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It’s clear from my work on our DBNR project - buying and reselling distressed properties - that the recent meltdown has changed the rules of real estate considerably. If nothing else, the people we’re encountering and the work we’re doing across the country differ greatly from what I’m accustomed to here in the Bay Area. Further, I’m finding that our project requires a different kind of due diligence - one that incorporates judging both qualitative and quantitative qualifications.

Take, for example, our property in St. Louis, Missouri. Generally, before any kind of a housing transaction, you request a credit report to see what someone’s payment and credit history has been. We had five prospects, four of whom supplied four credit reports. In the Bay Area, a credit score of less than 620 is cause for alarm. The highest score of the four in St. Louis was 524, and the lowest was 390; frankly, I didn’t know credit scores went that low.

You want to be convinced that someone can make their payments on time. The report should show whether there are late payments, and if so, with what frequency? Mostly, we want to see if there were any evictions, which would indicate they’d stopped making rent or mortgage payments.

With this group, though, we had to dig a little deeper and see if there were mitigating circumstances. I learned a lot by asking such questions. For instance, one woman had a foreclosure on her record, but it was because she had helped her sister buy a house, and it was her sister that hadn’t made the payments. Another prospect had declared bankruptcy, but was quite upfront that he’d done it to protect his assets from his ex-wife. In other situations, there have been medical debts that remain outstanding.

You might be surprised to know which prospect we finally chose - the one with no credit score.  He had a good explanation - he had always worked for cash. While he had no credit score, he not only had documented income, but he was able to document that he’d owned other properties. We negotiated a $38,000 purchase price, with $500 down and $600 per month.

We also came up with what I think is a highly creative way to ensure his passion about his property. If he makes his payments on time for a year, and documents the repairs he’s going to make, we’ll reduce the balance by $5,000. That gives him a purchase price of $33,000, for a property he believes may be worth as much as $50,000 once it’s fixed up.

This is someone who’s passionate about owning a house. Given the number of people who have chosen to walk away from their homes in this crisis, perhaps this is the way the mortgage industry should have been qualifying homeowners all along.

I’m seeing a perfect storm threatening the real estate industry that I’ve been part of for thirty+ years. It’s not a pretty sight. Like an ominous weather pattern, you can see it swirling and still not be able to do anything about it.

The three elements of this storm: regulations, expectations, and retirement.

Regulations. Over the last few years, even for a qualified prospect, entering into a buying or refinancing deal is like having a second job that lasts anywhere from three to six months. Pulling together the documentation for buying or refinancing has always been a challenge, but it’s worse now. Lenders are demanding more documentation than ever before. At the same time, new regulations are coming faster than most people can keep up with. That usually means even more documentation.

At the same time, the government has imposed rules about appraisals that muck up the process. For instance, mortgage brokers can no longer communicate with appraisers. That increases the amount of back-and-forth communication. The more people that are involved, the more chance for slippage and miscommunication.

Expectations. To buyers, this looks like incompetence. Many of them have expectations that buying will be easy, especially as the economy improves. Having researched as much as they can on the Internet — not always a reliable source of information — they’re ready to shop around for real estate agents and mortgage brokers. So when they’re asked for even more documentation on an ongoing basis, they get frustrated by the pace of the process and frequently walk away.

As a result, the professionals are constantly afraid of losing clients over events they can’t control. That changes the dynamic of the relationship in a negative way, because the agents have to develop five times as many prospects in order to get a single sale. This stretches their workload even more, potentially causing more delays.

Retirement. The final piece of the storm is retirement. The real estate and mortgage professionals who got into the postwar real-estate boom have already retired, and others who came in when the industry was flush in the 1950s and 1960s are increasingly thinking about it. That means the industry faces an increasing loss of professionals with patience and perspective.

What can buyers and investors do? They can ratchet down their expectations. Be more patient and educated about the process. Go ahead and research information on the Internet, but develop an intelligent consensus about data (such as what a house is worth) from multiple sites. Take the time to find a professional whom you know and feel comfortable with. Competence and experience are the best umbrella in a storm as bad as this.

