This from a recent article in The Puget Sound Business Journal:

“Sales of larger apartment buildings in King County are on the upswing, setting a record average price per square foot in 2011, according to data supplied by Dupre + Scott Apartment Advisors Inc.

Investors last year paid an average price of $136,509 per unit for apartment complexes with 20 or more units in King County, Dupre + Scott data show. That’s the highest price paid in more than a decade, topping the average price of $135,371 per unit set in 2007.

That record price is especially surprising considering sales are still well below their 2005 peak …”

Good news for Pacific Northwest real estate markets continues to mount. Let’s hope it (the market) continues to follow the recent indicators.

– Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

I hope you are enjoying the beautiful fall weather. It is certainly my favorite time of the year and good things are on the horizon for Real Estate Investors.

We have been saying for most of this year that with an election year coming up, the government will make a move to stabilize the housing market and reduce the fear that has been driven by the looming number of nationwide foreclosures. The stock market was not up nearly 400 points today just because Europe has found a solution for their financial crisis, there was good news domestically about the US economy as well.

The sale of new homes in September surpassed experts estimates due to low interest rates, low prices, as well as pent up demand for new homes. However, contracts to buy existing homes fell in September according to the National Association of Realtors, and the culprit is confidence. What’s weighing on confidence are still-falling home prices, and what’s pushing those home prices down are foreclosures.

Today, on CNBC.Com, in an article from Realty Check, it was stated: The Obama Administration is pushing a potential plan to auction off foreclosed properties in bulk to investors, specifically the quarter of a million properties currently on the books of Fannie Mae, Freddie Mac, and the FHA. “As demand for single family rental properties rises, so too do potential investor returns.

According to an administration source: ” There is a hope that we ‘ll be able to do a pilot in the near future, perhaps by the end of 2011 or early 2012.”

“Many investors are out there raising billions of dollars to buy these properties,” says Jaret Seiberg of MF Global. “It’s a great idea, and it’s one of the few things that we’ve heard in several years now that can really help housing in a meaningful way. The idea is not just to reduce supply but to reduce the fear that there ’s going to be this massive flood of foreclosed homes into many markets, and that fear of this foreclosure inventory that’s really keeping prices down,” adds Sieberg.

“The beginning of the of the rentership society is upon us,” says analysts at Morgan Stanley. “Single family rental total returns offer lower volatility and outsized returns Vs. other major asset classes, even when accounting for the housing bubble and subsequent declines.”

This is not surprising news to us as we have been saying for months that the federal agencies will sell off their foreclosures in bulk to investors as the demand for rents are way up. We are already seeing a large number of international investors in the US housing market as they see the prices of our homes to be a steal. When the current administration announces a plan to reduce foreclosures as well as offering incentives such as tax breaks and low interest loans for investors, which will be soon to take advantage of the election year, investors will be coming back to the market and prices will stabilize.

Now is a great time to take advantage of the discounted prices on Investment Real Estate. We are working with fantastic asset managers in Kansas City, Indianapolis, and very soon Memphis. Please visit our website at www.realestateio.com for updates.

Please feel free to call me anytime at 541-537-2042 to discuss Real Estate investing. We have been in this arena for over 20 years and have wonderful contacts all over the United States bringing us fantastic cash flowing properties.

Jeff Lindikoff, Total Property Solutions, LLC, j.lindikoff@gmail.com, 541-537-2042, www.realestateio.com

– Clay (sparkman@lendicom.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

We’ve been getting quite a few calls from new investors lately who are interested in investing in trust deed secured loans. This makes a certain amount of sense to me, as a number of factors are lining up to enhance the attractiveness of this type of investing. The factors I have in mind include the following:

• The stock market is highly volatile.
• Treasury securities pay almost nothing and are only rated AA+ (by–as you know–one particular rating agency).
• Most investors wish to diversify beyond commodities markets such as gold and other hard metals.
• Trust deed secured loans are backed by actual collateral to facilitate recovery in the event of a default. Very few investments, if you think of it, actually have a backstop.
• There seems to be a growing sense among economists, various experts, and those who deal in real estate markets that real estate values are not likely to fall significantly during the next few years (though they may continue to decline in certain areas).
• As I noted in an earlier post, Miami markets are fast on the mend. What is happening there? (investors from all over the world have decided that property values are at a low and are swooping in to buy excess inventory, thus driving prices up. This may be the beginning of a potentially nationwide trend. Investors tend to be bearish by nature, so when they think a market has pretty much bottomed out, it is worth paying attention to this collective information.
• The point about the market more-or-less bottoming out seems to apply most particularly to commercial real estate.
• And of course, as an investor you have a buffer against a reasonable amount of depreciation in your collateral market. For example, if you lend on a certain property for one year at 65% LTV and if values in that market fall by 8% during that year, you’re most likely going to come out whole if you have to take back the property. (The markets for rentals appear to be strong.)

Let me know if you have any additional thoughts regarding pros and/or cons of investing in trust deed secured loans at this time.

On a related  note: this is a very specialized niche blog. Currently there are 123 subscribers, and I don’t have any way of knowing how many people read the blog through and RSS feed. (This compared with my private money for borrower/brokers post which has 1750 subscribers and an unknown number of RSS readers). I rarely every receive comments back from the readers of this blog–and don’t get me wrong; I understand this as I don’t often comment on the blogs that I myself read (I tend to silently enjoy them). Yet I sometimes lose steam as I begin to wonder if folks out there are actually reading this stuff.

I am going to do something now that I ordinarily only do with my wife: beg. If you are reading these posts (or at least a few posts here and there when you have the time), would you be so kind as to send a quick note back or post a message saying so (nothing fancy; just an “I read this blog” sort of thing)? I would appreciate it greatly, so please, please, oh please … <begging part>. There, that wasn’t so bad now was it.

