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Even Bill Gates would tell you that some of the hardest — and most necessary — moments in the life of a business are the ones when you stop, take a breath, and ask yourself some questions: is this strategy working properly, just as he did in 1996 when he “redirected Microsoft to become an Internet-focused company”. Can I make adjustments to be more profitable?

It’s almost an antithetical move for entrepreneurs, who are supposed to be confident in their strategies even in the face of setbacks. But once you’ve been speeding down the road for a while, it makes a great deal of sense to pull over to the side and recheck your roadmap. After all, if you headed off to a ski vacation in Tahoe, but you hear the highway is snowed in, you’ll have to find a different route to get there.

That’s what we’re doing here at DBNR right now. We knew there would be challenges like these:

Speed. Cities and municipalities are razing dilapidated properties more quickly than in the past. We had one property in Indianapolis that we had no illusions about — in the initial photographs we received, there were tarps on the roof — but it was demolished last week without us being notified. As the economy improves, cities are moving faster than in the past to rehabilitate “blighted” neighborhoods.

Lack of motivation. We were highly altruistic going into this project, hoping to put people who hadn’t had the opportunity to have homes previously into properties that they themselves would fix up. We’ve spent hours on the phone talking to people who are supposed to call back, but they didn’t because they were apparently wrapped up in March Madness. On one property in Detroit, I’ve talked to 15 people and we still don’t have anybody who is willing to do what it takes — small though that might be — to get in there. Why is that?

So what do we do? Every entrepreneur knows that out of challenge comes opportunity and we have found one we like a lot. Over the last several months we’ve built relationships with other bulk REO investors and told them our story. Turns out we’re not the only ones encountering these issues. What a surprise! One investor even told us how he’s changed his business to adapt.

Mike from Pleasanton, CA told us that now, instead of purchasing “C” class property, he purchases property that doesn’t need nearly as much rehab. He then hires a local contractor to rehab and then sell on a land contract just as we are doing. He’s found that using this method his hassles have gone way down. He has a greater number of sales, his default rate is lower and since he “cherry picks” the properties he buys he gets to weed out the nightmares. Yes, his properties cost more, but overall he says it’s worth it.

How do we take advantage of this? We think we’re no more than 30-60 days away from getting additional investors on board. In addition to being able to purchase more property, we’ll be able to test various adjustments to our model to improve performance, including Mike’s. We’re building relationships with real estate professionals and contractors in Chicago to be able to test this “light rehab” model as soon as we’re funded, and possibly on property we now own.

Every entrepreneur likes to hear and act on new ideas. We’re excited to evolve and adapt to challenges we face and we don’t have a problem adjusting our business when an opportunity presents itself. After all, there are many roads ahead you can take to get to your destination.

Alfred Lord Tennyson thought spring was for love, but it’s appears to be different this year. To be sure, spring is a time for change. After being cooped up for the winter (yes, even in California), we emerge into the sunlight, ready to absorb its healthy Vitamin D. Polls show that spring traditionally brings better moods and positive expectations for most of the population.

Certainly, for many years this elation has been channeled into real estate-related activities. In all my years in the business, I’ve seen activity pick up around mid-February and continue through April. Sellers list property, prospects start looking for property. Even the activity around home improvement increases, whether in anticipation of selling or just because the weather’s better. Maybe it’s the culmination of projects you notice must get done when you’re stuck inside.

Of course, people focus on real estate in the spring because they want to make moves before summer vacation, and they want to make sure deals are finalized before the kids go back to school.

This year, however, there seems to be even more of a hubbub in real estate as spring begins. I’m seeing lots of reasons for this.

Low interest rates. Last week the Federal Reserve voted to keep interest rates at their historically low rates. This is giving people incentive to think about entering or investing in the real estate market again.

Number of properties available. No secret here. With lots of foreclosures and short sales out there, the market has never been better.

Number of sources for properties. More than ever before, properties are available both through traditional real-estate transactions and non-traditional seller-to-buyer transactions. Going the latter route requires a trusted advisor, but the traditional 6% commission structure is under fire as never before.

This silver lining has a cloud, of course — one that we’ve talked about before. The delays involved in appraisals, financing, and mortgage approvals are worse than they’ve ever been, stretching out to months instead of weeks. Even people whose credit histories are stellar and who have equity in their homes are seeing delays in simple refinancing deals. If you really want to either buy or invest in property — no matter what the source — before summer vacation or the autumn school year, the time to start your efforts is now.

