Squish Happens
Most people believe bubbles “burst”. When people talk about the decline of tech stock values at the turn of the century, they say “the tech bubble burst”. Of course, lately it’s all about the “real estate bubble” bursting. Over the last two years, The Real Estate Guys™ have taken some criticism over one of our TV shows where we said, “Real estate bubbles don’t burst”.
But we’ll stand by that. Bubbles don’t burst – at least not as long as whatever is underneath them is real. And there isn’t much that’s more real than real estate.
So we say bubbles are squishy. In fact, the term “bubble” (in the context of referring to a rapid run up of prices) is really a misnomer. Better to say “balloon”.
When you squeeze a balloon, it squishes. It comes out the sides or goes between your fingers; it just finds someplace else to go.
So you’ve heard that real estate prices have dropped. There’s deflation. Equity is gone. Everyone’s underwater. Life as we know it is over. It’s real estate Armageddon.
Then you see (like we did) today’s Wall Street Journal article, “Hong Kong Land Sale Raises Worry of a Bubble”.
A bubble? Didn’t it burst?
Well, no. Actually, it squished.
According to the Wall Street Journal:
“Government officials here (Hong Kong) grapple with how to cool off overheating property prices”.
When’s the last time you heard “overheating” and “property prices” in the same sentence? It almost seems like an oxymoron, like “reliable copier”.
Here’s another excerpt:
“The big (land purchase) came after (the real estate developer) sold 900 apartment units in a major new residential complex over the weekend for a total of US$541 million.”
If you do the math, that’s over $600K per unit! In ONE weekend. We haven’t seen THAT in the US for awhile.
More…
“In China…home prices have risen as much as 25% in the past year and land values have doubled.”
That’s this past year, as in 2009. You know, when US prices were in their third year of decline.
Now, consider where much of the money that fueled the US real estate bubble came from. Get it?
The bubble squished. But if your perspective is too narrow, you might think it burst. Especially because that’s what everyone says. And if you think bubbles burst, then you will quit the game and hide in your FDIC insured bank account. Meanwhile, as the dollar crashes, you’re savings become worth less and less.
We have two main points:
First, real estate is an asset class unlike any other. It’s real (permanent). Gold and other commodities can also make this claim so, in and of itself, being real doesn’t make real estate utterly unique as an investment.
But, unlike virtually every other investment, real estate’s value is not universal. Real estate values vary by markets and sub-markets, and those markets are global as we can clearly see.
Compare that to gold, which is also real. If an ounce of gold is selling for $1200, it’s the same price all over the world. There’s no squish, except to another asset class.
To really look at it right, you can’t think of real estate as an asset class. You almost have to think of each property, or at least each market or sub-market, as an asset class. So when one is down, another is up. Squish. Like stocks and bonds, gold and the dollar, etc.
But the big thing (our FAVORITE) that makes real estate unique, is that it can be financed with bank or private funding and debt serviced by tenants. This makes it VERY conservative when structured properly. Why? Because even if the property declines in value, as long as it produces enough net operating income to amortize the loan (meaning the tenants are paying down your loan) some day it will be paid off. Then it just generates cash flow forever. That’s a beautiful thing. Form that perspective, squish doesn’t matter that much.
Our second main point is that right now many people are forming new financial paradigms as a result of what they’re seeing and experiencing. The people who lived through the Great Depression came out of it with very powerful convictions about how they viewed and handled money. There were many great attitudes such as frugality, saving; and loyalty and appreciation for the opportunity to work. We would all be better off by adopting these attitudes.
However, many of those same people missed out on some of the greatest opportunities in modern history because they brought a lot of fear and rigidity out of the trauma of the Depression. Many people were hyper-conservative.
To be clear, we aren’t suggesting anyone should take risks they aren’t comfortable with. And we aren’t criticizing anyone’s personal investment philosophy – no matter how conservative it might be. We’re certainly more cautious about the risks we take these days.
We are merely suggesting to be mindful of the temptation to be hyper-conservative in terms of your willingness to be an investor. If you won’t invest in your education or take time to investigate opportunity, you’ve probably decided “investing is too risky” and have effectively quit. You think the bubble burst, the game is over, and there is no opportunity. Or it’s so far off or you’re so out of position that you’re on investing sabbatical. This is probably not you, or you wouldn’t be reading a blog like this. But, there are lots of people who have quit – or are in various stages of quitting. Make sure you know who you are and that you’re honest about it.
Now is a great time to be getting started (or re-started). Talk to the people you know about real estate investing and see what they say – and watch what they do. How are their attitudes changing as a result of the last three years? What’s their game plan going forward? Ask yourself those same questions.
