The Broker's Record

Santa Cruz Foreclosure-Buying Seminar

June 07, 2009

I’m going to let you in on a little secret. It’s not something I talk about much on this blog – if I did, I guess it wouldn’t be much of a secret, would it? OK, deep breath – here it is, my confession.

Most of my business these days, over 90% of it, comes from listing and selling bank-owned “REO” foreclosure properties. I do work with a few buyers, because I enjoy working with them and it gets me out to see a lot of the inventory I otherwise wouldn’t see, and helps me stay up on the market and to be a better Realtor overall.

I work with a variety of banks and “REO outsources” (asset management companies) from across the nation, and I list and sell their properties in Santa Clara, Santa Cruz, and Monterey Counties – from San Jose to Salinas, from Boulder Creek to Santa Cruz, Watsonville, Pacific Grove, and everywhere in between. I’ve been doing this for about two years by now, and it’s been an interesting ride to say the least.

Along the way, I have learned quite a few things about buying bank-owned REO (”real estate owned”) foreclosure properties. At this point, these properties represent a very large percentage of sales in Santa Cruz county. If you are looking to buy a house in Santa Cruz, there is a very good chance you’ll be buying a foreclosure – especially if you are looking for homes under, say, $500,000 – which many (most?) of you are.

Last year at the Santa Cruz County Housing Exposition, I did a presentation on Opportunities in the Foreclosure Market. I video taped that presentation, and it is available on my web site. I had a great time doing the presentation, and as I recall, it was packed – standing room only. Several people told me it was the best presentation they saw at the expo.

This year, it seems there was no housing expo – but I think there is now perhaps more interest than ever in buying foreclosure real estate. And so, I’ve decided it’s time for another presentation on the subject.

I’ve reserved a room at a central, downtown Santa Cruz facility, and I’ll be giving a free presentation, limited to 30 attendees. The presentation will be different than the one I gave at the expo last year – this one will focus exclusively on buying bank-owned “REO” foreclosures. I won’t talk (much) about short sales, for example – this will have a solid focus on the process of buying a foreclosure property on the “retail” market, and is aimed at the average buyer just looking to buy an affordable home here in Santa Cruz.

Sound good? If you are interested, click here to sign up for the seminar. I hope to see you there!

Tags: foreclosure : real estate : REO : seminar

Posted by SantaCruzBroker at 11:39am
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Caveat Emptor for Watsonville Investors

May 24, 2009

I’ve got some clients, and they’ve got some money to invest in Real Estate. They are not looking to speculate on real estate – that’s how so many people ended up getting foreclosed on in Watsonville, and in California, and in many other places throughout our glorious but fading homeland. Rather than simply speculate, my clients want to make smart, long-term investments.

A Speculator is someone who is placing a bet – they put some money down, and their bet is that the value of whatever they buy will go up. They may have reasons to speculate that the price will rise, but it’s more of an anticipation, an educated guess. This is what so many people did wrong – they bought real estate they could not afford to hold on to, speculating that it would always be worth more than they paid for it, so they could get out, easy, and make a handsome profit for their trouble.

These clients of mine are probably not what you would call professional real estate investors – but they want to buy real estate as if they were – and after they do buy a few properties, and if they keep with it, hey, before you know it – they will be professional investors, after all, every professional has to start somewhere.

One of the primary things an investor wants is a good “cash on cash” return on investment . That is, they want to put up some cash, and have that cash investment return them money, put money back in their pocket, each and every year. So let’s say you put $100,000 down into a property, and you want to get a 10% return on your investment – that means, that after all expenses and costs, you get back $10,000 pear year on your $100,000 invested.

And that is where a lot of investors go astray, I think. They don’t have realistic numbers as to the income the property will generate and the costs that owning, financing, maintaining, and renting the property will incur. As it happens, my clients went on to my web site and found my handy Excel spreadsheet for income property analysis. It’s a really great tool (to be used for estimating purposes only, of course! Contact your legal, tax, and accounting professionals before making any investment decision!) to help you figure out what kind of a return you can expect on any given property.

