Real Estate Investor?

This is Part One in a Three Part series

The System

Have you ever seen one of those signs and wondered?

"We Pay CASH for Homes!"

or the latest incarnation...


"Real Estate Investor Apprentice Wanted"

Wonder how all these people could pay cash for all those homes?

Wonder why the same looking signs have popped up everywhere?

Wonder why if they have so much money, they can't afford better signs or advertising?

Wonder why if they are seeking an Apprentice - why are they driving a beat up Pinto?

I have too.

So a little over a year ago I paid good money to go to this big Real Estate shin dig in Moscone Center. It was put together by the Learning Annex. It had keynote speakers like Anthony Robbins, Robert Kiyosaki, and even The Donald.
I certainly wanted to "Learn" and why not learn from guys like that?

For three days, for twelve hours a day, I attended "class" after "class". If I remember right there were over 80 different "classes" offered. Not by the Keynote guys above, but by True Professional Real Estate Investors. These people were some of the most successful people on the planet. They had spent the early years of their life learning how to strike it rich with real estate and now wanted to give something back.

I know they were truly successful because of the expensive silk suits they wore. And then I couldn't help but notice their flashy watches. Oh and the way they talked about their last vacation. And then to verify what I already knew, they also told me they were (extremely wealthy). Each and every one of them did.

Amazingly, they were all willing to share vital information, the very same information it took them years of hard work to learn, with anyone!
Almost.

Just as long as you were one of the first 500 people to make their way to the back table and give their wonderful helpers a credit card.

Don't think of the $1,800 charge as a high price to pay for 12 CDs and a booklet. It's an investment in your future!

Time and time again, in each and every "class", with the very same speech pattern, the rush to the back was on. People of all walks of life were suddenly running for their financial lives.
Not for the door (as I might have hoped) but for the back table!
These good people would literally inundate the 20 or so wonderful helpers.


"NO... Take my Platinum Card first, I was here first!"

At times it reminded me of glorious holiday times past.
Cabbage Patch Kids, Tickle Me Elmo, and Beanie Babies have nothing on this spectacle.





Continued soon...

Volatility Kills

Volatility.

In Chem class we learned volatility was about how fast something went from liquid to vapor.
"The higher the volatility the faster our beaker of blue stuff evaporated."
I know that because that's exactly what Susie D. (my lab partner) wrote down for Problem 17 on the big test.
And that's exactly what I wrote too. Ok, so I was a "team" player.
And then that led to Mr. Wisner bringing in my parents for a... shall I use the word, "Volatile" meeting?

So there I was, hopelessly wishing that any of the participants, Mr. Wiz, my parents, or even myself, were a little more volatile.
I for one certainly would have liked to have vaporized at that moment in time.

Flash forward to my wine sommelier moments...
"Next we want to gently swirl the wine in our glasses.
This volatizes the esters of the wine.
This aerates the wine and releases its aroma and bouquet."
You can imagine it was a much more pleasant 'volatile" time in my life.

Equity traders, option traders, and the like speak glowingly of volatility.
To them volatility is a chance to get in or out of the market or stock.
Long or short, call or put, if a stock is flat or sideways it's hard to make money on it.
Volatility, financially speaking, "refers to the standard deviation of the change in value of a financial instrument with a specific time horizon."
Thank you Wikipedia
If you are on the wrong side of a volatile trade you could see your whole portfolio go to vapor.

Now let's talk about Volatility in Mortgages.
This is deadly stuff.
Yes, rates go up and down that doesn't change.
Sometimes the rates go up and down with greater speed and velocity.
There's another V word - Velocity.

But the warning I want to get across is this.
Small moves in rates, combined with the ever tightening credit window, combined with higher and higher debt, combined with flat or minimal appreciation rates will yield a highly charged, highly Volatile marketplace.

There are people I come across each and everyday who have questionable loans for their particular goals.
2/28, 3/27. 3/1 ARMs, POAs, Interest Only's -
Don't get me wrong, they are all good loans for the right person at the right time, but so often I see them with the wrong person at the wrong time.
I see volatility.

I have someone who came to me to refi last week.

• They have minimal credit,
• they have to "state their income",
• credit cards are close or at the limit,
• they have a new boat payment,
• just a little money in the bank,

Oh, and their loan amount now is the same as their home value.
All they want to do is get into a loan that will not adjust. (Theirs is about to start adjusting)

They up the Creek and there is no Fixed Rate Paddle, or any paddle for that matter.

You could say they are on the extreme side.
But I see many, many other borrowers just a couple steps away from them.
Borrowers who over the last 2 or 3 years have grown very comfortable with a Minimum Payment, or an Interest Only payment.
When it's time for them to get into something fixed - even with good credit, good income, there may no longer be a fixed paddle available.
It's not all about rates, the credit window has volatility too.
Right now with the sub prime issues the volatility of the credit window is high. And that window is closing!

When it comes to mortgages:

• Volatility in appreciation,
• Volatility in interest rates,
• Volatility in the underwriting guidelines,
• Volatility in the credit window,
• Volatility in pretty much anything can kill.

Be careful out there.

Boxes, Part 2

In part 1 we discussed the advantages and disadvantages of being a direct lender.

In essence, if it doesn't fit in their box it doesn't fit and they have to decline the loan.

From a borrower's point of view...

Let's say our Borrower walks into Bank A, applies for a loan, a week or two later they find out they were turned down.

That's OK, they didn't really like that bank anyway.
So they go to Bank B.
Same application, same documentation, and unfortunately with the same results.

Undaunted, they go to Bank C.
Applied, Documented, and turned down!
3 strikes and your out!
"That's it, We are un-financable!"

End of story - right?

I can't tell you how many times I've come across people who were resigned to the fact that there was nothing they could do about their situation.
"We've already applied at Bank ____ and they turned us down too."