Remember, squish happens. As an investor, you want to pay attention to the flow of capital and try to be on the right side of squish. And since you know squish happens, be sure to structure your deals to survive if you’re on the wrong end of it. We’ll be talking more about this in the future.
Most of all, make sure you take the right lessons out of this Great Recession. The right lessons are those that make you a better investor, not those that push you back to being merely a saver or a non-participating observer. Invest in your education. Investigate and evaluate opportunities. Keep your head in the game, even if you’re on the sideline temporarily.
We’d love to hear from you! Use our feedback page to tell us how this recession has affected your investing philosophy and strategy. What are the people around you saying and doing? Where do you see opportunity and why? What are you doing to broaden your horizon, increase your education and increase your network?
Historic election stunner in Massachusetts! What does it mean? Why should you care?
If you’re a die hard, true blue Democrat, you’re bummed. And if you’re a progressive liberal with a groupie crush on Barack Obama, you’re borderline suicidal.
On the other hand, if you’re a dyed in the wool, gun-toting Republican, you’re thrilled. And if you’re an ultra-conservative, Obama demonizing, big government conspiracy theorist, you’re euphoric – and possibly hung over.
But what if you’re just a regular American, who goes to work everyday, pays your bills, and are busy trying to navigate all this change while you’re building toward financial security – and maybe even financial independence? In that case, it seems, you’re in the majority.
You see, this isn’t about which team won. The talking heads, though they feign “objectivity”, all really have a team they’re pulling for. But when things get really tough, most Americans don’t care about political parties. They don’t care WHO is right. They want to work and enjoy the fruits of their labor. And right now, it seems, they want more balance.
“Healthy tension” is a more accurate word to describe “balance” or a move to the middle. Massachusetts, like it or not, was a move to the middle. This is the place where Americans seem to be the most comfortable.
Back in the old days, people would have antennas on their house to capture the television broadcast signals. These antennas were up on poles that could be 10 feet or taller! To hold them up, the homeowner would attach wire 
cables high up the antenna pole and then to 3 or more corners of the roof. Then they’d cinch those cables up real tight so they pulled against each other with the antenna stuck securely in the middle, where it stood tall and strong against the gusts of winds and storms that would blow against it.
Of course, if one cable snapped – or even stretched and lost its resiliency – the antenna became unbalanced. In this weakened state, even a modest storm could easily knock it down. When this occurred, the homeowner would get up there and tighten up (or replace) the loose one and restore healthy tension.
The American people, in their wisdom, using their rights of free speech and to vote, have jumped up on the roof of the house and are attempting to restore healthy tension. If you’re on one side or the other, you don’t like it because you have to work so much harder and wait so much longer to advance your agenda. To which the people in the middle, say, “Good.”
When things get too extreme one way or the other, or if things change so fast that people can’t keep up (whether that’s in understanding the change or adapting to it), then Americans want to move to the middle. That’s where they are comfortable. That’s where they feel safe. That’s where they have confidence.
Now there’s an interesting word. Confidence. Don’t they say that consumer confidence is the key to economic recovery?
Bill Clinton and Ronald Reagan were opposite in many ways, yet America thrived under both. The reasons can be debated, but one worthy of consideration is that both were great communicators held in check by an opposite party Congress (just as their respective Congresses were held in check by them). People felt like they knew what was going on and it wasn’t too much too fast.
So, as we often ask, what does this have to do with you and your real estate investing?
Well, in our (not always so humble) opinion, quite a lot actually. Here’s why (and it’s pretty simple):
When things are changing too fast, it demands too much of our attention. When people are uncertain and uncomfortable, they don’t act until the dust settles. Without the American people taking action, nothing happens. You can’t legislate motivation or confidence. And we’re finding out, you can’t stimulate it either. It’s the product of an environment.
Conversely, when things are chugging along at a comfortable pace, people can make plans. They can assess risks and take action. Americans are not the kind of people who like to be taken for a ride – no matter who’s driving. We like to be in our own driver’s seat. This is especially true of entrepreneurs and small business owners. When people are confident they start businesses, they hire people, they make investments, they spend money. In case you hadn’t guessed, this is all very good for the economy and for your real estate.
Your personal satisfaction with the election results is really just a function of which side you’re “pulling” for. Whichever side that is really doesn’t matter (for purposes of this discussion). What’s important is that everyone is pulling and that the tension pulls us into the middle. That’s good, not because of the policies or the gridlock, but because it makes the majority comfortable and eventually confident. We know it’s hard to get excited when your team “loses”. But this recent election isn’t the big win or big loss so many want to make it out to be. It’s a glimmer of hope for one group and a reality check for another. It’s tense, which is what makes it good long term for the economy and for your real estate.
