This week Bruce is joined again by Lance Martin. Lance has been in the real estate business for 24 years as broker/owner of Coldwell Banker Pioneer Real Estate which serves the Inland Empire. Lance is an expert in residential REO foreclosure sales.
During the downturn, Martin expected more tenants to show up on the marketplace. He expected rental vacancy to be near zero. Perhaps a lot of people moved in with family. Over the last six months, the demand for rental inventory has become much stronger. Martin’s rental vacancy is about 6%.
Bruce has noticed from data charts that vacancies increase when foreclosures increase. This seems counterintuitive, but part of the explanation for this is that people move out of California. When there is high unemployment, people find other places to work and households downsize.
Martin and his father realized in 2004 that the upward trend in prices was not sustainable.
Most agents want to be REO agents, but most of them do not realize how much work is involved in being an REO agent. You do not earn as much commission, so you have to work with a larger volume of sales. The expenses involved in the REO business are also much larger. Martin knows of a few REO agents who quit their job soon after receiving it, because they were quickly overwhelmed. The REO brokerage business is not the real estate business. There are no similarities between listing an REO property for sale and dealing with homeowners.
Bruce responded that when you are in the middle of an REO phase in California, you really don’t have time for real estate. However, when you transition to real estate, you don’t have the standard clientele that you would have had as an REO agent. You’re almost starting from scratch. Lance said this was true, except that he is not an REO broker in the sense that he is an agent who sits in an office, works for a broker, and his whole world revolves around REO. His REO business he has been maintaining for the last several years has helped him grow his office. A big part of his business plan is to grow his offices. Last year in 2010, he was out buying real estate offices, and at the time he had multiple people telling him they didn’t understand what he was doing. But, he bought four properties and opened one brand new place himself, adding a total of five new offices for Pioneer Real Estate in Santa Ana, Claremont, Covina, and Redlands. Part of his plan is not to fall into the trap of being stuck not knowing what to do when the REO cycle is over. His company is consistently recruiting and bringing in new agents. Lance said that most of the agents that are in the business today are tough and understand the business really well, but it’s only in the last few years they’re realizing that things are not the same as they were 8-9 years ago. Part of his business plan in the future as REO begins to wind down is to run a more traditional shop, work as a broker, and continue to grow his shops. The problem is nobody really knows when the REO business will wind down, so we don’t really have a true real estate market right now. We’re just working with artificial government policy. This artificial policy could be related to balance sheet policy being driven by the financial players or to the robo-signing scandal that’s preventing the banks from having all the legal documents necessary to push the properties through to foreclosure.
Bruce stated that there has been a change in people’s attitudes of whether they should own a piece of real estate property at all, something which he really dislikes. We have gone from wanting to give everyone a loan, which was the attitude 5-6 years ago, to not wanting to give anybody loans and reconsidering whether owning a home is even the right decision. To Bruce this is very frustrating because he doesn’t want the country to lose on being a part of making decisions and sharing a piece of real estate, which he says is who we are. Lance stated that unfortunately this is what we do, and we have changed our attitudes about the market. For example, Lance is starting to obtain some condos in Moreno Valley that his company is listing and selling for $40k. This is what he calls an overcorrection, as this was the price they were selling them for back in the early 90’s. Now, you look back and it’s hard to believe you were once able to buy a condo at that price. In 2006, you were selling this exact same condo for $225K. Now, we are going back the other direction towards lower prices, and people are asking, “Is now a good time to buy real estate? Should I own, not own, rent?” He thought there is still is some level of confidence out there in the market, and there’s always a good time to buy real estate. However, you have to do you homework. You need to figure out what it is you’re buying, where you’re buying it, what the market is like. He used the example of last month when there were more pending sales in the Inland Empire multiple listings than there had been in at least two years. There were over 9,000 units that went into escrow, which had not happened in over two years. Bruce and Lance had discussed this before saying that 9,000 was a significant number but could have been made up of, for example, some short sales that wouldn’t work. He also said there was a chart for closings where the numbers were really aggressive. So there are a lot of opportunities to buy, but not every listing is a good opportunity to buy. It is unfortunate that you have people out there who should be buying but instead are afraid to or are waiting for a specific reason. Whether or not the price of the house has bottomed, Bruce didn’t think you could go wrong getting a 30-year loan for something that says 5% or less, for example. You just do the math on it. Even if you thought values were going to suffer a little bit this year in a specific location or neighborhood, if you factor in the interest rate, then you shouldn’t be afraid of what the market is going to do. Lance said that CAR has reported a slight reduction in median price state wide by about 2-3%. When are you going to see this again?