The problem is that the loan did not fit neatly into the lenders box.
It wasn't that it was a bad loan.
There was just something that kept it from fitting in.
It may have been something small.
It may have been something big.
The Bank isn't going to tell them the exact reason why?
They'll just turn it down and move on to the next one.

A broker doesn't have a box.
A broker does the math, understands the loans weakness as well as it's strengths and then applies that loan only to those banks (lenders) he knows want that particular loan.

So a Mortgage Broker has many boxes.
I have 7,000 different programs to choose from.
Which box a particular loan fits best into is the "ART" of what I do.

I like to say that if I do my job correctly, I will get the borrower the very best loan that fits their goals and needs at that time.

Broker's used to be at a disadvantage to lenders in underwriting.
Technology has changed that.
The playing field is even now.

As a Mortgage Broker, I can now pull credit in seconds.
I can then apply that credit record and supporting documents to an Automated Underwriter, something only available to lenders not so long ago.
I can get an approval in seconds if not minutes.
Submit the loan to a human underwriter via simple uploading of documents and in 24 hrs have a real approval!
That's pretty powerful stuff!

The one thing I still have to give to the lender side is the knowledge of products.
A direct lender should have better understanding of the quirks and features of their products.
Don't get me wrong, I'm not talking about your pimply faced bank employee, but the true mortgage professional (generally they don't work in a retail bank location).

Don't you love technology?

The Lead Gen Biz - Part One

So I caught a little flak over my explanation of the Tree and it's business model.
LINK

No biggee.
If I get this right, I am the "Flak-er", and they would be the "Flak-ees".

The Flak-ees reactions ranged from the standard issue knee jerk "Duh", to eye opening wild disbelief.


Let's do this in two parts:
Part One - the answer to the Dee-Dee-Dee side, (Carlos Mencia reference)...

Some of the Flak-ees maintained that the Tree was and is doing what it needs to do to stay in business. In order for the Tree to continue offering the great services it does to us poor consumers, they need to sell the leads. "Wadda you think? They should just give 'em away?"


Uh, no...
I have no problem in their selling the fruits they have grown.
I do have a problem with their trying to deceive both the buyers of the leads and the customers.

Advertising has been called the business of half truths.
Some might argue that there's far less than half of a truth in any advertising.
But I'll say, if the banks were competing you indeed would win.
That is the truth. But the truth is, the banks can't really compete.
For many reasons, the playing field is stacked against honest competition.

With the Tree sending leads to their own mortgage company first, they get a jump on the competition. If they really wanted you to know they had a mortgage company wouldn't they have called it something like Lending Tree Mortgage?

Home Loan Center doesn't sound like L.T. at all does it?

Then there is matter of human nature.
I'm a good guy, but I know there are plenty of less than honorable people out there.
As I have said before, they can lie thru their teeth about rates and fees all the way to the signing table. There's nothing illegal about it. It's called Bait and Switch and I see it everyday.
And guess what? If they know they have to beat 3 other liars to get your business, guess what they are going to do?

The best liar wins.

I have a great solution.
Make them tell the truth!
How?

The "Mueller Act"!

Force the lenders (you figure out how) to quote you a rate, a term, a prepay, the total non-recurring closing costs, all fees, everything, and then set that quote in stone.
No changes - period!

Then, if the loan you get isn't what they quoted - they have to pay the difference plus let's say $10,000 in damages.

Furthermore, take the quoting away from individuals (loan officers who work for commission) and put it in the hands of the corporation. Not that corporations don't lie - they'll be more apt at looking at the bottom line.
In short, fully guarantee the quote.
Sounds like a sound and reasonable idea - right?


Now let's step back and see what happens.

From the Lender side:
The lenders will now be caught between trying to compete but not underestimate the rates and fees. They know there are 1,000 ways a loan can change from application to funding.
Many of which are completely unseen this early in the process.
As a lender, you can take a calculated risk and hope nothing increases the rates and fees, that you can close before your lock expires, that the supporting documentation comes back as stated.
But that's a risk. Guess wrong and it costs you money.

So the business is going to price these with a certain amount of cushion.
How much? - Nobody could tell for sure, but a cushion for sure.
Cushion means... not the lowest rate possible, yet low enough to win the deal.

Let's go over to the consumer side:
I'll take two different borrowers, one who has it all together and a super clean deal with no surprises anywhere. We'll call him Mr. Clean.

The other one has everything imaginable come up - not necessarily by his own fault. Both have identical income, credit, and debts. He's Mr. Calamity.

Mr. Clean is doing a refi on his condo. He locks for 15 days (cheaper rates), the appraisal is done and comes back perfect, the prelim as clean and clear as well. His HOA does what they need to do and keeps the records they are supposed to.
Working with any reputable lender, he would get the absolute best rates and fees.

Mr. Calamity, doing the same refi, the same amount, locks for 15 days as well.
But then the poop starts hitting the fan.
His appraisal comes back with issues - there are questionable comps, they need more pictures, or a zillion other things. The Prelim comes from title and shows tax liens. It also shows his ex-wife who happens to be on safari with the new husband. Ooops. We need a quit claim deed signed. His condo turns out to be unwarrantable, the parking is under the building as opposed to outside the footprint, the loan he applied for also says it needs to be 75% owner occupied complex wide. Oh, and there is pending litigation from someone who tripped on a sidewalk last month and is suing the HOA.

Each and every item listed added to the rate, points and fees of Mr. Calamity's loan.
That's just a couple of items that might go wrong.

So under the newly enacted "Mueller Act" the lender that quoted both these guys would get the same loan. Not having a crystal ball, the lender would have quoted the same to both. Got it?

But here's where market forces screw it all up.
Mr. Clean - had he gone the traditional route, would have gotten better rates and fees.
Why? Because the lender had to build the risk of unknown factors into the original quote - the cushion. Mr Clean paid more for his refi then he had to.