Even more good news: it will take time for a renewed healthy tension to restore confidence. And even more time for that confidence to actually show up in the economy – because most people take a Wait and See approach.
This is where YOU have opportunity. Because when the swells of recovery are rising on the horizon and the 
average person isn’t moving until it’s upon them, there’s still a lot of time for you to get in position to ride the next wave. Keeping with the surfing analogy, not every swell will turn into a wave you can ride. But some will. So, proceed carefully, but proceed. As we like to say, Think and Do is better than Wait and See. Surf’s up!
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Oh no! Vacancies are up!
If you’re a regular follower of The Real Estate Guys, you know we like to see the opportunity in every problem. This is the time of year when all the reports on the previous year – as well as the the predictions for the New Year – are all over the airwaves and internet.
One that caught our eye is from the Wall Street Journal on January 7th: U.S. Now a Renters’ Market – With Apartment Vacancy Rates at 30 Year High, Landlords Cut Prices 3% in 2009.
Oh no!
If you’re a landlord competing for tenants and trying to eke out positive cash flow, this is bad news. The problem, as the article (and common sense) details, is a lousy US job market. People are “clustering” (moving in with friends and family), so even though the people are still out there, the demand for rental units is down.
Stop right there. Have you ever clustered? There’s nothing more fun (not!) than moving back home with mom and dad – or sharing a bathroom with a roommate. As soon as things get better, what is the FIRST thing you want to do? Get a place of your own! Hold that thought.
Now, let’s go down memory lane. Do you remember when every 3rd person you met was a real estate investor? Folks with no experience and very little real estate education rushed in to buy real estate to make a quick buck – or in some cases, a quick tens of thousands of bucks – as the flood of money pouring into real estate created hyper-appreciation. Ahhh….those were the days!
But now those days are over. Lots of those rookie owners are now facing not only their first, but undoubtedly the worst, real estate correction in their lifetimes. While some have already been wiped out, many others are still struggling to hold on. But they don’t want to be real estate investors any more. In fact, they never really were real estate investors. They were mutual fund investors (i.e., hands-off-just-send-me-the-statements-showing-my-net-worth-growing investors) who ended up in real estate because it was the hot commodity at the time.
In other words, they are what true real estate investors affectionately call “Don’t Wanters”. Maybe you have some properties you don’t want, so you’re a Don’t Wanter. But, we’re not talking about having a problem property (that’s just part of the game), as much as we’re talking about people who are leaving real estate investment never to return. They don’t have the heart to stick it out during the tough times. Maybe we should call them Quitters (not in a bad way – real estate investing isn’t for everyone).
This is where the true blue investors have opportunity.
How much effort is going into job creation in the US right now? We know that’s a loaded question. But we didn’t say how much effective effort is being put out. Just how much effort? There’s no question that it’s a top political priority. If this current group doesn’t fix it soon, a new team will get a chance. But sooner or later someone is going to fix the problem. If you don’t believe that, then it’s time to move somewhere else (how’s your Chinese?).
Meanwhile, people struggle. They cluster. They hunker down and watch expenses. They save when they can. And they dream longingly about the day they can get out on their own.
What about builders? Are they cranking out new rental units? Heck no! The credit crunch and economic uncertainly have put the kibosh on that. And in certain markets, there simply isn’t any room to build anything new even if someone wanted to. Markets like San Jose and San Francisco California.
Hmmmm. Arent’ those two of the three markets the Wall Street Journal article said led the decline in rental rates? (Yes, they are – as you’ll see when you read the article).
Do you see the picture yet?
Amateur investors with rental properties in markets “that had brisk growth until the recession” (again, quoting the Wall Street Journal) – whose properties are now experiencing declines in income. Those declines might be temporary, but when you want out, you don’t think long term. You just want out.
Might the Quitters be interested in selling? Since income properties are valued by the income they produce (more income equals more value and vice versa), those properties are worth less (not to be confused with “worthless”) now. That is, they’re on sale.
Meanwhile, potential tenants are clustered on the sidelines waiting for economic recovery to give them the jobs they need to move out. And with few new units coming on line, they will be competing for the available units – which seem to be abundant now (hence the price declines). But again, the population didn’t substantially decrease – so at its core, the demand is still there. But without jobs, people are…well, let’s say “enjoying each others company” more often.
