10 Predictions for 2010

With the closing of one year and the start of the next I thought I would take some time and jot down some predictions for 2010. I want to do this for a couple of reasons. First it allows me to shares my thoughts on the next 12 months with a lot of people who can point out my errors. Second it allows me to look back in 6 or 12 months and evaluate how I did reading all the tea leaves of real estate investing

1) We will see the peak in residential foreclosure in 2010

2) The Case-Shiller Index will turn negative and continue negative until July or August which will prove to be the bottom people have been looking for

3) Duplexes – Quads will prove to be great buys in 2010 assuming you can get financing as banks will want to dump these as rents continue to get soft and loan quality continues to get worse

4) Great Long Term Holds can be purchase in 2010

5) Rents stay soft for all of 2010 (But 2011 will see this turn around)

6) Small Commercial apartments 5-40 units start to foreclose in greater numbers providing excellent buys late in the year

7) Government extends the first time buyer program at least 1 more time as real estate stays soft through Q1

8) The Fed stays on hold all year and does not raise rates in 2010

9) Stock market (Dow) will retest 7,500 before June 2010

10) Home building industry consolidates to remove capacity from the system as new housing starts stays weak throughout 2010 as we burn through the foreclosures

As always let me know what you think.

Good Investing in 2010

One Data Point is not a Trend but …

So I just heard from one of my REO agents. She indicated that this past week she was given 20 REO properties where she rarely saw more than 2 or 3 a week the past 6 months. She also expects more next week in a short week.

I don’t know if this is a trend yet but the backlog might finally be hitting the market.

Curious if you are seeing an increase of REO’s in the MLS in your market.

Good Investing

Real Estate Investing will TEST you ...

To the new investors looking to get started make sure you and your significant other is totally committed because investing in real estate will test you. When you get started everything is great. Deals seem plentiful and you are making all the correct moves. You may even buy a property, get it rented and bring in the repairs under budget.

But then boom the roof leaks, the water heater goes out and the tenant doesn’t pay rent and skips town. Stuff happens with real estate investing. So be prepared and make sure you have the support of the family at home because there will be months that will surprise you.
Remember if Real Estate Investing was easy - EVERYONE would do it

Good Investing

Looks like inventory on the low end is building again

I might be wrong but over the last 10 days I am starting to see a growing number of low end houses for sale. Which could mean the buyers have gone away for the winter OR the banks are finally releasing some inventory. Either way this will certainly have a negative impact on December sales.

My prediction is that December is reported as a negative month when all the metrics are released in January.

If this is true we just had what stock investors would call our "Dead Cat Bounce". As a pet lover this is a terrible term but in this case the real estate market just had a bounce and we may see a dive deeper with more foreclosures and short sales and lack of new buyers ...

Is the media Negative or Positive on Housing as Investment

I only ask as I saw an article in Yahoo Finance that said Housing Flipping is back and it documented a couple of very impressive examples of profit. I know it is not that easy especially when you’re buying on the court house steps as the article discusses. But telling someone they can make 100k simply by buying an REO and selling it is bound to bring in more new investors.

I don’t know about you but I get really nervous when the main line media starts highlighting Real Estate as an easy, quick and lucrative business. This type of attention seems to bring in the masses and start a nasty bubble. Could we really be starting another bubble in housing so soon?

I doubt it as financing is tight and unemployment is too high, but more articles like this are sure to make great investments harder to find.

I am curious if you are seeing the more negative or positive articles in the media. In March it was 100% Negative with Zero Positive. Today I would guess it is 70% negative and 30% Positive. What do you think?

Good Investing

Market seems to be changing again:

In my investment market I am starting to see signs that the market is changing again. In the early part of 2009 if you had cash you could close on some very nice deals. Then the world changed with supply constraints and artificial demand looking to scoop up cheap homes.

As an investor I am happy to report that I believe the market is changing as I am starting to see inexpensive homes come on the market in greater numbers. I am also seeing small multi families (2-4 units) come on the market in great numbers. The final bit of good news is that small commercial buildings are being listed (5-20 units) at reasonable prices.

I have looked at several apartments that appear to be ok deals but they require 25%. The market in this space will turn when the bank holding the property chooses to finance the building at 10%. If they simply changed the required down from 25% to 10% they could move some properties. Hey they could be like the FHA and only require 3.5% down…

Good Investing

So does 1.5% make a difference???

In my investment market the most popular loan programs are sponsored by FHA. Which only requires 3.5% down payment for first time buyers and given the $8k tax credit meant each buyer would have to come up with very little out of pocket cash when they netted out the tax savings.

As we are relearning if the home owner has next to no skin in the game they are less motivated to keep paying on a depreciating asset. Given the poor performance new FHA loans, FHA is looking at raising the requirement almost 30%. But on a nominal basis the change will only take it from 3.5% to 5%. So why does 1.5% make such a big difference?

People are suggesting that this small change is going to put a damper on the housing market. I say are you kidding me. The market is going to cool down because the supply of housing is going up and demand is going down.

If you don’t have 5% or even 10% for the down payment keep saving. Owning a home is a great thing but it can not be just given to everyone.

Don’t blame FHA changes for the coming slow down in real estate sales. If FHA doesn’t address their guidelines now they will just become the next sub prime lender and all of us tax payers will feel the burden of bailing them out.

We need to create loan programs that encourage investors to own real estate. We need to encourage capitalism to insure we turn this thing around.

Good Investing

Said it before and I’ll say it again:

If you are a new investor you have to get your hands dirty and touch your real estate. It is not about just buying properties or investments but about putting a long term business together.

I didn’t always get that. I thought I was setting the world on fire just buying multiple properties and that would set me free. Please learn from my mistake. I invest 3 hours away so it is not easy for me but I now spend several weekends a month in my investment market turning properties as they go vacant.

I strongly believe this makes me a better investor. It also gives me experience as I work my way towards investing full time some time in the future.

Good Investing

As an Investor what should we hope for????

So I am torn on the following question and would appreciate your feedback.

First off I think is more than obvious that the government has their finger prints all over the single family home market via tax credits, loan programs, etc. My question is as an investor do we want them involved???

If the government were to suddenly say no more help go figure it out on your own a couple of things would happen. Prices would collapse in many places, banks would be more inclined to reduce loan balances and the market would clear as economist say. But it would likely be very-very painful!!!! But probably last no more than18-24 months as the seeds of capitalism would start to bloom again in the bloody aftermath of the market turmoil.