Earlier this month, I wrote about the challenges of obtaining what’s known as an abstract of title for a property in Des Moines. It’s a legal document unique to Iowa that requires the services not of a title company, but of a real estate lawyer. If you never owned real estate in Iowa, you’d never know such a document existed.

But now that DBNR is investing in real estate across the country, I’m beginning to realize that not only are there many arcane, regionally specific rules, but also that municipalities are grasping on out-of-town investors as a faceless source of income. Some of our properties have been abandoned, which means that no one is there to see legal notices posted on the door regarding issues such as weed abatement. When the city receives no response to an order, penalties, fines and interest begin to mount up. Out-of-towners, after all, can’t vote, and so are frequently powerless to effectively argue liens and other orders.

We have one property on Logan Street in Minneapolis. It’s a stately, 4BR/2BA two-story house on a good size lot. We’ve gotten more call volume on this property than any other. But even before we obtained it, because of its deteriorated condition, the city had imposed a tear-down order.

We talked to city officials, who told us we had two options: raze it or bring it up to code, at a cost the city estimated: $80,000. If the city razes it, it’ll send us the bill. Interestingly, when we talked to contractors in Minneapolis about this situation, we learned that if you have a local person who knows how to deal with the city, the costs come down considerably. It just requires someone local who knows how to deal in person with the system. One contractor told me, “We do this a lot because there are lots of old properties in the city that have been abandoned. It’s a fairly generic process.”

As it happens, the bank that foreclosed on the property had filed an injunction against the tear-down order, so we have some buffer in terms of figuring out how to deal with this.

We face a similar, but more optimistic situation, with a house on Bonar Street in Indianapolis. This house is in pretty bad shape, and it has $36,000 in back taxes and fines on it to boot (the city had done weed abatement on it, and assessed a fee for doing so). We found a buyer for the house, someone who knew and loved the area because she’d lived there as a child. We told her about the back taxes, warning her that she’d have to deal with the city about them. We don’t know the end of the story, but she thinks she can get the figure whittled down to around $7,000. Why? Because she’s going to be a tax-paying, voting citizen there.

Nobody likes foreclosed homes, and to be fair, municipalities are dealing with severe financial issues because of the loss of property tax revenue from abandoned properties. But it seems like they’re using this opportunity to soak absentee landlords for fees they can’t get from locals. Large out-of-state banks may be bureaucratic molasses to the rest of us, but to municipalities, they’re a godsend. Their slow-moving characteristics mean that fines and penalties can pile up quickly without someone paying attention to them, and corporations are more likely to pay the fines and write them off. The problem is that small companies like DBNR are being caught up in these nets too.

Want to know the current state of home ownership? Consider this February 2010 report from a real estate analytics firm, a division of First American Insurance:

First American CoreLogic reported today that more than 11.3 million, or 24 percent, of all residential properties with mortgages, were in negative equity at the end of the fourth quarter of 2009, up from 10.7 million and 23 percent at the end of the third quarter of 2009. An additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity. Together, negative equity and near?negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide.

That’s a lot of people with negative equity or, to use the colloquialism, whose mortgages are “upside-down” or “underwater.” What happens when you owe more on something than it’s worth? Your pride of ownership is diminished, certainly. And we’re really only talking about two things where this applies: houses and cars. We can buy stock and have it lose value, but stocks have more liquidity, so we can sell them quickly. We expect cars to depreciate, so that’s no big deal (if you feel that way, lease them).

But homes — that’s a different story. We expect homes to appreciate, whether they’re our primary residence or an investment. So what happens when almost a third of mortgaged properties stop meeting their owners’ expectations? The First American CoreLogic report cites an interesting observation: when negative equity reaches 25% or $70,000, people begin to behave not like homeowners but like investors who don’t want to pay for a declining asset any longer. They stop making payments and walk away.

That’s a lot of people potentially giving up on the American Dream of a safe harbor, a place to raise a family, a place tightly woven into the concept of controlling one’s own destiny. If you own your home, you can’t be evicted, and your lives and those of your children disrupted. Your rent can’t be raised exorbitantly. You get a mortgage deduction (this year, anyway). You get equity (usually) over the long term.

That’s really the key phrase: over the long term. People who walk away from a mortgage clearly have no appreciation of the long term. Not only do they not believe in it relating to the value of their property, but they also ignore the long-term ramifications of their actions on other facets of their life.