Conclusion? Now might be a great time to strategically acquire rental properties from don’t wanters in markets with good prospects for recovery, but poor prospects for an increase in supply. Because when you combine growing demand with capacity to pay (jobs) with limited capacity to increase the supply, you have a formula for increasing cash flow and value. But if you wait until all that happens, you’ve missed it.
As Wayne Gretsky once said, you have to “skate to where the puck is going, not to where it is.”
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Sign, Sign, Everywhere a Sign
Here we are the end of the first decade of the new millennium. For old geezers like us who remember when George Orwell’s 1984 and Stanley Kubrick’s 2001: A Space Odyssey were speculations into the future, just saying “2010″ is weird. And if you’re not in the geezer group, you might not even recognize the title of this blog as the opening verse of an old 60′s rock song. What does that have to do with real estate? Nothing really. The point of this blog is that as we enter this new decade, more and more positive signs keep popping up. We’re here to help make sure you don’t miss them.
A December 19th Wall Street Journal headline says, Down Payment Standards Eased. Well, that certainly caught our attention. The gist of the article is simple: Mortgage lenders and mortgage insurance companies are beginning to loosen their lending standards. This, the Journal says, is a sign of increased confidence in housing.
You can read the article yourself, so we won’t repeat it here. But we do want to point out a couple of ideas we think are worthy of consideration.
First, the looser standards are being applied on a market by market basis. This acknowledges the obvious truth that real estate values are local. This fact creates both opportunity and challenges for an out of area investor. How do you know which markets are recovering and which ones are still declining? While knowing what to research to figure this out is one thing, actually having the time and resources to do it is another. How convenient when huge companies have already done some of this work for you! So, it seems to us that any market where the looser standards have been applied might be of better-than-average interest.
Also, the article talked about the toughening of lending standards by Fannie Mae, who they say just raised its minimum credit score from 580 to 620. That alone just took lots of people out of the running to buy a home. While that might seem negative toward new buyers driving up values, it also means more people will need to rent. As a property manager, if you’ve been running credit reports on prospective tenants, there might be an opportunity to pick up new customers in the 580 to 620 range. Of course, you take more risk when you lower your standards, but unlike these automated underwriting engines that just lop people off the list at a specific point, you can be a little more personal. There are a lot of people in this economy whose once pristine credit is tarnished because of unemployment or strategic mortgage default. This doesn’t mean they will be poor credit risks when renting a place to live from you.
The landscape continues to change. With every shift, problems and opportunities are created. The signs are all around you, so keep your eyes open. Think about what you are seeing. Form hypotheses and develop action plans to take advantage of the shifts. When we’re at the end of the next decade looking at 2020, where will you be? The actions you take in this next year will be the foundation for the answer to that question.
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WSJ says House Flipping Make a Comeback
We noticed an interesting headline it today’s Wall Street Journal. “House Flipping Makes a Comeback”. That brought back fond memories of easy equity during the days of “irrational exuberance” in real estate. Of course, there’s a dark side to irrational exuberance which we’re sure you don’t need to be reminded of.
So why did this article catch our interest?
The star of the article is a real estate “investor” in Phoenix…really? Phoenix? We thought Phoenix was a train wreck. Or, is their opportunity in chaos?
Anyway, this guy in Phoenix went to an auction and bought a house that was formerly worth $1.3 million. He paid just under $489,000. He then sold it to a woman for $699,000. That’s about $210,000 in quick profit. In The Real Estate Guys’ world, we call this “found” equity. It’s “found” because he didn’t do anything to the property to make it worth more. It was worth more than what he paid for it at the time he bought it. The bank left money on the table. He found it.
Sounds easy, right? How many of those would you like to to do in a year?
The article goes on to talk about different markets and statistics. It provides some insight into bank motives. Blah, blah, blah. This isn’t to be critical of the Wall Street Journal. But they write for a different reason than we do. We’re thankful they brought the topic up. Now we have something to build on.
What we’re interested in is HOW to do it. Though we’re not experts in purchasing foreclosures, we have certainly done our share of “found equity” deals. Based on our experience, here are some tips if you decide to play this game (which can be very fun and profitable!):
ALWAYS know your exit before you get into the deal. And ideally, you want more than one. The article doesn’t say if the Phoenix guy had his buyer identified BEFORE he bought the property, but that’s the way we would have played it. With a buyer in hand, you show up at the auction (or go into the open market) and look for a property that your buyer wants. If you know what they’re willing to pay and you can buy it for less, then you have margin and a quick and known exit.
