now that both residential and commercial real estate are going to get much worse for those who bought them poorly before 2006.

The present upswing in the residential markets has been artificially induced by temporary incentives such as the First-Time Homebuyer Credit . However, human nature being what it is, once our government runs out of money for these incentives and puts an end to them, the residential housing market will go right back down and probably descend to depths even lower than it’s ever been before in the baby boomer generation. Given that we are in hock up to our ears to other countries that invested in our real estate, we all better start learning to speak Chinese if we’re going to end up working for these foreign investors and start renting from them after they buy the real estate we lose to foreclosure.

From a February 17, 2010 article in Builder magazine, an “expert” states, “With the decline in activity following the original expiration of the housing tax credit firmly behind us, we believe this data continues to support our view that housing demand continues to stabilize if not slowly reemerge” (ref. Michael Rehaut, a housing analyst with J.P. Morgan). I find Rehaut’s statement to be hilarious, like when former U. S. President Herbert Hoover boldly stated, “Prosperity is just around the corner”, right before The Great Depression when the only things just around the corner were people selling pencils and apples after losing their jobs.

As pessimistic as I am on the near-future prospects of our residential markets, I believe that our commercial real estate markets are in for a real blood bath soon. As a whole, New York City has been the economic center for the U. S. ever since the institution of our modern financial system. NYC still remains home to Wall Street, the biggest casino in the world, where fortunes are made and lost almost daily. Given the commercial credit markets and information leaked via that great equalizer, the Internet, it came as no big surprise when lenders began foreclosure proceedings last Tuesday on the $3-billion Peter Cooper Village/Stuyvesant Town , a joint venture led by Tishman Speyer Properties and Blackrock Realty that was acquired for $5.4 billion in 2006 (great timing, guys!).

On a much smaller scale, one of my mentors, Scott Lane, who is Director of Education of our local Real Estate Investors Association, the Capitol City Real Estate Investors, warned me in late 2005 that the residential mortgage brokers in our REIA were complaining that a lot of their loan programs were being eliminated. Despite Scott’s warning, I still foolishly bought some properties with those now-defunct loan programs as part of my exit strategies and now I’m sitting on a few extra houses I wish I didn’t have. The gist of this story is if small-time investors like people in our REIA knew that this problem in the credit markets was coming before it actually became a problem starting in 2006, how could the big guys like Tishman Speyer Properties and Blackrock Realty miss the mark with this given all their resources to perform due diligence? I may be wrong, but I’m guessing that pride kept them from killing the project before it got to this point. When you’re as big as them and you commit to a project, maybe their only choice was to proceed despite those early warning signs in the markets since losing face by backing out would have been worse to their investors and bond holders.

Almost all the news I see regarding commercial real estate has a pessimistic outlook. The Congressional Oversight Panel has warned that a wave of commercial real estate loan failures could threaten America's already-weakened financial system over the next few years. From a recent MarketWatch reference, “The panel, chaired by Harvard law professor Elizabeth Warren, says it remains "deeply concerned" that commercial loan losses could jeopardize the stability of many banks, particularly the nation's mid-size and smaller banks.”

So, should we be worried? Only if you bought properties like those experts at Tishman Speyer Properties before 2007. I sense a lot of opportunity in the midst of the gloom-and-doom chaos and that a whole new generation of multi-billionaires will emerge from this mess. The nouveau riche will be those bold enough to ignore negative media hype and take action to grab the equity and cash flow left behind by those left in the dust from the foreclosures and other distress. Cash is king now and if you know where to find it, then you will be part of his majesty's royal court. In my previous post, I illustrate only one way to get cash for opportunities such as this and profit from it, but it does require a very different mindset to implement strategies such as this since this is a market that has never been seen before in our lifetime.