Mr. Calamity however made out like a bandit.
Not intentionally, but the lender would have to honor the quote.
(eat the difference)
His real rate and fees would be incredibly higher.
Missing his lock might have cost him a 1/4 point.
Tax liens, pending litigation, HOA cert. all would bump him out of an A paper loan.

The lenders, learning from their mistakes on Mr Calamity would adapt and build in a bigger and bigger cushion. Unfortunately imposing this cushion on the next Mr Clean.

So in the end, the "Mueller Act" would fail in what it was enacted to do.
Mike Mueller would be impeached,
the Act would be repealed,
and the lessons learned would be taught to high school history students across the US for years to come.

Ok, how's this idea instead?
We educate the consumer to make insightful decisions, by working with trusted professionals, who understand the consumers objectives and goals.
I like that better.

Next time we'll look at the "They don't really do that do they?" side in Part Two

Boxes, Part 1

PART 1: The Lender Box

No this isn't about a Justin Timberlake song.
"I'm giving you a loan in a box..."
Don't even go there - you haven't heard me sing!

This is about the difference between a direct lender and a broker.

Another way of saying it,
it's about the difference between a Mortgage Banker and a Mortgage Broker.

The question seems to comes up from time to time and here's how I explain the difference.
I've was a Mortgage Banker for years and years.
I am now a Mortgage Broker.
Is that better?
No, it is neither better nor is it worse.
It is what it is.

Picture a lender, any lender.
While they may have a wide range of products they offer,
and they may offer the same programs at the same rates and the company in the next block,
they also have specific things that make them unique or different.

They have things they like,
They have things they don't like.
They have quirks both good and bad.

There are plenty of lenders around.
Many have retail outlets you can walk right into.
From the sidewalk, how do I as a consumer know which one is a portfolio lender?
Which one is very aggressive on manufactured homes?
Which one will not do a HELOC behind a Neg Am Loan?
Or of those that will, which ones will not go behind one with a recast of 125% and which ones will?
Looking at their windows, I certainly can't tell.
Walking into their lobbies, waiting in line, and even talking to the very young loan officer, I can't tell.

As an savvy mortgage person you know that even with a vanilla 30 yr fixed Fannie Mae, no two people have the same loan profile.
You didn't? Better go back and read this one: "The Right Answer".
All those factors can have a profound effect on the rate, terms and fees involved.

In mortgage terms that would sound like this:
"We, insert name of lender here, will fund this loan only after thoroughly reviewing that all terms and conditions detailed in both our 142 page book of guidelines and the secondary marketing guidelines set forth by the Federal Home Loan Mortgage Corporation have been completely satisfied."

The guidelines are not really 142 pages, I exaggerated a bit.
But in my slightly skewed metaphoric terms, it simply needs to fit in the lenders "box".
If it fits, it's a loan.
If it doesn't, it's a decline.

I know, it's not that simple.
There are exceptions to be asked for.
Possible ways around the rules or bending of said rules.
But in general terms, if it doesn't fit in the box - it doesn't fit.

Boy, was I just tempted to throw in a Johnnie Cochran reference there!


(Ok, I give in, but just a small reference.)

Direct Lenders may also have certain advantages.

For instance:
They may have direct underwriter access available.
On a loan file, if an underwriter sees something they cannot "un-see" it.
Submit a loan to an underwriter for review with something that should not be in that file, and it's too late. You cannot change it.

A real life example might be where a loan is supposed to be stated income, but the file sent to the underwriter has a W-2's included. So much for stated income, you just became full doc!

Hypothetically of course, let's say our mortgage banker might be able to, as he or she was hanging around at the water cooler, ask an underwriter what he or she might think about a typical and certainly hypothetical situation...

That underwriter may be able to give that mortgage banker an idea or two that might allow that loan to sail through easier and unencumbered - hypothetically of course.

The mortgage banker may also know the quirks and twists of their products better than anyone could.

Additionally, when I was a mortgage banker, there were programs and features that were available to only us (not the wholesale department).
We had favors we could call in from time to time.
We had access to instant automated underwriting decisions - Fannie Mae, Freddie Mac, and our sub-prime unit.
Not having to disclose YSP, and so on.

So lenders are not bad.
They are not good.
They are what they are.

Next time we'll look at this all from the brokers side.

The Truth About Lending Tree

In anything like this I find it best to start with the business model.

What is a business model?
Simple, it's what the company does, or plans to do, on a regular basis to make money.

DO NOT forget, every business is in business to make money.
Even Non - Profit's must have a business model, a plan to bring in money, or they will soon cease to function.

Lending Tree (hereafter to be referred to as the tree) portrays itself as the best and easiest vehicle for you to use to compare different lenders.
And you know very well that "When banks compete..."

But there's a couple of things you don't know.
The tree's business model is all about selling referrals, almost.

Fill out the application on their site and in 4 hours you'll receive up to 4 offers from competing lenders!

Hey that's pretty cool.
One stop shopping!

But how do those lenders know to send me their "best" rates?
Could it be because the tree sold your name and info to them for around $500?
True story!

So they advertise on TV, radio, ballparks, bus stops, and so on.
Meanwhile they bombard us with offers to sell us "red hot financing leads".
Four lenders pay $500 each for your name.
They know they have to beat the other guy so it quickly becomes a contest of who can bait and switch the other guys better.

You, the consumer, buys into what you believe is the best sounding one and commit to a loan.
You, the consumer then find out later, you can't get the rate they offered, or at the fees they originally offered but it's too late now. You've swallowed the hook.

The lender closes another loan, makes money, buys more leads.
The tree collected $750 on selling your name - so it made money.

