Foreclosure Tips

This week the Sacramento Bee ran a pretty good article on buying foreclosures. It reminded me of my experience with a HUD auction during the last recession, in the early 90s.

I teamed with a fellow Realtor and friend to research and bid on a major HUD auction of repossessed properties. From experience, we knew there would be lots of bidders and lots of competition, so we decided to focus on the least desirable, most plentiful segment: Compton repos.

We spent several days researching about 50 Compton properties prior to the auction. Available comps, physical inspection of each property, etc. When we showed up, it was like a circus! Every property got bid far above similar homes that were in better condition that were available through the local M.L.S. We were far outbid every time.

At these auctions, each segment of the audience is worked by a smiling, tuxedoed Texan. At one point I commented to one of them, “These homes are going for way above market value.”

“Oh no!” he said, between prodding buyers to up their bids. “That means most of these deal will probably fall out and not close.” Even auction buyers apparently get remorse and realize they overpaid.

Our conclusion: There are buyers who are willing to pay any price for a foreclosed “bargain!”

From the Bee article, and others in local papers, I don’t think much has changed!

Now here’s a summary of what the Bee says you need to know in advance about buying bank-owned properties:

– First-time buyers will need to be pre-approved by one or more lenders.
– Don’t be surprised if the bank that owns the home requires that you finance your
purchase with them.
– Expect competition. Many buyers bid on multiple properties.
– Banks won’t accept offers that are contingent on selling your home.
– The best deals generally are those homes with the longest time on the market.
– Bank-owned homes typically sell for 10 to 20 percent less than their listing price.
– Be sure to pay for an inspection and consider the cost of repairs or damaged or
missing appliances when bidding on a foreclosure.
– The bank is likely to make a counter-offer. Be sure to consider this when submitting
your first offer.
– Some banks will not accept an offer unless it is submitted by a REALTOR®.
– Banks generally are looking to close quickly, within two weeks to 45 days.

Note added 4/9: From today’s release of SoCal stats on homes beginning the 4 – 8 month foreclosure process in March, it looks like we’ll have lots more foreclosure auctions in the months ahead. (See “So Cal Foreclosures Up Again & What It Means“)

When Market Chaos Strikes, Get Back to Basics

Today another chaotic day on the world’s various “Wall Streets” coincided with mop-up operations for me on a six unit apartment building. By the end of the day I was reminded that the basics work in any market.

As Solomon put it 3,000 years ago, “Be sure to know the condition of your flocks, give careful attention to your herds; for riches do not endure forever. . . .” (Proverbs 27.23-24).

Or, in my case, to the condition of your fire extinguishers. Today I figured out that my procrastinating on some fire prevention upgrades on this building may have contributed to the loss of four of the units and to making five families temporarily homeless. Fortunately, there were no serious injuries.

As I walked through the rubble with the insurance adjuster this morning, what saddened me most was the ruined possessions of the families that lived there. Ash covered family photos and drawings taped to the charred walls. A heart with a child’s printed “I love you” tossed in the rented dumpster. Clothing & furniture tossed, by residents I knew had no renters’ insurance to reimburse them.

Then came the conversation with the the resident who attempted to put out the grease fire on his neighbor’s stove. “If only we could have found a fire extinguisher, we might have been able to limit it to the stove,” he told me.

Ironically, three hours before the fire started, I was in a fire prevention store ordering fifteen fire extinguishers. Delivery is scheduled for next week. I’d intended to get around to it months ago. I thought we had some extinguishers in the office, but also thought we should try some wall mounts outside, in cases, to see if we could make them more accessible while minimizing vandalism.

I had been thinking about mounting one just outside the door of the unit where the fire started. A $60 expense that might have prevented a $100,000 loss. Solomon got it right–pay attention to the basics. Know what’s going on. Don’t get so caught up in what the market’s doing or in what’s new to neglect the basics.

We still need to keep up with current trends. We’re getting more resident leads from Craig’s List today than from newspaper ads, for example. But the basic, unglamorous things like fire safety, grounds keeping, resident selection and screening, cost containment, client satisfaction are still what will make or break any business. That goes for rental property and for home ownership.

