This week Bruce Norris is joined by Ted Boecker, Mike Novak-Smith, and Shelly Lindekugel. Ted is the owner and broker for Re/Max Results in Moreno Valley, which he started in 1989. Ted has vast experience in real estate and has been able to train and lead 35 of Southern California’s highest producing real estate brokers and agents. Before opening RE/Max results, Ted practiced law with Miller Hodges and Bemis LLC in Newport Beach. Mike Novak-Smith is one of the nation’s largest REO agents and has managed and sold 1,000 homes for corporate sellers. Mike specializes in the default service side of the business, which focuses on REO short sale evaluation products. Shelly Lindekugel is the certified real estate broker manager with a diverse background in the real estate industry, which began in 1989. In 2012, Shelly stepped down from management to pursue real estate sales once more. She and her partners have consistently been named top performing team, closing approximately $15 million annually.
Episode Highlights
- When things started to decline in real estate in 1989, how did this change the kind of work Ted did?
- How is real estate business going in general, specifically when it comes to REOs and short sales?
- Does Shelly deal with consumers who buy the homes, and how is this side of the business going?
- Where are the top places people are migrating to in order to find cheaper housing?
- What is the urgency to buy now, and how easy is it to get a yes answer from a lender?
- What risks are involved with Subject To deals?
- What happens if one of the parties involved in a contract breaches the terms?
Episode Notes
1989 started as a wonderful year, then quickly turned lousy for the next six. California had not experienced anything like this. Bruce first asked Ted how this changed what he did. Ted said he came out of the commercial real estate, so he did not even know it was bad. He knew commercial real estate was bad, but not the whole industry. He grew up in a tough time and is probably why he is still here. He did not know it was going to be as hard as it was, so he just did what he did.
Bruce next asked Mike how business is in general. It seems that short sales are disappearing and REO sales are non-existent. Bruce thinks it would change their product, to which Mike said they are working hard and not making a lot of money. He has a lot of REOs, but a lot of them are going to become rentals. This has become the new REO for the lender. Bruce said he has looked at foreclosure charts, and there is not a whole lot of those. The damage coming from the REO side of the business is not occurring since they are just keeping them.
Bruce asked Shelly if she deals with the consumer who buys the homes and how business is on that side of the world. Shelly said they are super busy right now and have for a long time. The first quarter of this year has been crazy since they have been dealing with a lot of move-up buyers. This is the main part of their business right now, although this has been depressed for a while. However, Shelly does not know if the move-up buyer has been depressed or just really coming around now. They bring a good pile of equity to the transaction. For the most part, everyone has equity; so they are buying and moving up. Some are moving out of state, which is interesting. Bruce wondered what percentage are making this decision since this is a big deal. Shelly bet 30% of their sellers were moving out of state, a lot of them being older people who are retiring. This is unusual since usually a large percentage of seniors retire right where they are. If it does not make any sense to do this, you can see that relocation happening.
You can go to Florida and just look at some of the numbers there. Somebody bought a home and flipped it, but the person they bought it from in Orange County paid $100 grand for it 30years prior and had never done anything to it. It was sold for $1 million. They basically did not have any dough, and now they can buy a home for $250 in Florida and have $750 on which to retire. This changed their whole life.
The places Shelly sees people moving to are Utah, Northern Nevada, Arizona, and New Mexico. Following statistics, this is repetitive. Whenever California does really well, the first thing that happens is money migrates to those areas as investors and people. Texas gets some, and Florida is a recipient from other states on the East Coast.
Bruce asked what their sense is on the ease of getting a yes from a lender, which they said hard. Bruce asked if there are any programs for if you do not have a job very long or enough cash for a down payment. This is not easy; although Shelly said there are a lot of homebuyer programs out there, sellers won’t accept them. They are already getting multiple offers on everything; so as a seller why would you accept a loan with a homebuyer assistance program when you can just take a conventional offer? The government loans are still there, but they are very difficult to qualify for, and there is a lot of paperwork involved. Bruce said whenever he is involved in a transition, he is holding his breath until the end. What else can they possibly ask for, and how many times can they ask for the same thing they lost?
You have to qualify for a loan, and all the guidelines have to be met. The guys who know what they are doing know how to work the system. They have their systems down and get them done. It is not easy; but a lot of the potential deals get blown as they go in, although the fallout rate has not been as bad the last few years. They just don’t start it with somebody who is not going to make it. Going in, they make sure they do quality assurance.
Bruce asked if they see anything to indicate this will change radically in the next few years. Shelly thinks it is getting a lot easier and that lenders are relaxing their guidelines to a point. There are lenders who can do under 600 FICO score, or FHA, loans. They had originally decided not to do this, but now they are doing them again. It used to represent closing in on 45% of FHA’s business with the aforementioned FICO score or less, and now it is 5%. This is a very big difference in who you let into the system.