The other option is the government stays involved. This likely means less of a dramatic price drop but it also means the market is not working optimally. I suspect this means that we will just bleed price drops and flat line at some point for years, perhaps as long as 5-8 years.

But again as an investor do I want the violent price drop that would produce plentiful deals or the slow train wreck that will produce deals for years to come.

I suspect the answer lines in how large a pile of cash you have today. If you had access to lots of cash today you want the violent price drop but if you are like most investors looking to add deals as you secure capital you want the longest runway possible.

So in the end I guess I am glad the government is involved …. As a capitalist this goes against my nature but as an investor that wants the best for my family I need the long runway to secure lots of deals.

Good Investing

Be Thankful for this Investment Opportunity

There are lots of reasons to be thankful but given this is a real estate investment blog I just want to say lets be Thankful for the opportunity to invest in this market. In a decade people are going to talk about all the money made during 2009-2010. I believe there are always deals in real estate but you may never see opportunities like we have today again.

Do some research and look for your good deal

Good Investing

Don’t believe the Hype!!!

So the latest real estate numbers have been fairly positive but unfortunately they are laced with artificial sweeteners and they can’t be believed.

Let’s see:

We have the $8,000 tax credit that was set to expire and wasn’t extended until late in the month. So demand had to be pulled forward.

We have foreclosures and short sales moving up the real estate curve so these new distressed sales actually raise the average price.

Various supply constraints of loan workouts, extended short sales, etc.

In the end this reporting period will likely look like a blip rather than a trend as the subsequent months show reduced demand and increased supply.

We are not out of the woods just yet

Good Investing

Rents are getting soft so be conservative

As you might expect with Single Family housing prices falling more and more investors are choosing to buy rental properties as investments. This means a couple of things are likely to happen in the short term.
First the floor of the market is either in or very nearly in as first time buyers and investors snap up properties that are either cheaper to own or produce oversized cash flow returns. As more properties are converted from owner occupant to rentals in the short term we are likely to see rental rates fall as supply out paces demand.

I have already seen rental rates in my investment area take a $50 hit on several of my properties. So when you are buying today run all of your estimates and calculations with very conservative numbers. For example if you think you can get $950 a month, run the same calculations at $900 or even $850. If the deal still looks good you really have a great deal on your hands.

Something else to keep in mind is has rents fall the value of multi family properties will fall which may cause additional distressed sales of small multi families as many of these suffer from the same type of over financing.

As a new investor understand that in the short term rental rates are falling so buy with this in mind. But also understand that this will turn around in a big way as inflation takes hold.

Good Investing

Being Patient but Persistent Pays off BIG TIME!!!

If you have been an active investor over the last year or so like I have you have probably noticed a very different market at the end of year verse the start of the year. In short deals were easy to find during the first 4 months of the year as long as you had cash or a solid hard money lender. But then the market changed. The government created all these programs to restrict supply and increase demand.

The solid cash flow house went from easy to find to almost impossible. Most weeks I would make 10-12 offers on houses that meant my criteria and in every case I was now being out bid and sometimes by a large margin. I remember several houses going for 40% more than list price. Many houses would get 10+ offers within the first 48 hours. It started to feel much like 2005 all over again (Except the prices were much lower).

I refused to play in bidding wars and went 4 months without locking up a property which is my longest stretch in 5+ years. It wasn’t always easy but I stayed patient and just kept tracking properties. It was about mid year where I identified a particular duplex that would be a solid addition to my portfolio. I made a few calls and offered prices that were about 60% of list price. To say my offer was laughed at is not an understatement as the agent already had 10+ offers.

Well the property was quickly put in escrow but the buyer couldn’t close. So it came back on the market. I made the calls again and offered my same 60% of list price and was laughed at again. I was told they had multiple buyers willing to go over asking price. Sure enough it was in escrow again in a couple of days. This happened 4 times over 6 months. Each time I would call and offer the same amount and guarantee a close.

Well after 6 months and a dozen or so phone calls I just put this property in escrow at the exact number I offered 6 months ago. After doing my detailed walk through today with my repair team I am even more excited about this property. It will be my BEST DEAL of 2010 by far.

Lessons I learned from this. Be very comfortable with your numbers and don’t over pay if the market gets crazy and starts over paying. Keep a list of the properties you like as they may come back especially in this market with tight financing.

Most important always stay patient but persistent

Good Investing

Let’s start 2010 Goals Early

Good news I just granted you 13 Months to accomplish your 2010 goals. Sit back over the next week or so and think about what you want to accomplish. The Thanksgiving week is a perfect time to do this as you are likely around family and friends having a good time, instead of New Years Eve where alcohol and parties rule the day (not to mention that New Years kiss from the special someone).

We chose real estate investing for the lifestyle it can provide and thus lets set some goals to accomplish over the next 13 months.

I’ll start.

I will add 10 REO rentals to my portfolio that each produces greater than 20% cash on cash return.

Good Investing

Things are getting bad again (I mean good again)

Before you say anything I know that I am a little of my rocker but hear me out. Over the last two weeks I have started to hear the first couple of cracks in the media around this suckers rally we have had in the market (Real Estate and Stock Market). For about 4 or 5 months now I have been hearing nothing but good news and not really understanding where it was all coming from.

But over the last 2 weeks I am starting to see more and more people realize we are not out of the woods yet and we will have a lot more pain. Don’t get me wrong I don’t see the Armageddon option on the table again. We survived that near miss but just because we survived it doesn’t make everything better.

So I suspect over the next 6 months we will finally put in a bottom and then it will take 2-3 years to get out of this mess as we have a lot of idle capacity we have to chew through.

Signs that a bottom is in place will be some of the following:

Another Stimulus is approved by Congress (After all TARP will be mostly paid back so they will sell the public on the idea that they are just reusing capital, (Our Capital)).

