DEAN GRAZIOSI: DEAN GRAZIOSI REVIEW – REAL ESTATE FEED BY DEAN GRAZIOSI

When the difference between the fair market value and the seller’s desired asking price is too great, the agent has some tough decisions to make.  The agent knows that the analytical data is accurate.  The seller knows what price will make the family happy.  The seller may also know what similar homes in the area have garnered.  The agent hesitates to tell the seller that the property does not measure up to some of the surrounding sales.

There are several ways to handle this delicate crossroad.  However, they all begin with the agent having command of substantive facts and having the experience to connect the dots.  In some cases, the agent has no answers.  In those cases, the agent should retreat, explaining that it might be best to bring in outside assistance in the form of an office manager, broker of other sales experts.  While not an ideal solution, it burns no bridges and puts the possibility of meaningful dialogue on the table.

In most cases, this will not occur.  The seller wants to see how the agent responds to pressure and how the agent explains why there is a difference between their asking price and the perfect listing price.  In fact, that is an explanation the agent should be comfortable with and prepared for prior to walking through the door.

The agent has assembled comparable sales data.  To increase the effectiveness of this data and to establish a comfort level with the market value, the agent should examine various statistics.

·                     Comparable active listings

·                     Comparable closed sales

·                     Comparable pending sales

·                     Days on market of comparable pending transactions

·                     History of comparable withdrawn listings

·                     History of expired listings

·                     Square footage comparables

Sometimes agents develop such a feel for the marketplace that they are familiar with every one of these listings.  Familiarity with the marketplace impresses sellers and if presented properly is hard to dispute.  Responsible agents see as many listings as possible and stay in command of facts and market conditions.  Now, is your chance to put that experience to good use.

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The real estate recession and the much of the financial recession of 2008 were caused by loose and irresponsible lending practices.  These lending practices caused an excess of unqualified buyers to flood the market.  This increased unqualified demand for housing that caused inflated real estate prices.

Other lending mistakes were unreliable appraisal practices and an interesting and totally unprecedented practice called low-doc loans. Low-doc loans allowed the purchaser to declare their income without verification.  Supposedly these loans were created to permit self employed and commission-based earners access to the mortgage market.

Many times these working Americans would exaggerate their income or state income they thought they would earn rather than their actual earnings.  In any case, when the economy slowed, these workers were among the first to take deep hits.  When their commission income soured and their self employed income suffered, they were unable to make mortgage payments.  It did not take long for the housing market to become flooded with excessive inventory.

With each short sale and with each foreclosed property, the value of surrounding properties was effected.  American homeowners quickly found that their slice of the American Dream was worth less than they owed. Homeowner balance sheets slid into the negative and credit cards were more closely monitored and in many cases limits were lowered.

Congress took swift after-the-fact action.  Efforts were made to raise the integrity of appraisals.  Those low-doc loans were eliminated.  Lenders are now required to provide written documentation for each and every credit application.

Today’s real estate investors are aware of these changes.  They know that lenders do not want to see a lot of movement between accounts.  Lenders are required to account for every shift and to explain the source of all deposits.  Money for deposits can be borrowed or gifted but written explanations will be required.  Prospective borrowers should always seek pre-approvals.

In today’s credit market, borrowers should prepare for this tight monitoring in advance.  There are no short cuts to circumvent the system anymore.  Plan ahead and obtain pre-approvals before entering into negotiations.  

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According to newly released statistics, real estate investors should sharpen their REO acquisition skills and get ready for a profitable 2010-2011. According to Radar Logic, “The unprecedented number of homes in default, foreclosure or REO inventory, and barring some unforeseen exogenous boost to housing demand, the price stability we saw in 2009 will likely come to an end in the second half of this year.”

The current Real Estate Owned (REO) exceeds 478,000 units.  Fannie Mae owns 23 percent of the REOs, Freddie Mac owns 11 percent and the Department of Housing and Urban Development (HUD) owns another 10 percent.  The Department of Veteran Affairs (VA) owns about 2 percent of the inventory.  All together, the U.S. government owns an astounding 46 percent of all REO properties.

