San Diego Housing Bubble News and Analysis

I forgot to mention the first part of my plan, which is to ask for advice on a website I know where lots of brilliant and insightful people post. It's one of the forums over on foreclosures.com. If anyone's interested, I can find the exact web address. (Just kidding. It's right here at pigginton's econo almanac for the landed poor.)

I prob shouldnt be the first person to respond here, as I am not a guru of investing in any way shape or form. But the question that comes to mind is, WHY? Why do you want to invest in foreclosures? Do you want to flip imediatly and take a profit on a greater fool theory? Do you want to get a nice little rental and do the LL thing. Do you want to be the next Donald Trump? Diversify your extensive portfolio?

These are questions you need to know the answer for long before you start buying foreclosures. They will dictate what and how you buy/sell.

DWCAP, I'm not expecting any gurus to show me the light. Just a tidbit of info or advice here or there would be great.

Why? To make money. As I said, I don't think there's any money in it right now. But I think there will be a few years from now. And I want to be ready when that happens.

At some point the market will turn around and prices will start going up again. The only question is when. I don't think they'll go up any time soon, and I don't think they'll go up fast for another seven or eight years at the very least. Maybe not for 15 years. But they'll go up. And if I can get in at or near the bottom by buying houses that banks are giving a discount on in order to unload them, then I should be in good shape. If I can get a few that are cash-flow positive, then I can hold on to them indefinitely as rentals. Either or both of those would be fine. As I said in my original post, I don't know yet whether my plan will be rentals or flips or both.

As far as the greater fool theory, that only applies if houses are fundamentally overpriced. Which they still are. But which they may not be within a few years. If some confluence of events prevents houses from becoming sensible investments, I won't do it. But I think it will become profitable at some point in the next few years.

I'm 47 years old, and I'm eligible to retire from my job right now with a 70k pension. But I have a daughter who will be in college in 11 years, and I plan on living another 30 or so, so that isn't enough. I'm renting right now and have high six figures to invest. I figure that if I put that into residential real estate when it's more sensible than it is right now, I should be able to have a comfortable retirement and be protected from inflation.

That's my plan, anyway. All input, contrary and otherwise, is appreciated. I'd like to see it from all angles before I start plunking down money.

Hey ZK.
The only part I wanted to comment on at this time is the licensing part.
Until this year, it was illegal for an investor buying a property in NOD or NOT status to use an agent. This was due to a well intentioned but problematic belief that agents would just be taking advantage of distressed sellers.

Technically the law said that the agent needed to carry a certain type of bonding (which did not exist). This year, inevitably (considering the number of nods and nots), their was a court case that largely nullified this. I will ask counsel about it and repost more tomorrow if you like.

The point is a license used to be kind of a dangerous thing when dealing with foreclosures.

urbanrealtor,

Thanks for the info. It's a pretty important point for me, so, yes, any further info you could give me would be greatly appreciated.

Thanks again.

You seem to have all the ingredients necessary to make a go of it: enough money, right age to launch a second career, willingness to learn the business, and enthusiasm. What you will need, when the real bottom comes, is the internal fortitude to steel yourself against the anti-real estate psychology that will prevail then. If history is any guide, the same mass hysteria causing people to defy all logic and buy wildly overpriced properties at the top will be reversed. You will look around you and see the wreckage of years of price declines, and the ruined personal finances of those who took the plunge and lost, and will have second thoughts. I suggest even some current Piggs who are now confident they will jump in at the bottom will really not do so when the time comes.

I suggest even some current Piggs who are now confident they will jump in at the bottom will really not do so when the time comes.

Yes, when we start talking about housing stagnating at a permanently lower plateau because of retiring baby boomers or some other reason, that's when you should jump in.

Just my two cents,

1) Very hard to pick the bottom or the top.

2) Trying to invest in RE without a 10 year expected hold time is crazy (a lot of people were able to do this from 2000 - 2005 and make a lot of money but that was as we all know, an exception).

3) You need to have the cash flow and reserves to be able to hold for ten years (maybe you will only need to hold for five or two, but expect ten).

Just my two cents,

Just one more thought,

There are a lot of nice foreclosed homes available now, but I think the nice ones will go fast, there will be plenty of dog's that will last a while though (this loan work out thing and all).