People will stop talking about the Fed raising rates in 2010. It is not going to happen people. In fact I think it is 50/50 that they raise rates in 2011 (If they do raise them it won’t be over 1%)

Government will pass a $5,000 stimulus for anyone to buy a foreclosure, that should chew up excess capacity quickly

FHA or other Government entity will increase investor loans from 10 properties to 30 or 50 properties

Bank of America will be majority owned by the government with the next bailout, they have to regret buying Countrywide

Public Builders will start to buy each other out for their cash positions and to reduce future building capacity

Taxes will go up (If we keep spending we will have to raise taxes)

Keep in mind I made my best deals of 2009 in Jan-March just as the financial panic was hitting TILT. So we should all have a chance to ring the register again.

Buy Cash Flow properties and hold for the long term

Good Investing

The scariest statistic I have heard in a long time!!!!

Make sure your sitting down when you read this…. I just read that we have over 4 Million homes at least 1 month delinquent on their mortgage. That is a large number but until you have this next piece of data you probably are thinking I am crazy for claiming it is the scariest number.

Guess how many homes we have listed for sale right now across America??? Well, we only have 3.9M homes for sale.

How does that feel? We have 4 Million delinquent homes and only 3.9M homes for sale.

Guess what happens when supply goes up and demand goes down ….

This is going to be interesting

Good investing

More Pain Ahead (But More Opportunity also)

I suspect over the next 30-60 days it will become ever clearer that we are still in the throws of painful real estate correction. Over the next several months I expect several things to happen:

1) Delinquencies to continue higher (Currently 9.6% this likely goes to over 12% and maybe as high as 15%).

2) Prime mortgages will continue to fall behind in increasing numbers

3) Building new homes should continue to stay low

In addition, the more I look at the additional tax credit available to move up buyers ($6,500) I am struck by who this will and won’t help. Because unless you sold years ago and been sitting as a renter (if so good for you) who would want to sell a home and buy another one? I am guessing most people feel the home they have is good enough given the loss they have felt or seen in the last several years. Maybe if you bought back in the 80’s you could have the equity to think about trading up but it has to be a small pool of people available for the new credit.

As for the 8k tax credit they did such a good job of being non committal on extending it that almost everyone and their brother who could qualify did purchase a house already. And as we know they can’t buy another primary residence so the additional pool of buyers is lower than say in the summer.

I don’t know how to get around my fear of a tidal wave of supply coming just as demand dries up causing prices to reverse coarse and fall again. Simple supply and demand means prices will have to fall to clear the market.

But as a buy and hold investor you should be ready to pounce because I suspect we are in or about to be in the best buyers market of our investment lifetime.

Good Investing

Why are people surprised when building starts come in lower than expected???

I have said it in a previous post or two but we need to sell the houses we built and stop building new ones. The way out of this mess is to chew through the inventory of homes we built over the last couple of years.

I don’t know the exact numbers but I can tell you we built several hundred thousand houses we didn’t need. The easy financing made them easy to sell so we built them. But now we have to pay the bill for those homes. We can either sell them slowly or knock them all down and start over.

It is a simple equation. The supply is greater than demand so don’t build more spec homes.

Good Investing

Section 8 Rentals – Good or Bad Investments:

As a real estate investor who aims to own cash flow properties one of the first choices you will have to answer for yourself is do you want to rent to Section 8 tenants? In my investment area the lower end of the rental market is dominated by Section 8 tenants.

First I should be honest I support this program and see a lot more good than bad from the program. The two main reasons I like the program are first and for most a portion of the rent shows up on time. In addition I come to appreciate the yearly inspections they perform on the rentals to insure the unit is in good condition. I want my tenants to have safe and sound homes and the inspections insure this to a greater degree.

The downside is these inspections frequently come up with miscellaneous items that were actually tenant damaged or never reported by the tenant. This can cause a large repair bill around inspection time but I see these repairs as small investments aimed at stopping bigger problems.

Another issue some landlords discuss is the limits on rental rates, rent increase and required notification periods. If you are buying cash flow properties with the intent to hold long term this will not be a problem but if you hope to flip the house inside a year you might want to look for a non Section 8 tenant to give yourself greater flexibility.

Another question I hear from new investors is don’t you have a bunch more problems with these tenants? The simple answer is No. Now I do have problems but I see these as more people problems and when I look back over the years most of my tenant issues and evictions have been with no Section 8 tenants. As a landlord you are in the people business and everyone deserves a safe and secure place to live.

My final thought on this subject is I get some personal satisfaction out of supplying safe, sound and secure housing for families. I grew up very poor so I see this as one simple way to give back.

Good Investing

Always looking for the next deal

As an active buyer of property in Fresno and Madera I thought it would be a good idea to list the basic characteristics of a deal I would pursue. As I hope to attract agents and investors from Fresno to the blog.

As stated in earlier posts I am a buy and hold investor that focuses on cash flow properties.

The last several purchases have been REO or Bank Owned properties that needed roughly 10K in work to make rent ready. These properties were to far gone to qualify for the FHA buyer and in older neighborhoods that the owner occupant would ignore given the amount of options they have. I have purchased both individual homes and duplexes.

I am open to looking at any opportunities where I can buy a distressed asset at a great price. I can close in as short as 10 days in order to secure a deal.

I am starting to see deals in the small multi family’s 4-10 units and have made several attempts to purchase them without luck recently. But that will change.

If you are an agent I am happy to have you represent me assuming you bring me the deal before another agent or I find the deal. I want to pay the people that help me add properties to our family portfolio.

Another area where deals are possible is if you know of a building or house that is owned free and clear. In this case we should be able to structure a owner financed deal that benefits all parties.

In the end I always like discussing deals so feel free to reach out

You could send an email to wealthbuildingpro@gmail.com

Good Investing

Latest Headline - Tax Credit Sparks First Time Buyers:

Anyone shocked that if you give someone free money that they would buy an asset at a depressed price? Me neither. Especially when you look at the facts that you have to either pay a mortgage or rent a place. So if you are a first time home buyer this is absolutely the best time to buy a house. I don’t know why anyone would have a headline claiming such shock!!!

In my investment area a buyer can pick up a nice foreclosure for 80K. Put under $4,000 down via FHA loan program and get the full 8K tax credit back from the government. Their mortgage payment will be under $500, while it would cost $900+ to rent the place. Now I know there are more costs to owning a home but you can easily see that it has never been better to be a 1st time home buyer. The government basically gives the buyer a FREE asset that lowers their monthly living expenses.

Two questions:

What happens when this government induced demand stops? Do we suffer for 6-12 months because we pulled forward a lot of demand or is the government going to be forced to perpetually extend these programs as a right to insure reelection?