First, some context. For most of the last half of the 20th century, real estate was a safe and prudent investment. Your returns, especially here in Silicon Valley, were almost guaranteed, unless you bought at the top of the occasional frenzy.

The last frenzy was probably the worst, and certainly wasn’t limited to California. When the tech boom went bust (and even before), a lot of money that traditionally would have gone into stocks went into real estate, something solid and presumably immovable. The idea of “irrational exuberance” shifted to real estate, and we saw the results in the form of 120% loans and relaxed verification of income. There was a lot of greed on the part of both buyers and lenders, and lest I forget to mention, sellers were happy to walk away with a lot of easy money.

What comprises this new mindset? For one thing, greed can no longer be a component of your investment goals. The new investor still wants a return on his or her money, but self-centered, me-driven greed won’t have a place anymore. Returns won’t justify it. Real estate will grow at a steady pace, but not a spectacular one.

I’m actually seeing a trend toward more altruism. With this new program Diving Into the Pool of Real Estate I’m working on, the investors are actually doing something for the common good. The program involves buying distressed properties in bulk, essentially, and then selling or writing them off as appropriate. The profits come in a variety of ways Six Ways to Profit From Distressed Properties, and the altruism comes from the fact that investors are helping lenders get back to some semblance of normal sooner.

Lenders like the fact that these “pool purchases” clean out the pipeline of properties they’ve already written off and have no other way of dealing with. They’re hamstrung by regulations that limit what they can do with the properties. But when the altruistic investor takes 100 properties out of lenders’ portfolios, they’ve created an enormous space for that lender to focus on the others. It’s a tremendous relief.

That’s not all there is to it. Because the cost of the houses is so low, investors can still get a profit selling to buyers who may not have been able to afford homes at the height of the boom. In some cases, buyers can offer mortgage payments that approximate their rental payments. They’re getting equity, but the investor can still benefit by holding the note if they wish.

It’s a win-win situation all around, something we haven’t had in real estate for quite a while.

It has been my practice for the last 5+ years to do my best to advise and counsel real estate investors.  As market conditions have changed several times in that span, of course my advice has shifted as well.  My basic philosophy is Buy what you can afford while prices and rates are low, and this continues to be good advice.  After all:

• The number of people who need homes to live in is increasing
• The available supply of homes is finite and not expanding
• According to a US Census Bureau survey, home ownership is down nationwide (see details below)
• People who want to own remains constant
• The majority of buyers are first timers
• Affordability has drastically improved, while financing availability has deteriorated

If this is you, it is the perfect storm:

• You have at least $100,000 or as much as $2.5 million you want invested in real estate immediately
• You have a high tolerance for the risk of buying property across the country you have not and will never see
• You may or may not want to become a landlord, but a looking for fast turn-around and high ROI’s
• Owning 20 - 30 properties short term while they are sold does not frighten you
• You are an active investor who would hire a trusted adviser to oversee a 3-6 month project
• Recycling distressed property to return it to homeowners appeals to you
• Avoiding all complications by not securing financing appeals to you
• A portion of your investment capital can be at work for 3-5 years or longer

US Census Bureau Survey results:

“The homeownership rate declined in 2008 for the fourth straight year according to the Housing Vacancy Survey, conducted by the US Census Bureau in conjunction with the Current Population Survey.

The home ownership rate for 2008 was 67.8%, down from 68.1% in 2007.

By region, home ownership in 2008 was highest in the Midwest at 71.7%, followed by the South (69.9%), the Northeast (64.6%) and the West (63.0%).” - Home Ownership Rates

The major problem with these types of investments has not been investors who meet the milestones listed above, but the companies who secure the property have had 3 major drawbacks:

1. They could not acquire bulk REO or distress property below 60% of current value leaving insufficient margins for wholesalers or investors to implement a profitable exit strategy
2. They have not had a reliable or tested turn-key process that worked to dispose of the purchased property by their investors
3. They have not had a dependable relationship with suppliers to be able to acquire property on an ongoing basis at low discount prices.