Again just my two cents.

EconProf, good point about the fortitude necessary to by when the gloom dominates. Hopefully I'll have the same fortitude then that it took to sell in 2005. Of course shelling out money amid negative hysteria will probably turn out to be harder than collecting a bunch of money was, even if it did go against the prevailing wisdom.

Nor-LA-SD-guy,

I appreciate your "two cents."

1)Yes, picking the top or the bottom is hard, maybe impossible. I'm hoping that sorta near the bottom will be good enough. I'm expecting the bottom to be long and flat, which would make it easier to time. I also figure that if that happens, it'd obviously be better to buy towards the end of the flat part, if you could manage to be so lucky.If you have an opinion on that, I'd like to hear it.

2)As far as a 10-year hold time, that's another good point. If I keep some as rentals, which is part of the plan, I'd be expecting to hold them for a minimum of 8 years, probably somewhat longer for some of them. But what about buying at a discount from a bank, maybe even in bulk and turning them immediately for a profit? What's your opinion on the profitability of that? Some guys at work are talking about buying in bulk in the 2012-14 time frame. If this thing continues to go badly, that could be the time frame when banks are overwhelmed with properties the don't want to own. I've heard that in that situation they give larger discounts if you take a number of properties off their hands at once. The guys at work are talking with a professional about pooling resources and buying in bulk, where the discounts are greatest. Of course, at that point, they'll be next to impossible to sell without giving your own discount. I guess that's the sticky part. Thoughts?

3) Im not planning on investing in any property that won't cash flow. Do you think that's a good plan, or do you think some flexibility is warranted there?

When you say "reserves," what do you mean? Why do I need that? How much?

Thanks for your input.

I agree that measuring the psychology is an important part of trying to locate the bottom. As far as the data side of the equation, our hero Rich will be closely listened to. I subscribe to Robert Campbell's newsletter, and I find that helpful. Any other reccomendations for market timing would be appreciated.

zk if you can learn as much as possible about the trustee sale process I believe this is where the true value will lie for those who can use cash for purchases. I am hearing more isolated cases of trustee sales where the winning bid is BELOW the default amount of the first mortgage. As the depreciation cycle continues I would expect more and more of this to happen. Not saying it happens all the time but there certainly are cases of it happening and we will see more of them.

Yoda is on to something here.
I have been hearing the same things actually.
Don't really know how accurate any of it is of course.

The one caution I would give is that buying for "less than default" is not a good (or bad) thing unless it is also substantially less than market.

Trustee sales do not permit any contingencies or inspection so you should get a pretty sizable discount (from market comps) for buying what is essentially site unseen. Just saying.

In reference to a posting about trustee sales (auctions) made less then two weeks ago:

Submitted by urbanrealtor on July 31, 2008 - 11:20pm.

Not to be a tool but why would anyone want to?

I have not been to one but really, it has been my understanding that generally the bidding starts at the price of the defaulted loan.

Unless a place is truly right side up (which seems rare these days), most auctions seem like a bad idea. There is no title insurance that I am aware of or any inspection regarding liens or condition.

Let me know if I am wrong. This is just my understanding.

************

Apparently you have changed your mind about things in the last 11 days.

************

zk - regarding trustee sales. Most of the people involved with them are professionals. Market value is an easy determination. Obviously lenders are starting initial bids below default amounts because of depreciating market values. Trickier aspects to the trustee sales involve issues with title. Here is where you need to do most of your homework and it pays for you to work with a title officer to dig up all the information you can with regards to title. Other risks may be mitigated with alot of legwork. Issues such as physical condition of the home, termites, getting all of your due diligence done will depend on your own persistence. Never be afraid to go to the home you are interested and knock on the door to try to make contact with the owner. If they are still there you may want to offer them a small fee in order to procure some time to set up some inspections. Maybe it happens, maybe it does not. If they are not there, then trying to have your title officer help you get in touch with the lender or contact who can get you in is something to try as well. Again, no rush here, you have a few years to polish your skills. Alot of diligence and legwork can score you a good deal.

Yes, Yoda, you are correct (thats why I call you that).

I have been hearing different things of late.