Despite the very real possibility of an abundance of commercial loan defaults, I believe that the commercial real estate market is healthy for those who used common sense and sound investing principles up to and throughout this market downturn. As a case-in-point, stabilized commercial income properties still have healthy debt-service-coverage-ratios (DSCRs). From Dan Yeh’s commercial mortgage metrics blog post on February 18, 2010 in The Scotsman Guide, the table below shows average DSCRs for all commercial Loan Posts in 2009, segmented by major property type and region:

Avg DSCR	Midwest	Northeast	South	West	U. S.
Multifamily	1.41	1.41	1.34	1.3	1.35
Retail	1.46	1.36	1.49	1.36	1.43
Office	1.24	1.4	1.35	1.38	1.36
Industrial	1.54	1.49	1.39	1.46	1.46

For multifamily income properties, lenders typically require that the DSCR be at least 1.25 nowadays. As long as a property is stabilized, the Average DSCR table shown above indicates that there is plenty of margin for error given the average DSCRs for their respective regions in the country. It appears that any distress was mainly caused by investors who depended more on appreciation rather than on sound value investing principles. There is nothing wrong with the properties themselves, but rather with the ways they were purchased and then financed. The solution appears to lie within the financing. Here, I make a key point that my mentors taught me: The money in real estate has always been in the financing, not in the actual real estate. If you can fix the financing on a distressed property, then you can solve the problem with that property.

Especially in times like now, fortune favors the bold. I think that this is the best time in our lives to grab as much of the gold as possible that the real estate gods have thrown in our paths.

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Taking Advantage Of Bad Commercial Debt For Huge Profits

Last week, one of my mentors told me of a deal he was working with someone. Here is a brief description and the numbers:

► Hotel for sale by a bank that took it back in foreclosure that appraised for $21 million.

► Lender willing to lend on this at 60% of the appraised value, i.e., $12.6 million.

► My mentor buys it with a partner for $10 million from a bank’s REO inventory, then they sell the hotel to an investor for $12.6 million and they split the difference and pocket about $1.3 million each.

► End result: My mentor and his partner on the deal each get $1.3 million, the end buyer of the hotel gets a hotel that appraised for $21 million for only $12.6 million.

The key to this strategy is that the lender is willing to lend based on the appraised value, not the lesser of the appraised value or the purchase price. This lender is a true LTV (Loan-To-Value) lender, not a LTC (Loan-To-Cost) lender. If you search for them, you’ll find lenders who call themselves LTV lenders but they are really LTC lenders so if you decide to implement this strategy, be sure you find a true LTV lender.

So, are these deals really out there? Well, unless it’s just media hype, there may be a tidal wave of defaults on CMBS (commercial mortgage-backed securities) soon. The trends seem to show that commercial mortgage loan defaults are increasing at an alarming rate so the pressure will be on the banks and the government to relieve this pressure by dumping the inventory of both commercial REO’s (real estate owned) and paper at huge discounts. According to a February 10, 2010 article written by Mark Heschmeyer of the CoStar Group, “CMBS loan liquidations were averaging about $108 million a month in 2008 and last year the average jumped $182 million with November's totaling hitting $255 million and December's ballooning to $585 million, according to CMBS bond rating agency Realpoint. Loans were being liquidated at losses near 66%.”

Combining LTV lenders with the mounting pile of bad commercial mortgage debt is a very viable strategy that takes advantage of the misfortune of others to become wealthy yourself. If you are squeamish and this technique makes you feel too much like a vulture to put into action, keep in mind that this wealth has to go somewhere, so why not to you and me? From my science and engineering studies wayyyyyyy back in the Stone Ages, there is a law upon which all modern-day physical and chemical principles are built called The Law of Conservation of Energy . In a nutshell, this law states that energy is neither created nor destroyed in a closed system but merely changes from one form to another.

Wealth is much like energy in that it is neither created nor destroyed but just moves from place to place. On a purely physical level, it is a zero-sum game where one person must lose wealth for another to gain it. This is very different from value which can be created and destroyed since value is a subjective concept whereas wealth is an objective one. Therefore, it is possible to actually give someone value while taking their wealth, which is what preforeclosure investors do by buying houses from sellers on short sales, i.e., for less than the loan balances, and taking the equity in their homes in exchange for giving the sellers peace of mind by negotiating off potential deficiency charges and other liens.

The above now being stated, we are now looking to add this strategy as follows:

► Apartment complexes anywhere in the continental United States, as long as they are not in war zones, that appraise for $4.2 million or more that we can buy at 60% or less of the appraised value.

► We don’t care how old the appraisal is as long as we can get a formal appraisal.

► We propose a profit share with anyone who brings us a deal as described above that we end up closing on.