This is the lead generation business and make no mistake, this is a big business.
I get lead sales offers everyday, not one - many!
It's not just the tree either.
Have a high traffic website? - You can collect names of people who want to refi and sell them!
Got a blog like this? - same thing.
Buy an Autodialer and download the names and numbers of people with sub-prime loans into it.
Let it run each and every day. Collect all those people that "Press 2 now" for more info.
Sell them, not just once but over and over again!

See those banner ads, pop up ads, or that long column of ads on a website - that's all about lead generation!

What's that you say?
How come the tree collected only $750 when it sold 4 lenders at $500 a pop?
Smart cookie you are!

You see, the tree also owns it's own mortgage company called The Home Loan Center.
OOOOPS!

Chances are the first quote and probably the best was from them!
Nothing like faking the public into believing they were getting an honest deal while drive applications to your own people, all the while still making money off from 3 other lenders.

Too bad they couldn't keep it a secret. Now they are involved in a class action suit.

Also related: BankRate - same animal, same tactics, same problems - class action lawsuit.
This one not brought on by consumers but by the advertisers themselves.

In anything you do, anything you buy, ask yourself the simple question -- what is the business model working here?

Oh here's a mini bibliography of sorts:

http://www.bizjournals.com/charlotte/stories/2006/10/09/daily31.html

http://www.consumeraffairs.com/finance/lending_tree.html

http://inkblots.markwoodman.com/2005/05/24/cutting-down-the-lending-tree/

http://inkblots.markwoodman.com/2006/05/23/stump-grinding-the-lending-tree/

http://www.epinions.com/content_17983901316/show_~allcom

http://thesqueakywheel.com/complaints/2006/FEB/complaint8288.cfm

http://thesqueakywheel.com/complaints/2006/SEP/complaint9941.cfm

http://realtytimes.com/rtapages/20030909_lendingtree.htm

"I contacted LendingTree.com regarding a refinance loan and was told by the representative Mr. Daniel Lete that I would have to give him a $400.00 deposit to secure the lock-in interest rate on the loan and receive additional information regarding the Mortgage lending process. I stated that I was concerned about providing my credit card information without getting any information in writing first. Mr. Lete assured me that my deposit could be refunded. However, after giving my credit card information I was sent an e-mail from Mr. Leta which included detailed information on the loan and the very limited circumstances which I would be entitled to a refund of my deposit. Mr. Lete was quite misleading.

The matter resulted in my not getting my deposit back after the loan agreement was never signed or processed. After getting the lock-in interest rate, I needed to change my refinancing amount. I was advised by Mr. Lete to get a home equity rate because of the low amount I was requesting. I declined to proceed with the process after I was quoted a very high interest rate."

Scarcity is a Value

Over the weekend we held our Investing in Real Estate: 101 seminar.
We filled the big room of the Walnut Creek Marriott.
150 people if I heard right.
No room for walk ins.

I heard nothing but good comments so far.

One of the best things (I think) in doing these seminars is that each and every person has a card they can turn in before the end and have their question answered. They don't have to stand up, they can ask anonymously, and get a real answer to maybe something they were afraid to ask.

The question came up, "Where would you suggest investing in?"
It's an open dialogue in this part of the session.

Rob handled the question originally and rattled off some far away cities in NC, WA and then mentioned Sacramento. Charlie Krackeler didn't have much to say about it, but I did.
I objected!

Rob's point was that since Sacramento was the Capitol, it was the hub of the state.
There will always be jobs because they are not going to up and move the Capitol to Walnut Creek. Jobs equal good housing appreciation.

My point was that he is part right.
Jobs, schools, and roads all add to healthy appreciation and a good overall economy.
That's true enough.
But the world is driven by supply and demand.

I argued that pretty much anywhere in the central valley there is plenty of cheap land.




I used the area by the Arco Arena where Hwy 80 intersects Hwy 5 as an example.
I have a very good friend who bought a new house, in a new division, for 1/3 what he could have down here in the Bay Area.
By the way, the Arco Arena was originally built back in 1988 in the middle of farm land. This area is now called Natomas. and it literally is right next to the Arco Arena. It even has it's own school district!

Important Point
When we as a society need more housing we build horizontally not vertically.
That means "Out" not "Up".
That's housing - not office space.
Office space builds up not out.
We want to live in our own home, our own little homestead that we can stake out with a white picket fence.
When we go to work, we want to go to the hustling bustling towers with the corner office.
Your mileage may vary, but you can see my point.

As more Sacramento housing was needed, developers simply bought the cheapest land available (farm land) and built OUT.

Some of the most expensive residential land in the bay area is where?
In places where they can NOT or will not build out.

Case in point - the SF Peninsula.
Surrounded by water on three sides and SJ on the other where can they go?
So there is a finite amount of houses able to be built.
That means suitable housing is scarce and not plentiful.

Or look at CA coastland. Want to buy a house overlooking the ocean?
This also a good example of a limited amount of spaces available.
You and I both know you'll either pay the big bucks, or have to settle for somewhere obscure.
"Cheap coastal homesites are available in the Aleutian Islands - Call Now, Operators are Standing By!"

Looking at Natomas as an example.
I went looking for a picture of before and after.
I found a whole page on the CA website dealing with the growth in this area:
LINK
Oh, and here's another good page: LINK

Here's a picture of the area showing 1999 and then again in 2003.





The red squares are farmland, bluegray housing.
It's easy to see, we converted lots of farmland to housing.
And you know what's outside of the picture?
Even more farmland!

Tree-hugging aside, here's the point:
If Sacramento housing is or becomes expensive, the developer just turns around and buys more farm land and builds more houses.
Don't blame the developer, he's just doing what the market dictates he do.
he sees the demand and increases the supply.

Macro economics say...
With a diminishing supply and rising demand, prices will increase.
(Think Oil and Gas)
What do you think gas would cost if oil was plentiful and all we had to do was turn on the tap?