The other thing that would be quite helpful is if readers would give me some indication of what they would like to see in future posts. With some 17 years in the business, I am capable of writing a decent post with regard to just about any aspect of the private money investing business, but I get to a point where I simply don’t know where to go next. This is your chance. Put in a request, and I’ll do my best to give you something worthwhile back. Deal?

– Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

http://www.nytimes.com/2011/07/27/business/affluent-buyers-reviving-market-for-miami-homes.html?pagewanted=1&_r=1

It seems that the Miami market, one of the worst hit during the real estate turn down, is on the mend, and that is attributed to investment buyers who have stepped in and said with their dollars: This market has gone about as low as it is going to go. There are opportunities here. We are ready to buy and hold and make our money down the line.

This has provided the much needed buffer, almost like say those who speculate in commodities markets, to balance out the market and absorb the gap that would otherwise exist between supply and demand.

I’m curious: how many of you think this could be a trend for the entire nation? Is this the way that it will all get turned around, and is this the beginning of that turn around? Please comment.

– Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

With a double dip real estate depreciation nationwide becoming fact in April, and now with  the federal government threatening not to extend government backed financing options large (jumbo) residential loans, this market is hardly getting easier or more predictable.  So you might ask, “How do we get private money loans done in today’s real estate market?”

Well I can tell you this.  Equity comes at a premium.  A particular loan scenario may have certain flaws, but if the equity position is strong enough, we can generally place that investment with our investors and they will feel comfortable knowing that if they have to take the property back, they will be unlikely to lose principal or interest given the enormous amount of buffer involved.  And even better, if there is a large amount of equity it is very unlikely that the properties would ever come back at auction.  First of all, the borrower has a great deal at stake and thus is very likely to make loan payment a priority.  And secondly, even if the borrower gets into trouble, there is almost always one more loan or one more rescue option to come in and take you out the existing investment.

Here are a couple of examples, loans that we are currently packaging for placement.

Sample 1 – $200,000 loan on a Washington non-OO home which is free and clear.  The home is valued at $375,000 and the loan proceeds will be used to pay accumulated business taxes.

Sample 2 – $60,000 loan on an Oregon coast OO residential foreclosure bailout.  The home recently appraised at $162,500.

So you see the common theme: trouble coupled with large equity positions = good private money loan investment.  We’re seeing more and more of this kind of thing.

So remember the private money investor’s credo:  Never lend on a property that  you wouldn’t buy for the price of the loan AND any property that you would gladly buy for the price of the loan is a loan worth serious consideration.

– Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

In December of 2007 we were faced with a decision.  After three years of successfully flipping properties to low and moderate income buyers, we awoke one day with no buyers and no plan to find new ones.  Our dilemma was very simple, do we dissolve the company or do we create a new viable model that will work in this new economy?  If we decided to create a new model, what would that look like?

We had just begun to hit our groove in the spring and summer of 2007.  We had successfully flipped around 100 properties in the first 2 ½ years of business and we were working at about a 4 to 5 house pace per month.  We were making money and had been in the black for quite some time.  We considered ourselves “real estate investors” and thought we were pretty darn good at it.  So when we found ourselves faced with a flight or fight decision only a few short months later, it seemed surreal.  My partner, Karen, and I spent days talking about what a viable model was for the new economy.  We had heard of other local groups “selling to out of state investors.”  We decided to attempt to replicate a similar model, but with a focus on local investors.

For three months Karen and I worked on a plan and developed systems and processes that involved Golden Key (GK) (www.gkhouses.com) selling properties to investors that wanted to invest passively in real estate.  Our vision was that everyone recognized the opportunity, but very few people had the skills to do something about it.  We thought we would approach professionals (executives, doctors, lawyers) and pitch them on the idea of owning 10 – 15 properties instead of investing all their money in the stock market.  Locally, based on our expected average sales price, this involved them investing $100K to 150K individually.  Our responsibility in this plan involved acquiring the properties, rehabilitating them, leasing them, and then finally selling them to these new found investors.  We felt this model would eliminate most of their risk and objections.  Questions like, “What would it rent for?” and “How much will the rehabilitation cost?” became commonplace in our initial pitches.  What we decided was that we really needed to mold two businesses–an acquisition business (to find the deals) and a management business (to process the houses and manage them on a go-forward).  Our office quickly became a “mission control” of spreadsheets and flow charts.

In 2008 we had only moderate success with pitching this business.  We had very little trouble getting people to agree that there was an opportunity, but a whole lot of trouble getting them to write a check.  We were able to identify some investors, but continuing changes in the lending environment made it harder and harder to close the deals and made it more difficult for one person to purchase multiple properties.  This resulted in a time intensive process of dealing with lenders during the close and constantly finding new investors.

Because we became very frustrated with how slowly the business was progressing, we decided if we could pool the investors versus dealing with them individually, this would allow us to really deal with one “client” and speed up the process.  Since we didn’t know how to put together a fund, we approached a local investment bank, Founder’s Investment Banking (FIB) (www.foundersib.com) in late 2008.  We thought FIB to be a good fit since they had a real estate practice that had previous experience putting together real estate focused funds.  At the time, they were disinterested, but we did plant the idea.  We continued to approach other similar groups, but with very little success.  So we continued to sell to both local and out of state investors, one house at a time.

In the spring of last year (2009), FIB came back to us and said they would be interested in putting together a fund.  The fund’s investment thesis was to purchase the homes, already renovated with a tenant already paying rent, and then to hold the properties in a portfolio renting them, and as the market recovered begin selling them to homeowners, preferably the tenants.  What they saw was that the current market was allowing for a unique opportunity, and they could purchase these homes at similar returns to what they could expect from an apartment community; however, apartment communities will always sell using the same criteria (cap rate, cash flow, etc.) that they used when purchasing it.  In comparison, single family homes can be sold to a homeowner who purchases for much different reasons and thus will pay a premium for that home.

FIB also saw this as an opportunity to enter the single family management business.  They asked if, that in addition to putting together the fund, they could invest as a partner in both the acquisition business and the management business.  This fund would give both businesses a tremendous amount of horsepower, so settling on a sales price was a challenge.  After a series of meetings, over about three months, we finally agreed on a sales price for a portion of our business.