So what are you waiting for? What are WE waiting for??? It’s time to stop reading and time to start taking your share of the wealth that was left behind by others.

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Why Are Real Estate Markets "Overvalued" Or "Undervalued"?

As I went to my computer to get some work done, I couldn't help but notice a story on Yahoo News about "America's Most Overvalued Cities" as it pertains to residential real estate. One of the highlights of this "objective" article was a ranking of supposedly overvalued housing markets and by how much they are/were overvalued, both now and back in 2006 when the real estate markets first started to soften at the start of this present recession, as given by:

Metro area          Median price   % overvalued '10   % overvalued '06

Atlantic City, N.J.   $232,100           30.2%               59%
Wenatchee, Wash.      $240,900           28.9%               13%
Ocean City, N.J.      $294,800           26.6%               47%
Longview, Wash.       $184,700           22.3%               24%
Honolulu, Hawaii      $605,300           21.9%               31%
Asheville, N.C.       $172,900           21.8%               24%
Portland, Ore.        $267,600           20.8%               35%
Bellingham, Wash.     $280,200           20.0%               43%
Corvallis, Ore.       $266,400           18.9%               14%
Salem, Ore.           $201,000           18.2%               25%

This is just another case of some know-it-all, self-appointed committee made up of people who must have some latent need for attention and for feelings of importance by trying to let us know how essential their opinions are to the real estate economy and our country's financial health. Back in January 2006, these same geniuses decided that Naples, Florida was the most overvalued metro area then. From the subject news article: "That finding so rankled the Naples Chamber of Commerce and area real estate agents that they hired economists to dispute the evaluation, according to Richard DeKaser, the real estate consultant who engineered the report for National City."

I skimmed this article more for amusement than anything. I put forth to you, the reader, that the powers-that-be who determined that the aforementioned markets are overvalued have no idea what they are talking about and should be completely ignored on the basis that they are just self-proclaimed captains of a ship of fools who believe their drivel. To support my assertions, let's examine what actually determines property "value" in both residential, and commercial, real estate markets.

There are three main factors that real estate appraisers use to determine "value" of any real property: 1.) cost of replacement, 2.) income generated by the property, and 3.) recent comparable sales of similar properties. Each factor has its use, depending on why this valuation is needed. For example, insurance companies typically use replacement values since, in the event of partial or complete destruction, they are charged with the responsibility of paying for part of, or all, costs to repair or replace damaged properties. In the eyes of an income investor who wants a good return on his/her invested money, the income generated by a property will probably be most appropriate. For an owner-occupant who wishes to reside in a house, recent comparable sales are usually the most relevant for valuation of the property. Early in my real estate investing career, I only considered price when I tried to place a value on a property and completely forgot to account for the time factor, which happens to be just as important as price when determining property value. Now, when I try to place a value on a property, I ask myself two things: At what price will the property sell? and How long will take to sell at that price?

Despite what appraisers, real estate agents, or other self-proclaimed experts may say, property value is determined by only one thing: how much someone is willing, and able, to pay for that property. For example, if you buy a dog house at Lowe's or Home Depot, you can get a perfectly good one for about $63 plus tax. But if there is a neighborhood where I know this same kind of dog house will sell quickly for $20,000 and someone in that neighborhood offers to sell me his/hers for $10,000, you can bet that I'll gladly borrow $10,000 from a hard money lender, or some other loan shark, and buy that sucker to flip for a quick profit...and I sure wouldn't need some property valuation committee to let me know if those dog houses are overvalued or not. The key to flipping dog houses in that neighborhood is that I must know at what price I can quickly resell those dog houses, I can't just roll dice or rely on someone else to tell me this rather crucial piece of information.

Short of being able to read minds, residential house values for owner-occupants are often best determined by recent comparable sales of similar houses in the area. While I'm not a big fan of real estate author, John T. Reed, because he is very narrow-minded in his views of creative real estate and not open to out-of-the-box thinking, I do have some of his materials and his fundamental knowledge of finances, however unimaginative, seems to be solid at the most basic levels. In at least one of his publications, Reed states that there is no such thing as a seller's market since it is ultimately the buyers who determine what they will pay to buy a property, if they even decide to buy it at all. I agree with Reed on this one. As real estate entrepreneurs, it is up to us to determine what our markets will bear. In other words, we don't dictate the markets, we merely serve them. It took me several expensive lessons by purchasing the wrong properties at too-high prices to finally pound this simple concept into my thick skull.