What are some of things you have been hearing?

Or anybody.

Are buyers or investors having better luck these days?

Its still all anecdotal but I would like to hear some actual first-hand accounts.
Right now I am getting it all 3rd hand.

Sound off.

SDR and ur, I appreciate the suggestions regarding trustee sales. I like the suggestion about contacting the owner. A couple questions regarding title issues:

So, trustees have the option of selling at the trustee sale for less than the amount of the first? Is that right? I thought the opening bid had to be "a penny over" the amount of the debt (on the first). Is it just the opening bid that must be exceeded? Do they set an opening bid amount of their choosing based on their desire to get rid of the property?

Second question: I can't imagine plunking down six figures for something without some assurance that I'm aware of all liens and title issues. One would obviously hate to get an expensive surprise in that situation. I'm sure I'll learn all about checking for any liens or title issues that might exist. I guess my question is, why am I working with a title officer? Do they have access to something I don't, or just the experience to catch something I might miss? I have two issues with this, either or both of which I could be completely amiss about. First, I'm having a hard time seeing that it might be so complicated that it's something I won't be able to do myself. I'm fairly not unbright (and modest) and I work very hard. Of course, at the beginning, I'll have no experience, so there is that. Second, if I can't get title insurance, I might have a hard time trusting somebody else to ensure that I'm not going to get a very large surprise at a very bad time. I don't know if I'd be able to sleep unless I did it myself.

Thanks for your expertise.

One of the risks in buying REO properties is the lack of disclosures, which can mask certain problems:

- Molds (because the previous owners were angry & flood the house by leaving the faucets running).
- Structural issues with the property.

Can one hire an inspector to detect these problems before making an offer ?
Which physical problems cannot be detected or very difficult to detect ?

zk will get back to ya later tonite.

gn agreed with you on the issues with REO (which of course are inherent in trustee sales)

Will address those later tonite as well.

zk -

Contrary to what people have said, a trustee sale is really an auction. Now the lender has indeed given instructions to the trustee as to what they will accept. Again, the best way to learn the ropes of auctions are to go to them. The short answer to your question is that in some cases the opening bid may indeed be below the default amount of the first mortgage. Do you simply have to exceed the opening bid to get the home? Well.. theoretically yes but again, I believe all cases are independent so the practical answer is possibly. Yes it would all vary with the desire of the lender to get rid of the property.

Getting to know a good title officer is helpful because they can not only obtain a preliminary title report for you, but they can help you interpret it and point out issues in it. Unless you have alot of experience with this, it is something I would recommend you do. You can bet that pretty much anyone else at the auction will be bidding on properties that they have made sure that they have a full understanding of any and all title issues.

I understand what you wrote but I know my own limitations. I consider myself an excellent engineer and realtor as well. However I do not hesitate to have my title officer give me his opinion on any property I have ever considered purchasing. I am not saying you don't look at everything yourself as well, but utilizing expertise is something you should consider.

As far as inspections and performing due diligence goes, again, regardless of whether the home is an REO, Short Sale, purchased at trustee sale, or even a standard resale, I think the due diligence process should be pretty much the same. While short sales and regular resales do come with complete disclosure packages, it should be noted that disclosures only tell the buyer problems that the sellers know about... (presumably). I would not hesitate to say that many standard resales most likely would have some sort of elevated spore sample counts, or perhaps not entirely level slabs. My point is not to diminish these problems in REO properties but rather to approach the process with a more standardized methodology regardless of the source of the sale. What differs obviously is the timelines for contingency which is brutal right? Trustee sale you have 0 contingency. REO you usually get a 7 - 14 days. Short sale and standard resales you generally have 17 days. These are all just generalizations on the timelines but I think you get my point.

zk - For a trustee sale you can certainly hire inspectors to check out the items you mentioned. The challenge is accessibility. If the home is still occupied by the seller then you are good to go. Offer the guys some bucks and set the inspections up. If the home is vacant then it is more challenging to get in.

Honestly guys, while disclosures are helpful... I am just not sure how much stock you can put in them with regards to detecting everything. If a homeowner had a faulty windows and over time moisture got into the framing and mold built up that seller would more then likely never know. Again, this is not to diminish the importance of the disclosures but rather to stress the importance of your own diligence.