There are some key numbers you need to know. The first, is the interest rate on the loan you will be getting. This is tricky – many times, your loan broker will quote you a figure, and then your actual interest rate turns out to be 1/4 or 1/2 or even a full percent higher than that. Make sure you ask for your Good Faith Estimate from the lender so you will know what your actual interest rate is going to be, and if you have to pay any points to get it.

You will also find out how much of a down payment is required. At first, my clients were figuring they’d only need 20% down for a non-owner-occupied real estate loan. Their lender informed them, when asking about their actual rate, it would be 25% down.

Another key bit of information you’ll need to know is, how much can you actually rent the property out for? The rental market in Watsonville has been extremely tight of late, and rental prices have been very high – or have they? I had recommended my clients look on Craigslist and also on Zilpy.com to see what the rental prices were looking like. The problem with that, though, is that these are asking prices for rent. It does not mean that they are the actual prices people are paying.

When you’re an investor, every month a unit sits vacant kills you. If you are asking too much for rent, you are not going to attract the kind of quality tenants you are looking for. You need to price the unit well for quick rental to attract quality, long-term tenants.

I talked to a property manager down in Watsonville about the rental situation. She said that the rental market had softened considerably, especially since the Housing Authority of Santa Cruz County had put a freeze on new housing vouchers. Ouch. According to the lady I spoke with, actual rents in Watsonville are now down about 20-25% from a year ago. D’oh.

What this means for my clients is that the amount of money they can afford to pay for a property, given their higher interest rate and lower rental rates means that they can offer less for a property than they had first thought – in order to make that 10% (or near 10%, anyway) cash-on-cash return on their investment. And there’s another important factor to consider for you number crunchers out there – closing costs and fix-up costs. It could be you need 25% down for your loan, and then another $10K for closing costs and another $15K on top of that to rehab the property so that its condition will make it desirable to rent quickly and for the highest rent possible. The $100K you thought you were investing could easily look like $125K before the first tenant moves in, and if you want to get 10% back, you’ll need to see $12,500 per year free-and-clear.

While we are on the subject, let me ask this: why are rental prices in Watsonville down 20-25% from a year ago? I don’t know for sure, but here’s what I think: it used to be there were a lot more owner-occupants in Watsonville than there are today. A year ago, there were less rental units available. All the people getting kicked out of their houses by foreclosure were competing for the scarce rental stock. Now, a lot of those formerly owner-occupied houses have turned into rental houses, thereby increasing supply. At the same time, not as many people are getting foreclosed on at the moment because of the various foreclosure moratoria which have been in place. And, of course, the unemployment rate in Watsonville is reported to be at 25% – that’s huge, and I think it means a lot of people are going to be sharing housing, families living with families, rather than each family having their own individual place as I’m sure they’d prefer in many cases but owing to the weak economy cannot afford to do so at the moment.

And, one other thing: what do you think these lower rental rates are going to do to home values? Will they have no effect? Bah, humbug. I dare say they will continue to drag down property values in Watsonville, and that we have not yet hit bottom. A lot of the buyers in Watsonville today are investors – and a real investor will only be able to pay so much for a property to get the return they need to justify the considerable risk. Also, as rental rates decrease, it blunts the incentive to for someone to buy – as the chasm between monthly rent and a full PITI payment widens, more fence-sitters are likely to stay there on that fence, and continue to wait out the market.

To all ye would-be investors, in Watsonville and everywhere else in our Golden State, I say: rock on, but play it safe, and always use your green eyeshades when analyzing any real estate investment. I’d hate to see you end up like thousands of well-intentioned but mis-guided “investors” before, with your investment dollars flushed down the drain and a bitter taste in your mouth.