I've lost count of how many times I've heard a Realtor tell me, "But you should pay full asking price for this house! It's worth much more than that!", to which I smile at the Realtor and silently write him/her off as an idiot who is only concerned about getting paid a commission rather than serving the public as their local Realtor Boards claim that they have the high ethical obligation to do so just because they are "Realtors" and not only real estate agents. Now, when I look to purchase a property for resale, I try to determine a price and property type that will give me the largest pool of buyers to whom I can resell it. I call this "looking for the straw in the haystack, not the needle."

For the previously-mentioned "experts" to proclaim that certain markets are overvalued or undervalued is complete arrogance on their part. If people in those markets are willing and able to pay those prices, then those are the fair market values of those properties, pure and simple. They aren't overpriced or underpriced, they are priced just right for those particular buyers. How hard is that?

Commercial real estate tends to be a bit more objective than residential real estate since income, improving a property to its highest and best use, and recent comparable sales all become co-mingled into a cloud that seems to spit out a single fair market value for that property. Add to the mix that there is the very real possibility that there could be a mass default of commercial mortgage loans soon, and we have commercial real estate that is headed for bargain-basement prices for those astute enough to figure out how to maximize their values once they buy them up. In chaos, there is profit. As the great investor, Warren Buffett, said, "...be fearful when others are greedy and greedy when others are fearful."

Each person has a price in mind, and ability, to pay for a certain piece of real estate. This is what determines fair market value, not a group of patronizing expert wannabes. The bottom line is to do your best to know what your markets will bear and keep your finger on the pulse of those markets as they change. I can only believe that these valuation "experts" spout their opinions just to feel important, and newswriters publish this sensationalized garbage just to sell copy. After all, nobody would buy a news article that tells us that everything is fine and dandy. Controversy is what sells, not normalcy. Don't believe the media hype. Use your common sense, and get the proper training and tools to do your jobs as real estate professionals and entrepreneurs.

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HUD Attempts to Eliminate Seller Financing (Feedback Deadline is February 16, 2010!!!)

This is a scary rule that would be very damaging to all real estate professionals if it becomes law. I strongly urge that we all go to the indicated website to leave a comment requesting rule changes as described below. THE DEADLINE TO SUBMIT COMMENTS IS FEBRUARY 16, 2010 (THIS COMING TUESDAY!). Let's not let this one pass or we will all pay the price for complacency!

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HUD Issues Problematic Rules Interpreting SAFE Mortgage Licensing ACT

HUD has proposed to eliminate ALL seller financing unless the seller lives in the home or becomes a licensed mortgage originator. The proposed HUD Rules interpreting the federal SAFE mortgage act can be viewed at www.regulations.gov . Use the search parameter "HUD" and the keyword "safe". Please review and comment regarding the impact of this broad interpretation of the law.

"In addition to establishing HUD's responsibilities under the SAFE Act, through this rule, HUD proposes to clarify or interpret certain statutory provisions that pertain to the scope of the SAFE Act licensing requirements, and other requirements that pertain to the implementation, oversight, and enforcement responsibilities of the States. HUD solicits comment on the proposed clarifications and on the regulations proposed to be codified."

History:

As you may recall, we lobbied hard last year to maintain the right for individuals to make up to five seller financed transactions per year before being subject to mortgage originator licensing, etc... However, that law was passed subject to the Department of Housing and Urban Development's (HUD) approval of the law as "compliant" with the intention of the federal law. If any state does not have a compliant law, the SAFE act allows HUD to implement licensing for the state. HUD has since issued proposed rules. In a nutshell, seller financing would no longer be allowed for non-owner occupied homes.

How YOU can help:

We learned about the publishing of the rules very late in the process... and the deadline for comment is upon us on February 16 (THIS COMING TUESDAY!!!). However, we desperately need for thousands of REIA members across the country to go on record with HUD on this issue. We will be working to try to affect this law in other legislative ways, but cannot hope to gain traction unless our members have clearly communicated that they are opposed to this portion of the rules. This is your chance to be counted on this issue.