Investment in Real Estate may become a good idean in the future, but not until the fundamental price to rental income comes back in line. Until you can rent out the property for a positive cashflow, it is a bad investment.

Foreclosures today are way overpriced. For the most part they go off at the existing loan value -which is still over market. Real Estate Owned (REO) the property that the bank has foreclose on and hired an appraiser to price, and a realter to sell may be better than a direct foreclosure, but still over reality. When the rental income comes in line with the price - that may be the time to take the plunge.

The days of rabid price home price increases because everyone sees it as an investment not just a residence are over. Without the free financing of the early 2000's a home will just be a home. The equation of rent vs. buy will be forever changed to favor renting. There will be some who just want to own their own home, but prices will need to drop a lot from today's REO levels to make the ownership equation work.

Question for SDR
It is my understanding that trustee auctions require substantial deposits (like 20%) and good funds within a few days. It is also my understanding that there is no inspection or contingency period. In other words, you go to the courthouse with a cashier's check and close within a week or so.

Is this your understanding as well?
I ask because you mention a due diligence and investigation period. My understanding is that there is no such standard allowance.
If you understand differently please advise. I am curious to know if the practice on these is changing.

To Bubba:
Your post does not demonstrate understanding of current practices. Very few of existing REO sales are based on default valuations.
They are typically based on current market values (not always successfully though).

You have a point regarding rent though. It can serve as a semi-backstop to price declines.

The equation of rent vs. buy will be forever changed to favor renting.

Thanks for the wisdom Bubba. I can't wait until I start seeing statements like this in the MSM or hearing it from my non-RE-obsessed friends. That's when it will be time to buy.

UR to me due diligence and contingency periods are independent events. A contingency period is an amount of time you have that starts at acceptance and ends at some point after acceptance. A due diligence process is a process you the buyer goes through to find out information about a home you want to buy. A due diligence process does not need have a necessary start time or even an end time for that matter. Obviously it is bounded in some manner by the contingency period and your liability as a buyer increases substantially (ie the cost of the home in the case of a trustee sale) by not completing due diligence prior to contingency periods ending.

Abstract it out. You can perform due diligence anytime if you like, even BEFORE the purchase of a home which is strongly advised in a case of a trustee sale.

Yes as far as I know trustee sales are all cash. I believe my post stated contingency = 0 for trustee sales, and I was trying to imply that the due diligence process may be started early (prior to the auction) for trustee sales by trying to knock on the door to get in.

SDR, that is a good model for thinking about it and good model for addressing the issues involved. The only caveat I would add is that generally title companies have records a few days out of date. Sometimes the getting a title policy does not cover claims arising from events between their last update and the issuance of the policy. For example there is a trustee auction on Aug 30. On Aug 29, your preliminary report and policy are issued. The title company files were last updated on Aug 25th. There was a mechanic's lien filed on Aug 27th.

I don't know if there is a title policy that would protect you from this. There might be. In fact, I don't know what the procedure is for issuing policies for trustee sales. Do you happen to know?

So I have too many unknowns here to make an actual case for the danger involved. However, it has occurred to me before that an unethical contractor could just go around doing minor work on abandoned properties and filing liens that the bank would have to pay off down the road.

Yep you are definitely bound by the timelines with regards to a title search. All part of the bumps and grinds that go along with going for trustee sales right? In general trustee sales are definitely not for rookies. However they do afford opportunity for people who want to take the time, understand them (and the inherent risks), and who have the cold hard cash to get a deal. Personally I have neither the time nor cash to do it myself.

Yet if I did have the time and cash I would take the time to learn about them and definitely attend auctions.

However, it has occurred to me before that an unethical contractor could just go around doing minor work on abandoned properties and filing liens that the bank would have to pay off down the road. [/quote]

Mechanics liens have many requirements that must be met to make them be worth filing and hold up. A legal contract or employment by someone with a contract or subcontract from a legal agent, for the property in question is one of them. A 20 day notice to the owner to pay or face a recorded lien is another. A motion to foreclose must be undertaken within 90 days of the recording of the lien.

Someone can record an invalid lien but there is no real incentive with regards to abandoned houses.