Since the buyers are back in force and multiple offers on the lowest priced property is again common, there are now several companies with programs that have solved the 3 performance issues above.  But you won’t find them advertising or taking a high profile in any way.  They prefer to remain connected and committed to their long term, private referral sources, who seem to be able to supply them with all the business they need.

This is the best example “It’s not what you know but who”, and my strong advice is to protect those relationships that give you access to high ROI’s.

As we all look for ways to conserve and reduce spending I’ve noticed some pleasant unexpected results on a sporadic basis.  Some business and service providers seem to be improving and even lowering costs in many ways to accommodate their customers.

Just recently, I went to a new dentist due to a benefits mandate and was amazed at how well I was treated.  I referred several family members who had the same experience and even paid less than expected.  Simply amazing, and quite pleasant to be a valuable asset to their business.

A week ago my daughter had the same exact experience with an Optometrist, strange.

Now you might ask, what in the world does this have to do with an update on appraisers?

Well, buyers are back, all across the country and once again competing for property especially at the low end price ranges - What better time to acquire real estate than when prices are low?  Exactly what would improve housing values and the market?  Why?  With multiple offers come increased prices being offered, which is a desirable result that competition produces if you are a property owner.

Houston, we have a problem - it seems the new appraisal regulations passed a few months ago are creating havoc with everyone connected to real estate transactions whether purchase or re-finance.  In this series I’m going to deal with purchases.  If I seem a little cynical, I am. I warned about this months ago in an article titled “The Fire-wall That Doesn’t Work” so let’s take a look at results from the new regulations now that we have some:

• Costs to the buyer have increased 50%
• Time required to close a transaction has increased
• A layer of bureaucracy has been added which is not accountable to or able to be influenced by any participant of the transaction.
• Terminating or stalling transactions with poor quality or inaccurate appraisals

The problems:

• Appraisers who fear being accused by the end lender of inflating values are keeping values at the low end and not responding to the influx of willing buyers and sellers.
• Appraisers are earning 50% less for their appraisals than they once did and getting less work based on how the national assignment firms (bureaucracy) randomly distribute work.
• Unqualified or inexperienced appraisers will be assigned work equally with experienced professionals for the same fee although the results are dramatically different.
• Based solely on a bad review by an end lender or an assignment company, appraisers, in order to maintain their much needed income, are motivated to keep values lower such that purchase contracts are being sacrificed.

There is no real solution to this just yet because countless millions have been spent by a multitude of organizations setting these regulations and their structures in place.  Unwinding it at this point will of course provide relief if done in a way that serves the consumer, American business, and free enterprise.

One firm has proposed a possible solution and we’ll discuss that next week in part 2.

A common thread in todays’ world is how busy we all seem to be.  As you grind your teeth, sweat that next deadline and do your best to get through email and return calls, do you wonder if it’s possible to think about abundance and joy, let alone have that experience?

Occasionally you meet one of those rare people who appears to have life figured out AND is enjoying it - Amazing!  How do they do that having some of the same stuff to deal with that you do?

Just for a moment, with nothing else to pay attention to, see if you can imagine the experience of having these 7 habits fully developed in your life:

1. Build every day with the raw materials of your values and the vision of the future you want to live.  For this habit to be developed, DISCIPLINE is the practice.
2. Live life moment by moment.  PLANNING is a habit to master since the next moment is upon us.  Choose how to use it, or let it pass and deal with the next… oops, that one just went by.
3. A part of abundance is wealth.  What you have and need to live now, and what you will need in order to accomplish what you are going for.  The skill for this is FINANCIAL GOALS, a practice that will get you to and through your retirement years.
4. Sweep away tired uninspiring goals and replace them with an inspiring life purpose, from which an endless supply of relevant goals will emerge.  The practice to develop here is REGULAR REVIEWS.
5. Fight fear with action and get yourself an accountability partner who will hold you to account to accomplish your desires.  INTEGRITY is the practice of saying what you will do, by when, then doing just that.
6. Nourish yourself and others in small ways every day with simple things; like cleaning up your vocabulary and never complaining to anyone who cannot make a positive impact on the object of your complaint.  How many of us “Tell The Truth” in a negative way about our financial situation?  This is complaining and only ensures that things stay as they are, or get worse.  ANTICIPATION or POSITIVE EXPECTATION are skills well worth the time and practice to develop.
7. Finally, CELEBRATE everything you can.  There is much to celebrate if you look for it.  If you have trouble with this one, start an appreciation journal and commit yourself to write in it daily.

Live life by design, think about your credit, your budget, the impact of financing, saving, and investments on your long term planning.  Biggest of all, is your plan abundant enough to live a joyous life?

Try this     (click to follow) new tool to build a great plan in a short session.

“3 Insider secrets to help you predict where interest rates will be headed”

While this seems like a promising headline, for the last few weeks the mortgage backed securities market and the stock market have resumed their previous predictable pattern of behavior which is good news, or is it?

For years those in the mortgage lending industry were able to with relative confidence learn to predict where interest rates were headed by what was happening, in general, in the stock market and the bond or treasury market.  I don’t at all mean to suggest that anyone could accurately determine what rates would be but those with experience would “study the tea leaves” and make a relatively good prediction and hit it more times than not.

1 - When bond yields are up mortgage interest rates will move down.  Even though these two are not related but are distant cousins, it was a pretty reliable assumption.

2 - If the stock market is doing well the bond market tends to react in the opposite direction.  This used to be reliable because if investors liked putting their money in equities (stock) they would usually take it out of securities (bonds) to do that.

3 - Talk about the threat of inflation and the bond market would sell off and rates would rise within a few days and stay up in a protective mode until the conversation changed or inflationary fears subsided.

For the past year or so, these have not been dependable measures to predict where interest rates are headed due to the overall lack of enthusiasm and trepidation about the financial markets.  Interest rate behavior was pressured down, they stayed there & nothing negative about the market would have much of an effect on rates.  It has been a hay-day of low, good rates so to speak. . .

My friend Ray Avanzino presents a very straight up picture of current market conditions, check out his work.  Bottom line, the fear of inflation surrounding the increase in federal debt is increasing and therefore the bond market has sold off more dramatically than ever in the past.  This usually means higher rates and indeed they have gone up quite a bit in the last 2 weeks.  However, higher rates threaten our fragile recovery so now the pendulum is poised to swing the other direction so as not to slow down or stall what little recovery we might have going.

The lending industry is doing all it can to get clients locked and closed before major increases threaten already weak business.  So if you are in line, hopefully you have a skilled agent who can see these trends developing and will tell you when to achieve your home run for this cycle.

As usual, please comment, don’t be afraid, you’ve got a couple of minutes, just do it!

  If you are a gambler, today’s increase in 10 year treasury yields and the subsequent predictable increased interest rates may be just what the doctor ordered.  Because today’s increase is now the steepest ever since the last record set on August 13, 2003, gamblers are “in the zone” with heavy speculation about whether future interest rates will come back to their low levels we’ve enjoyed since December 10, 2008, or continue to rise.

If you are not a gambler and one of the many currently in or considering getting in a mortgage lending transaction, this is one of those times where market activity may change your plans.