They forfeit their down payment and any other payments they’ve made. They forfeit any opportunity to see the value rise. But there’s more. You want underwater? Walking away from a payment commitment is like drowning your credit rating for seven to ten years. Your credit rating isn’t just something people look at when you want to buy another house when the economy turns around in the future; it’s something they look at when you buy a car, an appliance, apply for a credit card, or even rent an apartment.

There’s more: with the easy accessibility of credit reports, employers are using them more frequently to make hiring decisions. It doesn’t even matter if you’re going to be handling money; employers look at credit ratings and payment histories as a reflection of trustworthiness and stability.

In a country nurtured on instant gratification, patience is not a virtue highly valued. But in this scenario, people must begin to value it, at the risk of devaluing — no, crippling — their future opportunities.

A California-born colleague of mine tells the story of being completely befuddled in a North Carolina ice cream parlor many years ago. The girl behind the counter was asking him a simple question. But because of both her thick accent and the words she was using, it took him a while to realize she was asking, “One dip or two?” A “dip” to her was a “scoop” to him.

I had the same reaction this week dealing with a Realtor in Des Moines, Iowa, where DBNR has a distressed property on 11^th St. that we’re selling. The Realtor is representing us on the 5BR, 1BA (believe it or not) 1,400-square-foot gabled house with porch and basement. It was a bank foreclosure that was transferred first to the middlemen from whom we purchased our cluster of distressed properties and then to DBNR.

We’ve gone through several rounds of negotiations around commission and closing costs because the price is so low, and I thought those would be the most of our aggravations on this property. I was wrong. In a phone conversation last week, the Realtor asked me where the abstract to the house was. That was my “one dip or two” moment, because I had no idea what an abstract was.

I’ve learned working with distressed properties across the U.S. that I’ve grown remarkably comfortable in the bubble of local Silicon Valley real estate. Whatever vagaries we have to deal with out there, I’ve long since grown used to them. I’d forgotten that lots of other places of vagaries too. In Iowa, it’s the concept of an “abstract of title.”

Apparently, a long time ago, the lawyers in Iowa pushed through legislation that forbid the use of title insurance, substituting a regulation in which real-estate lawyers draw up abstracts confirming the transfer of ownership. Whenever the title to a house is transferred, another page is added to the abstract, which is a physical sheaf of papers that stays with the house and is handed from owner to owner. The older the house, the thicker the stack of papers. It’s up to the homeowner to figure out whether to keep them in a binder, or a manila folder, or a box. Technically, if you don’t have the abstract, you can’t own the house.

But as you know, the bank foreclosed on the owners. This wasn’t a friendly transaction where one happy home seller handed off the keys to the house to another happy home buyer with their real estate agents beaming in the background, a scene where the abstract would presumably handed off as well. And DBNR was three owners later. Where was the abstract, indeed?

As it turns out, we did a little research and discovered that just because the state doesn’t have title insurance doesn’t mean it doesn’t have title companies. It’s not so antediluvian that the state doesn’t require copies of the abstract to be filed with the state. A title search — though expensive — can be done and a copy of the abstract ordered. (And yes, we would have expected a Realtor in Iowa to know that.)

But for a while there, we were wondering how we were going to lay our hands on this obscure document that could have been anywhere between here and Des Moines. Life is very educational when you get a glimpse of what’s going on outside your bubble.

If the title of this post sounds vaguely familiar, it’s because it’s from a song in the 1958 Broadway musical Flower Drum Song. It predates “Kids” from Bye Bye Birdie, but had the same sentiments.

However, I’m not complaining about the younger generation; I’m worrying about them. Not surprisingly, these concerns blossomed after a call this morning from my 33-year-old daughter. She lives with her spouse and two children in a two-bedroom rented duet home (one that has one common wall). With housing prices potentially bottoming out, she was asking about her options in terms of moving into home ownership.

This got me thinking about all the post-Boomer generation, colloquially known as Generation X (or the “baby bust” for their lower numbers), born between 1961 and 1981. My daughter was born in 1976. What are her peers’ options for home ownership, especially in light of so many economic shifts? For example:

Down payments. Because of new qualification criteria, it takes a lot bigger down payment to get into property these days.

Employment issues. The downturn has impacted employment in a devastating way. Families that used to have two incomes are down to one. For the most part, people are making do, but are not saving a lot. Plus acceptable forms and proof of what income they have has gotten more difficult to produce.

Parental problems. Down payments in the past used to come from what were jokingly called “GI loans,” where GI stood for “generous in-laws.” But now many parents, having lost their nest eggs in the stock market or declining real estate values, are in no position to help out.

