Introduction to Investing in San Diego Real Estate

Real Estate Investing is not nearly so difficult as you might think.  As a matter of fact, with the right tools and a good advisor, real estate investing may be the safest, simplest way to accumulate wealth.  At least… that’s what I thought before moving back to San Diego.  I had been an options trader on the floor of the Chicago Board Options Exchange and before that a licensed, Series 7 stock broker.  I came out of an industry where assessing value, analyzing investments and managing risk were how we spent our days.  It was exciting and educational and stressful.  I eventually decided to move home, get licensed and advise clients in a less demanding atmosphere.  Heck, I thought to myself, I have a degree from Princeton and a fifteen year background in finance, real estate and investment.  Helping clients with their real estate investments should be nice and relaxing.  

I could not have been more wrong.  I was shocked by the antics I saw: the way investment property values were reached and opportunities were compared, the way financial planning was virtually ignored altogether, the way clients were treated as an afterthought in the rush to close transactions!  In the securites business you’d lose your license for doing things that are considered common and ethical in the World of Real Estate.  I thought there would be an endless supply of clients ready to make their fortune investing in real estate and there weren’t.  Do you want to know why?  Because it’s the Wild West out there!  It reminds me of a line from that great movie-western Chisum:  “There’s no law west of Dodge and no God west of the Pecos.”

Lawyers, Guns & Money
That line is not entirely accurate.  I know we have God out here because I listen to clients and agents constantly saying things like, “Oh God, please let this close,” or “Oh my God I can’t believe we missed that deadline,” and my personal favorite: “Dear God, why won’t anyone call me back.”  But laws… that’s another story.  What we’ve got is a bunch of cowboys running around, calling themselves “real estate advisors” and no real system or structure for the Small Cap Investor.  The first time I saw this it hit me: when you enter into a transaction it’s like stepping out on to the streets of Tombstone.  You might enjoy a fine, sunny walk or you might stumble into the OK Corral.  The only way to proceed is with an agent who’s one terrific gunslinger; protecting you as you walk down the dusty street.  Now that system works well enough when it comes to buying or selling your own home.  Especially because there are a lot of really caring, moral, professionals in real estate - agents who always, without fail, put your needs ahead of their own.   Besides which, most owner-occupied transactions aren’t based on money or long term risk/reward so much as emotion and short-term marketing.  But if your objective is to successfully invest in real estate, you can’t afford the Wild West Show.

Before I move on, please allow me to be clear: this is not the agents’ fault.  They just don’t have access to the training or the conceptual framework required to give investors the attention they need.  You see, they’re bombarded with systems for marketing and generating leads, but there’s no widespread acceptance of the tools for real estate investing.  This state of affairs, as I said, is not the agents’ fault.  It’s very difficult to know what you don’t know… when you don’t know it.  My main purpose in writing this series is to help investors make clear, profitable decisions.  But I hope it will also serve the agents who want to specialize in and cater to Small-Cap clients.  The number one action an agent can take to ensure their long term success is gain a level of expertise and so stand out from the crowd.  In the marketing seminars I lead for agents they are taught this simple mantra: “Differentiate or Die.”  (I know, I know, it sounds a bit dramatic.  But that’s how ideas get remembered.)  In the rest of this series I will use the term “investor,” but these concepts are equally important for the agent to understand (maybe more so). 

The Future of Investing in San Diego Real Estate

In future articles I am going to discuss Investment Property Valuations (there are actually four values), and the role Arbitrage plays in every transaction we contemplate.  We’ll look at the effects of Volatility as well as the pros and cons of Fixers, Flips and Turn Key.   I’ll explain strategies for beating out the competition in a Multiple Counter situation and what your Drop Number is and how it affects your Highest, Best Offer.  You will learn the four keys to Investment Analysis, the concept behind the Infinite Investment Strategy and whether Partners or Investors may help you.

Before we do all that, I think it’s important to understant exactly who a Small-Cap Investor is.  That is the subject of the next article.  Thank you for reading the Introduction to Real Estate Investing 101.  I look forward to your comments and questions.

