REO / Bank Owned Inventory Down – Expected Increase Over Next Quarter

If you’ve been looking through the market for bank owned homes, foreclosures, HUD homes, REO homes, corporate homes – you’ve noticed a trend: there isn’t much there.

Rewind 6 months ago and the market was flooded with foreclosures. 22% of the home sales in Cypress were foreclosures in 2011. We were expecting more distressed sales in 2012, but something happened that has a lot of real estate investors scratching their head – where are they?

I decided to start a discussion on BiggerPockets.com titled ‘REO / Foreclosure Supply Down?’ and got a great response from Chris Martin.  See below:

Fannie Mae and Freddie Mac are good barometers for national foreclosure trends. Fannie Mae, page 82 of their latest 10-Q says “…foreclosure levels were lower than what they otherwise would have been during the first nine months of 2011 due to delays in the processing of foreclosures caused by continuing foreclosure process issues encountered by our servicers, changes in state foreclosure laws, and new court rules and proceedings. Additionally, foreclosure levels were affected by our directive to servicers to delay foreclosure sales until the loan servicer verifies that the borrower is ineligible for a HAMP modification and that all other home retention and foreclosure prevention alternatives have been exhausted. The delay in potential foreclosures, as well as an increase in the number of dispositions of REO properties, has resulted in a decrease in the ending inventory of foreclosed properties since December 31, 2010.“

Freddie Mac, page 79 of their latest 10-Q says “Our REO property inventory declined 17% from December 31, 2010 to September 30, 2011, primarily due to a decline in the volume of single-family foreclosures caused by delays in the foreclosure process, including delays related to concerns about the foreclosure process, combined with continued strong levels of REO disposition activity during the period.“

Be patient though, since more distress is on the way. Freddie: “…we expect the volume of our REO acquisitions will likely remain elevated, in part due to the resumption earlier in the year of foreclosure activity by servicers following the suspensions over concerns about documentation practices. We have a large inventory of seriously delinquent loans in our single-family credit guarantee portfolio, many of which will likely complete the foreclosure process and transition to REO during the next few quarters as our servicers work through their foreclosure-related issues.“

It looks like more REO’s are expected to hit the market in the next few months. Keep your eyes out for more deals and discounted homes.

4 Months Until “Selling Season” – Tips to Sell Fast!

The new year is now here, and brings (hopefully) another great year for the Houston real estate market.

If you’re like most sellers, you will be waiting until “prime time” to list your house on the market. Typically we see most sellers will want to list their homes around March – May. Home sales start to decline after September, so you will need to be “SOLD” by then.

Allow 30-90 days for your home to sell, depending on how well your agent works, how it is priced, and your neighborhood inventory.

Here are some tips to ensure your home sells for the highest price this summer, on a budget:

• Pressure wash sidewalks / driveways / brick on houses
• Pressure wash your roof with a “chemical wash” – this makes a huge difference to old roofs
• Remove any wall paper in your house…
• Remove bold color paint
• Re-paint where wall paper / bold colors were with neutral earth tone colors
• Start de-clutterting now. Garage sale!
• Fix any repairs you know your home has (an inspector will find it, and buyers will use it against you)
• Have your HVAC system checked out to make sure its working properly (buyers love to come into a COOL house on a hot summer day).
• Stain your deck for a fresh look
• Trim trees and bushes back so they look freshly cut and not over grown
• Re-mulch your yard (1-2 months before you list) so you’ll get a nice contrast of colors on your landscape
• Plant a few new flowers in your front yard to add color (curb appeal 101)
• Get your carpet steam cleaned before you list (1 week before listing)
• Remove excess photos from your house, keep them minimal (buyers like to imagine themselves in your home – let them do it!)
• Start organizing, and de-clutter as much as possible (throw out the old magazines)

Last but not least…

• TELL ALL YOUR NEIGHBORS You will be moving in a few months.. Neighbors will help you sell your property. Think of their network of friends, family, in-laws, cousins, co-workers, etc.

You’re going to make it a lot easier on yourself (and your bank account) if you start with these tips going into the new year.

On average, I’m seeing homes in Northwest Houston sell for 96-99% of list price. Did you notice the word, sell? That’s because the homes that are over priced, don’t sell. If your agent recommends you sell for $160,000 and you decide you want to “start high” and list for $245,000.. then you’re wasting everyone’s time.

The longer the house stays on the market, the more of a discount buyers expect when they buy. If the house is over priced, agents won’t show it and buyers won’t be interested. You’re setting yourself up for failure if you list your house anything over 10% than what is really worth.

I’ve already got plenty of sellers contacting me ready for this year. I hope 2012 is a great year for you and your family. I’m excited about the up and coming year for my business.

If you are thinking about selling your Houston home in 2012, or know someone who is, e-mail me at dday@cbunited.com and we’ll discuss further.