Bruce asked what the urgency is right now to buy. Thinking back to 2004 and 2005, he built a track of homes in Rosamond, 9 miles outside of Lancaster and a long way from LA. 90% of his buyers bought a home in Rosamond and would drive to LA. This was how desperately they wanted to get their name on a grant deed. Bruce wondered what the urgency is now for people to buy. Shelly said there are all different kinds of motivations. She thinks people are worried about the interest rate going up and want to buy now before it gets higher. She is seeing a lot of millennials buying now, and this was depressed for a while as they were waiting a lot longer to buy.
Shelly has a new client who has never owned a house and are in their late 50s. They have rented their entire life in Huntington Beach. Now she is looking for a house for them in the Lake Elsinore or Menifee area. There are all different reasons and motivations, including prices. You want to get in there before prices go up more. Ted said how the news is saying Dodd-Frank is being softened and lightened, which might lead buyers to want to get into the market.
In the 90s, Bruce wrote a seminar about Subject To deals, and Ted did an interesting transaction during this time. One of Bruce’s chapters in his seminar was what not to do with a broker. He thought it was a waste of time until he met Ted since this was a niche he had. He asked him to describe what a Subject To transaction is and how often he did it. Ted said in the late, maybe early 90s, he did a lot of land contracts, which could also mean an all-inclusive trust deed or Subject To transaction. If he were to walk in as a buyer, he would tell the seller he is taking over his payments and maybe give him something for them. The seller would trust Ted to make the payments, and Ted would trust him to get out of town. They would then all go on their merry way.
There are risks involved. In their 3-4 years, they probably did 1,000-1,200 Subject To transactions. This was all they could do. Bruce saw this as inconceivable since it is a miracle for a broker to just do one. They don’t get it and don’t want to stand in the way of it. You could say Ted was either naïve or really smart, but he gave the risks on each side. If you sit both the buyer and seller down together, tell them the risks, and ask if they understand them, most people are not going to come back. A lender may not for interference with a contract, but there were so many brokers without legal training who were afraid of the idea. They had been taught these were against lender policy.
In Ted’s view, the contract between a borrower and lender is a contract. There are terms in this contract. If one party breaches the terms, you have not violated the law but you have breached it. The other party then has certain rights to react to this. In a land contract, the transfer does not occur with the title. However, he would in other cases. Bruce asked if he had one preferential over another, to which Ted said at that time he was still afraid of the notification to the lender. He preferred the land contract where the grant deed was recorded 3-5 years down the road.
Bruce asked if this is prevalent right now. The interest rates he is talking about in the 90s were 10% on the existing paper. He did not know if the market was a lot less, but it may have been. If you were going to borrow a loan after the recession, it was around 7-8%. He had a 10% existing paper, which was a tougher sale than today since now it is at 3-4%. Today, it is the opposite situation and you have bargain paper in place. Ted said he could not relate to the cultural activities at the time, but what he recalled was there were a lot of buyers who could not qualify or did not have a down payment, but they could pay. Now you have a whole lot of buyers who cannot get a yes answer from the lender who can pay. Either situation is the same problem since the buyer cannot buy the house unless something creative is done.
Bruce asked if these have become popular again, although Ted said he had not heard of them until that day Bruce was interviewing him. Shelly had a buyer in her car the other day who asked if they could take their loan Subject To, and she said no since they had the house on the market and a lot of equity. Regarding the entire group of people with pending trustee sales, Bruce asked why they would say no to that. Mike said a lot of them would say yes, and the Subject To idea works best when the seller is either slightly upside down or at a break-even point. There is a fine line where they work, and this happened with the last couple he did. His client was at a break-even point, and they did the Subject To for relatives. The lenders do not care about it.
Mike had done some checking the previous week, and to foreclose in California the minimum is about $35,000. If they are getting the payments every month, they will not worry about it. $35 grand to foreclose is because you have to follow so many laws and procedures. 15 years ago when you called First American Title, it was $3,500. Now it is that times 10, and they do not want to do it. Bruce was curious what the motivation was since they were a lender, not a wannabe property owner. He wondered why they could not leave it alone, but common sense is not always in play there.
Bruce did a Subject To purchase one time where he fixed the house and made the payments. He then received a notice in the mail that he was being foreclosed on since his name was not on the loan. This was his first experience with this. He called to check up on this, and the lady read him why they had the right to do it. He finally went to the president of the bank and explained to him the situation. He agreed with him that it made no sense and left it alone. The point is Bruce had to go all the way to a decision-maker in order for someone to not throw the rulebook at him and say they can do it. Even if they can, why would they? Common sense is sometimes missing in the plan.
