Trust Deed Investing + Out of State Investing

[BradPitt]

Hello everyone,

I am new here. I live near Pasadena, CA. I would like to talk about 1st Trust Deed Investing. I have done some interviewing and researching and it appears to me to be a sound investment for a 1 to 2 year term. At 50 to 65 percent LTV, The market would probably have to drop more than 15% a year to affect your investment in case of a default, which is not that often(depends on your broker’s judgement). The return is 8-12%. From one company I called, I asked them what happened during the RE downfall here in CA during 1998. He told me it was tough times and that he had lost some clients’ money in 2nd trust deed investing. But, he continued, he learned from his mistakes and he had never lost an investor’s money in 1st TD investing during that time with over 1000 portfolios. He also won’t invest in foreclosures or higher end homes due to complications he used to experience. I dunno.. it sounds rather tempting to me despite my openness to the idea that real estate could fall 50% or more in the next 6 years. Or if not investing in trust deed investments in CA, why not invest in them in other states, especially states that run countercyclical to the housing boom…

Please see this article:

http://www.inman.com/InmanNews.aspx?ID=54136

There are many states that have not experienced the housing boom the rest of the country has experienced it seems. It is my suspicion that many people will flock to these undervalued places when crash takes an ugly turn. Why not even buy some of these houses in those places?

I look forward to your input.

[powayseller]

I don’t know anything about 1st or 2nd deed trust investing, but I do know the housing prices have dropped year over year in the entire country, except the South. Nationwide, median yoy home prices are up only .9% this year. This real estate bust will be nationwide, so there is no safe place.

Read Robert Campbell’s Timing the Real Estate Market. Learn how you can make money buying at the bottom, when fear reigns, and buyers are scarce.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

I have a close friend who runs a fund that does exactly what you are discussing, and I have no money in it despite his stellar track record. A rising tide lifts all the boats and a receding tide lowers them. The up cycle in RE is over for now, it is too late, the easy money has been made. I for one think it is time to have money elsewhere for a few years. RE’s time will come again in the future. Chasing RE in places that have not risen much is like buying stocks in 2000 that had not dropped as much as the biggies, ultimately they all got dragged down.

This asset class is not the best place to have $$ right now, it is really that simple to me. Sorry for the bluntness. I would not risk tying up money in Austin, TX for example, in an illiquid asset just so that I could make 5% per year in it if everything goes great. You need the perfect storm for a T-Bill rate of return, and it makes no sense to me.

Just my opinion – no interest and I have a prime easy way into this arena (mortgages) if I wanted in.

[4plexowner]

The link given is for a subscriber’s only article.

Remember that InmanNews has a bias – they provide information and services to the real estate industry – they aren’t going to discourage you from investing in real estate.

Let’s see, I can get 5% in a FDIC insured money-market fund or I can get 8-12% by letting someone else invest my money into something that I don’t really understand and they’ll require me to sign something saying it is OK if they lose all of my money (fine print in all financial contracts).

This is a no-brainer for me – the extra return isn’t worth the risk given the current state of the real estate market nationwide.

[BradPitt]

Sorry about the link. I thought I tested it as a nonsubscriber. Anyway, I’ll just quote it.

“The next real estate boomtowns: Where are they?
Some housing markets are on the upswing
Thursday, July 06, 2006

By Glenn Roberts Jr.
Inman News

>>More
Mark Dotzour chief economist for The Real Estate Center, a research center at Texas A&M University, said he gave a presentation earlier this year to a group of Texas mortgage professionals in which he asked how many of them had recently closed a mortgage loan for a California resident — about 75 percent raised their hands in response.

“This is quite a deluge. It’s quite widespread,” Dotzour said of the influx of California buyers to the Texas market. “We’re starting to see a pretty significant migration of California people not only buying property for investment but moving here to live.”

Several housing markets in the state are now emerging from the doldrums of the dot-com bust and Sept. 11 terrorist attacks. Employment and housing markets in the state were slow to rebound from these events, which kept home prices low while many other real estate markets throughout the country experienced an unprecedented and prolonged surge of home sales and price appreciation, Dotzour said.

Several communities in Texas appear to be ripe for a boom as the national housing market winds down from its formerly feverish pace, he noted. “There are places where we are seeing substantial increases in prices. Not only are sales up but price appreciation is increasing at an increasing rate.”

Real estate markets in other states, too, are picking up while former boomtowns have begun their descent. The North Carolina Association of Realtors reported that existing-home sales in May jumped 4 percent from May 2005, with sales in the Charlotte area rising 14 percent during that period. Also, statewide sales rose 10 percent from January through May this year compared to the first five months of 2005.

