San Diego Housing Bubble News and Analysis

For all those out there that think we're near a bottom, give a read to Mr Mortgage's latest post. Looks like Good Ol Cramer's calling for a bottom.

http://mrmortgage.ml-implode.com/

Note: When I first saw Cramer on Bubblevision back in 2000, he was a "guest" on their shows and he told it like it was. But people liked his personality. Then he became one of them when he got his own show. Way of the world.

There are groups of investors who are begining to buy in Naples Florida. I believe there is no income tax Florida. Pretty attractive to a high net worth individual.

I have run across several flips lately. More investors then people think are purchasing at trustee sales here in San Diego county. I am in an escrow right now for an investor owned property. My buyer is getting it at below market value and the owner who bought it at trustee sale is more then likely making a nice profit as well.

I just listen to Bruce Norris's radio show and he claims he's buying REO's for 30% of the outstanding loan amount. Said he did about 25 in the last 60 days. He's mostly Riverside County. But it shows that he's probably making money.

When you can get a place that is below rent value it's time to buy.

Bruce's 30% is probably closer to 40%, but a 60% haircut that you can sell or rent out is where you make the money.

Flippers for the most part could only come to power because of the zero down / no doc loan years. For the most part that is all gone, and we are left with prices that people can start affording again.

I've also seen a number of flips, and have run into plenty of "investors" at open houses.

The bubble mentality is alive and well in San Diego. It is not over yet.

I think that hard money guys like Bruce are going to flip because they've got cash and the discount allows them room for profit, if they can turn the property quickly and he's chosen them well. Time is a huge risk factor in this market. I think that's why he flips far more than rents and holds. It's going down, so he makes money getting in and then out asap.

Granted, when rents are more than purchasing, it probably makes more sense to own. Given all the financial analysis. But rents could come down in this cycle as they did in the 1990's. Also, prices could keep falling and thus put you in a "financial lock" with the house. Where it would be hard to sell without taking a loss. Or you could go upside down as well. And then how long will it take to recover?

We're in uncharted waters here for foreclorures. We're starting to hit 1800 a month in SD County. The worst it got inthe 1990's was around 600 a month.

Just something to consider.

The class of flippers that I am talking about have no cares about rents and such. They have cash and because of that they scope out good deals and purchase them and put them back on the market immediately. Smaller groups of investors that can raise enough cash to make small portfolio purchases from banks can do the same thing.

The trick to making money in this style has much more to do with insight into the local market, how much the first mortgage is with respect to valuations of that local market, demand for that local market, and simply running the numbers to see if they will work. It is all about getting the home at trustee sale and getting it back on the market immediately. This is not about holding a property at all but it is about moving it and moving it quickly. Also one hopes that you can sneak this purchase by the bank at the trustee sale with respect to the bank doing thier own due diligence on the home and hoping they are dumb enough to sell it to you at the price you want it to go at. In certain cases the amount of that first mortgage is well below the market conditions for given homes.

I am not saying this is easy but I am saying it is being done and is more then likely beyond the scope of how people view markets here on Piggington. Money can be made and IS being made by investors doing this. IF you are diligent and do it for the right property at the right time you can do well.

There are still a number of current buyers out there that are going to get burned by this market. You would think the simple prediction of the interest rates rising to curb inflation would keep many buyers from purchasing in this market. I agree that many people can still afford to purchase a home and maybe everyone does not have the same idea that a home purchase is an investment. I personally believe this next year is going to get nasty with all the negative news still yet to affect the market.

Buying a flipper is a very speculative move in this market because when those rates start moving over 7% and 8% we will really start seeing a stagnate market. We are in the age of the paid programs and million dollar dreams. Everyone thinks they are more educated about RE purchases than ever before. The educated investor only knows what they have seen, but fear the unknown. The truth is no one has witnessed what will occur when this market really crashes and it is coming soon.

Having lived through this before, I can tell you that buying and holding right now is dangerous. Actually flipping is the only thing that makes sense if you can get it cheap enough. That's a big "if". The owner of the debt is going to be the one that allows you this deal. Like buying for 30% to 40% of the LOAN amount. Not the market value or any other measure. The loan amount. The first loan amount.
Given that foreclosures are rising rapidly, the lenders are capitulating because they hold the shadow inventory, so they know what's coming. More of them! If you can get to them, and get them to do the deal, you've got a shot at making good money. Making money in a declining market is a game for professionals! And 30 to 40% off the first loan is the prices the best are paying, and they know their game very well. And they will be competing against you when you and them put your "flips" back out on the market.

I think that there are very few, if any, here on Piggington that have a concept of what I am talking about. I will try to explain one last time. The cast of flippers here are not people buying and holding. They are not going to rent the property out. These are locals who have a very keen eye for select local markets here. These are people who make extraordinary returns on large sums of money. What confounds me is that I personally look on this as lost opportunity while I sit here and read about how this is a losing proposition.

Again, this is no claim of a market bottom or anything like that. Of course foreclosures are rising, of course the secular depreciation cycle we are in is going to last quite awhile. Yet as sure as I am about that I am also as sure that those who warn the most about things that will "certainly happen" that are "right around the corner" are also those who are absolutely nowhere near the market right now. They have no sense at all about the reality of what is happening.