January 1^st of this year the deal was completed and the fund was closed.  The fund has purchased around 35 properties to date.  It takes us about 75 days from the time we acquire the property until the time we are able to sell it to the fund.  The fund has provided us exactly what we expected.  We’ve been able to produce product with speed.  Our margins are about 70% of what they were in the past, but we expect to do significantly more deals under this new model.

Our story is one of reinventing ourselves for the new economy.  Our biggest challenge these days is finding something that is sustainable long past the opportunities the current economy is presenting.  We never want to find ourselves in the same position we were in three years ago.  Our management company has grown from 20 houses in 2007 to almost 300 today.  We believe that the challenging market will be an opportunity for quite some time; maybe not as BIG of an opportunity as it is today, but we believe the U.S. will feel this pain for the next four to five years.  Additionally, single family management will benefit from the slow recovery and continue to grow over that same time period.

We’ve learned quite a few lessons over the last three years which will probably be, as we look back, the greatest return on our adventure reinventing Golden Key.

Our first lesson is that very few people really understand real estate investing.  This is very dangerous in a business where we talk about leverage being able to multiply an investor’s returns and the same holds true for his losses.  Becoming intimate with the actual data is a very healthy process.  What are the real expenses?  What are the real revenues?  How might they change?

Secondly, we’ve learned that investing for value over investing based on speculation is a whole lot less sexy, but it sure pays the bills.  In the past we purchased properties based on what we “thought” we could sell them for.  Today we purchase properties based on what we KNOW they will sell for.  Rental value is a much more accurate measure of intrinsic value than a sales price.

Lastly, it is hard to both manage and invest–so no matter how emotional the month is, you have to examine your business as both the operator AND the investor.  Make sure it makes sense for both.

We continue to grow and learn daily and I hope that our story will add some value to what you are doing.

Matthew Whitaker is Managing Member of Magnolia Partners, LLC and Golden Key, LLC (www.gkhouses.com) in Birmingham, Alabama.  He has been investing in single family houses since 2004.  He has acquired over 150 houses personally and has a team that has the collected wisdom of acquiring over 400 houses.

Okay, I don’t know about you, but whenever I read news about some new development in the real estate market, my first instinct is to say, “What does this mean to me?”  Hey I’m not proud of it, but that’s just how I’m wired.

This past two weeks we read that:

(1)  GMAC and JPMorgan Chase are being challenged with regard to the legitimacy of their batch judicial foreclosures, and are in the process of reevaluating their foreclosures for possible irregularities.

(2)  Old Republic National Title said this week that it would not issue policies on GMAC foreclosures until further notice.

(3)  Bank of America, the country’s largest mortgage lender (by assets), went a step further, saying on Friday that they would freeze all their judicial foreclosure actions pending a review for irregularities.

(4)  Richard Blumenthal, the Connecticut attorney general, asked judges in his state to put a halt to all foreclosures for 60 days so the “situation” can be further evaluated.

(5)  California’s attorney general, Jerry Brown, said that Chase should stop any foreclosures in the state until it proved that it was following proper legal practice.

(6) Chase said that they have now frozen 56,000 foreclosure cases.

So as I scratch my head and try to make sense of all this, the question is floating in the ether: What does this mean to us?  And by us, I mean those of us who are involved, directly or indirectly, in investing in private money loans.

Here is what I have come up with thus far.

(1) We are very happy that we are not title companies.  They are in a tough spot.  If they insure polices for these properties, they may end up paying enormous amounts in claims at some point, and if they don’t insure these properties, they will be turning away a great deal of business, and revenues will take a serious hit.  (Fidelity National Financial shares fell more than 4% and FATCO shares fell on the order of 3%.)

(2)  I think this is primarily impacting judicial foreclosures, so those of us who lend more on the west coast and generally in non-judicial foreclosure states, may not have too much to worry about, as far as any direct impact may go.  (Though it is not clear to me what is up with Chase in California, California being a non-judicial foreclosure state.)

(3)  If you are a private money lender, you probably aren’t doing large batch foreclosures and so again the problem may have very little direct impact on you.  The issue with regard to the judicial foreclosures is primarily related to large batch foreclosure processes involving thousands of loans at a time.  Apparently the issue involved inappropriately filing for summary judgments across the board and “robo-signers” in which mid-level executives would sign thousands of affidavits per month attesting that they had personal knowledge of the facts of the case.

(4)  With regard to the economy, this may actually be a good thing.  I was talking to my dear friend and wise attorney Jeff Hill on Friday and he said that he felt that this may be a sign that, though it is going to be messy, things are beginning to come to a head.  I’ll take that idea one step further and suggest that this might actually serve as a sort of damper or shock absorber, slowing down the resolution process just enough to allow a more gentle transition to occur.  (Of course, you could see this either way.  Maybe it would be best to have it all come undone and be done with it—the sooner the better.  The corrections must eventually take place.)

(5)  I think this may open some real opportunities for those looking to buy short sale properties.  Banks are going to be screaming to get these properties off their books.  And of course that opens up opportunities for private money lenders looking for quality loans.

(6)  Certainly this is good for home owners who are in foreclosure or on the brink of foreclosure.  They may have gained 1-2 years in their homes.

(7)  And of course, as always, this will be good for the lawyers.  Any distressed homeowner who doesn’t go out and retain a defense lawyer immediately is probably missing the boat.

I guess I am being fairly optimistic here.  It is certainly going to be a messy situation and it is difficult to know how it is going to all play out.  It certainly won’t be good for the banks.  And yet do we really care anymore what is good for the banks?

I’d love to hear from some readers out there.  What unforeseen impacts do you anticipate or see coming about as a result of this fiasco?

– Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

I’m a real estate investor.  I see opportunities in buildings – and in numbers, and I use those opportunities to create income and equity.  What I do benefits society, but I’m not going to lie to you – I am driven to do it for my own benefit, and society’s gain is a side effect.  Nonetheless, I can’t do it without society – I can’t charge more rent than the market will bear, else I won’t find tenants.

If I find a vacant building, foreclosed, neglected, and being sold off at a discount, I can buy that building, rehabilitate it, and offer it to society as additional housing options.  When I rent an apartment to a family, they have choices.  They could rent an apartment elsewhere, or they can rent mine.  If they choose to rent mine, it’s because it benefits them – it is the best choice being presented to them.  I have helped them by making that apartment one of the choices for them to consider, whereas it did no one any good by being vacant and uninhabitable.  To make that choice available to them requires an investment on my part; I have to see the opportunity.  I have to recognize that the building is being offered at a price that, after repairs, taxes, utilities, insurance, and legal costs, will earn me a profit.  I have to believe that the ratio of risk to reward makes that investment option a better choice for me than other investment opportunities; else I’d be better off choosing another investment opportunity.

If I’m too greedy, some other investor will snatch the buildings out from under me at a higher price, but if I’m too naive, I’ll pay more for a building than I have to, and my profit will be lower.  There’s something of a “survival of the fittest” element at play here, in that stupid investors tend to be out-performed by smarter investors, and that gives the smarter investors more of an opportunity to make more investments.  Even a smart investor, however, can’t possibly be a party to every deal in a geographic area, so there may be multiple investors in a given pond.

If I see a building that another investor has renovated, rented, and is offering for sale, I can alleviate him of his future risk by buying his building from him.  He might have to deal with slow-paying or even non-paying tenants, he might have to repair damages or ordinary wear-and-tear, or he might have to fight with his insurance company if his building is burned to the ground.  I undertake and relieve him of these risks, and in doing so, I create liquidity for him by redeeming his investment and a fair profit so he is encouraged and enabled to reinvest it elsewhere.  He can then buy and rehabilitate another neglected building, making it available to rent, and his motivation is that it will be a profitable endeavor for him, too, else he would make different investment choices.  When I buy it from him, although he has already done all the work to make it inhabitable and profitable, I am still undertaking risks, and I will be responsible for maintenance and management, so I still need to be compensated for my investment.  Consequently, before I will buy his building, I need to determine that the anticipated rent income will more than cover my expenses, and so much so that I will be rewarded for my investment more so than I would be rewarded in other investment choices at my disposal.  He wins, I win, and the tenants win … and the government taxes all parties to it.

Just as I can help another investor with his investment in a property, so, too, banks can help investors playing the property investment game.  Banks pay interest on deposits and charge interest on loans.  Nowadays there are many other ways for a bank to earn money, such as fees and various other investments, but the difference between the interest they charge and the interest they pay is one of their primary sources of income.  If a bank offers too low of an interest rate on savings, they won’t have money to lend, and if they charge too much interest, no one will want to borrow it.  On the other hand, if a bank pays too much interest on savings or charges too little on loans, they will not be as profitable as they could, and they will be out-performed by smarter banks.  Again, “survival of the fittest” comes into play.

Depositors are not, however, the only source of funds for bank loans.  The government also lends money to banks.  When the government lowers that interest rate, it compels banks to lower the rates they charge borrowers (in order to compete with other banks), and that makes borrowers borrow more money.  During the housing boom of the early 2000s, that was a major factor in the low interest rates banks were charging, which encouraged people to buy and refinance homes, and to take out new mortgages.  When the government raises that interest rate, (or when teaser rates expire in anticipation of that rate going up,) banks raise the rates they charge their borrowers, and that is one of the reasons that so many people can’t afford their mortgages today.

But there’s more to it than that.  There are limits to how much the government will lend banks, which is a function of how many funds they have on deposit.  When a bank lends money for a mortgage, they move towards that limit of how much they can borrow, so instead of keeping that loan on their own books and servicing it, taking perhaps 30 years to recoup their money, another government-related firm, Fannie Mae or Freddie Mac, buys those loans from them, replenishing the bank’s pool of funds for lending.  Without Fannie Mae and Freddie Mac, banks would run out of liquidity themselves and be unable to continue lending money to new borrowers.  Fannie and Freddie were chartered by Congress to buy loans, bundle them together into “mortgage-backed securities” and resell them to investors.

Fannie and Freddie set guidelines of what terms and debt-to-equity ratios were considered “conforming” loans, but as the market heated up, there was little verification of conformity, and ultimately, loans were made to sub-prime borrowers based on “stated income” or “no documentation,” rather than “full documentation” with “income verification.”  As long as the banks could unload these hot potatoes to Fannie and Freddie, they didn’t care, and as long as Fannie and Freddie could package and resell them to unsuspecting investors, they didn’t care.  Ratings agencies, such as Moody’s and D&B continued to give these mortgage-backed securities high credit ratings, encouraging pension and retirement funds to invest trillions in them, precipitating a disaster for hundreds of millions of average inexperienced investors who simply relied upon their fund managers to make decisions that they hoped would be in their best interests.

When interest rates went up and people started defaulting on their mortgages, the poison had already spread to millions of Americans and even to foreign investors.  Fannie and Freddie, who were chartered and funded by Congress, might have been fine if they had followed their mandates, but while the getting was good, they started drinking their own Kool-Aid; they started stockpiling mortgage-backed securities, investing the money that Congress gave them to perform their job – our tax money – in these poison investments.  When the ratings finally dropped, they couldn’t unload the loans to investors, so they couldn’t replenish their funds, and couldn’t buy more mortgages from banks.  Loan “conformance” guidelines got tougher and banks couldn’t unload their hot potatoes.  This meant that they had no replenishment of funds with which to make new loans.  Without loans, investors and homeowners couldn’t buy properties, and if you’ve ever studied the most basic tenets of economic theory, the principal of “supply and demand” promises that when demand decreases, prices will decrease, too.  Homeowners were now “under water.”  Not only couldn’t they afford the increased interest payments, but their home values had dropped, too, leaving many of them owing more than their homes were worth.