Make sure your buyer is real. That is, he’s ready, willing and able (as in financially capable of buying). If you’re a real estate agent, this is basic. If you’re a newbie flipper, it’s gold. You don’t want to be stuck holding the property.
Make sure your margin is more than 6%. Even though 6% on a $300,000 deal is $18,000 and it sounds like doing that 10 times a year might be a decent living, it’s the same as if you were a real estate agent. The difference is a real estate agent isn’t putting his own capital at risk. If you’re going to take more risk, you need to receive more reward.
Don’t put all your money into one deal. It will be SO tempting when the “no miss” deal comes along. But remember, this is real estate. Something ALWAYS goes wrong. It doesn’t necessarily mean you lose money, but it might be tied up for awhile, so you lose opportunity. Side note: If you don’t happen to have $500K sitting around like our friend from Phoenix apparently did, go find 10 friends who have $50K and do a small syndication. Now no one has all their money in one deal. And if this whole process takes 90 days, $200K on $500K is a 40% return in 3 months. That’s 160% annualized. We’re betting there are some investors out there who would want to get in on that. If you decide to go this route, make sure you visit with your attorney first. Syndicating isn’t something for the newbie do-it-yourselfer.
Did we mention to have a plan B? And C and D? If your buyer falls through, have 2 or 3 more lined up. If possible, be prepared to “Flip and Hold”. This is what we call buying a property for cash, then refinancing it to get most of the money (or if you bought it low enough and wait a bit, you can sometimes get ALL your money back out). Then rent the property for enough to float the mortgage and expenses. Obviously, this is more complex and there’s some math to do to make sure it all makes sense. And we know that getting loans on certain types of properties (and cash out loans in general) is harder to do today than in the past. We recommend knowing your financing options BEFORE you buy, even if you don’t plan to hold. You never know how it’s going to work out. The more options you have the safer you are.
We obviously could go on and on (we’re experts at that). This topic is too deep for a simple blog post. But it should get your brain whirring (which is always a good thing). Our recurring theme is that there is a lot of money to be made in real estate right now simply because most people still aren’t ready to play. This guy in Phoenix made 200 grand because other people weren’t there bidding. And what a great service he provided for his buyer!
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The Biggest Scam Ever Could Be Your Biggest Opportunity!
No, we aren’t advocating becoming the next Bernie Madoff. We just read Robert Kiyosaki’s article on Yahoo Finance called The Biggest Scam Ever. It’s about 401k plans and he’s commenting on the cover story Time Magazine recently published on the subject.
Time says their sources estimate that 44 percent of Americans (a chunk of which are baby boomers) are in danger of going broke in their retirement years. That’s bad news. But it’s great for real estate entrepreneurs!
Once again, as we watch the horizon, we see waves of opportunity forming. Do YOU see them?
Think about it. Tens of millions of people in danger of going broke in their retirement years. These will be seniors with social security checks. It isn’t much income, but it’s consistent. At least that’s the promise from Uncle Sam.
So their lifestyle will be taking a substantial dip. Some are sitting in homes that are paid for. Some are sitting on big fat mortgages. Some are renting in nice areas. All will need to do something to decrease expenses and increase their income.
Can you help them?
A few weeks back we did a radio show on reverse mortgages. This is one of the few remaining tools available to reposition idle equity and put it to work. The cash flow arbitrage is easy because there’s no payment required. Better yet, there’s no danger of foreclosure. Seniors with equity could make great investment partners to acquire cash flow real estate, which, conveniently, is readily available into today’s low price, low interest rate market – an attractive, but historically rare combination!
(By the way, we’re writing a free report on reverse mortgages, so if you haven’t already requested it, just go the feedback page and send us your request.)
We also recently blogged about the notion of buying homes via short sale from homeowners who are facing foreclosure because they can’t afford to make the high payments. If you missed it, look it up. Couldn’t similar strategies be employed with seniors? We think so. When you can help someone stay in their home for a lower payment, that’s a good thing!
Now hold on because our brains are flying around at light speed. And rather than write a manual on how to do all this, we’ll just ask some questions to guide your thought processes.
If you think that several million seniors will be looking to cash out of their homes and rent, what areas and neighborhoods would they be interested in? Think about weather, taxes, and proximity to medical care and airports (so they can easily go back home to visit friends and family). What major population centers will they be moving from? What are their options for more affordable areas nearby?
What about property types? Think about floor plans. Do they need lots of bedrooms or just a couple? Do they need storage for all the stuff they’ve collected over their lifetimes? What about stairs?