Second where does the market go that is not supported by the government? Do they continue to be depressed until the government throws money at them or does the capitalist impulses of the average American kick in at some point?

The markets have a lot of external forces don’t get caught on the wrong side.
Good Investing

Why small time property investors should never bet against Obama?

In the stock market there is a general felling that investors or the market should never bet against the Fed (Federal Reserve). However, as a small time property investor I think we should tweak this message to never bet against Obama!!!

I am a very simple man who is only interested in supporting my family and having the security of a comfy retirement so this article will have nothing to do with politics (we can save that for the talking heads on TV).

The premise for this post is you need to watch where the government is focused and see if you can place yourself in the path of the money. Because if you can take your small pieces of capital and invest it in markets the government is focused on fixing you could get an artificial pop in value.

If you chose this strategy know that you will need to pay very close attention because as the government focus changes and it will you will need to recycle your dollars via a sale, 1031 exchange or be willing to hold for quite some time. Because as the government changes focus demand will fall and prices will stay flat to down.

At this point the government is still very focused on the first time buyer market via tax credits and liberal FHA lending. Recently they have expanded their coverage to include the move up market via their own tax credit.

The government is not done with housing and they will continue to be a market force so find away to profit from all the money they are throwing around.

Good Investing

Understand investment areas may be evolving as we continue through this cycle:

It should go without saying that the investing landscape is evolving as over leveraged property gets recycled in the system. In addition the external forces of the government are making the market less efficient with prices propped up by free money ($8,000 Tax Credit) and low down payment requirements of FHA (3 1/2%). Through on top of this the tough selling season on the winter and holiday months and you have the recipe for some interesting developments.

Always remember the more challenges in the market mean more opportunities to make money and lose money.

Thoughts for the investor:

As an investor learn the investment areas that we hot during the peek. For example in my area there is a part of town generally referred to as the “Mayfair”. It is or was a very solid investment area full of nice homes, duplexes and other small investment properties. At the peek it was perhaps the most desirable investment area for outside investors. Can you say problem?

As the investors (the government would call speculators) showed up in greater numbers these properties shot up in value. I know of several examples of simple duplexes producing $1,300 a months in rent (total) selling for over $260K. Can you say negative cash flow!!!

I drove this area over the weekend at I can tell you a lot of these overleveraged properties are on there way back to being recycles through the system. But in the mean time while this painful process is happening the area has turned slightly rougher!!!

I suspect we likely have a 24 month window to see this neighborhood reborn as a safe area but it will take some time and some patient investors. Else this neighborhood could keep sliding.

If you researched your investment area you would find similar investment areas ripe with opportunity and challenges. If you chose to invest in these markets understand the cycle with likely get worse before it gets better. So make your money when you buy the property and then manage the units very closely!!!

More Problems = Better Deals = Greater Wealth

Good Investing

Did you hear “Housing prices start to stabilize?

I saw this lead article on CNBC today and I couldn’t wait to read it. From where I sit this article is pure make believe and has no resemblance on the real market. The premise of the article is prices are firming. Which I guess if you simply look at the headline number might be accurate but there is no chance the overall market is healthier now than last year.

Don’t believe me then let me ask you a few questions:

Are overall delinquencies up or down from last year?
Answer: They are up HUGE this year

Have banks started to unclog their short sales and non payments (some over 1 year old)?
Answer: Nope

How could the market be better if FHA is becoming a landlord?
Answer: Simple it is not better

What I believe is termed Strategic Non Payment up or down from last year?
Answer: If this is not turned around soon it may become the national pastime

If we let articles like this and others that talk about second derivative improvements fool us we will be in for a nasty surprise in 2010. Don’t get me wrong you have seen some improvements. Investors are buying cheap cash flow houses so there is a bottom in the market. If an investor can buy a property and produce a return in excess of 15% they will buy the house. Anything else is just crazy talk until we can create jobs.

Your opinion is welcomed as something feels off in the current market.

The market that I focus on has seen a tremendous change in the last 6 months and more specifically in the last 60 days as things have gotten really strange. I suspect we are seeing a collection of events collide. What bothers me is I can’t tell if these events are going to be something we can build on and call a foundation/bottom or if it is going to cause a large and painful event. The following is what I see:

The market or what normally is called the market is being manipulated by several external factors. These factors are not a normal part of the investment cycle and thus cause an inspired response. The factors in the current market are affecting both supply and demand which leads me to believe we are entering a dangerous time.

Items Affecting Supply:

Foreclosure Moratoriums (anyone think we will have another one around Christmas)
Banks refusing to foreclose to insure they don’t have to take the large negative hit to their books/ratio’s
Pretend and Extend being deployed in the commercial market
American’s taking to strategic non payment like a national pastime
Loan Workouts that delay problems for the future as default rates are high
FHA becoming landlords, don’t pay your mortgage but become a renter and never move

Items Affecting Demand:

Loans are hard to get, except if you’re a new investor and most likely to over pay given lack of track record
Tax incentives that are focused on first time buyers which in most cases will buy the cheap house in the bottom third of the market (Good for Them)
City programs trying to buy foreclosed homes to keep homes affordable

Given the items above I am struck by a couple of things. First all the items holding back supply is bound to loosen up by March – June next year, causing pent up supply of homes to hit the market. In addition all the artificial demand items (except the loans) are set to expire around the same time. So let me ask you this, what would happen if the restriction on supply is lifted at the same time the artificial demand is capped off? My guess big price drops, much longer days on market and an inventory/supply number approaching 12-15 months. For an investor this could mean the best time to buy is just over the horizon.

Something else I am struck by is all the demand is focused on the low end of the market often characterized by the sub prime market which was so 2008. Most of our additional pain is going to be felt in the move up or high end market. My fear is that we are going to get caught looking at a problem that for the most part solves itself because investors can buy these older homes and turn them in to rentals and miss the tsunami coming are direction. The problem in the move-up and high end markets can’t be solved with little $8k credits and these homes at least currently can not be bought as safe and secure rentals. If we are not careful this could be the tipping point next summer that sends us back into the financial abyss.

In fairness I see another outcome that is possible and one that the government is going to push with all its might.