These numbers may explain Fannie Mae’s recent announced crackdown on voluntary “walk-aways,” or strategic intentional forfeiture due to the presence of a mortgage that outweighs the home’s value.  Homeowners who walk away without making diligent efforts to obtain modifications or a short sale are barred from obtaining new Fannie Mae backed mortgages for a period of seven years.  Fannie Mae has also pledged to aggressively pursue collection of the outstanding obligation from the delinquent homeowner.

Radar Logic estimates that there are now 3.1 million homes in the government’s REO inventory.  Assuming an average mortgage of $200,000, the government is managing about $614 billion in distressed residential properties. 

Taxpayers stand to lose billions on these properties.  Typically REOs sell at about 40 percent of market value.  At that rate, taxpayers would lose $246 billion.  Adding 25 percent of the government properties that should sell through short sales, the total taxpayer loss could easily amount to $333 billion. 

For today’s real estate investors, all this government owned real estate represents very real opportunities with unlimited profit potential.  Experienced purchasers of REO properties have fully documented presentation kits that increase the investor’s chances in what promises to remain an active market.  Polish up those REO presentation kits and get ready to invest aggressively. 

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Residential real estate investors are in for happy days ahead.  In fact, investors will soon enter heretofore impossible territory.  Conservative estimates drawn from the U.S. Treasury Department, Zillow and Radar Logic clearly illustrate that the government will soon have more than 3.1 million Real Estate Owned Properties to manage and sell.

As usual, the nation’s taxpayers will be paying for damages incurred by the country’s lax and irresponsible lending practices.  Remarkably, the proponents of these practices have tarnished the public confidence in financial institutions but have created millions of multi-millionaires along the way. 

The employees who developed the high-risk, low-doc loan packages worked for such companies as Goldman Sachs, Lehman Brothers and Bank of America, among others.  The typical Goldman Sachs employee earned a resounding $630,000 last year. 

Of course were it not for the American taxpayer which gave the company $10 billion in a direct loan and another $10 billion through an AIG loan repayment, the company would have closed the doors.  It is good to know that companies like AIG, which has cost the American taxpayer more than $180 billion so far, can afford to repay Goldman Sachs for what was clearly a poor investment while Goldman cannot help out any of the homeowners the company duped.  It is the classic example of American greed.

Now the federal government will be forced to come to the rescue again.  Other than the financial companies that packaged those dreaded low-doc loans and then sold them over and over again, the next group of winners stands to be residential investors.  The new-age investors who can learn to deal with the government’s cumbersome paper trails and slow decision making abilities stand to make big returns on relatively small investments.

The reason is that the U.S. government cannot afford to maintain these properties.  Frankly, investors may soon see favorable financing terms that will exceed their wildest expectations.  If you are an investor, get your REO presentation kit together.  If you have never invested in real estate before, this is the best chance you will ever have.

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The Real estate market is bad and it’s not going to be kind in the future. Many analysts believe that the situation is bound to get worse as the year progresses. The overall picture in the country shows that the foreclosure rates are increasing.

The other side of the coin, however, projects that the foreclosed sale is picking up; Arizona showed the biggest increase in the foreclosed sale price, which is up by 15.5 % in the start of November as compared to the previous month. Other states also witnessed modest growth, like California, which saw a 1.83 % increase; Nevada, Florida and Texas showed an upward movement of 1.45, 1.27 and 1.05% respectively.

Only three states saw the foreclosure sale prices go down, and not by much. These states were Maine, West Virginia and Washington, where the drop was 1.88, 0.72 and 0.6 percent respectively in the month of November when compared to October. What this essentially means is that it is a good climate for individuals who really want to buy their own homes and have been looking for a good opportunity to do so. The prices of the foreclosed properties are still well below the fair market prices, but are slowly rising.

The choice of diving into the real estate market is difficult to comment upon. At one end, the foreclosed properties are good investment propositions. The mortgage loan rates rose by two base points for the 30-year, fixed-rate option as well as the 15-year, fixed-rate from last week. So the 30-year and 15-year fixed-rate loan rates stood at 5.34 percent and 4.72 percent respectively. Whereas the 5-year fixed-rate mortgage loan actually saw a reduction in rates by 7 base points to be at 4.69 percent.