Filed under: INVESTORS , Real Estate Investing, San Diego

Investing in San Diego Real Estate: The Lost Years

As the Investing in San Diego Real Estate opening page suggested, there are really only two reasons the average person has missed out on the profits and safety inherent to investing in San Diego real estate: price and knowledge.

Price
First and foremost in most people’s minds, the astronomical prices have prevented all but the wealthiest from being able to purchase investment property in San Diego. One needed to have a tremendous cash reserve (or a long history of property ownership and equity appreciation) just to get in the door. Even if you did have the cash to qualify for a down payment, it was nearly impossible to purchase a property as a Small-Cap investor  that would cash flow.  The rents were just not great enough to match the cost of ownership.  Of course that fact, along with the more widely reported mortgage crisis, led to the housing bubble.

Unfortunately for the economy (although it has been a great benefit to investors), the natural movement of the real estate cycle, caused in large part by the crash of that same bubble, has reduced most of the pricing roadblock. The benefit has been two-fold: prices in San Diego have dropped to the pre-bubble levels of 2002 and thanks to rental demand, the cash flow opportunity has returned to 1992 levels. These two factors alone put San Diego back in the forefront of real estate investment opportunities.

Knowledge
The second reason for missing out on San Diego real estate investments continues to be a much greater obstacle for the average person, derailing many potential investors before they ever really get started. It’s more than a lack of knowledge really; it’s a lack of framework. There is very little assistance or advice the Small-Cap investor can access. This is in large part due to the way real estate investing has been viewed… or more accurately: the way real estate investing has not been viewed and practiced in the same way we do other investments.

CQ Financial Group is changing that. My background is the stock and options industries and I understand how to analyze and compare various investment strategies. The tools required to do so have not existed or at least been available to the average investor. We are creating them right here… for you.

Action
The articles in this series are designed to show you the proper way to value investment properties, how to compare various opportunities using tools like Drop Amount and Arbitrage. You’ll discover how to make money, or at least prevent yourself from losing money, rehabbing properties. It is a wealth of information and like all educations, the best place to start is at the beginning. Read Real Estate Investing: Introduction first. Gain some insight into what the problems are and how they came to be so that you may fully understand the solutions. If you have any questions you are free to comment on the articles, email or call us. We are not just writing theories and creating books… we are active right now; advising clients on the best real estate investing San Diego has to offer. The time is right and the information is here; all you have to do is ACT.

Filed under: INVESTORS , knowledge, price, Real Estate Investing, San Diego

Faulty Headlines and Defaulting Home Loans

Our local newspaper has recently been ringing the bell of fear and apprehension in regard to the housing market here in San Diego County. Has the housing market come to a screeching halt? Have people stopped buying homes? Certainly the local economy is doomed by the “shattering event” of loan defaults and foreclosures. Let’s take a closer look.

On Tuesday we were treated to an article announcing a steep slide in home sales (New Home Sales Slide 3.9% in February – 03/27/07). On Thursday the front page headlines shouted out: Home Loan Defaults Skyrocket in County – 03/29/07 (emphasis mine). As you read further into Thursday’s article you find that “…homeowners throughout San Diego County are defaulting on their loans and losing their properties to foreclosure at an increasingly rapid pace…” The key word here is pace. They are not losing their homes at a record level or even new levels. In fact, we are currently experiencing defaults at about two-thirds the level of our record setting year of 1996. What has increased is the pace of defaults as measured against this same time last year. What is needed is a little perspective: at this time last year we were still experiencing well above average appreciation and home owners were able to sell their way out of any problems. It is not so much that defaults are abnormally high today, but rather that defaults last year (and the preceding 4-5 years as well) were abnormally low. As you read further into the article you discover that the default rate in San Diego County is approximately one-third of one percent (.0033); highly stressful for the homeowners going through it, but not particularly significant to San Diego County as a whole. You must read through 8 paragraphs and reach page 10 (below the fold) before you discover that “… (The) default and foreclosure numbers… pale by comparison to the number of loans issued and homes sold.”