Part of the problem is that the Urgent is rarely Important, and the Important is rarely Urgent. But that “stitch in time” still can save nine stiches later.

The city Fire Chief recommended 5 pound (net) rechargeable fire extinguishers with metal heads & spouts, rated ABC (trash/wood, grease, & electrical fires). Actually at least 2A10BC. Around $40 at Lowes, slightly less in quantity at Maintenance USA. Roughly another $35 for the safety case. You might want to pick up one to keep near your kitchen or garage at home. And at least one more for any rental properties you own.

The same principal applies to what’s much more important than possessions: Family, relationships, health, friendships, our walk with God. Pay attention! Don’t neglect the important for the urgent. Keep your priorities straight. Do some preventative maintenance. It’s easier to install fire extinguishers than to gut & rebuild apartments, but apartments can often be rebuilt much easier than relationships. It’s far easier to fix ruined buildings than ruined lives.

That’s not to say there isn’t hope for even the most hopeless situation. That’s just one of the many wonderful messages of Easter. Just today I passed a church with a sign, “Nothing is Too Hard for God.” Guess someone knew I needed that today. Just like eleven discouraged disciples 2,000 years ago, after their Messiah was arrested, unjustly convicted, and crucified. But, as one of my favorite sermons says, “It’s Friday, but Sunday’s coming!” God can redeem any situation if we let him.

But the first step could be to prevent the situation from getting any worse. Take it from someone who learned that lesson the hard way!

How to Sell Your So Cal Home for Top Dollar in 30 Days

Selling for top dollar fast isn’t all that hard, even in today’s slow market. Last month we took three listings, and had all three in escrow within 14 days of hitting the market.

In fact, our 30 years of experience has taught us that if you don’t sell in 30 days, you almost certainly won’t get top dollar. You’ll also be more frustrated with the whole process.
It’s not rocket science, either. The technology’s changed, but the basic steps to selling fast for top dollar remain the same. We’ve been teaching classes on them for almost two decades. There are only six key steps, yet very few agents or sellers complete even four of them correctly:

1. Preview & plan with a trusted adviser, often a Realtor with at least 15 years experience–one who’s been through a few slumps before. Actually, the most important step seems to be picking the right agent, and then picking his or her brains as early in the process as possible. We recommend starting by checking out our “Top 5 Ways not to Pick a Listing Agent.”

Develop priorities for steps 2 & 3 below, discuss what would be the best time to get the home on the market, and get a rough idea of the price & net you can expect.

2. Prepare the property. By now you should have determined which repairs and upgrades deserve your attention, and the time you have to get them done. Most sellers focus on the wrong things–things that bug them, as residents, but that most buyers don’t even notice.

Concentrate on things that a person would notice when just spending 60 seconds touring the home, because the first 60 seconds are the critical first impression period. That means the front yard, the front room, the kitchen, baths, & master bedroom. Don’t even think about fixing broken things that aren’t obvious, like an inoperable dishwasher. Those will be negotiated after the home inspection, and the buyer may not even care.

3. Stage the home. This is putting your best foot forward–like shining your shoes before a job interview. It usually involves removing clutter and some furniture throughout the home. Sometimes we recommend adding or changing furniture so that the home will appeal to the most likely buyer. For example, many sellers have converted a bedroom into an office or den after their kids have moved out, but frequently buyers need an extra bedroom more than a den. We actually have an inventory of what we call “instant beds” to use in such a situation. The slower the market, the more critical this step is.

We also instruct our sellers how to stage the home before each showing, which usually includes turning on extra lights and moving to the front yard while the home is shown. We usually discuss the questions they can expect from buyers and agents, and the best ways to respond (rule #1 is “Never lie.”)

4. Price accurately. Not too high, not too low. Based not just on recent sales but also on an evaluation of your competition–the best priced, most attractive homes currently on the market. Not based on what the seller values, but on the values of the most likely buyers, who are usually quite a bit younger than the seller. Here’s another place where an inexperienced, dishonest or lazy agent can cost you tens of thousands of dollars. Also one who isn’t familiar with your neighborhood.