To indicate the future trend, the 30-year fixed-rate mortgage loan rates were 6.32 percent in the October 2008. This means that the interest rates are favorable for buying a new home for many thinking of having a place of their own. However, the average American is still not able to take advantage of this opportunity due to reduced employment opportunities and difficult cash flow situations.

Some believe that it is a nascent stage and one wouldn’t get this price advantage any time later. With the government tax credit program of $8,000 now ending in April, 2010, the low mortgage rates, and foreclosed properties up for grabs at a lower than fair price, we should see better buying trends for foreclosed properties if not the new ones.

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Buying that Real Estate Owned (REO) property represents a real investment opportunity for profit.  Sounds easy, doesn’t it?  The lender does not really want to hold the property.  The previous owner has gone a separate route and there is a very real possibility that this property can be purchased well under market value.  Like all marketplaces, the REO marketplace is competitive so develop your strategy and stick to it.

The experienced investor can win in this market, but it takes preparation, discipline, a solid investment plan and a coordinated team effort.  Once the bank owns the piece of property, their goal is to turn it over.  Usually banks retain the services of a familiar real estate agency to manage the property and handle the sale.

The investor should ask the agent to research the performance of the REO real estate firm.  Often these companies price properties according to a specific formula.  The investor can learn much about the asking and selling price by knowing the asking and selling prices of other REO’s handled by the listing agency.

The selling agent should contribute to the information gathering process by constructing the property’s history.  Research the Trustee’s Deed or Sheriff’s Deed to find the Bank’s purchase price.  This information may also be on the tax rolls or listed with the title company.  Compare that purchase price with the listing price.

Analyze the loan amounts that secured the property. Somewhere between the original mortgage amount and the foreclosure sale price is the amount the bank is willing to accept.

These figures may have no correlation to the market value.  The investor needs to know the fair market value.  In many REO purchase situations, there may be multiple offers.  The investor must use the fair market value to determine the profit potential.

As we have discussed before, the investor takes an unemotional view of the REO.  This is about profit.  Use the historical data to build an understanding of the bank’s position and use the fair market value analysis prepared by the real estate agent to set your purchase limit.  Present a well-qualified offer and be comfortable with the offering price.  Peace of mind has value too.          

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Real Estate Investor – Part Three

Even the most experienced real estate investor can get excited when opportunity knocks and pressures their investment plan.  Sometimes good real estate opportunities arise quickly and require immediate attention.  Ideally, the investor has time to involve the team of professionals, but sometimes the pieces are hard to pull together.

One of the mistakes investors make is to act without doing the necessary legwork and before performing responsible due diligence.  A good investor always finds a way to get the homework done on time.  Many times contingencies are the investor’s best friend.  Whatever it takes, protect yourself and your plan.  Use contingencies to assure enough time to perform due diligence and get your estimates.

Another tricky forecast that can get the investor in trouble is the inability to properly project cash flow and carrying costs.  If the strategy is to buy, hold, rent and manage until certain profit levels are achieved, cash flow is critical.  In today’s market management fess for single-family rentals can run as much as 7 – 10% per year.

Real estate investing is about addressing your plan.  Determine if you are a part-time investor or if you are a serious, volume investor.  If you are in it to win it, establish a steady pipeline of possible investments.  Keep the possibilities coming and sweet profits will follow.

Just as important as building that never-ending pipeline is to develop multiple exit strategies.  If you invest in a property and only have one way to exit, you should reconsider the investment.  The real estate market is like any investment market.  There are swings in supply and swings in demand.  Cover all your bases.

Another area where investors must keep their eye on the ball is checking estimates for rehab and repair.  Many times these proposals are a best guess estimate.  Danger lies in those muddy waters.  Get on top of your estimates, allow for increase and proceed accordingly.

Happy real estate investing!

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Given that there are terrific buying opportunities in today’s real estate market, the experienced real estate investor learns how to buy at the best price.  Real estate investors leave the emotion at the door and replace that emotion with facts, figures and budgets.  Quite simply, there is no other way to invest today.