The factors listed above have caused an interesting thing to happen and one I have seen first hand in my investment area. In my market for example the price of a vacant, bank own, 3bd 1 bath home requiring 10K or more in repairs has gone up 50% in 6 months. Yes 50% in 6 months for an annualized return of 100%!!! In January you could buy a solid property for 45-55K today it would take 65-75K if you could beat out the other 10 buyers. See what I mean about artificial, this is not healthy!!!

But guess what has happened over the last 3 months? Surprise prices have increased in this section of the market!!! This has caused the press to report that real estate metrics have turned and gone positive on a month to month basis. I don’t know why anyone is shocked by the fact that if you restrict supply and add gasoline to demand you get a price jump. Shocking!!!

But guess what happens when real estate goes up on average even if it is fake and caused by forces not common to a healthy/functioning market? Two things: First the animal spirits can be rekindled as the average American can not stand missing out on a sale. What is a greater deal than real estate (Buy low – Sell high)? Second the higher the average price may cause some banks or financial institutions to actually write up their loan portfolios. If this happens it will cause banks profits and stocks to go up dramatically. This goodness will cause the financial networks to talk about the next bull market and we are off to the races.

I see a couple of problems with this scenario. First all this financial engineering does nothing to create jobs. It may cause some banks and hedge funds to higher a few more MBA’s and pay big bonus but it doesn’t help Main Street. Second it does nothing to change the behavior around strategic defaults that will become the story of 2010.

Let me know what you think. Are you seeing the same artificial restrictions on supply and artificial sweetener around demand? Am I over thinking this and I should just realize that the government has engineered the bottom and we are all good to go from here?

Good Investing

Find articles written for the new investor at www.wealthbuildingpro.com

Thoughts on recent Fresno Bee Article

I recently read the article titled “Cities face hurdle to buy foreclosed homes” by Sanford Nax (http://www.fresnobee.com/business/story/1700707.html ). It is a very thought provoking piece full of facts and solid reporting. But as an investor in Fresno real estate and given my chosen framework of a blog I thought I would share a couple of thoughts the article sparked.

From my read the article had two main points. The first being it took the city a lot longer than other cities to get the program in place. While it is easy to say it would have been better months ago (without question) I can only imagine the waste that may have happened. Speed is generally a trade off for quality so I will assume the city chose to insure our money was not wasted.

As for their second point I am little confused. It seems the city is frustrated that they can not buy cheap foreclosures because investors are beating them out. The article basically says the city can not over pay but individual investors can. As an investor I take exception to this theme because wasn’t one of the original goals of buying foreclosures to put a floor under the market? Well good news the market has already done that and now the market is building a solid base from which we can grow out of over the next couple of years (maybe 5 years).

If the city is having trouble competing for the older homes that investors like me are buying (The older 3/1 or 2/1 that offers options) then they might want to focus on an under served area that would provide a ton of future value for the city. In Fresno you still have a fair amount of 1Bd / 1Bth homes around 600 sq ft. Now I know some investors like these types of homes but I can tell you it is a very small list. So maybe the city should turn to buying very small homes on 6,000 sq ft lots. They could create very simple 3/1’s that would be more valuable to the city as years go buy with increased tax revenue. Plus the contractors working with the city could employee more people full time as they add 700-900 sq ft of living space verse simply polishing a junkie house.

As the article indicates one of the stated objectives of the city funds is to produce available low income housing for owner occupants, which is very admirable. However, I do have a growing concern for the average renter in the low income areas. I am seeing a larger number of small multi families come on the market. If this trend continues and banks continue to vacate these properties we may have a real shortage of safe and secure rentals. Perhaps some funds could be pushed in this direction. You could still sell the duplex or fourplex to an owner occupant if you had too (not ideal).

In the end the low end of the market has seen a lot of interest from owner occupants, who very likely will get a 10% discount on the house via tax credit, investors as the properties will cash flow and now the city programs are kicking in dollars. It is no wonder we are all having trouble locking up deals because we are all competing for the same finite listings.

Good Investing

Has Fresno Real Estate put in the market bottom?

This question really depends on which way you look at “The Market”. As an investor in the market who reviews listings everyday I thought I would take a shot at providing my answer to this important question. Feel free to comment with your thoughts.

First when I compare the market we have today with the one that existed at the beginning of the year it is clear the banks (sellers) fear has subsided. At the beginning of the year you could tell the banks were scared and ready to deal. I suppose the loans from the government to the large institutions did the job and gave them the cushion to be a little more selective and less trigger happy to dump properties. At the outset of the year they wanted CASH and they wanted to sell.

Another characteristic that is unquestionable is that there are more buyers in the market for low priced rental properties. Given the low rates found in most savings accounts and the unsteady nature of the stock market it makes sense that more people are turning to low end rentals for return on their money. Therefore the supply demand equation has tipped dramatically since the beginning of the year. It should also be mentioned that the low end market has also seen a dramatic up tick of home buyers given the available tax credit for first time buyers.

Now let’s review the statistical metrics called out most commonly by the media.

Has the mean or average price of Fresno homes bottomed? For review the mean is simply the amount of all homes sold divided by the number of homes sold. At the beginning of the year when the large price drop in single family homes was recorded, what was selling? Well from my experience I know for certain that the cheap and very cheap houses were being dumped by banks. I also know that almost no high end homes were sold because financing was shut down. So you had a market with transactions highly skewed to the low end. Given only one side of the market was functioning it should have been obvious to us that the average price would fall dramatically at the beginning of the year.

Another metric sometimes trotted out by the press is a slight variation on the theme above. They say has the “Medium” price changed. The medium is a different statistical metric that is simply the middle price. Think about listing all the sales in Fresno from cheapest to most expensive and then finding the transaction in the middle. For example if there were 100 homes sold you would find the 50th home sale in the list from cheapest to most expensive and that would be the Medium price. Like the mean/average above this statistic is greatly exaggerated by the dominance of the low end transactions at the beginning of the year. In a market where 80% of the transactions were low end you will find a market were the medium is found in the low end transactions.

Fast forward 10 months to November, 2009 and I can tell you first hand that the low end of the market is still the most active but homes are going for 20-30K more than they would have gone in Jan/Feb of 2009. In addition with the loan market on better footing the move up and high end market is functioning better than early this year.

This rebalancing of the market will lead the media to create additional positive press articles stating the bottom is in and all is clear on the real estate front. The more positive press will lead to more buyers and you know what happens when more buyers show up, yep prices go up again.