5. Wise, aggressive marketing. This involves doing dozens of things right: flyers, Multiple Listing Information & photos, web photos and virtual tours, property search placement, web and print advertising, open houses, etc. There’s a right way and many wrong ways to do each one.

For example, the only phone numbers on our signs and flyers are our cell phones. Sign calls don’t go to an 18 year old receptionist who’s never seen the property, but to one of the two listing agents, day or night. We’re even careful about the time of day and day of the week we input our listings. Our goal is to obtain competing offers the first weekend or two. By the way, we’re counting the 30 days to sell from the day it hits the market to the day you accept an offer.

5. Negotiate wisely. Again, dozens of things that need to be done right. Herb Cohen’s You Can Negotiate Anything is one of my favorite layman’s books on negotiations, but the real secret is to find an agent who’s an expert at it. It’s not just about price–terms, time frames, repairs, deposits, release of deposits, and the buyers’ ability to qualify & intention to close are also critical.

6. Disclose wisely, follow up regularly, and don’t blow it during the escrow. My mentor used to say 90% of our work is done once the escrow’s opened. With today’s crazy news and lending climate, that’s even more true today than it was in 1980.

As always, your questions, comments, and feedback is appreciated. You can also call us directly at 562.822.SOLD. And yes, you still can sell your home for top dollar in 30 days, with the right help.

What I Learned About Investing Out of State

Dave here, with a sad, true story that might make you think twice before investing out of state.

Back in 2004 I decided that ten years was probably about it for our California real estate boom. (Turns out it should have been. Unfortunately, I was about two years early with that call–see “How we got into this mess.”) (For our current market forecast, see “A Change in Our Predictions?”

Barb & I are buy & hold investors, but it seemed it might be time to liquidate at least one or two of our local rentals. To avoid capital gain taxes, we decided to use a 1031 Starker delayed exchange to purchase in an area where prices might be nearing a bottom. The ultimate in market timing–something I’d wished I’d done back in 1991, the last time our local market peaked.

After researching markets from Las Vegas to Florida I found a complex with upside potential in a small town with a fairly strong economy. As an added plus, we have family living fairly nearby.

So we sold a rental house in Lakewood, and bought 90 some units in 12 brick buildings in McMinnville, Tennessee. The 90+ units only cost two and a half times the house’s selling price. Sure looked like going from the top of the California market to the bottom of the rural Tennessee market to me. (Perhaps this whole experience has influenced my thoughts on market timing.)

Well, Barb & I have been spending time & losing money in Tennessee ever since. I knew it was a major turnaround project, but we’ve had great success with turnarounds before. But those were nearby in Southern California, not two time zones away.

I recently discussed my Tennessee challenges with David Haas, the best property manager I know in So Cal (or anywhere). He’s been following my saga for several years, offering helpful pointers along the way. This time he nailed it.

“You know, Dave, a number of my owners exchanged out of state over the last few years. It’s gone badly for every one of them.”

He went on to detail the particularly sad saga of one landlord who eventually lost his equity and his Texas apartments and then took a huge tax hit from the capital gains he’d deferred when he exchanged into it.

There are several reasons for this common woe, most of them obvious. Most experts agree your property should be close enough you can drive by it occasionally. What I didn’t realize is that letting locals know you live out of state is like walking around with a “Kick Me!” sign taped to your back. Or a bullseye on your wallet. And once a Californian opens his in rural Tennessee, they know you “ain’t from aroun’ heah.”

I also had no idea how much looser disclosure and construction standards are in rural Tennessee. Our seller disclosure laws aren’t perfect here, but to me California looks like consumer heaven compared to Tennessee. And building codes in unincorporated areas? Non existent, as far as I can tell!

Eventually, I had to hire my Tennessee son-in-law to supervise the units. He’s not David Haas yet, but he’s learning, and he’s honest. He’s now got his own management firm, Sasser and Thrasher (I’m not making this up). They’re now also managing units for other out-of-state owners, most of whom were ripped off by their former managers. Like another Californian, who flew out to inspect the six new roofs he’d paid for, only to find they didn’t exist.