In Idaho’s Ada County, which includes the capital city of Boise, existing-home sales grew 16 percent from May 2005 to May 2006 and the median price increased 26 percent from May 2005 to May 2006, according to Intermountain Multiple Listing Service statistics.

Meanwhile, the National Association of Realtors reported that the national rate of existing-home sales dropped 6.6 percent in May 2006 compared to May 2005. And the U.S. Census Bureau reported that the rate of new-home sales fell 5.9 percent in May compared to May 2005.

In Texas, Odessa and Midland led in home-price appreciation in the fourth quarter 2005, Dotzour said — Odessa had 15 percent year-over-year price growth for the quarter. Real estate markets in El Paso, San Antonio, Wichita Falls, Corpus Christi, Tyler and Brownsville, among others, are also on the upswing.

Dotzour said that Texas has been cited by some industry experts as an undervalued real estate market. “You can still buy a really nice home for $100 a square foot in Texas,” he said. Waves of new-home construction in the state since 2002 have helped to moderate home prices, he said.

Some airline companies with major hubs in Texas have stabilized since the blow of Sept. 11, he said, and the high-tech industry is also making a comeback. Those factors, along with gaining strength in the oil and gas industry and the influx of new businesses and residents in Texas, have set the stage for an improving real estate market.

“Texas traditionally has run somewhat counter-cyclical to the national economy,” Dotzour said, though that may be changing. “So much of its economic fortune is related to oil and gas.” As the price of oil and gas and related chemicals rises, Texas tends to prosper while the rest of the nation suffers, he said. The state’s economy has diversified in the past 20 years, so that Texas now “looks and acts a lot more like (the rest of) the U.S. than it used to. Most of Texas now is more in tune with the rhythms of the U.S. economy.”

Texas is a fairly young state, Dotzour said, and the state is experiencing its own baby boom. The U.S. Census Bureau projects that Texas will be one of the fastest-growing states in the nation from 2000-2030, with a population increase of 59.8 percent in that time. The population in Nevada, meanwhile, is expected to grow 114.3 percent in that time, followed by Arizona at 108.8 percent and Florida at 79.5 percent. Other fast-growing states include Utah, with projected population growth of 56.1 percent from 2000-2030, Idaho at 52.2 percent, North Carolina at 51.9 percent, Georgia at 46.8 percent, Washington at 46.3 percent and Oregon at 41.3 percent.

Mary Manry, Brants Realtors
Mary Manry, managing broker for Brants Realtors, a real estate company in Fort Worth, Texas, said her market area is expecting “tremendous growth in the next 10 to 15 years. We’ve got room to grow. We’ve got space. We’ve got a (nearby) international airport, a diversified economy.” The underground amenities — namely natural gas deposits — are also an asset for the region, she said.

“We see a big influx of California investors,” Manry said, noting that Californians can buy a lot more house in Texas for a lot less than they could in their own state.

“We are certainly not in a down market,” she said. “I think we will see the benefits of a lot of these overheated markets coming this direction.”

Statewide, home sales in Texas increased 8.3 percent for the first five months of 2006 compared to the same period last year, according to statistics compiled by Texas A&M’s The Real Estate Center. And from May 2005 to May 2006, the total inventory of for-sale properties declined 5 percent, the median price of sold homes increased 6.3 percent, and the supply of for-sale homes dropped from 5.8 months to five months — all indications of a seller’s market that is gaining steam.

In Fort Worth, home sales for the first five months of the year are up 12.2 percent compared to the same period last year, though the inventory of for-sale properties has risen from 6 months in January ’06 to 6.5 months in May, suggesting the Fort Worth area is increasingly a buyer’s market — a supply greater than six months is generally considered to indicate a buyer’s market.

“We’re still seeing pretty good activity and our projections are probably what is most important,” Manry said. The home-building industry may have overbuilt a bit in the region, she said, adding that the extra supply should be absorbed by the expected growth.

Dotzour said that suburban areas near major cities, such as Dallas and Houston, are likely magnets for future growth. In addition to homegrown population growth in Texas and the in-migration of Californians, another growth engine is foreign immigration, he said. Some real estate professionals have noted a general trend in real estate booms spreading east from California into neighboring states, namely Arizona and Nevada, and Texas may be a beneficiary of this eastward real estate investment trend, Dotzour said.