So yes I think the bottom of the market has been found and we will work our way slowly back to replacement cost. Please understand that I mean slowly back to replacement cost.

What does 10.2 Unemployment mean for Real Estate Investors?

All I can say is this is interesting times we live and invest in. The first thing that jumps out at me is that cheap money is here to stay. Several articles I reviewed today talked about the Fed being on hold until the middle of 2010. I suspect the Fed will stay very accommodating through out 2010 and I suspect there is a fair chance they do not raise rates above 1% until 2012. I haven’t heard any talking head on TV thinking this far out.

The headline number for unemployment is going to get worse over the next 6-9 months with unemployment peeking above 11%. Then it will take a year or so for the country to build a base we can grow from. The unfortunate truth is we can not pay for all the sins of the last 10 years in only a year or two. We are probably in the fourth of fifth inning. Note I suspect the steepest part of the drop has already been felt but we are not done with the pain.

Another area that is certain is the move up and high end home markets are going to continue to crack under the stress of job losses. It would not shock me to see homes that went for 600-800 in various markets to go for under 300K as the market begins to show maximum stress.

However, the low end market is likely to get health quickly because cash is paying next to nothing in the bank and people will need to chase return with controlled risk. Given the low end of the housing market is selling for 60-70% of replacement cost with fairly stable rents I suspect investors will continue to jump in with both feet. We have already seen a tremendous change in the low end market.

Given the long road a head I suspect we will see more public homebuilders consolidate to remove capacity from the system. I don’t see how building homes on any type of scale is going to be profitable until at least 2012-2013. However, if the builders would just change their business model slightly I suspect they could continue to churn out profits while waiting for the building wave to build again. I propose that builders should focus on buying foreclosed homes in large tracks built over the last 5 years. They could pick up 10-20 homes and rehab them and put in some special touches and really help save neighborhoods. Talk about good karma!!!

Another item I suspect that will come to pass in the next 6-9 months given all the bad news is a big bank that is currently perceived as rock solid will be owned at least partially by us the US tax payer. We will need to send them 20-40B to maintain capital ratios. The bank will be so large that FDIC will NOT be able to let it fail. So we the tax payers will buy some preferred stock or convertible to inject the required capital. My fear is it may be worse than expected and require 2-3 extra injections at which point we may own more than 50% of the bank. (Just a hint when this happens we will be very close to the bottom and ready to grow again).

Buy and Hold will still be the preferred long term investment but their will be some very busy flippers taking beaten down foreclosures and turn them in to FHA approved homes. If you could flip 4 homes a year and make 20K that is an extra 80K of income before taxes. I suspect this type of activity has at least 2 more years to play out.

Good Investing

Why all the talk of a "V", "U", "W" or "L" shaped recovery

As real estate investors it is very important for us to watch the economy. All of the alphabet soup listed in the title are options for how the recovery might look (in the rear view mirror).

A “V” shaped recovery means we will come back as fast and as sharp as we went down. As an investor this means you need to push all your chips to the table now. We don’t see this as likely as too many of the problems still exist and other are still in front of us namely resets on Pay Option Arms and commercial real estate. But don’t be confused the government will do all it can to produce a quick recovery as a 20% rise in real estate would fix a lot of the problems and make banks wildly profitable as the “write up” their portfolios of loans they have marked down to nothing.

The “U” shaped recovery means we will spend a fair amount of time on the bottom but as we come out of this mess it will be fast and profitable. An investor that sees this market should be placing strategic bets over the next 6-18 months as we put in the bottom. The type of recovery seems more likely than the “V” shaped recovery because it takes into the account that we have a few more shoe’s to drop.

The dreaded “W” shaped recovery means an investor should be very picky with any investment now and wait for the next wave of stress in the market. This particular recovery option keys off the idea that any up-tick has been artificial and it won’t hold once the stimulus is taken a way. You need to know this is the least favorite outcome to our government. We are confident that if they smell anything close to a double dip recession that the printing press will go on overdrive. They will create a second stimulus focused on shovel ready projects and they will spend – spend – spend.

That leaves the “L” shaped recovery. In this case the investor has time to make their investment decision. They should buy investments as they make since and plan to hold them for 5-10 years as we take a very slow grind out of this recession. This slow grind will rebuild the foundation of the financial system, consumer balance sheets, etc. It will not be fun by any stretch but we have survived worse and we would survive this too should it come to pass.

In the end you need to understand the environment we are in at a macro level so you can make wise micro decisions. Not that we are experts by any stretch but as of today our current guess of the likely outcomes is as follows (Assuming these were the only options):

V Shaped = 5% - Doesn’t seem likely give future pain ahead
U Shaped = 30% - If the stimulus holds and no other major surprises are found
W Shaped = 10% - Government would fight this with every dollar they could print
L Shaped = 55% - Capitalism works it self out and we reset the balance sheet

Good Investing

Loans are the hardest part of investing today ...

If you're a newbie investor with decent credit and enough capital to put 20%-25% down you are in a great spot. As 30 yr mortgage money is CHEAP and the price of foreclosures are CHEAP. So at a mimimum go buy 4 properties and set yourself up for the rest of your life.

If you chose to buy more you can get loans #5-10 done but it will take time and a lot more people will need to look at the loan. The extra pain shouldn't stop you but just know loans 5-10 will be tougher to get.

If you own more that 10 properties or you try and buy property 11+ go luck. The traditional lender market is all but shut down for owners of lots of property. So buyers with a lot of proeprty are turning to hard money lenders and paying high rates with lots of points but if the deal works with the high rates great because sometime in the future you should be able to refi out of this loan.

At some point this will change but it might take awhile. So guy buy what you can and always keep fighting because if the deal is good enough you can always find the money.

Good Investing

Did you hear? Pending Home Sales up 8 months in a row!!!

Well the good news in this report from our perspective is it validates that the low end of the market is very active. Big surprise with 8K first time buyer incentive at risk of expiring.

This report also means we are close to the mysterious bottom from an average price perspective. But as we have stated before we believe this is more of a statistical issue because we are foreclosing on and selling more homes in the traditional move up market with the upscale markets soon to see a wave of Alt-A foreclosures coming.

Also we have to remember that more pending homes do not mean more actual sales as the buyer must still get a loan. Also we suspect a fair amount of the rise in pending sales are actually short sales that are just as likely not to close because they take so long to process and approve.