When Bruce first went into the business in 1981, he refinanced his house at 17.5% fixed FHA. So he thinks it’s funny when people say interest rates are too high right now and they want to wait for them to go down before they make any move. You just have to realize it’s a very different world now.
Bruce went on to discuss the actual process that Lance goes through as an REO agent when dealing with houses that are sometimes occupied. He asked him what percentage of the properties that he ends up getting listings for are occupied by someone. Lance answered the number is close to 75% and is significantly larger than it was in the past. Many were former mortgage owners, many were tenants. Bruce thinks the higher number was largely courtesy of the internet. There is a phrase “Cash for keys” that they teach in some night classes, which Bruce said is expected to come soon. Lance replied that back in the 90’s not many people understood that the banks would be willing to offer you money for a house. In the recent cycle back in 2006, most of his clients would offer about $1,000. Now, unfortunately, the market is upside-down. Ridiculous amounts of money are being offered to people who really don’t deserve it, but the expectation of the occupants has changed. They want to stay in their house, and they want money. There are a lot of properties now that are a part of shadow inventory; basically properties that are not on the market but should be on the market. For example, 20% of everything that Lance currently has in his inventory is, in effect, off the market because post-foreclosure, the tenant in the property was offered an opportunity to lease the property back for a period of time. Therefore, the properties are now in rental inventory. He called this ridiculous since there are several buyers willing to step in and buy the properties. As a property manager or an investor buying a property, you need a tenant. If your tenants are now occupying properties that are bank-owned, then those tenants are off the market.
Bruce asked if the word “option” is ever discussed with lease-back. Lance answered that generally speaking it is. However, it also depends on who you’re talking about; who’s buying the property. For example, a tenant always has an option to purchase a property. However, if it is a former borrower, then it is not discussed, at least not with Lance’s clients. He actually has mixed feelings about this. He said it may make sense given the volume of inventory he and his company are having, but it does get back to what he said earlier about not having a true real estate market but rather an artificial market. Bruce reiterated saying that you can have a permanent artificial market if you continued down a government controlled path. You can then have what feels like stability and know that if you look at the charts you can see this happen very quickly. And this is what is scary. Lance’s business plan is now much different than it otherwise would have been because he now has to take into account what is becoming a sense of “normalcy” when it comes to either inventory coming into the market or the policy for a specific client. The part that scared him was if they allowed things to go back to normal, then his business plan was wrong. Bruce said one of the nice things about having access to Foreclosure Radar was that you have a warning light and know the process. Just because you foreclose on an REO property doesn’t mean that home is going to be up in the market for sale tomorrow. It’s going to take months, or sometimes, years. Lance has properties that are just now being brought into inventory where the foreclosure process for the property started 14 months ago. This could have been the result of numerous things, whether a long eviction, a title issue, or a brief rental program. You have to pay attention to the data you’re given, look at it daily to see if anything changes in the trend. You have to always be up to date on everything in the market.
One of Bruce’s pet peeves is when people deliberately damage property and take things out of the house like they own them. Lance has never been able to prosecute these people in his experience because most of the people he has done business with did not fall into this category. They were not abusing the property in any way. The individuals who were damaging the property either left before they arrived at the property or never answered the door. Generally, the percentage of the properties damaged is close to 0%. For one thing, it’s hard to determine who damaged the property. It’s one thing if you were a witness to it, but the banks are usually not geared up to deal with it. It is a sad state of affairs, as he has seen several properties that were completely destroyed. He had seen cases where neighbors went in to other houses and took something out because they were missing it in their own house. Bruce one time had his own carpet taken by people who needed carpet for their house, and Bruce had just the right kind that matched their model house.
To end off, Bruce asked Lance who was easier to deal with: tenants or past owners. Lance answered tenants since they seemed more prepared than the owners who stayed in the property post-foreclosure. Most of the tenants were well aware that the property had gone into foreclosure and were simply waiting for someone to knock on their door.
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