Happy New Year!

The Rules of Thumb for Landlording

This is going to be a short post today for a short concept, The 1% Rule of Thumb.

The 1% Rule of Thumb was invented by real estate investors to sift through piles of houses. This rule of thumb will quickly determine if the deal is good enough to make you some money (cash flow) or at least break even.

Keep this in mind: all markets are different. In my market, 1% of the appraisal value for Houston is good for rent. Some markets can get up to 2% of appraisal value in rent. You won’t see that happening in Houston.. because its cheaper to own than rent in Houston!

Do not confuse appraisal value with purchase price/repairs!

 Lets break this deal down real fast:

• Purchase Price: $65,000
• Repairs: $32,000
• Total all in: $94,000

The 1% rule of thumb on the “total all in” cost would be $940 per month in rent. I could get that easily. I would probably have too many applications to even review for that house. I wouldn’t cash flow much at all, but I could get that in rent.

Now I bought the house for $65,000 and put $32,000 in. We’ve found that were $94,000 all in. But here is the kicker..

The house appraised for $137,000.

1% of appraisal value – $137,000 = $1,370 per month in rent.

So now we know the difference between the 1% rule of thumb on appraisal value / purchase price.. but what about a rule of thumb for PITI?

Estimate 50% of your collected rents will go towards PITI, vacancy, property management, and maintenance. So really, you should profit 50% of what you collect in rent per month.

So a quick snapshot on landlord rules of thumb:

Appraisal value: $137,000 x 1% = $1,370 per month

50% rule = $685 cash flow per month.

Although it’s not going to be like that every month, I’d say it’s within $15 of what is actually performing on that property for me.

If you can learn these basic rules of thumb, your life as a real estate investor will be much easier.

Merry Christmas!

How to Analyze & Purchase a Multi-Family Complex

I am working with more and more investors lately, and it seems that they are all interested in a very hot item right now: multi-family complexes.

If you ask any seasoned real state investor, they will tell you that they would rather own a complex of 4 units, rather than 4 single family homes. It makes logical sense, due to the fact it is easier to manage, you have 1/4th the maintenance, and you have one location.

I’ve worked with investors who buy multi-family properties and have great innovative strategies, such as maximizing by renting “per room”, instead of renting “per unit”. This works best in areas where students are living near by, and want to rent rooms on a “per room” basis.

Below is the break down I use to analyze a multi-family deal:

I’m not going to go over cost estimation, appraisal value, after repair value, or LTV value. I have gone over this in previous post. This information is calculated by due diligence, and finding out what repairs the place needs. You also need comparable sales / appraisals for the true value of the complex.

Take note of the cap rate. The cap rate is a tool many investors uses to look at what percent they capture the first year on the deal. Some investors will take cap rates of 6.45% – others want high cap rates, of 20%+.

You can calculate the cap rate by dividing the net operating income by the sales price. So in my case, 14,724 / 215,000 = 0.0685, or 6.85%.

Maximize your cap rate by finding cheap properties that need repairs, and get the repair work done at a good cost. You can also adjsut your cap rate by increasing rent. Just think the higher cap rate, the higher your first year return.

Look at my buying cost column on the bottom left hand side of the deal. Some of those are fixed costs, and some are variable cost. As you might know, fixed cost stay the same, variable cost are based on variables in the deal. Majority of the variable costs you’ll run into are based off your loan amount / purchase price. These are your out-of-pocket expenses, around $9,000-10,000.

On the top right hand column, you see the “Rent Roll”, which is where you will find what each unit is renting for. So each 3 bed, 2 bath apartment is renting for $900 total, or $300 per room. So that’s $3,600 a month gross rent, or $43,200 annual gross monthly rent.

Below that is your expenses, broken down in both annual and monthly expenses. You subtract those from your gross rent, and you have your monthly / annual cash flow.

I like to divide my monthly cash flow by my out-of-pocket expenses, which will give me a break even point in months. So after 7.95 months (lets call it 8), I will break even on my investment. That’s not too shabby…

How about we look at this deal now, on what that “creative” savvy investor did, renting each room for $500..

You will notice some numbers stayed the same (fixed costs), and some changed (variable costs). Your monthly note stays the same. Your taxes stay the same. Your property management fees increase (budget 10% of monthly rent for property management fees – even if you’re managing yourself, you can write it off).

Most importantly, you might notice that he increased his cash flow to $2,955 per month, from an original $1,227 per month – that’s a gain of $1,728 per month, or $20,736 per year!

He broke even on his initial investment in 3 1/2 months with a cap rate of 16.49%.

Obviously, more tenants will result in more stress, more occupancy, and more maintenance.  You will need to adjust your numbers accordingly.

Multi-family investing is a tried and true way to gain passive income from the real estate market. I am a firm believer that having control over your money, and investing right, will lead you further than any stock market, mutual fund, or index fund.