The areas most impacted by homeowner defaults are “…houses carrying subprime loans…newly built South County communities… and among condo conversions.” It is no surprise that sub-prime borrowers are seeing a higher incidence of default rate, especially given the “creative” financing that lenders were pushing toward the end of the boom cycle we just witnessed. If you take a borrower already in debt, give them a loan for 100% of the purchase price, throw in the closing costs and base it all on “stated” income and “stated” assets, you are going to see some foreclosures. Also, specific areas are being hit harder; South Bay is an example here in San Diego. I suggest that this has more to do with the high percentage of new construction in these areas. People were purchasing new construction homes from builders of entire neighborhoods – with literally hundreds of homes to sell. Combine the potential for home price inbreeding with builder’s in-house financing and you have a recipe for inflated values and upside down borrowers.

New construction homes also help us to understand the drop in new home sales reported earlier. As we predicted in late 2006, the condo conversion glut that was dampening new home median prices would not sell out until the end of the first quarter/beginning of the second quarter of 2007. Now we are witnessing the very depletion of this condo conversion and new home gluttony and what do we see? Why, a drop in new home sales of course. You have to read much further into the article before it is reported that “…sales of existing homes rose in February (2007)”.

Am I suggesting that we do not have any problems in the local housing market? Of course not; we are likely to see defaults continue to rise. Not to mention the “neg-am” or “option arm” iceberg that is only now coming into view on the horizon. Will the housing market safely navigate that debacle or sail USS Titanic-like straight into it? Too early to say; I am only suggesting that the current situation is not nearly so dire as the headlines would have us believe. We should read these reports with an analytical eye and remember that newspapers, like any living organism, have a survival instinct. Good news does not contribute to sales and survival in the fourth estate.

To Your Success

Sean

Filed under: BUYERS, INVESTORS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , foreclosures, option arms, San Diego, The Press

San Diego Economic Forecast

I was fortunate enough to attend the 2007 San Diego Economic Forecast, hosted by Stewart Title and featuring Ted Jones, PhD. Dr. Jones was the Chief Economist for Texas A&M University’s Real Estate Center, the nation’s largest publicly funded real estate research group. He currently serves at the Senior Vice President and Chief Economist for Stewart Title Guaranty.

PART 1 – THE FORECAST
Dr. Jones began his forecast by pointing out that the current difference between short term rates and the 30 year mortgage is only 76 basis points! This is the smallest margin in years. He then suggested that a client staying in a loan for three years or more would derive the most financial benefit from a fixed rate loan. The rule of thumb has generally been 8-10 years before a fixed rate loan made sense, so this is quite a change and further underscores our need as originators to truly consult for our clients.

Over all Dr. Jones sees fixed rates climbing 60-80 basis points by the fall, putting 30 year rates at 6.625% – 6.750% in September and 7.000% by year end. Commercial rates should run approximately 1% higher. These numbers are historically very low and depending on the type of press the housing market receives, I expect to see strong buying throughout the year. As a matter of fact, Dr. Jones commented that three years from now anyone looking back at the market will wish they had bought two years previous (i.e. RIGHT NOW).

Economically, San Diego has done well and will continue to do well. We added 9800 net jobs last year and our net job growth is 12% higher than our ten year average. Average pay in San Diego went up 3.94%! The only number going down was new construction permits, which dropped from 14,306 to 9,000. For many this is seen as a positive, however, because San Diego was slightly over building in comparison to what is generally considered healthy for the local economy.

Existing home sales dropped 24% year over year in San Diego. This may seem drastic at first glance, but in actuality the speculators made up almost 30% of recent purchases. What does this mean? It means the speculators have left us and we are back to a normal and sustainable level of purchase activity. One last thought: to put this in perspective, Florida (where the speculation game went wild) is having a real problem. Their sales have dropped 40% or worse and in some areas there is a 47 month supply of inventory. In those areas the standard listing now is for TWO YEARS!

PART 2 – TICKING TIME BOMBS
The biggest concern of the night was the exotic loan products that have flourished over the last few years. According to USA Today, in 2005 the median down payment on a purchase was 2%. In fact, 43% of all homebuyers put 0% down and nearly 1/3 of all loans were interest only or option arms. Dr. Jones broke that down further for San Diego and reported that 37% of all loans were regular ARMS (defined as 3/1 and longer with or without an interest only option), 10% were fixed rate loans… and the remaining 53% were exotic loans or “time bombs” waiting to go off. These time bombs include all negative amortization loans (a loan type so abused that I refuse to do them for clients and in fact have never originated on ethical grounds) and loans with short lock periods: 6 month Libors, 1 year Treasuries and so on (this is not to be confused with the 2/28s offered by most sub-prime lenders).