Here’s our recurring theme: Problems are opportunities when you look at them in light of available resources. Most people get brain lock when facing problems, even though there are all kinds of resources available to turn problems into profits. Don’t let this happen to you! You won’t want to look back on this time in history and say, “I missed it. If I only knew then what I know now!” Trust us, you don’t want to “shoulda” all over yourself! It stinks.
Lastly, we don’t understand why so many people cap on Kiyosaki when he posts his articles. We’re betting these people have never spent any time with the guy. Or they work for the people he rips. In any case, if you haven’t figured it out already, we think he’s brilliant more often than not. We look for every opportunity to spend time with him and the people he surrounds himself with. You don’t have to agree with everything, but it will sure stimulate your thinking! Which is the same reason we do our radio shows and post these blogs.
The key to turning this economy around is for people to be informed, think, make good decisions and take bold action. The people who do it first will win the biggest. Why not you?
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Don’t Be So Negative! Just Change Your Perspective
If you’re left brained (logical), we probably already lost you at the headline. But this isn’t a blog on positive thinking (not that we have anything against that). We’re talking about negative equity and how it gets measured. More importantly, where are the opportunities?
Just before Thanksgiving, the Wall Street Journal ran a headline that “One in Four Homeowners are Underwater.” This isn’t because California slid into the ocean, but is one of the lingering effects of the mortgage meltdown that began over three years ago.
The article says that 10.7 million households had negative equity (about 23% of all households) according to research firm First American Core Logic. Nearly half of those, or 5.3 million households, owe at least 20% more than the current value. And nearly 10% of those (520,000) had already received Notices of Default. An even more telling statistic came up later in the article, when the Mortgage Bankers Association was cited as stating that 7.5 million households are 30 days or more late on their mortgage payments.
What we think is interesting is that 24 million households, which would be about 50% of all households, have NO mortgage. Therefore, they have equity! But just because they aren’t in imminent danger of losing their property doesn’t mean they didn’t suffer loss. If your property went from a fair market value of $500,000 down to $250,000, then you lost $250,000 of net worth. Last time we looked, that’s bad. Especially if you were counting on using that equity, through a reverse mortgage or moving to a less expensive area, to help fund a chunk of your retirement.
Of greater interest is one line buried in the middle of the article which said that First American Core Logic had changed its methodology for calculating these numbers and “using the old methodology, the portion of underwater borrowers would have increased to 33.8%”. Wow! That’s 1 in 3. Think about that. Go outside and look up and down your street and count every third house. Underwater!
Of course, it doesn’t really work that way. There are certain areas that are more underwater than others. We’ve been talking a lot about Dallas lately. This is a market that didn’t lose value anywhere near as much as say, Phoenix or Las Vegas. In fact, according to the Wall Street Journal, citing First American, homeowners in Nevada, Arizona, Florida and California are more likely to be underwater. Funny, but weren’t those once the hottest appreciating markets?
So what does all this mean?
Well, our headline had double meaning. Obviously, changing the methodology for generating the statistics resulted in a report of 23% of households underwater, instead of the nearly 34% under the old methodology. If you’re watching trends, this might mislead you. Lesson: Always be sure to dig a little deeper when relying upon statistics.
The bigger lesson is that one person’s problem is another person’s opportunity – and not necessarily in an opportunistic way. In other words, someone doesn’t have to lose (worse than they would anyway) for you to win.
If you’re a regular listener of the show, maybe you’re already picking up on where this is going. Obviously, we see a lot of opportunity in a landscape covered with problems. Problems are every entrepreneurs dream!
With 7.5 million people behind on their mortgages and millions of those with negative equity, they can’t refinance or execute a traditional sale to get relief. Millions have negative equity of over 20%, so they don’t qualify for the government sponsored loan modifications. And according to this same Wall Street Journal article we’ve been discussing, Sanjiv Das, head of TARP recipient Citigroup’s mortgage unit, mortgage companies are reluctant to reduce mortgage principal over worries about “moral contagion, with people not paying their mortgage or re-defaulting because they believe the bank would reduce their principal.”
So banks won’t modify. Homeowners can’t refinance or sell for enough to pay off the loan. Problem, problem, problem!
But what would it look like if an astute investor were able to buy the home on a short sale, taking advantage of today’s fabulously low interest rates, and then rented the house to the former homeowner for a payment that the now tenant could afford?
You could even go one step further and provide a lease option to the former homeowner, with a price point designed to make you (the investor) a nice profit, even through the re-purchase price would look like a bargain to the former homeowner. It’s still less than their original mortgage (which was paid short when you bought the property). Do you think the former homeowner turned tenant would be willing to pay a little bit more than market rent to stay in their home knowing they have an option to get it back? Do you think they would take better care of the property than the average tenant? Do you think they are more likely to stay long term, thus reducing your exposure to vacancy and turnover expense?