PLEASE SUBMIT YOUR COMMENTS TO HUD! We have less than one week to flood this system with comments.

Follow these simple steps:


CLICK HERE TO AVOID HAVING TO DO THE FIRST 5 STEPS BELOW AND GO DIRECTLY TO THE COMMENTS SUBMISSION SECTION!


1. Logon to www.regulations.gov .You will see two white boxes for searching

2. On the left box labeled "Document Type", pull the menu down and select "proposed rules"

3. On the right box labeled "Enter keyword or ID", enter "safe mortgage". Then, press search

4. Locate the blue search result "FR-5271-P-01 Safe Mortgage Licensing Act: HUD Responsibilities Under ...." To read the rules, click on this title. You will be taken to another page. You will see "views". You can click on PDF file or another symbol which will show you the rule document online.

5. On the right of the screen, click on "submit comment"


CLICK HERE TO AVOID HAVING TO DO THE FIRST 5 STEPS ABOVE AND GO DIRECTLY TO THE COMMENTS SUBMISSION SECTION!


6. Complete the form providing required information and your comments and then submit

What do you say?

Say what you feel, but say it politely! The message should include that you would like the definitions in the proposed rules to be changed so that private individuals can originate and service loans on properties they personally own. Some ideas from others:

· bank loans are not available on some types of properties

· the tight lending climate has made bank financing "out of reach" for many

· seller financing is an "age old" tradition based on private property rights

· these rules would prohibit even partial seller financing - i.e. a "seller second"

· according to HUD's "Residential Finance Survey" in 2001, roughly 40% of all non-farm residential properties in the US are owned free and clear

· an estimated 6 million Americans own a property other than their own primary residence

· an estimated 4.5% of Americans own three or more properties, many purchased solely as investment properties

· 40% of non-owner occupied residences are mobile homes which are more difficult to sell with bank financing

· approximately 5% of homes in US are for sale or for lease... seller financing may be key to liquidating this inventory

The continued success of our industry as we know it is threatened by these proposed regulatory changes. Please do not hesitate to follow the steps above and make your voice heard.

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Good Investment Returns In Commercial Real Estate In "Bad" Markets?

I believe that commercial real estate has yet to hit the bottom of its market cycle. From what I've been reading and hearing on the commercial markets now, the worst is yet to come. But if you are a disciplined investor who sticks to the fundamentals of value investing and strong cash flow, you can make good money in what most people call, "this bad real estate market."

Prior to this present "down market" in real estate, it was relatively easy to obtain financing for both residential and commercial properties from banks and other conventional lenders. In the commercial arena, there was plenty of talk and hype about "condo conversions", "fractionals", and "preconstruction investing". There wasn't so much emphasis placed on the life blood of commercial real estate projects, i.e., cash flow. People would buy properties with bridge financing (also known as hard money), construction financing, or other expensive, short-term loans with the motto: "Get in, get out, and get paid". They were considered to be "financial geniuses" and many weren't shy about letting us know how smart they were. I have personal experience with one such "genius" in Augusta, Georgia who almost conned me out of $160,000 in his own failed condo conversion of a war-zone apartment complex called Wesley Arms. He recently lost the project to foreclosure while taking down other investors with him whom he calls his "friends". I can't fault the developer wannabe of this failed fiasco completely since he just fell victim to loose lending policies by banks as well as his own over-inflated ego. It happens to the most experienced investors, even Donald Trump who recently had a couple of failed condo projects of his own, Trump Baja in Baja, Mexico and Trump Tower Tampa in Tampa, Florida. For the record, I've always considered "preconstruction investing" to be gambling, not investing, and something only the foolish would do. By the way, just so you don't think I'm trying to be "holier than thou", I am one of the foolish as I also lost money investing in a local preconstruction project, albeit on a much smaller scale than those who poured money into Wesley Arms and the two aforementioned Trump projects. Previously, I knew, in theory, not to speculate in preconstruction deals and now, after getting stung by ignoring what I already knew not to do, I know for sure never to do it again. Fortunately, in my case, I was the only one who was financially hurt. I wouldn't want to have hanging over my head the thought that I hurt others who put their trust in me.