In An Unfair Advantage I discuss several ways that mortgage lenders lock interest rates.  Discussing this today is a bit like closing the barn door after the horses have gotten out but never-the-less an effective conversation.  My strong recommendation is read this and call your lender to have them tell you if you are locked or not and if you are, do they have enough control to close your loan before your “better than market rate” will expire:

Locking in the rate

Not an exact science, there are a lot of ways you could lock in your loan interest rate.  Here are some useful guidelines:

Rates are locked for different periods of time.  The specific period of time has mostly to do with the time required to close the transaction - they could be 15, 30, 45, 60, 120 days or more.  Each of these periods carry additional costs as they increase.  When locked, over 90% of lenders will not allow any changes to the locked rates up or down, within the lock period.  If a transaction extends beyond the lock period, the borrower will likely be charged to extend the rate, 1 week at a time, regardless of who caused the delay.  Here is a list of some common practices among lenders for locking the rate:

• Upon loan application when the loan comes in to the lender
• At the request of the borrower any time during the process
• The lender or borrower may want to time the locking of their interest rate with market performance. While not advised, this is a practice that should be left to highly experienced professionals who even then will be correct 75% of the time instead of 50/50 like everyone else.
• At final loan approval since the closing at this point is guaranteed and the cost to lock is the lowest.

If you have not locked your rate at this point or you are preparing to enter a transaction, discuss the impact of today’s market activity on your file with your lender and if it changes your qualifications.  Even though this may not be an issue for you since rates will not likely rise more than .25 - .375%, it is still a good conversation to have for you and your lender.

  As a real estate investor you are different than the previous version recently retired with these improvements:

1. You have money
2. You are a keen observer of value, growth, and cash flow

For those of you looking for the ultimate value, it is not foreign to you to do what the herd is not yet doing because when they are, it’s too late.  John Bell, an entrepreneur from New Jersey, in his commitment to help reduce debt for his clients, has researched the West Florida area and gives us some compelling results.  Since there has been little in the news, good or bad, about Florida, this is worth your attention.  Thanks John!

Florida’s West Coast Looking better!
Last year the Cape Coral area of Florida had the highest foreclosure rate in the country but now Real Estate climate in the Cape Coral, Florida area and on the Gulf Coast of Florida are showing signs of improvement: First-time home-owners are suddenly entering bidding wars with real estate speculators from as far away as Spain and Germany. Sales in February outpaced those at the peak of the boom, with some houses getting more than 50 offers and selling above their asking price

Banks in these markets are dumping foreclosed properties, attracting cash-rich speculators who are looking for cut-rate bargains and first-time buyers are finally rushing in, lured not only by plunging prices but also government incentives like ultra low interest rates and hefty $8,000 tax credits.   

This doesn’t mean the national bust is over -  but prices have fallen so much in some areas that shoppers are getting interested again, improving the balance between buyers and sellers. It also does not mean prices will surge all too quickly but heavy buying should at least begin to put a floor under prices. “Are we at the bottom?” asks Christopher Thornberg, an economist with Beacon Economics. “We are getting close and just as Florida, and Las Vegas led the nation into the housing bust, those areas could provide the template for a national recovery. . .

Local Resources:
Sunbelt Realty, property listings: http://www.larryguinnc21.com/      
Cape Coral Florida’s Real Estate Guide: http://www.bestcapecoralrealty.com/
Cape Coral Chamber of Commerce: http://www.capecoralchamber.com/

To contact John Bell directly send email to jdbell@optonline.net for a dose of personalized care and concern.

I heard it said at a sales meeting last night that people are downsizing in a way that takes them “Back to their roots” of family, close social gatherings, & needs type purchases instead of wants.  Further, that this is becoming a trend and a new way of life.

On the NBC Today Show a couple of days ago, there was a piece on the values of real estate.  One of the claims was that according to NAR (National Association of Realtors) the average home size desired now has dropped to a taste over 2,000 square feet, several hundred square fees less than just 1.5 years ago.

As I look around, I certainly do see examples of all this but how wide spread is it?  I am now working to build a larger consensus.

I’m working with an Intern who’s major is finance at a local university who put a 6 questions survey together to help answer the questions above in more detail.

Please take 5 minutes and answer these few questions; you may even win a prize for doing it.  Then after you do it, have others take it, he thinks we can get 1,000 responses in a very short while.  Right on Daniel!

The Financial Preferences Survey =  Click Here

Lets discuss your views too

Cheers. . .Danno