Look, don't confuse what I am saying with, "go buy a home now because investors are doing it". Yet while lots of you may raise the red flag about the impending doom, (which I am not sitting here and denying) there are plenty of people making alot of money. They get in and out of the market quickly and they are quite nimble. Quite frankly, business for them has never been better.

I know a few who are killing it also. There's money to be made in good times and bad for those who know how.

Could you give us some basic numbers about these deals? No names or specifics, just the discount they're paying compared to the real-time market price and how quickly they're turning the properties?

The way they make money is buying in all cash at trustee sale for a large discount. The far majority of people can't do this, and there are risks involved. There is no inspection contingency, so you have to try and do an inspection before the sale and any liens on the property are now your problem. The average person doesn't want to take that risk. The reward is that they can sell for a profit to somebody who's financing the property who gets to inspect the property and doesn't have to deal with liens on it. The profit is because of the risks involved with the deal and the need for loads of cash severely limits the competition.

Jordan you are absolutely correct that this is not for the average person. Not by a long shot at all. As far as the risks involved with purchasing at trustee sale we have gone over that before and once again, not a good idea for pretty much most everyone here.

As sdr said, there are a few savy people who are "making a killing"

Peterb no I cannot give you any specifics at all. To be quite honest this topic is of high interest of me for potential business and personal reasons so I prefer not to. I never said these opportunities are easy to find, just that they are out there. One resource you can use to learn more about trust sale history in various zip codes is fidelityasap.com.

Wow, SD Realtor. I just asked you to tell me in very vague terms what discount you're paying on properties from current market prices. Bruce Norris has said on the radio that he's paying 30 to 40% off the loan amount to lenders. A very well known guy in a very specific market. Not govt secrets here.
Can you verify if this is what you're paying?
I cant understand how this is risking anything for you? But maybe I'm missing something?

Peter sorry if I misunderstood your question.

I am not paying anything on the properties as I have not participated in any of these sales. I have mined alot of tax roll information to see what properties that are in default have as first mortgage amounts and then correlate that to the local market conditions of where they are located to see if they would be candidates for an investment flip. I have done this for a couple of local markets that to me, offer possible returns for this methodology.

In terms of profit margin on some of the ones I have watched and know about, the net return is about 10-15%. This is after closing costs. What I do not know is the cost of any rehab work prior to putting it on the market. Not bad for only having the money tied up for 2-3 months. To me it doesn't matter if the investor bought it for above or below the default amount. I am not measuring that, only what the end result is. Bruce Norris may very well be paying what he has claimed and then respinning the properties and doing well and it would not surprise me. He also has access to large sums of cash so he is in an excellent position to take advantage of the current conditions.

thanks. That's all I was curious about. Sounds like you're looking for indicators that the property is headed for default of the loan. Which suggests to me that the deals are short sales. But it's also occured to me that lenders may avoid paying property tax after they've taken the property. So you could get an idea of an REO before the lender has taken any action on it. Kinda like seeing into the shadow inventory.

15% at 4 times a year annualizes out at roughly 60%. Nice work.

For all the people out there that are wondering about the better areas of SD County and whether or not the zip code they're interested in is showing any signs of weakness....tax roll data could prove to be a very useful indicator as to future problems and opportunities. Getting lender data real-time is all but impossible, but county tax records are a different story. Smart!!!

"Locals with a keen eye for local markets"

Is this realtor speak for "the market is rigged"?

Hi Peter -

Yes definitely you want to find the homes in default and even with NOTs. I don't even look for short sales, I just go right to the tax roll or study the information from my title officer. As far as the additional costs after a trustee sale, yes you need to account for all of those which is another reason why a good title officer is essential and of course you need to build these costs into your margin of course.

Yeah that 60% number makes me drool as well. Again none of this is easy money and yes there is risk involved but none of this is out of the realm to do....well except for the cash part...

I bet Bruce (and I would imagine he has investors) is doing really well.

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paramount no the game is not rigged. The game is won by those who work at it. I can tell you pretty much any street here in Scripps... I live here, I know it well and I know what will sell and what will not sell. If I see a property go to REO and the first mortgage is significantly less then what I feel the current market would be for that home and I find no other major liens it would be a good purchase and flip.

This is what I meant.

Nothing is rigged I am sorry to tell you.

Smart work. Not rigged. This is how people that know their craft make money. A lot of the remarks I see on this site indicate to me that many people are not very serious about finding out what's really going on.

This is good advice for anyone that's really interested in a certain area. Do some investigation into the financial stability of the homes in the area. The vacancies, empty looking homes, tax records,etc... there's lots of data that is public domain. It may not tell you the whole story, but you'll get a good idea of where to keep looking. Or where it's going. This level of granularity is not known or discussed by the big picture guys. Their too busy talking about the industry in aggregate. The big picture. That's why there's opportunity in knowing the detail of any given hood. House by house. The nice thing about this current crisis we're in is that you can find homes in trouble. This is tough in the good times.

Incidentally, all the real rigging goes on at the top in plain sight. Just look at what the Feds done for some Wall Street buddies of theirs lately. BS is too big to fail, but I guess Indymac deserves to get thrown under the bus. Sounds fair to me.