If you could buy a home for $200,000, or continue paying your $300,000 mortgage for a comparable home that was only worth $200,000, what would you do?  Many of them started walking away from their homes and their obligations.  Banks had to foreclose on them, but banks don’t want to be in the real estate management business, so rather than maintain and rent them, banks sell them.  Returning for a moment to basic economic theory, increases in supply also depress prices, so the foreclosure auctions further pushed the economy downward.  Banks were recouping only a fraction of their investments, making it harder still for them to make new loans.

There were a number of other factors contributing to the current economic downturn.  I haven’t even touched on how the crisis affected business loans, and consequently business development.  We can draw a clear line to connect the dots between businesses failing, stock market declines, unemployment, the credit crunch, reduced consumer spending, and a lower GDP.  That, plus increasing gas prices, tax-funded bailouts of banks and auto manufacturers that were “too big to fail,” the soaring costs of our “war on terror” and military actions in Iraq and Afghanistan, and the ballooning of government (most obviously demonstrated by the behemoth Department of Homeland Security and it’s prodigal child, the Transportation Safety Administration), have devalued our currency against other nations.  We could also discuss how inconsistent tax assessment laws and decreasing home values have created a barrage of tax grievances and court cases which have wreaked havoc with many municipalities’ budgets, creating more layoffs, reductions in municipal services (closing fire houses, reducing garbage pickups, consolidating schools, etc)  It’s really something of a “perfect storm” of financial catastrophe.

But that’s enough background – let’s get back to the story about me….  The pendulum has swung back too far; banks have become overly cautious.  They were encouraged by our government to make too many bad loans, got screwed, and now they’re reluctant to make even good loans.  As a real estate investor, that’s a problem for me.

I have three different investment properties in “the funnel” right now, and I can’t afford to close on all of them without help – one or possibly even two, but certainly not all three.  One is a six-family building for which we were waiting for the seller’s bank to approve a short sale; we’ve already lined up financing, and we’re hopefully moving forward with that one.  One is a seven-family building for which our bank just told us they’re not going to be able to lend us more money.  The last is two side-by-side three-family buildings, mostly vacant, which we may be able to buy without direct financing if we can get other ducks in a row.  Let me use these last two investments to highlight why I think the banks have gone too conservative.

If you had $1,000 in a savings account and $1,000 in credit card debt, the math is pretty simple: you have a net worth of $0.  However, if you were earning 1% on your savings and were paying 21% interest on your credit card, at the end of the year, you’d earn $10 but owe $210, so you’d end up with a net worth of negative $200.  From a purely-mathematical perspective, you’d be better off paying down the debt with the savings to maintain your net worth rather than lose ground every year in interest.  The guy who pays it down is clearly the better one at math, and the guy who doesn’t will get himself into worse and worse financial condition every year, probably never understanding why.  Overly-simplified, that’s our problem with the seven-family building.  We had some cash and a line of credit, and we used the cash to pay down the line of credit until we were ready to buy the building.  Now that we’re ready, our bank doesn’t want us to use that line of credit as a down payment for the property that we’re going to purchase with the loan they were otherwise prepared to give us.  Had we held onto the cash and not paid their line of credit down, they’d have no problem with us using that cash as a down payment, even though the end result would be the same debt, but we’d be paying interest on the line of credit in the interim.  Silly?  I think so.  If the property upon which we have the line of credit was a good investment and was sufficient collateral for the line of credit, and if the property we’re trying to buy is a good investment and is of sufficient collateral for the new mortgage, what’s the problem?  They’d apparently prefer to lend money to the guy who is worse at math.  I like my strategy better, but they seem to think they know something that I don’t.  I wish they’d clue me in as to what it is…

To fund the two three-family buildings, we’d be happy to get a direct loan, but after all the problems we’ve had with the new lending guidelines, we’ve instead tried to use equity we have on another property.  We own another small building outright and tried to get a loan against it.  They asked us what we thought it was worth, and we took an intentionally-over-inflated guess, figuring that if we guessed low, they’d never give us more money but if we guessed high, we could always borrow less.  Expectedly, the appraisal came back low, but rather than make a counter-offer, they declined our application.  I asked if we could be reconsidered at a lower amount, and they said they won’t consider another loan application on the same property until six months have passed.  What kind of stupidity is that?  To me, it should be quite simple: we have an asset that we now agree is worth $X, and we’d like to use it as collateral against a loan; the only thing left to decide should be how much debt-to-equity ratio the bank can approve, but instead, they’re just saying “No.”  I got a free appraisal (at their expense) and a refund of my application fee, and now I have to apply for a loan elsewhere.  Does that sound like good business to you?  Would you like to own shares of that bank?  I’m glad I don’t.

I didn’t want to muddy this article up with too many tangents, but there’s another thing that’s bothering me, so while I’m on a rant, let me get this one out, too.  That second bank has different debt-to-equity guidelines for people who are employed (higher) versus people who are self-employed (lower).  I asked which category I was, and I couldn’t get a straight answer.  I have several sources of income: I am employed and paid on a W-2 by a corporation.  I happen to also own that corporation, so when the corporation makes money, I get distributions on a K-1 as a shareholder.  I also earn money on my real estate investments, as reported on a Schedule E, and I have various other securities and instruments upon which I earn interest and dividends on 1099s that I report on a Schedule B.  If I sell stocks profitably, I earn capital gains, also on 1099s, which I report on a Schedule D.  If you’re going to jump to the conclusion that I am self-employed because I own the corporation for which I work, let me point out that lots of IBM and Walmart employees own shares of the corporations for which they work, but you wouldn’t think of them as self-employed.  How do you consider the people who have full-time jobs but also have side businesses DJ-ing at parties or taking photos at weddings?  Are they not, in that capacity, self-employed?  You would argue that those endeavors are but a small component of their income, and that the bulk comes from their regular jobs.  If so, then the bulk of my revenue comes not from my self-employed salary (if you insist on calling it that), but from my investments, so my self-employment revenue is also just a small component of my income.  As hard as I tried, I couldn’t get them to tell me how I’d be considered, so I’d never know how much debt-to-equity ratio to request, and since they don’t always counter-offer, and won’t let me reapply for six months, they’re basically telling me to take my business elsewhere.