So, now we need to build a reliable checklist that will eliminate surprises and lead us to the bottom line.  To build this list, we break expenses into three basic categories.

Purchase expenses – depending on the type property, the investor’s credit history and the lender’s requirements, there can be some variation to the cash requirements at time of closing.

·    Down payment
·    Attorney fees
·    Taxes in escrow
·    Recording fees
·    Survey costs if necessary
·    Title insurance
·    Pre-paid reimbursements to seller

Income & expenses – with most investment property, current and projected income and operating expenses affect the property’s value.  The buyer should understand:

·    Net heating and cooling costs
·    Net tax obligations
·    Net management fees
·    Annual maintenance expense
·    Cleaning or janitorial expenses
·    Lawn and landscape costs
·    Mortgage expense
·    Income

Each property presents unique income and expense opportunities.  When it comes to gathering this information, more is better than less.  Gather as much info as possible.

Immediate Cash Requirements – every property can be improved.  Some improvements are superficial while others can represent major expenses.  Again, the investor eliminates surprises. Check the following systems thoroughly and be safe rather than sorry by calling in experts for structural inspections.

·    Roofing
·    Basement
·    Heating and cooling
·    Exterior
·    Windows
·    Plumbing
·    Pest control
·    Asbestos mitigation
·    Elevator
·    Electrical

The successful investor will expand these basic lists.  Get behind the numbers to repair or upgrade these systems and use structural experts to help clarify the property’s true, not emotional value.  Your due diligence to these building systems could well determine the success of your investment.

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Regardless of what you are purchasing, real estate or otherwise, practicing due diligence should be of the utmost importance.  We’ve all been there at some point, excited about a new purchase, later to find out that it wasn’t what it was made out to be in some way or another.  This is not a situation you want to find yourself in as a real estate investor!

If you are unfamiliar with what due diligence is, it can be summed up with the word research.  When it comes to practicing due diligence in the real estate business, it simply means to find out everything you can about the property and the surrounding community.  It involves fact-finding that can be very time consuming and tedious but will ultimately paint the picture of whether or not a specific property is a wise investment. 

Here are just a few things you want to find out while researching a property (there are more):

• Before you purchase any property, make sure you gather sales and ownership information.  Your local tax assessor or recorder of deeds office should be able to provide the information you need for this purpose.
• Municipal records will tell you if and when a property owner has applied for rezoning or land development approval.
• One bit of information that is often overlooked is to find out if there are any approved land developments or new community construction plans near your potential property.  This includes any new highway projects.  You can find this out by contacting the local municipality office or land development offices.  This is crucial to researching future property values.
• If you are purchasing a home off the beaten path, make sure you look at your local floodplain maps available through FEMA.  You should also contact the municipal sewer and water authorities in your area to see whether or not your property can be serviced by public water or sewer.

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Every real estate investor knows that they need to do a lot of scouting to find good deals.  However, not every investor finds their deals in the same way.  With online sites such as Twitter, Ebay and Craigslist becoming the norm, the most popular method of scouting real estate these days is definitely the internet.  But keep in mind, there are many other ways to find real estate goldmines. 

Perhaps one of the best ways to find your million dollar deal is just to go driving.  Of course, for this to be effective, you have to know what you are looking for when you do it.  Scouting your neighborhood does not mean you should be looking for homes with “for sale” signs.  Instead, you should be looking for neglected properties.  Pay attention to homes that have overgrown bushes, weeds and lawns.  Look for garbage and a general “trashy” appearance.  You should also look for multi-units and apartment buildings that do not appear to have proper upkeep.  The point here is to scope out properties that appear to be falling by the wayside.  You will want to make sure that you do not make yourself highly noticeable.  Think of yourself as a detective and do not purposely interact with anyone on a property you are checking out. 

Once you find a property that looks like it may be a good investment, the next step is to get the parcel number from the local zoning office in your town.  Once you get the parcel number you can look up the owners’ information and prepare a professional letter to them regarding a possible purchase of the property.  If the property owners happen to live out of state, the chance of you working out a successful deal just got that much greater. 

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