In times of easy credit, it's easy to forget solid investment fundamentals based on value investing and cash flow. People start to speculate almost completely on appreciation. In more difficult times like now, cash flow is what will save your investment. But cash flow is boring while speculating is exciting and the real mavericks of real estate speculate to become wealthy like the wildcatters who took big risks drilling for oil outside of the known oil fields, right? Wrong. All the so-called "mavericks" who became wealthy in real estate, and have remained so throughout the years, such as Sam Zell, William Sanders, and Michael Mazzei, built their wealth on a solid foundation of value investing and strong cash flow. There are two books I really enjoyed reading that describe how these long-lasting real estate moguls put together their deals and about their philosophies on private equity investing, Maverick Real Estate Financing and Maverick Real Estate Investing, both by Steve Bergsman.

These days, the "quick-sell after appreciation" strategy that worked when banks gave loans easily doesn't work nearly as well now and is often a recipe for disaster, as seen by the increasing number of commercial properties (and residential, as well) going to foreclosure. In times like this, strong cash flow is key to sustaining real estate investments. In the case of income properties, apartment complexes are the easiest to finance now, although even these relatively recession-resistant investments have taken a hit as well. Our primary targets for commercial acquisitions are apartment complexes now. We already own a 184-unit complex, The Park at Summerhill in Texarkana, Texas, and are looking to expand our holdings.

People are usually more concerned with getting their investments back rather than what their returns on investment are going to be. There are two ROI's we have to address: Return ON Investment and Return OF Investment. Accordingly, we set our investment criteria to optimize both ROI's.

As of the date of this blog post, we look for the following Returns ON Investment for our investors:

Minimum Cash-On-Cash Return for the first year: 8%

Minimum Annualized Return On Investment (total return divided by the number of years invested): 20%


But to minimize risk, we look for the following parameters to address the Return OF Investment (these also meet or exceed lending criteria):

Minimum Debt Coverage Ratio: 1.25

Minimum Capitalization Rate: 7.5%

Maximum Break-Even Ratio: 80%


By following the above criteria, we find that it is still possible to make double-digit returns with greatly reduced risk. Right now, we're finding that the one of the best ways to meet our investment criteria is by purchasing apartment complexes from those who didn't heed the fundamentals of value investing and cash flow. At least for a few more years, our main value play will be to purchase properties from financially-distressed owners. This is how the enduring "mavericks" often became wealthy and remain so today. Don't listen to the doom-and-gloom media. Now is perhaps the best time to buy commercial real estate as long as you always remember to build your portfolio on a solid foundation and not on a house of cards.

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Fannie Mae Announces 3.5 Percent Seller Assistance on HomePath® Properties

Just a quickie today. A Fannie Mae press release has let it be known that Fannie's knees are starting to buckle and things are getting desperate to move some inventory by announcing this welcome news on seller assistance. Bad news for Fannie may be good news for aspiring homeowners.

Now if they would only loosen the purse strings to make short sales a lot easier...this may be coming soon. In the end, I think it's those "vultures" called investors who will help save the system.

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Know Your Market And The Numbers...Or Pay A Price

To have staying power in this business you have to know both your market AND the numbers. Knowing your market tells you WHAT people want to buy or sell, and knowing the numbers tells you HOW MANY people can actually buy what they want or sell what they don't want. One without the other is useless.

I hear a lot of this, mostly from residential Realtors: "I really like to work with people and can help them buy the homes of their dreams! I got into real estate to make money by selling beautiful homes to them!"

After talking to some of these people, it is apparent that many have no clue about how their markets and the numbers complement each other in real estate. Many of the residential Realtors I met a year ago now have second jobs at the local Burger King (subsitute your favorite greasy spoon diner here), or are out of real estate completely and working an hourly job somewhere. Most of them know their markets but few of them understand how to apply the numbers to their markets. For example, it is common to most markets that most people want a 3-bedroom/2-bathroom house...BUT...

Only 30% of them have "A" credit and can qualify for conventional loans while the other 70% have to obtain "subprime" loans because of dinged credit and/or low income (ref. Robyn Thompson). These days, because of the mortgage loan mess we're in and the elimination of most subprime mortgage loans, I'm guessing that the percentage of people with "A" credit is even lower than 30% now and there are even fewer retail buyers than ever before. By knowing this, you can quickly weed out the suspects from the prospects and stop wasting your time with people who can't buy any house you have for sale. Also, most Realtors only want to serve that 30% of the population with "A" credit. Why not avoid the fierce competition in that relatively scarce market and figure out a way to serve the remaining 70%? Hint: seller financing.