There’s just one last thing along this vein that’s bothering me.  My corporation employs one other full-time W-2 employee besides myself.  He’s not a part-owner, so he’s clearly not self-employed.  He’d thus, be eligible for their higher debt-to-equity ratio loan.  If business gets bad, which one of us do you think is going to be fired first?  They’ll lend him more money despite the fact that his income is both lower and less secure!  Madness, I tell you.  I really wouldn’t want to own shares of that bank!

So what’s a real estate investor to do?  I’ll keep plugging away, trying more banks and mortgage brokers until I find some that want to make loans.  I’ll consider other options, like private borrowing from friends, relatives, and associates, paying them more on their loans than their banks would pay them for savings.  I’ll negotiate with sellers to try to get them to hold notes on the buildings I buy from them.  I’ll keep my eyes and ears open for other opportunities to finance my investments, and I’ll try to keep my mind open to new ideas.  If anyone reading this is or knows of any banks, brokers, or private lenders who want to work with investors buying residential multi-family buildings through limited liability companies, please contact me!  I don’t want to publish my email address here, but you can find it at http://MaverickStructures.com.  For one, I can’t wait for the pendulum to start swinging back towards center again.

Brian Blum is the founder and operating manager of Maverick Structures LLC, a real estate investment, rental, and management company.  He owns, rents, and manages several pieces of investment real estate, and is always on the lookout for good opportunities, reasonable lenders, and rational partners.  Brian also founded, owns, and operates Maverick Solutions IT, Inc, a technology consultancy and support provider, serving mostly schools, NFPs, and SO/HOs in the New York Metro Area.

We are always looking for the sweet spot these days in the real estate market.  And by sweet spot, I mean that realm of  investments that are on balance less risky and more likely to turn a profit in what is otherwise a jaded real estate market.

I have gone on a bit in my blogs about REO properties, foreclosures, rehabs and quick flips–and I remain convinced that this is a sweet spot.  Investors are making some real money in this area in today’s market.

I haven’t talked much, however, about multifamily property, and it would be a shame not to, for that is another clear sweet spot in the current market.

See the following article at CoStar Group for plenty of evidence:

Investor Hunger for Apt. Properties Still Sharp in Second-Half 2010

As real estate lenders, of course, we look for the real estate investors who are working the sweet spots successfully.  We want to lend money to people who are making money and have figured out the market (or at least are figuring it out).  If the investors succeed then we succeed and it is as simple as that.

– Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

The national economy is in a state of confusion and the local economy is in a state of confusion. So what does this mean for the market for investing in trust deed based loans?

Well of course nobody really knows–and this is just my take on it–but here goes:  First of all, let’s talk briefly about investment choices.  With so much uncertainty in alternative investment vehicles, maybe trust deed secured loans are a pretty good place to put your money.  After all, you will have real security backing up your value, and that can’t be said about most investments.  And you certainly have the opportunity to receive a nice double digit return on your investment, and that being so even if you opt for the best and most potentially safe such investments.

The key thing to keep in mind is that real estate markets are uncertain and potentially volatile.  And thus you need to be particularly rigorous in making loan selections.  I would say that the most important keys are: (1) Make sure you know as much as possible about the recent price history of the particular market you are considering.  This will most likely allow you to better gage the potential future volatility of the market.  (2) Keep the loans either short or long.  1-2 years for quick-turn projects, and maybe 5 years to those borrowers looking for and able to afford the long hold.  The danger zone in my opinion tends to be in between.  (3) Make sure that your borrower has a solid exit strategy (no exit strategy is foolproof given the seemingly scare nature of bank financing, but some strategies look a whole lot better than others).  And (4) Keep your LTV a little lower than usual so as to better absorb potential market depreciation during the life of your loan.  We still have clients who lend 75% LTV on very solid transactions, but these days most investors feel better at or around 65%.

With regard to demand, the following is relevant once again: Markets are uncertain and potentially volatile.  How does this apply to the market for borrowers of private money? To answer this question, we have to look at who borrows private money. I would say with complete confidence that easily 80% of all of the loans that we do (Fairfield Financial) are to those who buy, sell, renovate, and construct real property with the intention of earning a profit.

The relevant point here is that most real estate investors are likely to be avoiding the long-term hold and attempting to make the good buy and turn properties for a quick profit. This is a market where properties are going back to the banks at a frightening rate, and where this spells bad news for home owners who over-borrowed, this means opportunity for the quick-strike investor. The bottom line of all this is what? Again, it’s hard to say, but I think it would be fair to conclude that if you are a private money investor (like most of you on this list), you might want to look particularly for: (1) those borrowers looking to buy and sell property on a dime to make a profit (many times you can justify lending up to 100% of fix up money and repair money to these borrowers when they are buying well), or (2) borrowers that have a longer hold scenario (closer to 5 years) that fall between the cracks of the more conventional lenders, generally already own the property,  and might bear a 10-12% holding rate to bridge the gap for several years. The idea is that this type of borrower can afford private money sized payments over the longer haul and will utilize this option to get to from point A to point B.  And point B–I might add–is a place that we’d all like to believe is a better place, a place where life is predictable once again and property values are something we can hang our hat on.

– Clay (clay@privatemoneysource.com, 503-476-2909 or 800-971-1858)

Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964.  Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.

Back in January, in my post entitled, “Won’t somebody please call a plumber … the banks are clogged,” I addressed what I consider to be the essential question regarding what it will take to get the real estate economy on track and moving in the right direction assertively and with confidence again.

And now, nearly six months later, my final paragraph seems quite equally relevant.