Mike does his own checking and asks people their stories of why they lost their house. The average foreclosure in California now is about 2 ½-3 years. This is 2-3 years of feeing a house, paying attorneys, and is a monumental hassle. If someone was current, they would not care. The process is set up to be three months and 21 days, so apparently, it is not working too well. In the late 90s, Fannie Mae used to brag about how they were foreclosing quickly. It was a law that after 6 months you had to do it. In 1995, there was a dip, and that was when the law was enacted.
Bruce does not believe this will happen in this next round. He does not think we are going to have this big rash of foreclosures. Mike said one thing he has seen on about the last ten REOs he has obtained, 8 of them were deed-in-lieu. These are becoming popular with the banks because he was talking to an asset manager about it who said they give them $10 grand, pay $5 grand in attorney fees, and they are done with them. The seller is not just recording it and saying they are stuck with it, but rather they are participating in it. They save eviction costs and several years of no payments. When you are in a home and do not care anymore, that shows up in repair bills. In flipping 80 houses in Florida who had a 4-year foreclosure process, this was one of the surprises for Bruce.
He bought and sold many hundreds of homes and had a good idea of when he looked at a home built in 1989 that was 2,000 square feet. The rate can get within 1% of repairs, but not in Florida. There were a lot of surprises here, and lenders were definitely getting more aggressive. Bruce said the loan programs that have been in place for the last 8 years are so conservative. The one thing they have not done is extracted equity. Usually, when they have booms, such as in the 1980s, they took out equity. From 2000-2005, they took out tons of equity. In the last eight years, they have not touched one dime of equity collectively, although as a country we have paid it back.
Shelly wondered if people are learning their lesson. If you think of the price chart in California, it has literally doubled in the last 8 years, so all those gains are still in place. That move-up market is selling, getting a big check, and putting it down. It is hard to imagine a foreclosure scenario where you have these loans you have qualified for, and the equity has not been touched. You would have a sale that would not result in an REO and would have such an equity spread. Ted asked if the foreclosures Bruce is talking about are 3-4 years back, but Bruce said it has gone up so much that it is a mute point. He had one guy come in the office who had never made a payment on a VA loan. However, he had $200 grand of equity. All Bruce could say was congratulations. This was the only time he had seen someone who never made a payment walk away with money.
In the 90s, they had a fair amount of other foreclosures. It got dwarfed in 2008 and 2009, and this is why they changed the policy. Another reason we may not have this pile of foreclosures is the willingness of the lender to bend over backward not to get one. When it goes bad again, short sales will be big. Mike talks to a lot of foreclosure attorneys when he goes to REO events, and they will all tell you the lenders will do anything to avoid a foreclosure. They have to deal with the process; and however, they can get away with it they will do about anything they can. Ted wondered if they will allow assumptions or Subject To.
When Bruce was invited to Washington, D.C. to speak to Fannie Mae and FHA, he had a meeting with the FHA head. Sitting across from him, he asked why he couldn’t let them take it Subject To. Texas would not have had a foreclosure problem since you can rent the house for $1,500. They payments are $1,000, and you are foreclosing on the houses. It does not make any sense. Bruce asked the FHA head if he could just take them over, and he said he had no problem with that. Bruce next asked him to put it in writing for him, which he said he could not do. He understood it, but he could not sell it. In the policy-making world, this is a problem.
This is where the Subject To transaction fits in to the whole thing. It is another tool in the toolbox and another opportunity for certain people to take advantage of certain things. In the 90s, there were tons of people with either no equity or negative equity. The problem here is that we do not have the negative equity, and there is no reason to do it right now. If you had no equity and interest rates at 4%, you might still be interested in doing it. However, Ted thought interest rates might be the driver. If you have a loan on your house at 3 5/8 or 3 3/4; when next month we might be at 5, all of a sudden 3 ¾ looks pretty attractive. If you do not have to come up with $25,000 to bring the loan current, that is a pretty attractive rate. As an investor, two points of interest rate might make the decision for you.
When you have a buyer on that side, Bruce wondered if you have to have a 5% mortgage rate or if you could have a 7 ½ percent mortgage rate. Could you have a spread of 4% and still have a buyer? All of them agreed you can. Bruce wondered what the reaction would be if you ran an ad that said you did not have to qualify. Shelly said tomorrow they will have 125 offers. The question is why a seller would want to do it. This was why when Bruce originally talked about the concept, he thought it would be good timing since at the time there was negative equity and all these people who could not go anywhere. This is why he thought the concept would kick in again, but it never did.
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