While the conversion of farmland to houses isn't as easy as "turning on the tap", and limited growth or no growth initiatives may stand in the way of rabid builders plowing under the fields of corn, the general idea remains.

I met yesterday with the person who posed the original question.
As it turns out they may not be able to afford a place in the bay area.
Sacramento may fit their price range.
They are First Time Home Buyers and have limited buying power.
If they buy smart, and with a good exit plan, I see no reason why not to buy where they can.

DISCLAIMER:
I am not advocating Growth or No Growth.
I am not down on Sacramento.
Farmers vs. Builders.
Golden State vs the Kings.
Arnold vs. ?
I'm simply making the case that scarcity builds value.

Buy, Hold or Sell

We're doing another Investing in Real Estate 101 seminar this weekend.

This one will be at the local Marriott in their largest room.
And guess what?

I just found out we're overbooked!
Not only are we sold out, we're really oversold!
"I'm sorry Mr. and Mrs. Smith we're going to have to bump you to a later flight, Oooops, I mean seminar."
Room capacity is 120.

Let's just say, we're going to be cozy in there!

The good news: More than 100 people are going to get some solid education in investing.
The bad news: You are probably not going to be one of them.

So just in case, here's a quick synopsis of what we're covering and why.

One of the cornerstone ideas in investing in RE that we push is cashflow.
You must have proper cashflow.

Investment in anything means looking at your ROI, "Return On Investment".
If you don't get a good ROI, why invest in the first place?

How do you get a return in RE?
Only two ways I know of:

1. Cashflow
2. Appreciation

Think about that for a minute.

What do we see in the marketplace these days?

Flippers?
Let's talk about appreciation in terms of flipping.
Flipping is, buying low, then turning around and selling higher.
It's not that easy of course.

Sometimes you need to buy low, invest big $ to fix and fluff, just to be able to sell higher - right?
We'll that's "Appreciation".
The cashflow in flipping comes into play when the first mortgage payment is due.
No rental income means total negative monthly cashflow.
That's ok for the short term if the flip yields enough appreciation.

The greatest ROI comes from the strategy of Buy and Hold.
You know this. Look back over the years and during good times and bad, property just keeps on chugging along.
Yeah, we're in the bad now, but take a step back and look at a wider view.
Somebody somewhere said ( I can't remember right now) that property values at least double every ten years, as an average, since the 1930's.
Never less than double.

As a real example let's look purchasing a $500,000 income property and holding for 10 years.
Let's assume you put down 100,000 (20%), have good cashflow, and you never pay a dime towards principal.
Let's also assume we have a dismal appreciation rate over the course of those 10 years of only 5% each year.

Now let's look at the numbers:
Present Value would be what you have in it now - $100,000
after 10 yrs appreciation the market value or Future Value would be $820,088
subtract the loan amount of $400,000 and you'll have $420,088 in equity right?

Now go put that in a calculator and see what your ROI was.
Oh, here's an online one I found: LINK
What did you find out?

Your ROI was 15.43% right?
That's each and every year and at a very dismal 5% appreciation rate.
Still don't believe it?
Take any regular calculator, or an 8th grade math student (Hey Emily, i have a project for you...),
and start by adding 15.43% of 100,000 to itself.
The first one is going to be easy $15,430 added to 100,000 is 115, 430.
Now add 15.43% of that to the total and so on and so on.
Do it 10 times and you'll come up with $420,088 give or take a penny.

But is 5% appreciation too small?
You might think so. Most professionals would agree with you.
We may never see triple digit appreciation again, but what about double?

Go back and do the same at 10% a year.
Now at year 10 the same property is worth roughly a cool $1.3 Million!
Subtract the loan amount of 400,000 and that leaves 942,355 to be exact.
Pop that in the ROI calculator.
WOW!
25.15%

And that folks, is why Buy and Hold makes so much sense.

Yeah, I know.
I left out Inflation, Taxes, 1031 Exchanges, Realtor Fees, and so much more.
Let's not cloud the issue, the point is more about the "WHY".
Why anyone would want to buy and hold RE.

But there's a catch.
To properly buy and hold, you need to be able to HOLD.
Anyone can buy.
I have 107% financing to prove it.
This is where the Cashflow comes in.

Proper cashflow allows the investor to hold.
It may provide anywhere from a decent or minimal income each month.
But the real returns are usually found in the appreciation, not in the cashflow.

That in a nutshell is the seminar presentation you are probably going to miss.

Real Estate Blogs

It seems everywhere you turn around these days there is a new blog.
It's become one of our favorite buzzwords.

The corporate world has recently gotten into blogs.
Sports Blogs, Food Blogs, Infomercial Blogs...
The Today Show even has a blog!
Here's a thought: If Matt Lauer has something to say, why doesn't he just say it on TV? Why does he need a blog?

It seems everyone blogs these days. The blog is mainstream. It's all around us.
But what exactly is a blog?

A blog in simple terms is a software interface.
It allows normal people who do not know html or code to create pages on the internet.
That's a very powerful thing.

I could explain blogging and the dominate underlying technology of .php to normal people like this: "You type what you want to say here, and it shows up over there".
It really is as simple as that.

The blog editors today are primarily "WYSIWYG".
That's pronounced as "wizzy-wig".
It's an acronym for "What You See Is What You Get"
That means that what you type, and how you place it, and what you do to it, is how it'll turn out.

And all this adds up to is that it's easy for normal people to create pages on websites with blogging, or the server side scripting that runs blogging (php).
By the way, php goes back to 1994 - it's nothing new.

What is new, is how this technology is being used and to what end.

Many many years ago I used to design Realtor websites as a sideline.
Many were and still are static sites.
They don't change much.

Using .php I designed the usual website but on the front page I included a section where the agent could blog into.
By using an interface I gave the agent a way to change their webpage on a daily basis!

"I'll be holding an open house at 123 Easy St today. come on by!"