These loans are out there and we are only beginning to see the problems they will cause as their payments reset and, for many, their principle amounts increase beyond the value of their homes. A very disturbing development comes to us from the Midwest where a court case was decided just ten days ago. A couple bought their home using an option arm (neg-am) and did not make their payments. The loan requires that the actual interest rate (as opposed to the made up interest rate initially quoted) and the actual payment (as opposed to the made up payment initially quoted) kick in after six missed payments. Once that happened the required payment skyrocketed and the loan amount grew rapidly. It was at this point that the couple sued the lender because they had been promised that the payment on this loan was fixed for five years. Now one might think that after not making payments for six months this is an open and shut case. It was… the court ordered the lender to pay back all of the costs, the commissions, the fees AND to pay off the loan! This case is being appealed, but you get the idea of what is coming.

From my own observation, a great many of the brokers out there that focused on this particular loan product – and happily maxed out the margin in order to scalp 2-4 points in YSP off of their “clients” – are out of business now or will be soon. As we all know, you can not make a career out of taking clients for everything you can before moving on to the next one. Advising your clients on their best interest and garnering referrals is the key to long term success. I am happy to see those brokers move on to the next “get rich quick” scheme, but I am not looking forward to cleaning up their mess.

PART 3 – THE FUTURE OF OUR BUSINESS
Interestingly enough, Dr. Jones named his presentation this year:

You’re Nobody Till You’re Somebody@Somewhere.com.

The revolution in our industry due to the internet is moving ahead and anyone caught napping is likely to lose market share. This is evidenced by the fact that 79% of all homebuyers start their search on the internet (82% start their loan search there). Here are some more interesting facts:

Where Homebuyers 1st Saw the Home They Eventually Purchased:

• 35% by Realtor (down from 50% in 1997)
• 29% on the internet
• 5% in a newspaper

Where Realtors Spend Their Advertising Dollars:

• 39% newspapers
• 17% direct mail
• 11% online
• 8% signs
• 4% yellow pages
• 1% telemarketing
• 20% other

There are two ways to make more money in our business. Either you can increase your sales (or profits per sale) which is costly and difficult OR you can decrease your cost per sale. The future of advertising is online and the great news is that you can spend less money to attract more clients; more clients that are a match for you and your style.

Filed under: BUYERS, INVESTORS, LENDERS, REALTORS, SELLERS , Economy, San Diego

Lies, Damn Lies and Affordability Indexes

My apologies to Mark Twain. There has been a lot of comment recently on the dreadful numbers that come out with each affordability index report and I would like to take the opportunity to play devil’s advocate. Sometimes, when I look at a new report or statistical anylysis, I run the report’s conclusion through my “common sense meter” before I even begin to read the data. The same way they used to teach us in math class: guestimate the answer so you can readily see if your calculations are severly flawed when you are finished. In the case of housing affordability here in Southern California, the reality seems to differ from the reports. As a matter of fact, the reality is we can’t build enough homes to satisfy the demand. The CAR leadership council recently released these projections: by 2008-2010 California is expected to be 15,000,000 homes short of demand! Yes, that is 15 MILLION homes. The US Census bureau projects massive influxes of people to the sun belt and California will remain the most populous state by a landslide. It is difficult to see how this continues to happen when only 1% – 24% (depending on the report you read) can afford to live here.

What would make sense is that the reports themselves are flawed. Most of these studies use very outdated lender paradigms (e.g. money spent on housing can not exceed 28% of gross income) which will certainly skew the results as well as the free market. After all, if a buyer is willing to pass up a new car or eating out in order to pay 50% of their gross income to live in San Diego, should we be judging that? Many people would make sacrifices to live someplace they find especially appealing, whether it be the weather of San Diego or the historic roots of Boston. How about the amazing arts & culture of New York City? Many people give up their cars altogether to live in Manhattan – another area with a terrible affordability index.