Aggravating the situation is the fact that (my daughter excepted, of course) we have raised a generation of kids accustomed to instant gratification. The idea of saving for something and going without is as foreign to them as Studebakers.

The outlook is not completely grim. As with most difficult situations, I believe we’ll come up with creative solutions.

Rent. This may be the simplest option. With more single-family homes sitting empty, housing rental (as opposed to apartments) may increase. If the federal government rescinds the mortgage deduction to boost tax revenues, this option may become even more attractive.

Lease or co-ownership options. Lease options or rent-to-own options popped up in the 1980s when interest rates were appallingly high. Essentially, you rented the property with an option to buy, and the cost of the option was computed into your rental payments. At the end of say, three years, assuming you’d made all the payments, your option was converted into a down payment.

This arrangement has its drawbacks, of course — you end up with a higher monthly payment than if you’re simply renting; you have to be confident that the place you’re in is the one you want to buy; you have to be confident that your employment will stay in that area; and it’s not always easy to know what the value of a home might be three years hence.

Equity sharing. This is akin to co-ownership, where somebody owns the house and you set up an agreement with them that you’ll eventually share ownership as well. This probably works best between family members; otherwise, it’s a partnership, and in my mind, those are the only ships guaranteed to sink.

Regardless of what happens, I have one strong recommendation for Generation X: stop spending what you don’t have and start saving what you do. You don’t know the economic future, but I maintain that it’s always better to be master of your real-estate destiny.

A Catch-22, as defined by author Joseph Heller in his famous novel, is an unsolvable paradox of logic. As we approach the 50^th anniversary of Heller’s novel in 2011, those paradoxes show no sign of abating.

For example, consider the number of people with underwater mortgages. These are not necessarily people in danger of being foreclosed; they are simply people who bought at the wrong time for the wrong amount, whose houses are worth considerably less than the mortgage being serviced.

According to a February 3, 2010 article in The New York Times http://www.nytimes.com/2010/02/03/business/03walk.html, more people are ignoring both the potential impact on their credit scores and the possibility of a market turnaround, and simply walking away from their homes. They’re asking, why should I keep paying for an asset that’s worth less than I paid for it? If this trend continues, there’s going to be a second disastrous wave of empty homes, creating problems for banks and municipalities alike.

However, this is America, and in America, we like solving problems. Here at DBNR, we’ve become affiliated with a company called RescueRefi. Let’s look at how it works, using the example of one of my clients who has three rental properties, all of which are underwater. For one of them, in Riverside, Calif., he paid $637,000, but it’s now only worth $325,000. His remaining mortgage: $560,000.

The goal of RescueRefi is to reduce the principal of the loan, which in this case would be a $290,000 loan; it charges interest rates of prime + 3 percent (+ 4 percent for people with poorer credit ratings). RescueRefi charges a non-refundable fee of $1600.

What happens? The homeowner lowers his loan amount and his payment, the city of Riverside has to lower his taxes, and he now has 10% equity in the property. RescueRefi pays off the old mortgage at a significantly reduced rate, and gets the income from the new mortgage payments. The original lender avoids having to foreclose and resell a property with significantly reduced value.

Back to the Catch-22. The first problem is that RescueRefi is managed by a hedge fund, and many people blame the derivative-happy hedge funds for causing parts of this financial crisis in the first place. The second problem is that the hedge fund is a private company; there are no SEC statements or reports available to confirm its funding, its validity, or even the identify of its executives (to do this, one would have to hire someone to check its Certificate of Incorporation in its home state). As an affiliate of theirs, I can only conduct so much due diligence in order to convince my client that they’re legitimate. Their name is beginning to show up on sites devoted to scams, but only in the context of people asking if anyone else knows who they are. There are testimonials on its Web site, but anyone can write a testimonial.

This is the sad state we have arrived at in this crisis. Hank Paulson and Alan Greenspan have gone on Meet The Press and said that the government can’t make any further financial commitments to solve the housing crisis; it’s in the hands of the private sector. A lot of people are in need of assistance to reduce their expenses and the threat of foreclosure. A company in the private sector has stepped up, but no one knows whether they’re trustworthy or not. We have reached a point where an industry that thrives on trust no longer has any.

With apologies to William Shakespeare, a recurring suggestion for solving the real estate crisis seems to be eliminating commissions for real-estate agents. Firms like Help-U-Sell and Zip Realty offer either reduced commissions, or services for fees, as opposed to commissions. For people who have a high level of comfort with their own understanding of the legal and ethical pitfalls of real-estate transactions, these are acceptable options.