I know, this doesn't seem like much today, but think back just 10 years ago.
What did your website do?

So technology and php may have changed the world.
That's a good thing.
But here's my bitch.

If you are going to blog that's great.
If you are going to blog about real estate because that's your job, your profession, your skill, or your marketing plan. That's even better!
Then just do it, and do it on a consistent basis!
(WOW, I just used two major marketing catch phrases in the space of a couple of sentences!)

BUT
And this is a big BUT
Do not cheapen what you do by trying to make money on the side.
I'm talking about putting ads on your blog.

A blog is a great way to send out information to a mass audience.
It's a great way to send a message.
But I'll ask you this?
What kind of a message are you sending when you also include a revenue generating list of ads?

If you need help on blogging, setting up a blog, blogs as part of a marketing plan, feel free to contact me.
If you want to sell ad space on my blog, you've got the wrong man!

Bay Area Housing Market

As promised, here's a better look at the existing home sales numbers with an eye towards the bay area.

If you were watching the headlines yesterday, you saw the world coming to an end!
It's the natural sensationalistic thing to do.
Is that a word?
It should be!







Headlines like:

"Existing Home Sales Tumble in 2006"
"Existing Home Sales Hit 17-Year Low While Mortgage Rates Rise"
We even have the sky falling overseas,
"European Markets Fall On US Existing Home Sales Data, Weak Oils ..."

Headlines like that would lead you to believe.

In scanning the headlines an came across this little tidbit:
Two different news agencies, two different takes on the same story.



One says prices "Plunged", the other says they slipped "Modestly". Same numbers, same report, same day. Two sides to every coin right?

In the bay area here's how our numbers played out:


Here's a clip from a newsletter:
"A total of 7,488 new and resale houses and condos sold in the Bay Area last month. That was up 3.9 percent from 7,204 in November, and down 19.9 percent from 9,347 for December last year, according to DataQuick Information Systems.

Sales have declined on a year-over-year basis the last 21 months. Last month's sales count was the lowest for any December since 1996 when 7,180 homes were sold. The average for all Decembers since 1988 is 8,339. "

The chart above shows sales prices.
I believe these are Median but cannot verify that.
Over the year, you can see we're actually a bit higher than last January.

Also from DataQuick:
"The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $2,801 last month. That was down from $2,872 in November, and down from $2,943 for December a year ago. It peaked in June at $3,183. Adjusted for inflation, mortgage payments are 10.3 percent higher than they were at the peak of the prior cycle in early 1990.

Indicators of market distress are still in the normal range. Financing with adjustable-rate mortgages is flat. Foreclosure activity is rising but is still in the normal range. Down payment sizes are stable. Flipping rates and non-owner occupied buying activity are down, DataQuick reported."

"The median price paid for a Bay Area home was $612,000 in December. That was down 0.6 percent from $616,000 in November and up 0.5 percent from $609,000 for December a year ago. The median peaked last June at $644,000."


and I'll include this comment:

"Clearly the market is in a lull while potential buyers wait for lower prices. Because of seasonal factors prices may edge down during the next two months, but are likely to move up again in spring. An important factor is whether or not mortgage interest rates stay where they are. If they do, we should expect the market to pick up in March or April," said Marshall Prentice, DataQuick president."



What's it all mean?
To the short term person, the flipper, the speculator:
Not so good news, best to have sold in June when prices hit there high.
Now you'll probably have to hold till this June again to get your price.
Rates are probably going to go up, not go lower.
This is a key indicator to the Feds, they'll look at this as a healthy adjustment.
Further lessening the likelihood of their lowering rates any time soon.
That impacts your buying ability, as well as your buyers ability.
If you are buying - buy now. The market probably isn't going to go lower and why wait?
Get in the game!

To the long term person, the buy and hold, the RE investor:
Nothing new, business as usual.
We're in it for the year over year.
We have an exit strategy, we know where we are going.
The market fluctuates because that what it does.

I've said it before.
We are special here in the bay area.
Not "little yellow bus" special, insulated from the rest of the nation special.
I'm all for investing and owning in the bay area!

Oh, and the new home sales should be coming out today.
I don't care.
Neither should you.
It's the most skewed and incorrect report we're hit with.
I'd tell you why but I'll save that for another day.

December Existing Home sales

I wanted to wait till the existing home sales figures came out this morning at 7 to post.

I'll be able to get into it deeper later but for now here's just the bare the facts.

Remember though that this report comes from the National Association of Realtors, (NAR) and is a national number. That means to a reader here in the SF Bay Area, these numbers may be a little skewed.
What happens in Podunk, doesn't always happen here.

"Sales of existing homes fell modestly in December, closing out a year in which demand for homes slumped by the largest amount 24 years.

Separately, the number of new claims for U.S. jobless aid jumped a larger-than-expected 36,000 last week, a government report showed, its biggest one-week rise in 16 months.

The National Association of Realtors said the pace of existing home sales fell 0.8% in December to a 6.22 million-unit annual rate, a slightly bigger decline than had been expected.

However, the inventory of homes for sale was down 7.9% to 3.508 million units at the end of December.

Analysts had expected home resales to fall to a 6.25 million-unit pace from the 6.28 million-unit rate initially reported for November.

The national median home price of existing homes was unchanged from a year earlier, holding at $222,000.

"The blood-letting in housing continues, although at a lessening pace -- on trend," said T.J. Marta, a fixed-income strategist at RBC Capital Markets. "Despite the downside surprise, this data series supports the notion that the trough in housing and overall U.S. growth is past, having occurred in Q3 '06."

For all of 2006, home sales slipped 8.4%, the sharpest decline since 1982, when they fell 17.7%."


If that sounded like gibberish - here's the scoop:
Existing Home Sales were down.
Key word in that was "sales".
Many times we forget what says.
That sentence means the actual number of units sold over that period of time was less than previous.