I am not, by the way, advocating blanket acceptance of the many exotic loans out there that allow people on wieners and beans income to buy champange and caviar homes. I have never in over twenty years put a client into a “neg-am” for ethical reasons alone. And I am not discounting the fact that an affordability gap exists in many major cities as a whole; I am only discounting the severity of the problem. A fluid and open market place will hurt some of the people some of the time. But in the end it provides the most good to the most people by virtue of its self-correcting mechanism. If specific areas were truly unaffordable, people would stop buying homes there and prices would stablize or come down. On the other hand, if the demand far outstrips the supply… you may incur many problems, but a lack of affordability, by definition, is not one of them.

Filed under: BUYERS, INVESTORS, LENDERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , affordability, San Diego, statistics, The Press

Grim Future for Wells Fargo?

In my position as liability coach, I meet with a great many Real Estate agents as well as clients. Because of this I am privileged to hear a broad spectrum of opinions and perceptions on the housing market. Lately the topic of conversation has been the short sale. I have listened to seasoned veterans – those that have been through the entire real estate cycle at least once and have seen this before – discuss tactics for helping their clients: everything from the honest assessment required to creative marketing solutions. I have also heard from a great many newer agents – those that have been in the business less than five years – for whom the short sale is a trickier pony to saddle and ride. A common thread throughout, however, has been the short sighted response to a short sale market by residential lender Wells Fargo.

I am hearing from more and more agents about the absolute stonewalling and lack of urgency by anyone they talk to at Wells, whether the agent be on the listing or selling side. If you have not had the misfortune of dealing with Wells Fargo on one of these, one example should suffice: I spoke with a buyer’s agent that has represented an offer on a short sale property with minimal loss to the lender. Her buyer is solid (20% down, lender approved and so on) and the seller has agreed to all terms. It has been in front of a loss mitigation “specialist” at Wells Fargo for SIXTEEN WEEKS! The only thing more surprising than Wells Fargo’s negligent response is the dedication of the buyer to purchase this particular property. I spoke with a listing agent whom I hold in especially high regard that can not even get the loss mitigation “specialist” at Wells Fargo to return his calls. He has added this lesson to his client screening process. If the listing looks like a short sale, he now makes a point of ascertaining who the owners’ current lender is and if the answer is Wells Fargo, he walks away.

In my examples above I put the title of specialist in quotes in relation to Wells Fargo because it seems to me the only thing they are specializing in is the portfolio risk to Wells Fargo. My background is in Securities: I was a Series 7 licensed broker and Equity Options trader on the floor of the CBOE in Chicago. My first thought when I hear these stories is to start selling Wells Fargo stock. If their actions are making the short sale of property practically impossible, their REOs are going to climb and their books are going to reflect some very real losses. Not to mention the federal banking regulations regarding what percentage of REOs a bank can keep on the books as a percentage of their deposits. All that aside, the real danger to Wells Fargo is the virtual “freezing” of their position in regards to their ability to negotiate with the professionals in the field (that is to say: the Real Estate agents). If agents begin to walk away from anyone with a Wells Fargo loan the damage is threefold: first, Wells Fargo ends up foreclosing on all of their properties which is a cost nightmare that trickles down to all of us; second, homeowners that are upside down will not only lose access to the experienced agents they so badly need while navigating the winding trails of a short sale, but worse yet will find themselves relegated to using agents too new and/or uninformed to know better than take on a Wells Fargo situation; and last but certainly not least, when no agents are willing to waste time showing a short sale home with a Wells Fargo loan, prices are depressed and buyers view a skewed segment of the housing stock.

Has the experience of others out there been similar to the stories I am hearing? I must admit as a matter of full disclosure that while my lending knowledge and experience extends from shore to shore, my interactions with Real Estate agents is primarily parochial in nature. Are there other lenders acting with such short sightedness that your fellow Real Estate agents should beware?

To Your Success,

Sean Purcell

Filed under: BUYERS, INVESTORS, LENDERS, REALTORS, SELLERS , San Diego, short sales, Wells Fargo