So in the end we still have a market that is unhealthy due to various external issues.

Anyone think more foreclosure moratoriums are coming around the holidays that could be another negative wrench?

We also suspect more families that are currently paying their mortgage are going to decide it is better to withhold payment. If we can’t turn the value around this negative feedback loop could get even worse.

Commercial real estate is a hammer that is going to fall in 2010 and add pressure

But remember our motto “More Problems = More Opportunity”

Good Investing

Thoughts on the current market in Fresno

Deals at the lower end of the market are still very competitive with most listings going for over asking price. The biggest question we have is this current market for the lower end tight because of some artificail means or is it something more urgent that we need to take notice of.

At this point it feels very artificail, it feels like some just turned of the hose without telling anyone. The agents we work with don't have as many listings and speaking with our escrow we learned that active escrows are down 40% from last month. Something just feels very wrong.

We might be off base and we will reconsider our standpoint if listings are not up by the beginning of December.

Something else to note if you have some really big bucks is that for the first time we are seeing large apartment buildings foreclosed (50+ units).

Things are going to get very interesting next year (2010) as the apartment market implouds much like the single family housing market has this year.

Today’s question from a new Investor:

************************************************************************************
October 31, 2009

As we have mentioned in various posts and on our site ( www.wealthbuildingpro.com ) we enjoy helping people get started in real estate investing. Over the years many of the questions we get are the same or at least very similar and as time goes by we will take stabs at answering all of them in posts or articles. Our goal is to provide a one stop shop for new investors to answer their early questions on the road to real estate wealth.

However, on occasion we get asked a question that we just have to write about. Today we were asked by a new/potential investor what they should do with $200k. First off that is a ton of cash and you could do a lot of things with it. After asking a few questions we learned that this new investor is very conservative and had planned to just buy a house cash and have no mortgage. In our mind the investor would be house rich and cash poor.

This is certainly one option and one that this new investor (home buyer) may move forward with. As you might imagine we had another recommendation.

The following is a rough outline of what we recommended as a second option for the 200K.

1) Take 40K and buy the 200K house with a 80% mortgage and get a 30 year fixed rate loan as close to 5% as they can

2) Then we recommended the client focus on buying 4 – Duplexes over the next 12-18 months. The goal being to find Duplexes that need some work and can be purchased for under 75K and produce greater than $1,300 in income each. Depending on rates (currently around 6.5%) and required down payments we estimate cash flow will be greater than $500 each once repaired and leased.

3) We estimate that depending on repairs and other miscellaneous costs the investor should be left with 20-30K in cash that they can tuck away for unexpected costs of being a landlord or new home owner.

The strategy above does a couple of things.

1) It produces a positive carry of over $1,000 a month (2,000 in Cash Flow from Duplexes - $750 Mortgage Payment from primary house)
2) It creates a larger foundation or real estate for when inflation picks up
3) It enables the investor to safely take advantage of the market while it is depressed (Buy Low – Sell High)

In the end we don’t know if the investor will become an investor or decide to pay cash for their primary house. However, we feel good about providing the alternative option.

Thanks for reading
************************************************************************************

Our Top 5 Real Estate Investing Books

************************************************************************************
October 29, 2009

For those of you new to our blog or our website (www.wealthbuildingpro.com) we are primarily buy and hold investors who target under valued or distressed properties.

Like other active investors we are constantly looking for new material to read and review. We do it not so much to find new ways of investing but more to hear other stories, challenges and deals. We are happy to read a book just to get further validation but when we can learn just one thing it can put thousands of dollars in our pocket, which is what we really like. We estimate that we have read 100+ investing books to date and average about 2 a month. Without further a due here are our top 5 Real Estate Investing Books:

1) Investing in Fixer-Uppers by Jay DeCima

2) How I turned $1,000 into $5 Million in Real Estate in my Spare Time by William Nickerson

3) Investing in Goldmine Houses by Jay DeCima

4) The Millionaire Real Estate Investor by Gary Keller

5) Equity Happens by Robert Helms and Russell Gray


The keys behind each of these books were the author’s review of past deals and details on what it took to be successful over the long term. These are not get rich quick stories but instead offer principals the average investor can leverage in today’s market.

Get Educated and Take your Shot
************************************************************************************

Investing in the Fresno Market

************************************************************************************
October 29, 2009

As we start our series of postings on how we see the Real Estate Investing (REI) market in Fresno it is probably best to see where we have been, because any single point does not make a trend.

First off it should be noted that we have been investors in the Fresno market for 7+ years (been a crazy ride) so we have some experience. It should also be noted that we put our money where our mouth is as we have picked up 11 properties in the last 10 months. We focus on fixer type properties that need work in decent older areas. We avoid war zones and areas where we would feel unsafe getting out of car at night.

We look for deals everyday and are always looking to expand our network of experienced real estate professionals. If you support the Fresno/Madera market we would love to hear from you. Go to www.wealthbuildingpro.com for contact information.

On to the topic at hand: The current market.

In today's market it goes without saying that the lower end of the market is much stronger than any segment, especially when you compare it to 6-9 months ago at the peak of the financial storm. It is our opinion that at the beginning of the year the banks wanted CASH and they wanted it in a BIG way so they took some cash deals that they wouldn't take in today's market. SO if you were active during this window good for you, but that market is gone!!!!

As active investors we have to ask ourselves is this a short term buying storm caused by $8,000 tax incentives, low rates and limited new foreclosures (not to mention the summer buying season has just passed) or is this the new trend upward (or at least flat).

We obviously have no information outside of what we read but it is our opinion that we are in an artificial market that is acting like it is on a sugar high. When this wears off we will again test the lows of earlier in the year. We see all the pending and back up properties in the MLS which makes the available inventory look almost non existent (in our desired markets). How can this be? 6 months ago you could buy a vacant 3/1 REO house that needed work for around 50K, but today it probably would take 65K to 70K (For you math wizards out there that is a 30%+ increase inside of 6 months).

Can a 30%+ increase inside of 6 Months be healthy? I think you know the answer to that, "No".

So either what will prove to be the bottom was artificially depressed (certainly possible) or the sudden spike is artificial. It is our opinion that you can not have both.