Put yourself in the position of every party in such a transaction. Are there positives for everyone? Eveyone’s situation is improved. Win-win-win. We like it!
This blog is already too long, so we’ll leave you a homework assignment. Especially, it you’re sitting there thinking to yourself, “Great, but I can’t afford to do anything.” Go listen to our show on reverse mortgages. Then look for the stats in this blog. Then go outside and count the houses. Do the math.
We get giddy when we think of all the opportunity in today’s market. But of course, it’s all a matter of perspective.
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Home Construction Slows – Good or Bad?
The AP headline this morning says “Stock Market Slumps as Home Construction Slows”. Oh no! We can hear the pitter patter of mutual fund investors’ feet running to their computers to check the damage to their 401k.
Funny, but when we look at our computer, we see interest rates on 30 year fixed mortgages back under 5%. Even jumbos are under 6%! Meanwhile, gold, oil, car prices and CPI (Consumer Price Index) are all up. (Hint: those are signs of inflation).
When you put all that in the blender, what do you get? Well, it depends on what color glasses you’re wearing. (Too many metaphors? Sorry.)
Here’s the deal plain and simple: In the US, home and apartment construction is not growing as fast as the population. Rents are not falling as fast as prices. Interest rates are ridiculously low. Toss in gobs of people unemployed, which means they’re missing payments and wrecking their credit. They won’t be able to buy a home for awhile, so if they can’t keep the one they have, they will be renting.
So what do we have?
• A growing population and influx of people going from homeowner to renter means more demand for residential rentals.
• Less new apartments and homes coming on line mean less supply.
• More competition for fewer rental units means upward pressure on rents, in spite of a weak job market. Why? Because people need a place to live. Next to food, it’s pretty high on most people’s priority list.
• Low interest rates means if you or your investment partners are credit worthy, you can get great (i.e., low) long term interest rates on loans just before what many believe will be an inflationary cycle. Inflation means anyone in debt will win as the value of the dollar falls. This is why China is a little miffed at Uncle Sam. China holds a lot (if you think a trillion is a lot) of US debt and are concerned about a falling dollar.
• Low interest rates also mean lower payments. Lower payments make it easier to get a property to cash flow without 80% down. To quote from that fabulous book Equity Happens, “Cash flow controls mortgages. Mortgages control properties. Properties will make you wealthy over time.” This is true with or without inflation (i.e., appreciation), because you are using the tenant’s money to pay off the loan. No other investment lets you do that.
Additional opportunities exist for the extra ambitious. We call it finding and forcing equity. How? With less new units coming on line and many banks and overextended owners letting their properties fall into disrepair, there are opportunities to buy someone else’s problem cheap. Then, fix it up, rent it out and wait. If things go your way, you may be able to refinance to get your original investment out – and now you’re in for free. Kiyosaki calls this “infinite return”. We like it.
Of course, it’s not all rosy. Unemployment is still a concern. And financing (especially refinancing) is harder to qualify for. But, if it were easy, then everyone would do it and there wouldn’t be opportunity. Hey, wait a minute. It’s easy to buy mutual funds, isn’t it? And everyone does it, don’t they? Hmmmmm…..
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Part 1: Report from the National Association of Realtors Conference
This is Russ. I just got back from 3 days in beautiful San Diego where I attended the NAR Annual Conference. Robert drew the short stick and had to go to Belize to handle some business. Poor guy.
In case you don’t know, the National Association of Realtors is the world’s largest trade association, boasting well over a million members. Pretty good for an industry that’s been at the epicenter of the “world financial crisis”.
I noticed the AP reported on FHA Commissioner David Stevens’ speech at NAR. They said that Stevens told the Realtors “that concerns the agency is headed for the same financial trouble that snared Fannie Mae, Freddie Mac and the subprime sector are unwarranted.”
Really?
I didn’t hear the speech because I was more interested in what people on the front lines were thinking and feeling about the market. Besides, we’d already commented on our observations about FHA in two previous blog posts: Are We Going to Lose our Fannie? and Hey FHA! Your Fannie is Showing. You can find those in the Clues in the News category.
Why should you care about FHA? As quoted in the AP article, Stevens said it best, “Without FHA there would be no (housing) market, and this economy’s recovery would be significantly slower.”