As for us, I hope we’re finally starting to turn a corner. The day may come when Barb & I are glad we own The Meadows Apartments. But the price to get there was way more than we expected. We did much better during the ’91 – ’95 recession, when we stayed close to home and exchanged from single family rentals to multi family units.

So, before you jump on something out of state think twice. And pray thrice. At least. If it’s an area you know, maybe one you intend to retire to or have family in, it might be worth considering. But I’d start by checking out foreclosures and motivated sellers throughout Southrn Califonra before going out of state.

The Inland Empire and desert regions are about as far from home as I’d recommend going. We do think eventually things will turn around here (see “What’s Next For Southern California Housing?“) We think some parts of the I.E. may eventually bounce back like South Orange County did from the last biggie back in the 90’s.

Southern California still has lots to offer that few, if any, other places on earth can match!

When it comes to going out of state, I now think of what my mom used to tell me: “The grass is always greener in the other fellow’s lawn!” Or so you think–until you own it!

April 25th update: For the latest on my adventures in out of state investing, check out today’s “Post from Tennessee.”

How Low Will Prices Go?

Updates, March 31:

1. We wrote this post four months ago, & the passing of time has only proven our point. We think it’s as relevant today as it was when it was written.

2. We now have a direct link from our blog into the So Cal Multiple Listing Service’s database of currently available homes, so you can check prices on listings in your neighborhood at the speed of light. It’s in the column to your right, under “Great Links.” The So Cal M.L.S. covers most of Orange County and Southeast Los Angeles County. We are working on getting additional direct MLS links as well.

Yesterday (11/27) the Los Angeles Times front page asked “Homeowners’ big question, How low will prices go?”

Today, they gave us a partial answer: “L.A., O.C. home prices decline sharply.”

We’ve got a better answer: “Nobody knows.” We first heard it at the California Association of Realtors’ economists panel in Anaheim last month. It came from Frank Nothaft, chief economist at Freddie Mac, as he was discussing how low prices would go and when things would turn around: “We just don’t know,” Nothraft said. “We’re in totally uncharted territory.” His point being that the problems brought on by sub-prime lending make this “correction” a new animal.

In a way, however, Northaft was just restating the conventional wisdom regarding any market’s cycles: “They don’t ring a bell when it hits the bottom. Or the peak.”

The concensus seems to be we’ve got 1 – 3 down years ahead of us, more if a major recession hits. Most economists also predict that Southern California real estate will take a bigger hit than the national average, just as we went up more. Prices are predicted to “correct” between 15% and 40%, with most economists in the 20% to 25% correction range. Maybe worse for outlying areas like the Inland Empire or Palmdale, and for entry level condos everywhere.

Having a bit of a contrarian nature, when everybody gets on the recession bandwagon, we start thinking about getting off. To be honest, we’ve already seen price corrections of as much as 20% in Lakewood, Los Alamitos, parts of Long Beach and Orange County and some other markets we serve.

That’s from peak to current low, and it’s comparing like homes (similar location, size, & condition), not the almost useless median selling price that takes comparing apples with oranges to an insane new level.

With interest rates dropping again and prices already down, we wouldn’t be surprised to see prices start moving upward this coming February. But we wouldn’t be surprised if they kept dropping as well. (We’re talking about prices on homes going into escrow in February, not closings. So the increase that may come this February would show up in March or April closing statistics.)

Why don’t we know? “Uncharted territory.” Too many variables: interest rates are dropping, prices have dropped, but more foreclosures are coming, and Congress may be making the “liquidity crisis” worse with the House’s proposed “reform” bill. We just don’t know. Nobody does. If they say they do, they’re either lying or deluded, or God.

What to do when nobody knows when we’ll hit bottom? That’s in the post which follows this one, (“What to Do When Nobody Knows What’s Next”).

3/31 update: Nobody knows what’s next, but that doesn’t stop us from making our best projection, which we try to update regularly as needed. For our latest projection, click here: “What’s Next for So Cal Housing?” For a recent example of unanticipated surprises in the housing crisis, see “Pragmatic White House Ready to Help Out?”

On a more uplifting note, you might also want to check out “A little perspective.”