With a little knowledge, and the right real estate agent, you can go far in real estate investing.

Why For Sale By Owner Doesn’t Work & How To Sell Your Home For 42% More!

Many home owners each year take the For Sale By Owner route (commonly called FSBO) in order to save a few percentage points on the sale of their home. Most likely they are thinking that they can do the same job, if not better, than a licensed real estate agent.

Some may be able too. I’ve heard of successful FSBO’s. I’ve also heard of the FSBO horror stories. NAR found that 86% of For Sale By Owner’s convert to a REALTOR within 7 weeks of their house on the market. So on average, a For Sale By Owner seller spends about a month and a half trying to sell their home, and then hires a licensed REALTOR.  9 out of 100 sellers will sell their home “For Sale By Owner”.

Did you catch that? 7 weeks on the market and not selling. This is called “opportunity cost”, which is the cost of any activity measured in terms of the value of the best alternative that is not chosen (that is foregone). It is the sacrifice related to the second best choice available to someone.

Many times a home owner will want to list their home on their own, and wait for buyers. Lets say they list on May 1st, and go 7 weeks on the market with no “bites”. They should still be able to convert to a REALTOR and get a sale before “buying season” (May – August) ends.

But what if the home owner decides to list their home, For Sale By Owner on August 1st? Statistically they would convert to a REALTOR in September, where buyers are far and few. Most buyers are trying to buy during the summer, while the school year is not in session. Buyers are also not looking to move during the holidays..

I have my own theories of why majority of home owners will convert to a REALTOR when trying to sell. Let’s look at the typical transaction on a For Sale By Owner will play out.

Owner/Seller (emotionally attached) –> Buyer’s agent (experienced negotiator) –> Buyer (emotionally detached)

So the owner is dealing directly with a buyers agent, someone who specializes in getting prices reduced on homes for their clients. They do this for a living. They’ve done many, many real estate transactions. NAR statistics say that most home owners go through an average of 3-4 real estate transactions in their lives. To put things in perspective, I’ve been through 13 in the past 10 months. Who do you think has the upper hand on this negoitation?

My point being, is that websites such as Zillow.com or ForSaleByOwner.com is cheating motivated sellers into thinking they will somehow save money on the sale of their home, if they do it themselves. What those sites don’t tell you, is in 2010 REALTORS sold houses at a 42% price increase than For Sale By Owners.

So basically, you’re saving 3% on a sellers commission and risking 42%.

Hiring a REALTOR puts you in a different position, see below:

Owner/Seller (emotionally attached) –> Seller’s agent (experienced negotiator) –> Buyer’s Agent (experienced negotiator) –> Buyer (emotionally detached)

So doesn’t it make sense to hire a REALTOR? Well, yes it does. REALTORs have access to the one thing that For Sale By Owner’s do not – the MLS. The MLS is the multiple listing service, what every real estate agent lists their properties on for other agents and buyers too see. This is the most common method your home will be found, and will be sold.

The problem is that there are a lot of homes on the market. How will yours stand out? I’ve seen FSBO open houses with 1 “Open House” sign. I always wanted to stop in and ask them how it was working out. I’ve found that in my open houses, my response rate is directly proportionate to the amount of “Open House” signs I put out.

The difference is that I’ve got 20+ open house signs in my garage ready to go, with balloons, to market someones house. It’s something I do once a weekend. It’s not something I just decided to do one weekend and see if anyone shows up. It is a practiced, and refined process, which ensures maximum buyers through your door.

There are some FSBO owners who take the sale of their house very serious. This is not a bad thing, by any means. The problem (as stated before) is that home owners are emotionally attached to the house. I’ve seen deals fall apart because the seller was insulted by the buyers agent comments, and did not want to deal with the. You’re going to have to deal with buyer’s agents one way or another, if you sell your home your self.

It’s unbelievable what sellers will do to “control” the deal, and feel like they’ve won something. It’s up to the sellers agent to make sure that the seller feels good about the sale of their house, but also make sure they are not making rash decisions that will jeopardize the sale of their home. Chasing buyers away in this market is a big “no-no”.

This is the reason why For Sale By Owner homes simply do not work, in this market – if you get far enough to get a buyer in the door. Most FSBO sellers believe that putting a sign up that says FOR SALE BY OWNER will sell their house. Contrary to popular belief by FSBO sellers, this might increase offers (if it’s in a high volume area) but it will decrease the size of the offer.

Buyers agents, and buyers “smell blood” when they see that red and white For Sale By Owner sign. Some real estate investors I work with only want to buy FSBO homes, because they know that the person selling the home is not an informed real estate professional, with proper representation.

The bottom line is if you are considering selling your home, you owe it to yourself to speak with a few REALTORs and see what they offer. Most REALTORs offer a no-obligation, in home, consultation