The surest sign there’s trouble is when a bureaucrat comes out and tells your there isn’t (“Pay no attention to that man behind the curtain!” ). Especially when all evidence says there is. It’s even worse, when the “no problem” evidence provided is (again, from the AP article), “the agency has $31 billion in capital – $3.5 billion more than it had a year ago.” But (and it’s a big one), how does that compare to the number of loans insured? The AP article says that FHA has insured nearly a quarter of ALL new home loans made this year.
Consider these recent FHA related reports:
11/10/09 MiamiHerald.com – “FHA moves to boost condo market – The FHA recently announced more lenient, albeit temporary, underwriting guidelines for condo projects”
11/12/09 DSNews.com (reports to the mortgage default servicing industry) – “The FHA told Congress and reporters Thursday that its cash reserve fund had deteriorated to $3.6 billion – the lowest it’s been in the agency’s 75 year history.”
11/13/09 Wall Street Journal – “The FHA’s Bailout Warning – Whoops, there it is. – Critics of Fannie Mae & Freddie Mac were waved off as cranks and assured that the companies would not need a taxpayer bailout right up until the moment that they did.”
11/14/09 AP – “FHA Boss: FHA is not the new subprime” (this is the article written at the NAR conference that I opened up talking about). Hmmmm……I’m having déjà vue all over again…again.
Not to be redundant (okay, maybe a little redundant), but Supply and Demand only work when there is capacity to pay. If 100 people are starving and there’s only 1 Big Mac for sale, one would think that the price would get bid up, right? But that assumes (dangerous word) that those people have the capacity to pay. If they don’t, the price won’t rise.
The lesson? Stevens is right (for now) that FHA money is a BIG part of housing. If it goes away or is tightened, then there will likely be a dip in prices as less people can compete for available properties. Does that mean stay away? Not necessarily.
Eventually, private money (and there’s lots of it!) will make its way back into mortgages. Why? Because it’s profitable and real estate is real and the demand for it is forever. But until the sands stop shifting, private money will stay away. It’s no fun to play a game when the rules keep changing. As long as private lenders think they will have to compete against government (taxpayer) subsidized non-profit lenders, and/or that legislators will impede or negate their rights to recourse under the contract (i.e., stop a foreclosure or force a modification), then private money is going to stay away.
And who can blame them? But, (oops, my opinion is showing), even though all this government tinkering is designed to lessen the pain (ironically caused by government tinkering), it will also prolong it. But I guess private money is coming to the rescue one way or the other, since taxes take private money and funnel it into housing through the government via bailouts. Not my first choice, but that’s the way its working right now.
For joe schmo investors like us, bread and butter properties in highly populated markets with good transportation, education and economic infrastructure still make sense – as long as they cash flow and you’ve got reserves to allow you to own for 10-20 years. Because when private money does come back and is added to all the new money we’ve added through stimulus, it’s very conceivable that prices will go up. But if you have positive cash flow, amortization (pay down of today’s cheap loans over time), and tax breaks, you will still look good in 20 years. And who doesn’t want to look good in 20 years?
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Is Gold All that Glitters?
The AP reports that gold hit an all time high of $1,118 per ounce today. Do you understand why? Do you REALLY understand? And what does gold have to do with real estate (besides that you dig gold out of the ground)?
Great questions!
Gold’s rise is a prime refection of a falling dollar. Why? Because when the dollar “falls”, it takes more dollars to buy anything that’s real. It’s called inflation. Supply and demand play a factor, so just because the dollar falls, doesn’t mean that gold is going to respond immediately and proportionately. But in general terms, a falling dollar means inflation of things that are real. Things like gold, oil and real estate. Typically, gold really takes off when people are nervous about the dollar. So take that for what it’s worth.
The Real Estate Guys don’t claim to be experts at gold, but it’s something we’re very interested in. We watch the demand for gold, oil and treasuries because they give us insight into where cash is moving. When cash moves into real estate or mortgages, then it helps push real estate values up and equity happens. Do you see the connection?
Russ just got back from the Rich Dad Art of a Deal conference with Robert Kiyosaki. Rich Dad Gold Advisor Mike Maloney was there and we invited him to be on The Real Estate Guys show. We figure it he’s smart enough for Mr. Kiyosaki, we’re interested in talking to him. We want to pick his brains on your behalf and find out what he thinks about the movement of cash and its effect on real estate. Sound interesting? Then stay tuned to The Real Estate Guys! To make sure you don’t miss an episode, subscribe to our free podcast. And while you’re at it, sign up for the newsletter – and tell a friend. When you help us grow the audience, we are able to continue to bring you quality guests and programming. Thanks!
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