Renee Hentschel, Realty Executives
While Californians are feeding real estate market growth in Texas, North Carolina is seeing an influx from Florida and other Eastern states, said Renee Hentschel, an associate broker for Realty Executives in Hickory, N.C. “Sales have doubled for me, personally. A lot of that is due to a lot of folks from Florida. They’re cashing out on the homes they bought, taking the equity, and coming here. They’re actually getting more house for their money,” she said.

Sales in the Catawba Valley area of North Carolina that Hentschel serves increased 29 percent in May ’06 compared to May ’05, while the average sales price of existing homes in the area increased 13 percent in that time. “Things aren’t sitting on the market quite as long as they were before. It had been a buyer’s market. Right now we’re in between — moving toward getting into a seller’s market. I think we’re in transition.”

North Carolina seems to lag behind the rest of the nation in real estate trends, Hentschel said. “We hear about this big real estate boom and we’re (saying), ‘Where’s it at?’ A couple of years later we hear about the slowdown. We’re not slowing down here,” she said.

Sharon Lyons, broker in charge at Network Real Estate’s office in Carolina Beach, N.C., said that properties in her market area dramatically appreciated in a short period of time last year, and she attributes the surge to increased interest by people from other states, especially retirees from the Northeast. Buyers in the area are looking mainly for second homes to serve as investment or retirement properties, Lyons said.

Sharon Lyons, Network Real Estate
Sales have slowed in the area this year, though, falling 24 percent in Wilmington in May compared to May 2006, according to the North Carolina Association of Realtors. Meanwhile, the average sales price in Wilmington rose 15 percent in May compared to May ’05.

Trela Bird, a Realtor with McDonald Group GMAC Real Estate in Midvale, Utah, said the Greater Salt Lake City began to boom last year. “We’re seeing a very strong seller’s market now,” she said.

“We’re seeing a lot (of buyers) from California, and a little bit from some of the East Coast states, some from Texas, Arizona and Nevada. I think the news has gone out — we’re number four in job growth right now and prices compared to a lot of places are still reasonable,” Bird said.

“We get people from California (who say), ‘Oh, wow. We can get twice the house for half the price,” she said, though prices have been climbing. Buyers from out of state seem most interested in new and newer homes, she said.

A Coldwell Banker office in Utah reported that the average days on market of a home for sale in Salt Lake County declined from 61 in January 2005 to 43 in January 2006, while the average price of single-family homes in the county grew 17.3 percent in that time, from $196,925 to $230,953.

Also, the National Association of Realtors reported that total single-family and condo sales in Utah grew 12.7 percent from first-quarter 2005 to first-quarter 2006 — the seventh-highest increase among all states.

“We seem to be opposite of the national trend,” Bird said. “We had a very slow, steady market up until about March or April of last year.” ”

[BradPitt]

Hello Powayseller. I have Robert Campbell’s book, but thankyou for the recommendation. It is an awesome book for the art of real estate timing. I agree that the market could fall dramatically. I wanted to get the communities reaction to my ideas, because I think you all have a more holistic view of the market than most people. Thankyou for your input thusfar.

I think generally speaking there will be a price drop nationwide. Someone bought up a good point to think about whether it would be worth the risk of earning a 7% return…even if you save with a 1031. But I suspect that there are still some places haven’t had any kind of bubble develop at all, so I don’t see the potential for a 30% drop at all those places. Maybe a small drop since the mood of real estate will be rather sour. I think for the next 2 years, people are going to flock to Texas from California. I hear about it happening already. Then, after 3 years, the nationwide recession might cause everything to slow down everywhere because the mood of real estate sucks so bad.

Especially if you have cash in hand already, then I don’t see why trust deed investing in these places would be so bad. 10% return for a place that is either going to appreciate or flatline isn’t bad to me, especially if you diversify your trust deed portfolio. Of course, like someone else said, you really have to know who you are dealing with.

To do trust deed investing in California might be quite dangerous because of the potential for a default of their payments and a market crash happening concurrently. I still think investing in a 50% LTV for 2 years or 65% for 1 year is still safe though.

The 1st rule of NAR is that we don’t talk about the NAR.
The 2nd rule of NAR is that we don’t talk about the NAR.
3rd rule of NAR is we don’t talk about the housing bubble.

[powayseller]

I’ve read that Texas has the highest rate or number of foreclosures in the country, quite opposite of what this Inman article states. Texas has strict foreclosure laws; you get only 27 days to get caught up on your late mortgage. Why do trust deed investing? What’s the return they are promising, and what is the risk you are taking on?