So what is an investor to do when faced with a tough decision? Do you double down now and bet the market is racing back to replacement cost or do you take a deep breadth and pause for a few months and see what happens. Both options are risky and could cost you lost wealth.

We propose that you ask yourself a couple of hard questions and then decide:

Have Foreclosures peeked?Will the 8,000 Tax incentive be extended or enhanced a seond time?Has unemployment hit bottom in Fresno?Is net migration to Fresno up or down?Where are interest Rates going?Is Inflation around the corner?

No one every said investing was easy. But it certainly is fun.
************************************************************************************

Today’s Metric and what it means? 14.5% of homes are vacant!!!

************************************************************************************
October 29, 2009
There is no sugar coating this number. This is really bad news for Real Estate, Banks, the Financial system, our Recovery, etc. Why you ask?

Do you know why most houses are vacant in our opinion? Because people have given up and just moved, because banks are sitting on homes and not foreclosing because it keeps them from recognizing a loss, because people can’t rent them for a profit, etc. No matter how you slice it this number is bad and based on today’s reading it is getting worse not better. We suspect the more vacant housing you have the more foreclosure you will have and the more depressed pricing will be. 2010 is going to be a rough year but we need to get through it and come out stronger.

As you hear on TV all the time, real estate numbers are getting less bad. The whole second derivative argument for why we are turning a corner. Let us be the first to tell you that the market is not getting better and it will not get better until we turn this vacancy problem around. Fewer vacancies mean people can not only choose to live there but they can afford to live there.

Things are going to get worse before they get better. We need to stop building homes and create incentives to turn the current inventory into useful housing or just knock them down and recycle the material for better use. Our vacant and boarded housing stock becomes a problem that brings all kinds of unhappy things to neighborhoods.

On another related topic do you want to know why the Case Shiller index is up the last 3 months? The answer is unfortunately simple. Last year we were foreclosing on a sub prime home that was at the lower end of the market and now we are foreclosing on the move up and luxury market. Even if you sell the move up house for 50% off it will still raise the Case Shiller index because that 200K sale this year was a 90K sale last year so the average looks better.

Just track the transaction volume and months supply to see how we are doing because the “average” sale this year is very different than the "average" sale last year and it can be very misleading.

We need to think of programs to turn this vacancy number around!!! More jobs would be a good thing ...
************************************************************************************

National Headlines and our opinions for Oct 28th, 2009

************************************************************************************

October 28, 2009

As we have mentioned previously we are very focused buy and hold investors in Fresno California. However, that does not mean we ignore the national news or trends. Quite the contrary we look at the national headlines and try to understand if our market is similar or different. Plus we try to figure out what the national trend may mean for future opportunities.

Of the many headlines this week two caught our attention. First was the drop in mortgage applications (3^rd week in row as we recall). What could this mean as interest rates have not ticked up any great deal. We propose there are three contributing factors, if we are correct, it will mean this number will continue down in the coming weeks.

First is the fact that refinancing has to be slowing down. As rates have been pretty close to 5% for a while now and thus anyone who could or is likely to refi the loan has done so or at least tried to. To kick start the refi engine again you either raise the average price (value) or you need to drop the average rate below 4% to restart the refi wave.

The second area that is a contributing factor is the $8,000 tax credit that is currently set to expire on Nov 30. For our money we suspect most people went ahead and got a mortgage processed already and they purchased their home or are just about to close escrow. There may be a few brave souls that are trying to cut it close and thus just starting the mortgage process but it won’t be a large number. So our guess is the peak of the first time buyer is over and done with.

The final area is that investors are still locked out of the traditional market for loans. If you own even a semi decent portfolio of properties you are toast as no bank will talk to you. We constantly find deals for 50% of replacement cost that will cash flow $400+ a month but as experienced investors we are locked out of the market unless we go with hard money option which requires 40% down (not fun but we do it because the deals are that good).

The next headline that got our attention was that new home sales were down but also new investors were down. All the articles I read on this were negative and talking about the second crash and a falling market. All of these are hogwash!

These headlines tell me that the capitalist system still works and if the government would get out of the way the market would clear itself. This clearing process would be VERY painful but it is going to happen the only question is do we swallow the pain in 12-18 months or do we let it linger for 3-5 years?

Back to the topic at hand and why we think these metrics are a great thing for the real estate market. For that we will give you an example.

Let’s say you are in the market to buy a TV and you walk into any store in America and you are presented with the following choice. You could buy a basically brand new TV that is out of the box and has some dust on it and the TV remote needs batteries for 60%-70% off or you could buy the same TV in a Box with all the packing material and pay full retail. Which would you buy? Our guess is you buy the TV today that is out of the box and 60% off. Now what would happen if you were the TV manufacture and you knew with 100% certainty that there were over 500 basically new TV’s at the store that could only be sold at 60% discounts to your new in the box TV. Would you be in a rush to build more new TV’s? I certainly hope not. In fact we would do everything we could to build zero TV’s for a few months and let the natural law of supply and demand get into balance.

So back to the specific metrics;

New homes sales are down. GOOD – about freaking time. We need to chew up the supply of slightly used and vacant existing homes that were built, sold and foreclosed on ASAP. So new homes sales need to go down and go down further if you ask for our opinion.

Sales are down but Inventory is down more. GOOD, no GREAT news. This means people running for profit homebuilding operations are NOT being stupid and burning their cash. In fact if we were homebuilders and we knew our product and cost structure we would seriously be looking at buying some distressed foreclosed homes in our old markets that we sold out in 2005-2006. Think about the good karma they could build up not to mention profit by buying properties at prices significantly below their cost structure and then reselling them again. If they have confidence in their product the builders should look at revisiting communities hit hard by foreclosures. We don’t have any specific numbers but let’s say that in 2005 they could build a house for $160K and then they could sell it for $210K which gave them a profit before expenses of $50k. We suspect given the details above that if the builder wanted they could go back and buy that house for 100K, spend 10-20K on repairs and then sell it for $150K making 20-30K in profit. They would also help out the neighborhood by selling homes at retail prices instead of distressed prices.

In the end the problem we need to work through as a country is the pile of existing home sales.

************************************************************************************

New Wealth Building Pro web site

**************************************************************************************
Oct. 26, 2009

Check out this new site talks about real estate investment in Fresno and Madera areas...

www.wealthbuildingpro.com

**************************************************************************************