“And so even though a lot of good things are happening with our economy as of late, real estate prices will not correct until lending institutions provide adequate funding once again to owners and buyers—and the economy as a whole will remain at least partially broken until this occurs.”

There used to be a lot of talk about getting toxic assets off the books and getting banks to lend again, but I hardly ever come across serious discussions of this issue in the financial press these days.  It is as thought government officials and journalists and such have decided that this question is just too difficult to answer and thus should just be ignored.  Like a stray dog, maybe if we don’t make eye contact it will just go away.

I used to think that the banks would have to begin lending again as soon as they cleaned up their books a bit.  After all, if a bank doesn’t lend, what then does it do, and wouldn’t it go out of business?  Well it turns out that, “no” it is not necessarily so.  From what I can tell (and this is not a terribly informed position mind you), many of the banks and bank-like entities have taken to investing in various commodity style investments.  They have effectively become investment houses, and are doing quite well, thank you.

So I pose the question to my dear readers, as I honestly don’t have a clue: what will it take to get banks to start lending again—and I’m talking about loans across the spectrum (residential, commercial, development and construction)?  If you have a position on this matter, please share it with the group.  Or if you have access to an informed article that seems to reasonably address the question, won’t you please pass it along?

I’m sure we’d all like to know.

– Clay (clay@privatemoneysource.com)

I just recently finished reading The Greatest Trade Ever, the 2009 book by Wall Street Journal reporter Gregory Zuckerman.  It is a terrific read.  I really enjoyed it.  It evolves primarily around John Paulson, and tells the story of how he managed to make billions of dollars for himself and his hedge fund investors by arranging a series of investment positions that bet against the rapidly expanding subprime positions in the market.  In particular it tells the story of how he worked with banks such as Goldman and Bear Sterns to construct and facilitate such trades.

Zuckerman doesn’t waste much time judging the ethical or legal aspect of such trades.  Rather, he tells a damned good story of how a few individuals predicted an event that others just couldn’t fathom, and then positioned themselves, against all prevailing notions, to ultimately reap enormous profits from their heart-felt predictions.

It is a story of the most profitable series of trades on Wall Street, and if one theme comes through loud and clear, it is that only an outsider (and somewhat of a misfit) such as Paulson (and a handful of others) could have managed to “think” so counter to the prevailing notions of the industry, and perhaps more importantly, would have dared to defy so many others in the industry to the point of personally and professionally marginalizing themselves in the process.

Paulson is not under indictment, but as we know, Goldman is being sued by the SEC in a high profile case specifically targeting the Paulson-backed synthetic CDOs.  I personally would have to say that I lean toward Warren Buffet’s position that overall Goldman is not really to blame here.  See the New York Times story, From Buffett, Thought-Out Support for Goldman, http://dealbook.blogs.nytimes.com/2010/05/04/from-buffett-thought-out-support-for-goldman/

According to Buffet, “I don’t care if John Paulson is shorting these bonds. I’m going to have no worries that he has superior knowledge,” he said, adding: “It’s our job to assess the credit.” The assets are the assets. The math either works or it doesn’t.”

His point being that it wasn’t important for Goldman to disclose to fat-cat institutional buyers that John Paulson was shorting the synthetic CDOs they were buying.  The buyers were professional investors, and should have looked deep inside the assets to see exactly what they were buying.  Paulson certainly did.

I am now nearly finished reading The Big Short by Michael Lewis, and I must say this book—like every Lewis book I have read–is fascinating and irresistible.  It deals with the same basic material as Zuckerman’s book but tells the story from various other points of view.  It is quite a bit more technical than Zuckerman’s book, and in this sense, is precisely what I was looking for.  Lewis has a talent for explaining complex things in simple ways, and this book goes a long way toward answering unanswered questions I had regarding “How did this all work?”

What I get out of Lewis that I didn’t get out of Zuckerman so much, is that it is the ratings agencies that are at ground-zero of the breakdown of the system.  It is hard to tell if they were really stupid or really crooked or both, but certainly there had to be a good dose of both at work here.  I don’t care how you package and re-package subprime loans into bonds.  It should have been clear that such bonds could never be packaged in such a way as to earn a triple-A rating (same as US Government debt), and yet this was happening (and so much more).  Yes, the sellers of bonds and CDOs were gaming the system, but nonetheless, the ratings agencies allowed themselves to be quite easily gamed.  You might say they were easy.

The real lesson of all this is that the sub-prime collapse could have been quite readily predicted—as it was so clearly by a small number of individuals—but that there was just too much money being made and perhaps more importantly, a deeply institutionalized thought process at work here that defied those involved to even consider notions counter to the norm.

And what is the lesson for the individual trust deed investor?  It is this I think: Don’t invest in trust deed style securities unless you know what you are doing.  You must be able to evaluate the quality of any given loan.  And most of all, never–I mean never ever–let anyone else tell you what is and is not an acceptable level of risk.  Ultimately that decision is yours and only yours to make.

– Clay (clay@privatemoneysource.com)

After many years of holding relatively firm, the real estate market in the Pacific Northwest may be in trouble.  The following informative piece was printed yesterday at Business Insider.  Make sure to follow the “Check out how bad Oregon has become” link and the 14 slides that accompany the article.

http://www.businessinsider.com/oregons-expanding-foreclosure-rate-could-make-it-the-next-california-2010-2

What does this mean for Oregon and Washington?  How bad is it going to get before it gets better?  And what does this mean for the rest of the nation?  Please take a minute to share your opinions by clicking on the comments link for this site.

Keep in mind that this analysis is looking at residential properties only.

– Clay (clay@privatemoneysource.com)

One of my dear good readers sent the following e-mail in response to my last post, Home strippers coming to a neighborhood near you.

“Good topic Clay.  Now forgetting about us private lenders, the conventional lenders continue to be their own worst enemies.  They persist in bringing the properties to the city hall steps at 40% over market.  When no one buys the property, they have it inspected and insured, pay the utilities, and pay a realtor to sell it for them at a discount.  On top of all that they may face the problem that your article addressed.