What are some other numbers that can help you with your real estate business? I give some below. Every time I've violated the numbers, I've been burned. So if you learn nothing else from this post, just learn that if you break the "rules" of this business, you'll eventually pay a price to relearn those rules.

Many gurus sell wholesaling courses and proclaim how "You, too, can become a millionaire by wholesaling 10 houses a month like me!"

There are gurus who have wholesaled their ways to millions but let's look at the numbers (ref. Ron LeGrand, Marko Rubel):

Only 25% of the good deals are "ugly house" deals (rehabs, wholesales) while the remaining 75% of the good deals are "pretty house" deals (subject to's, lease-options).

This tells me that you have to have an a$$ load of marketing to "wholesale your way to millions". I know of one full-time wholesaler in Tampa, Florida (Mike Collins) who said he spends about $8000 per month in advertising to get enough leads to be able to sustain his business. If you are charmed by the wholesaling gurus into thinking that you don't need any cash or credit to become rich as a wholesaler, would this little statistic maybe help guide you to a better plan? I know a person in Augusta, Georgia whose business model involves buying houses "subject to" and then reselling them with lease-options ("pretty house" deals). He owns more than 50 houses this way and has done very well by paying attention to the numbers. His marketing is less than $1000 a month, versus the $8000 a month he might need to maintain his business at the same level as a full-time wholesaler.

A few other statistics that might help you design a more efficient business:

- Over 80% of the people in preforeclosure who manage to stop the foreclosure process by catching up payments, declaring bankruptcy, or other means end up losing their houses to foreclosure in the end (ref. Mark Klee and Caryn McKinney). This tells me not to stop marketing to people in preforeclosure just because they somehow get the foreclosure stopped. They'll be back and probably more motivated than ever to sell you their house. As a caveat, I've violated this rule four times by lending people money to catch up their mortgage loans and it's cost me about $57,000 in "tuition" to keep repeating this class. Hey, I'm a slow learner, so shoot me.

- Most of your buyers will be in the median house price range for your area plus or minus about 20%. If the success of your business model depends on quick resales of the houses you buy, do you really want to buy those $1 million mansions in your market if the median house price is only $170,000? What if you had a short-term, high-interest hard money loan on one of those $1 million behomoths? If you go against the flow with this statistic, just make sure your mortgage loan isn't from Tony Soprano or Don Corleone.

This blog post was part informational and part rant. I hear all the time from Realtors and others trying to get me to overpay for a house by telling me about "how great a deal it is" or how "it has so much potential" (a favorite Realtor phrase). Whenever someone says that to try and get me to buy into a deal, I look at the most important number of all: How much of their own resources do they have at risk in the deal.

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New Lead-Based Paint Rules Take Effect In April 2010

The Environmental Protection Agency (EPA) is enforcing new lead-based paint rules for rehabbers in April 2010. If you rehab junkers, this one could get expensive if you miss it. For the complete regulations, see the EPA's Lead: Renovation, Repair and Painting rule.

A quick summary of the new EPA lead paint rule follows (from the National Association Of Home Builders):

1. Training and Certification

Beginning in April 2010, firms working in pre-1978 homes will need to be certified. Along with the firm certification, an employee will also need to be certified as a Certified Renovator. This employee will be responsible for training other employees and overseeing work practices and cleaning. The training curriculum is an eight-hour class with two hours of hands-on training. Both the firm and Certified Renovator certifications are valid for five years. A Certified Renovator must take a four-hour refresher course to be recertified.

2. Work Practices

Once work starts on a pre-1978 renovation, the Certified Renovator has a number of responsibilities. Before the work starts this person will post warning signs outside the work area and supervise setting up containment to prevent spreading dust. The rule lists specific containment procedures for both interior and exterior projects. It forbids certain work practices including open flame or torch burning, use of a heat gun that exceeds 1100°F, and high-speed sanding and grinding unless the tool is equipped with a HEPA exhaust control. Once the work is completed, the regulation specifies cleaning and waste disposal procedures. Clean up procedures must be supervised by a certified renovator.