Two things come into play here, how many houses sold, and how much they sold for.
Two very distinct items.


The law of supply and demand then says rates should move lower (lower demand right?)
WRONG.
While the number of sales fell almost 1%,
The median and average price of homes either stayed the same (year over year) or rose slightly.

To the traders, the feds and all those who in some way effect the bond markets, and hence mortgage backed securities, this is a better report than you may think.

To those people, this is what they see in that report:
Over the last year, with headlines blazing "HOUSING BUBBLE TO BURST?",
we as a nation saw ZERO decline in median house prices!

"The national median home price of existing homes was unchanged from a year earlier, holding at $222,000. "

Inventories need to correct, and the number of units sold may be down or up, but in the end no loss in value. Nationally speaking, How cool is that?


I'll get back to what all this means and more importantly what it means to us here in the bay area later when I get the local data...

Stay tuned.

When to Invest?

The question always comes up.
It doesn't matter if it's a "First Time Home Buyer",
or the "Wanna-Be Investor" it's always the same question.
"When is the right time to buy?"

But hey, it also comes in the form of a definite thought or statement.
"I'll buy when the market hits bottom."

Either way, question or statement, it comes down to WHEN?

When should you enter the market?
Guess what my take on this is?
That's right, it is always a great time to start investing!

Sounds like a sales pitch right?
It's not. The true investor always wants to be in the game.
Here's why...

There is always value in the market, though some times it is harder to find that value than other times. There is always a house or building that has not been taken care of properly, with motivated sellers. These are great properties to buy, just about anytime. More importantly, the real estate market is cyclical. Predicting cycles can some times be like predicting the weather. Since many of the greatest economists cannot seem to do either, it is not worth trying to jump in at the trough and get out at the peak. If anyone tells you differently, ask them if they have any swamp land they can sell you as well.

Buy and hold investors almost always make money because of the nature of real estate price increases. Even if you get in at a peak and hold, real estate typically comes back to bail the hold investor out. Established investors who only work in certain markets have even more of an advantage because they have seen peaks and valleys. They can read signs much better and know when it’s a great time to buy. Better still, they know what properties to buy because they are so familiar with the hot (and cold) spots in the area.

It's also important to consider the market when you decide on property types.
A quick example will make this clear: If you only invest in apartment buildings, then you want to watch out for housing prices and interest rates in your area. If rates get low and prices are still reasonable, people will flock from apartments to houses, leaving you with high vacancy. Doing some easy math (Net Operating Income falls) will show you that prices of apartments buildings will decline. Once this happens however, it might be a good time to buy apartment buildings. Why? Inevitably, housing prices will begin to rise and price people out of the market. As new home buyers enter the market, they will not be able to afford homes, but might be willing to settle for an apartment while they save.

It's the old supply and demand, ebb and flow all again.

So when?
Now!
(after you do your homework - right?)

Crystal Ball Anyone?

The news this week that the mortgage world seems to be talking about has to do with the economic forecast from two of the biggest insiders.

Last week it was Freddie Mac issuing it's forecast.

This week, the Mortgage Bankers Association released its economic forecasts for the next three years.

These projections did not differ substantially from those set out last week by Freddie Mac, however, here is a summary of the report.

• Real GDP growth will average about 3.0 percent in 2007, 3.3 percent in 2008 and 3.4 percent in 2009.
• Fixed mortgage rates are expected to rise to about 6.5 percent by the end of 2007 and to remain around that level through the forecast period.
• Existing-home sales will decline by about 7 percent and new home sales 8 percent relative to 2006. Both categories are projected to rebound in 2008 by about 3 percent and a further 1 percent in 2009.
• Existing home price appreciation will slow significantly over the next three years. Median prices for both new and existing homes should remain relatively flat next year and rise about 2 percent in 2008 and 2009.
• Purchase mortgage originations will reach $1.33 trillion in 2007 and remain flat in 2008. Refinance loans will total $1.06 trillion in 2007 and then decline to $957 billion in 2008. Purchase originations should edge up slightly the next year while refi originations should decline to about $800 billon.
• Total residential mortgage production in 2007 will be $2.39 trillion, declining by about 5 percent from an estimated $2.51 trillion in 2006. Total mortgage originations are expected to decline an additional 4 percent to $2.29 trillion in 2008 and drop another 6 percent to $2.15 trillion in 2009.

A couple of things to remember here.

1. Both these companies have a vested interest in the housing market.
2. This is a wild guess on both their parts, nobody can accurately tell you what tomorrow is going to be like. Not in terms of rates, or GDP growth, or anything else they have listed.
3. This is a national report, the bay area is special, we a have a certain amount of insulation that places like Podunk, MO doesn't have. Our appreciation is going to always be different.
   

I'd be pleased as punch if rates stayed where they say they will for the next 3 years.
I'll also tell you this - don't count on it.
If anything rates cannot stay the same.
Just by the nature of the beast.

Here's a chart I throw up on the screen in seminars:


You can click on that and make it really bigger, but do you see any period in time when rates stayed the same?
Not me.

Rates will change.
They'll either go up or down but they will always change.
Get used to it.

Broker Tour Tuesday

Tuesday is Broker Tour day here in my area.

If at all possible, I'll try and get out of the office on Tuesdays and meet some of the dedicated and professional Agents in the area.

That sure sounds a lot like sucking up doesn't it?
Well... Yes and No.

Walk into an open house on the weekend and you are likely to be greeted at the door by a relatively new agent.
Why? With inventories as high as they are running it's easy to see, there's plenty of open houses out there.

The experienced, dedicated and professional agent is still out there but may have 3 or more listings that all need to be held open at the same time. Those open houses need to be manned by someone, and legally they have to be manned by a licensed agent. As a new agent you'll have ample opportunity to work every weekend holding open house.