Pricing it to sell on the steps would solve their problems.

In early December, I looked at this piece of bank owned junk in St Helens, Oregon.  It was rough around the edges but the bones were good.  It was a typical Ranch style, 2-bath, 3-bed, 1400 sq ft, nice large lot, fenced, but no garage.  The bank had it listed for $198,000, but they had started out at $139,000 a couple of months earlier.  I called the agent and asked them if they had a misprint on the price (as there are nice, newer homes with garages going for $165k max).   The agent said no, it wasn’t a misprint; the lender had called him when it was at $139,000 and told him to boost the price to $198,000.  What is that about?

Until the banks get their head out, their balance sheets are going to continue to worsen.

Regards, Alan”

Well I can hardly say that it is the first time that I have heard of or seen this type of thing with the banks.  One does get the distinct feeling that these institutions are somehow unmotivated to remove the toxic assets from their books.

And it is even worse than all that.  As if they needed additional help at slowing down the corrective process:  The federal and state governments, with all of their efforts to keep owners in homes which they cannot afford, are seriously compounding the problem.  It could take an extra year or two to get many of these bad loans off the books due to the various federal and state requirements being imposed upon the banks.  (And that assumes the banks are motivated.)  The following NYT article does a nice job of discussing the matter.

http://www.nytimes.com/2010/01/02/business/economy/02modify.html

And so even though a lot of good things are happening with our economy as of late, real estate prices will not correct until lending institutions provide adequate funding once again to owners and buyers—and the economy as a whole will remain at least partially broken until this occurs.

And so I say:  “Won’t somebody please call a plumber … the banks are clogged.”

– Clay (clay@privatemoneysource.com)

There has been quite a bit of talk in 2009 about the possibility of a meltdown in the market for commercial real estate.  I came across some statistics recently that were quite astounding in support of the idea that a wave of commercial defaults is coming.  It is estimated, apparently, that there is currently 3 trillion in commercial real estate debt outstanding in the US.  According to this particular source (which I’m sorry to say I don’t recall), 1.3 trillion of that debt will come due within the next four years.  As we all know, there doesn’t appear to be much in the way of new commercial funding available for those current loan holders (or their potential buyers), so the above statistics—on the face of it–would tend to be worrisome.

Still, 4 years is a long way out.  I personally suspect that we will get a much better feel for what is likely to occur over the long haul by looking at what happens in 2010.  But I am not a prognosticator.  You’d think that with a degree in economics, I might have the ability–or at least the inclination–to analyze and predict long-term economic trends.  But I am not that kind of guy.  I am more of a “sure it works in practice, but does in work in theory” kind of guy.  I like the type of economics where you look at what happened and then play with the numbers and try to figure out why it happened that way.  Those familiar with Freakonomics and SuperFreakonomics by Levitt and Dubner will know what I am talking about.

I recall my first day in a big lecture hall at University of Oregon attending Macroeconomics 101.  I was a fresh faced kid eager to learn and ready to believe just about anything.  When the professor said something like this:  “Okay the fundamental assumption that we will make as economists is that people are rational and that they will behave in a rational manner,” it sounded fine to me at the time—perfectly reasonable.  I hadn’t been around long enough to believe otherwise.  It was only with the passing of years, after graduating from the university and going to work in the real world, that I began to question that assumption.  And ultimately I concluded that it was downright ridiculous.  My entire economics education was based on one fundamental and ridiculous idea. It would be as though we had utilized a chicken bone as the foundation for building a skyscraper.  (Needless to say, I was not happy when considering the amount of money I had spent obtaining this degree.)

A very good read which speaks to the matter is Predictably Irrational, by Dan Ariely.  The bad news, if you wish to draw conclusions from this book, is indeed that individuals often engage in irrational behavior.  However, the good news and the saving grace–I should think–if you are trying to understand human behavior in the aggregate, is that we are as it turns out quite predictable in our irrational behavior.

Where was I then?  Oh yes … my fundamental point is that I would rather not go too far down the road of attempting to predict the economic (or any other) future.  I will only go so far as to say that I’d rather it not happen.  But it is worth pointing out that a downturn such as that discussed may not be all bad for those who invest and traffic in private money loans.  If banks aren’t lending as 1.3 trillion in loans come due and with private money lenders as the primary option, the pickings would be quite impressive indeed for those who choose to keep investing.

So what do others have to say?  As per usual, there are a wide range of opinions.  And they tend to be somewhat polarized.  I myself tend to think that the doomsday people somewhat undermine themselves by being so certain and unrelenting, but at the same time, I am suspicious of anyone who says that things are looking good.  I figure the later must work the national association of realtors or some such thing.

I guess we’ll each have to decide for ourselves, and so here is a sampling of web content regarding the matter.

From the Dallas Morning News

http://www.dallasnews.com/sharedcontent/dws/bus/columnists/chall/stories/DN-Hallcolumn_09bus.ART.State.Edition1.3cf46e6.html

From the Business Insider

http://www.businessinsider.com/michael-panzner-commercial-real-estate-2009-11

From the National Real Estate Investor

http://nreionline.com/property/retail/foreclosure_in_doubt/

From the Real Estate Channel

http://www.realestatechannel.com/us-markets/commercial-real-estate-1/national-association-of-realtors-lawrence-yun-nar-commercial-real-estate-index-commercial-real-estate-trends-2009-office-space-lease-office-space-sale-investment-1273.php

From the Urban Land Institute

http://www.uli.org/ResearchAndPublications/EmergingTrends/Americas.aspx

Okay, there is plenty more where that came from, but I won’t burden you with it here; if you wish to read it, you’ll have no trouble finding it.  I would be very interested, however, in hearing the views of those who follow this site.  We are still quite small in number, but we have enough folks to fill a good sized classroom now, so by all means, raise your hand and be heard.  Please: prognosticate.

– Clay (clay@privatemoneysource.com)