The latest salvo in the commission war was a recent article [http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/02/02/ED4C1BP3O5.DTL] in the San Francisco Chronicle by Al Lewis, author of OOBonomics: 12 ‘Outside Of the box’ Ideas to Improve the Economy. He’s promoting the idea that buyers should get a $1,000 tax credit, which they can use to pay a real estate agent (even though the commission on a house with a median price in the San Francisco Bay Area would be about $15,000). Sellers would apparently still pay their 3% commission.

The fact is, commissions frequently depend on the Realtor. One of our first DBNR sales was through a Realtor. She listed the property and found the buyer, and she had no qualms about insisting on both commissions (the price was so low that we ended up compensating her more than appropriately). A friend of ours was able to get more cash out of the sale of her townhouse recently because both Realtors kicked in $1,000 from their commissions.

It’s not clear what Lewis’ qualifications are to talk about the real estate industry, since his primary job is in the health care industry (he’s in disease management, which has something to do with chronic care on a grand level). Admittedly, he speaks the truth when he says the real estate industry is a cartel, but there are multiple reasons why you hire a real estate agent for a fee, and not by the hour.

The old saw about airline pilots comes to mind. Pilots aren’t paid to fly the plane; that’s a fairly simple process. They’re paid to fly the plane when something goes wrong. Granted, there are too many rules and regulations around real estate these days (and the deluge isn’t stopping), but are consumers going to know enough to protect themselves during transactions they may make only once every few years, if that? Probably not.

Furthermore, there are a lot of activities a Realtor does that are transparent to the buyer, such as coordinating the result of a multitude of service providers in a transaction. In that way, they’re like actors. If they’re good, you don’t see the mechanics behind what they’re doing.

A few years ago, during the technology revolution, there was a lot of talk about the Web enabling buyers and sellers to get rid of the middle man. Well, guess what — there was a reason the middle man was in there. He was a trusted intermediary that had, through experience, gained insight into the pitfalls of the sales process. Realtors have the same kind of insight plus enormous local area knowledge.

More recently, CNBC broadcast a report about the current administration vilifying people who fly private airlines as being elitist. That’s one way of looking at it, but the people who do it (notwithstanding their carbon footprint) can bypass the mess at our nation’s airports and be much more efficient, effective, and productive in their work.

The point is, it depends on your perspective. From my perspective, Realtors earn their money. This is one part of the real estate structure that we shouldn’t be tinkering with.

Now that the barn door is open and the horses have galloped off into a landscape of foreclosed homes, the U.S. Department of Housing and Urban Development has developed guidelines to help people more aware that they’re entering into dubious mortgage arrangements.

The Real Estate Settlement Procedures Act www.hud.gov/offices/hsg/ramh/res/respa_hm.cfm) took effect on January 1, and represents a whole new set of guidelines lenders must follow in order to keep consumers from doing stupid things and avoiding common sense entirely. Part of RESPA is the requirement that lenders deliver a new four-page good-faith estimate about the costs of a mortgage. In response to the government tradition of trying to bring simplicity to finance, Wells Fargo has issued a 35-page document to help brokers understand the four-page form.

I’m not going to come out against consumer protection, but these changes are doubling or maybe even tripling the workload of real-estate financing professionals. It’s not clear who’s going to pay for this added administrative time, though it’s likely that it’ll be taken care of by higher, hidden fees. Then the vicious circle will continue: the government will require another form to explain the hidden fees. The lender will have to have still another form for borrowers to sign saying that they have been given the hidden-free form and understands what that form explains.

Where does this extra work come from? We used to be able to get a good-faith estimate of costs at the beginning of a client’s search for a home. It was always helpful to give the client a sense of what kind of property to look for. Now RESPA requires one form at the beginning of the process, and another good-faith estimate when there’s a property in sight. And that good-faith estimate must be within a small percentage of the final cost, or the lender is out of compliance. This makes one wonder, then, why it’s called an estimate.

It’s a merry-go-round. Consumers do stupid things, like applying for no-money-down, interest-only loans, in the expectation that their property value will rise. Economic laws kick in, bringing down the house of cards, and the government comes along trying to fix a problem that’s already taken place. It asks for more forms and more signatures from consumers who still don’t know what they’re signing; they just look to their real-estate professionals, who confirm that if they don’t sign the form, they can’t get the loan. Those two-hour hand-cramping signing sessions are just going to get longer.