Personally, I am saving my cash to buy real estate at the bottom of the cycle. Why risk losing the money in trust deeds? I expect a national housing slowdown in 2007 – 2009, as $ 1.5 tril of exotic loans reset. I know I’ll get slammed for saying this, but I think most of those borrowers with adjusting loans will default.

[SD Realtor]

I think that 3-4 years ago was the correct time to invest in trust deeds. BradPitt you may want to read up about tax liens. There are potentially nice returns with much less risk.

If the housing market does what we are all thinking it will do, and if the NOD rate continues to grow at the rate it is growing, it would seem to me that trust deed investing is not a good idea at this time.

Finally, I do not mean to be flippant but your initial posting referred to this investment guy having learned his lessons in the 98 downturn? Well 1998 was not a downturn… In many opinions of this site, 1998 will look like a great year compared to the upcoming years ahead for Realtors, lenders, and second trust deed holders.

Please show me this guys record for the true downcycle back in the early 90’s.

Chris J said it correctly, the easy money has already been made.

[Anonymous]

If you feel that property values will drop 30% maximum from current values then I would not hesitate to invest in a first T.D. with a loan to value ratio less than 55%. The worst case would be that you foreclose on the property and either rent it out or resell. There is enough equity to protect your investment. Research the rental market. If you foreclose and end up with the property at 50% of current market value I think you would be pleased. My personal criteria for T.D. investing is buying notes that I hope the borrowers will default on so I can profit from the discounted value of the asset securing the loan.

[La Jolla Renter]

Trust deeds have been good to me over the years. I don’t care if it is a 1st or 2nd. I would rather have a 2nd on a house in La Jolla at 50% LTV than a 1st at 50% LTV on a piece of dirt in Riverside that has been used to store heavy equipment and has risk of soil contamination.

I have dealt with a reputable broker for years. Solid deals have been drying up quick, and I have taken a pass on the last few deals because I didn’t like the LTV and location. My guy is closed to new clients as I would expect is any other reputable broker of 1st and 2nds.

I have come across other brokers that claim very generous LTVs in the executive summery, you have to really know what you are doing in this market.

Chris is right, if you’re not already in the game, the easy low risk money has come and passed.

[BradPitt]

Thankyou SDrealtor, I meant 92′ – 98′ downturn..typo. I’ll look into the Tax Liens.

Powayseller, I’ll double check the foreclosure rate.

I appreciate everyone’s input.

It seems that everyone here agrees that the downturn will make TD investing very risky unless you find good deals, which La Jolla Renter is saying are becoming more rare. In conclusion, I think I’ll have to be much more careful in making decisions. I’m suprised there are at least two people here who have invested in Trust Deeds.

[Anonymous]

The Texas ship left port long ago.

My mother-in-law is a nurse at an S.D. hospital. Way back in late 2005, several of the nurses she works had booked flights to fly to Texas to invest in residential real estate.

Yep. HAD to put money in real estate, but didn’t have enough to invest locally.

So, you have eager money, clueless about the markets they are investing in, throwing cash at whatever they can afford to buy.

If that isn’t one of the signatures of a bubble, I don’t know what is.

And, while it isn’t quite as easy as printing new stock shares, building new homes in Texas is extremely easy.

What happens to the Texas markets when the California money stops flying in to the state? What happens to the Texas market when construction slows nationally and globally, allowing the cost of labor and materials to drop and reduces the cost of construtcting a new home by 15-20%?

[powayseller]

ottnott, you mentioned something that is rarely discussed. Once demand for labor and inputs for housing drops, the prices of those will go down too. After the builders finish the houses currently in the pipeline and lay off their staff, construction materials, labor, appliances, commodities (copper,lumber), and everything needed to build a house will go down (less demand). It will be much cheaper to build. If I were doing a home remodel, I would definitely wait a few years…

[SD Realtor]

No worries Brad Pitt, I think you will be okay by continuing to look and learn.

If your broker you are dealing with is as golden as he sounds, ask him for a couple of his clients numbers so you can call them and get some numbers from them on some of the deals he has worked out for them.

[Anonymous]

4plexowner — Inman News strives to provide objective information about the real estate industry. We are not industry cheerleaders. Biased information is of no value to our readers. They want the good news and the bad.

Brad Pitt — next time you “quote” an article, you might consider the fair use provisions of U.S. copyright law before you cut and paste the entire thing into your post.

Matt Carter
reporter
Inman News
[email protected]

[Author]

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