Take someone in your office's listing, pack the corner signs in your trunk and create some flyers to hand out.
The concept is simple: expose the home to as many eyeballs as possible.
But then again, as most people should be using the expertise of a Realtor in finding their home, isn't that contradictory?

It is. But there's a lousy fact hanging out there.
Typically, from the time a person starts looking for a home to the time they actually purchase a home, they come in direct contact with 17 Agents. That's a number from the National Association of Realtors. People don't stick around, they are flighty. Very little "stickiness".

Turning the tables, how do those 17 agents manage to come in contact with the potential buyers?
Mostly by marketing.
That means putting their faces on everything from shopping carts to restaurant take out bags.
My local drugstore pharmacy bags have a Realtor ad on them.
Newsletters, Bus Stop Benches, Pizza Boxes, and anything else they can to generate the phone call. Oh yeah, and by holding open houses.

That's right!
The underlying reason to hold an open house is to meet and greet potential buyers.
Selling the house is secondary. They know chances are they are not going to sell this house to you.
It's all about establishing a relationship, it's starting the conversation, it's building common ground.

Walk into an open house and the first question you'll likely be asked is,
"Are you currently working with an Agent?"
They want to know if you are attached to an agent already or do they have a chance on earning your business.

The bigger original question was, "What's a Broker Tour?"
Every area has a local Realtor marketing group.
In my area it's called CCRIM.
Contra Costa Realtors in Motion - catchy eh?
Solano has it's SAOR - Solano Association Of Realtors
Name aside it's a wonderful idea.

When an agent gets a new listing they are able to put it on Broker Tour.
Like I mentioned, in this area it's Tuesday.
From 10 till 2 or so, the agents will hold the home open not for the public, (although they are always welcomed) but for the other agents.

This way, when a home comes on the market, a good agent has had a chance to preview it, and then possibly suggest it to their clients.

But I'm not looking for a home.
I'm also not a Realtor.
So what am I doing on Broker Tour?

In part, I'm doing the same thing the new agent is doing on the weekend - I'm meeting and greeting, not the public but the professionals that drive the market.
I'm always looking to build professional relationships with honest dedicated agents.

On the other hand, I need to hear the word that's out on the street.
I need to know the vibe, the pulse of what's going on.
How the market is treating them and so on.

I'll use this information in my TV and Radio appearances as well as in the seminars.

One on One Meeting

Disclaimer:
I am in no way insinuating we are in any way Presidential.
The truth is, I like to have a relevant picture for each post.

I generally go to Google Images and grab something I find. This time I couldn't find anything generic enough that wouldn't lead the reader to believe either of the two pictures was not a real seminar participant. So I opted for the overly obvious.
I am not now, nor have I ever been, Ronald Reagan.
Furthermore, Nancy (it's actually Suzanne Massie pictured) did not attend our seminar.
(Just in case the above picture confused you)
Pheew! Now that we have that straight, Let's move on.

Following a seminar, we invite attendees to schedule one on one meetings with us.
We only have so much time available and so many slots to fill.
Our latest seminar was about investing in Real Estate.
It grabbed the attention of many active investors and "wanna be" investors.

We had 130 or so attend the last one.
Personally, I don't know why they came (it being the Holiday Season and all).
And then, I really don't know why they then made the effort to come again to meet one on one for 30 minutes (It being even deeper into the aforementioned Holiday Season and all).
But they did.

We talked to many different people.
Everyone was absolutely wonderful.

At all Rob Black Seminars the attendees are given a card on which to write their question.
At the end of the seminar, we read the questions and answer them one at a time.
So everyone has a chance to get the answer to their question they want.

But sometimes the answer isn't as in depth as we have time for.
Sometimes it only opens up to more questions.

That's what a 30 minute consultation is for.
It's an extension of the seminar in which the attendee has 30 minutes to ask the questions that pertain to their particular situation.

While there is no sales pitch, it does offer us the time to sit down, meet face to face and mutually agree that we would like to work together in the future. I guess that's a soft sell.

I honestly think I take away more from these meetings than I give.


Warning:

It's just a funny observation, but in that group I see two distinct types or styles.
Type One:
Those that want to do all the research, all the homework, and thoroughly know their market inside and out.

And then there's Type Two:
They range from wanting to have it all handed to them on a plate, to not knowing the who what or where but are eager to learn.

Neither one is right, and then both are right.

Type One'rs will come to me with an idea or deal already done -
"Mike, I want a 7/1 Interest Only ARM on this house, no points / no fees, par pricing with a three year prepay. I'll put down $45,k and the comps suggest that should give me 79% LTV. When do you think I can sign and close?"

Type Two'rs either want to be handed a complete deal, or at least the major components.
They may do some homework.
They may be working towards becoming a card carrying member in good standing of Type One.
I'll see them try and emulate what the Type One does.
They'll even come to me with the same predetermined idea of what they need in a loan package.

The problem is that they haven't really done their homework.
They don't know what Type One does.
They don't know what the yield curve is.
The CPI Data, the Existing Home Sales, Foreclosure Rates.

Do they really need to?
The answer is "No, not really".

When you think about it, that's why you pay professionals right?

Using one of my favorite analogies:
You might learn all you can about gal bladder removal before going under the knife and that's a good thing.

But do you show up on the day of the surgery with homemade sharpie pen markings of where you think they should start cutting? Chances are that while you think you know the best places to slice you open, you'll also be open to their qualified opinions.

The same goes for dealing with loans.
Maybe this ties in with why you cannot simply go to those big online lenders.

Go to a loan officer with a preconceived idea of what you want and most of the times that's exactly what you'll get. But was that the right loan for you? Did the surgeon who removed your gal bladder run into your transverse colon because you penned the incision point too low?

The Point?
Go out there and learn.
But have an open mind, be open to suggestions, and listen.
Listening is maybe the most important part.