3. Verification and Record Keeping

After clean up is complete the certified renovator must verify the cleaning by matching a cleaning cloth with an EPA verification card. If the cloth appears dirtier or darker than the card the cleaning must be repeated.

A complete file of records on the project must be kept by the certified renovator for three years. These records include, but aren't limited to: verification of owner/occupant receipt of the Renovate Right pamphlet or attempt to inform, documentation of work practices, Certified Renovator certification, and proof of worker training. NAHB believes that record keeping will be a major enforcement tool for the regulation.

4. Exemptions

It is important to note that these work practices may be waived under these conditions:

•The home or child occupied facility was built after 1978.

•The repairs are minor, with interior work disturbing less than six square feet or exteriors disturbing less than 20 square feet being exempt.

•The homeowner may also opt out by signing a waiver if there are no children under age six frequently visiting the property, no one in the home is pregnant, or the property is not a child-occupied facility. EPA has proposed removing this opt-out from the rule.

•If the house or components test lead free by a Certified Risk Assessor, Lead Inspector or Certified Renovator

Important Deadlines

December 2008:
Remodelers must start distributing the new EPA pamphlet Renovate Right when working in pre-1978 houses.

April 2009:
Training providers may begin applying for accreditation. Once training providers are accredited, they may offer training courses that will allow renovators to become certified.

October 2009:
Renovation firms may begin applying to EPA for certification.

April 2010:
New rule becomes fully effective. Work practices must be followed.

For more information about this item, please contact Therese Crahan at 800-368-5242 x8211 or via e-mail at tcrahan@nahb.org.

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FHA suspends 90-day seasoning requirements starting February 1, 2010

Folks, great news, especially for those of us doing short-sale/flips. A few key things to note, though, from the press release:

[Begin excerpt]

The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of "flipping" where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:

•All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.

•In cases in which the sales price of the property is 20 percent or more above the seller's acquisition cost, the waiver will only apply if the lender meets specific conditions.

•The waiver is limited to forward mortgages, and does not apply to the Home
Equity Conversion Mortgage (HECM) for purchase program.

[End excerpt]

The press release and actual HUD "flip waiver" can be read at:

HUD Press Release Suspending Seasoning Requirements

Actual HUD Flip Waiver

One caveat to those who use 24-hour transactional lenders to fund their deals is that same-day double closings are still not allowed since the property must be sold by the "seller of record", which means that there is not enough time with a same-day double closing to have the investor be the "seller of record" when this is checked. More likely, a double closing will take about a week to execute to allow for the investor to become the "seller of record".

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Yet Another Real Estate Blog???

I know you're thinking, "Here we go again. Another blog on real estate and creative finance."

Yes, there will most likely be overlap with other blogs and with what experts, who are much more knowledgeable than me, write about. But while I can't hope to be more of an "expert" than those who are truly paving the way for us common folks, I'll try to combine the best of what I read, see, and hear and just maybe, at times, post some information that truly helps others in this field.

Just to give you a little information about my background, my formal education is as an engineer. I had already owned one rental house in my hometown for a number of years and always had a mild interest in real estate but never saw it as a way to make a living. I wasn't aware of any other way to do real estate except as a buy-and-hold landlord, which wasn't very appealing, so I started studying other ways to make a paycheck from real estate. I came across this strange concept called "wholesaling" and put a classified ad in the newspaper stating that, "We Buy Houses!", and I also started sending out direct mail to FSBO's (For Sale By Owners), FRBO's (For Rent By Owners), and preforeclosure leads.

From my marketing, specifically a bandit sign, I got a house lead that I was able to flip for about a third of my annual salary. This deal took me about 45 minutes of total work, including attending the closing to get my paycheck. After that, I almost immediately quit my job at the research lab where I was working and entered the real estate world full time. I've never regretted that decision and am having a blast as a full-time real estate entrepreneur. Of course, there continue to be hassles to deal with but this is a field where we determine our fates, not some boss who probably doesn't have our best interests in mind.

Anyway, as this blog matures and I learn more about creative real estate and business finance, I'll post what I learn so that someone might benefit.

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