Tags: cash flow : closing costs : craigslist : discount points : down payment : foreclosure : good faith estimate : home prices : home values : housing authority of santa cruz county : interest rates : loan : loan origination fee : rate of return : real estate : real estate finance : recession : rental : return on investment : watsonville : Zilpy

Posted by SantaCruzBroker at 1:00pm
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Santa Cruz Real Estate Great Debate

May 17, 2009

Spring has definitely returned to Santa Cruz! We’ve been having some incredible days, and I’ve been enjoying being a new dad here in town, cruising around with wife and baby in the stroller, around the neighborhood, over to Aptos Village Park, down to the Capitola Beach, West Cliff Drive, soaking it all in. It’s been an incredible what, almost six weeks now since Aiden was born?

I must admit, with all the fabulous weather and my beautiful bouncing baby boy to take care of, I’ve taken my eye off the real estate market somewhat. And that’s a good thing – truth be told, I’ve been working, on average, over 80 hours a week for nearly the past two years, and I think that for me, it’s not a sustainable pace. I reckon these days I’m down to something closer to 40-50 hours a week, which does leave some precious time to spend with my wife and amazing little man.

I think that many of us started off the year thinking there would be some Change, right? I think we were promised that, and for good or ill, change has come. Certainly, the real estate market has changed over the past month or two. If you are a subscriber to my newsletter, you may have noticed that last month (April 2009), the median price of housing in Santa Cruz has risen.

Well, I guess that puts the lie to me, right? Here I am saying no no, we’re not at bottom – and now we see rising prices? Scant months after I got up on my high horse and said, “Wait out the storm, ye long-suffering would-be buyers!”

Let’s take a look at these numbers. First, the summary:

So from a median price in March of 2009 of $405,000 we have skyrocketed to a median price of $449,000 – nearly an 11% rise in a single month. Now let’s look at the breakdown of those numbers, divided up into different market areas in Santa Cruz county:

You’re going to have to click on the chart to open it up in a bigger window to actually read the numbers. Taking a closer look, you can see that in every market area except for Rio del Mar (Aptos) and Soquel, the median home price in April was lower than it was in March. Those two areas, however, showed such strong month-over-month gains that they did lift the entire median price up about 10.9% for the county as a whole over the month before.

Except for those two areas, every other market area in Santa Cruz county showed price declines. And let’s not blame it on Watsonville – Watsonville experienced the smallest price drop of all, just 0.7%. Capitola – down 12.3%, Scotts Valley, down 28.4% – and the West county (Bonny Doon, Davenport, Empire Grade, etc.) – down a whopping 28.6%.

Now, hold on a second. Let’s talk about lies, damned lies, and statistics. There is a chorus of voices saying that it looks like we’re hitting bottom – after all, the median price, county-wide, did just increase, right?

Nope, not really. The median price just decreased a whopping 33.5%. The truth is, it is pointless to look at one month compared to the month before, because there is a lot of seasonality in the real estate market. You really need to look at the year before to see how the market performed – and from the statistics, we can see the median home price, county-wide, is actually down 33.5% in April of 2009 compared to a year ago.

And some people are now saying the market is bottoming out?!

One thing that many folks from the “the market is bottoming!” camp like to point out is the number of multiple-offers some listings are receiving. It is true, the market for single-family residences priced under $400,000 is very competitive. Most of those properties in our neck of the woods are to be found in the Watsonville area, and there’s no lack of multiple-offer situations going on down there. There are also a lot of multiple-offer situations going on in San Jose and Salinas – I have a listing in San Jose where I got 34 offers (asking price: $349,900) and another in Salinas where we got a similar number (asking price: $149,900). Surely that means we’re at the bottom, right? Right??

Honestly, I am mystified how people can take a few anecdotes, completely ignore the state of the economy and the housing market as a whole, and now herald, with strident authority, that we are now at the bottom of the market and THIS, TODAY is the time to buy, or you will miss out on the chance of a lifetime.

It’s clear that the bottom is coming – there will be a bottom, someday, and prices will start to rise, eventually. And it’s true, we will only know it by looking in the rear-view mirror – which makes it impossible to say for sure that this is, or is not, the bottom of the market. What’s more, not all market segments will bottom at the same time, so there really is not truly a “bottom” so much as a series of different bottoms for different kinds of properties in different places.

Allow me to tackle the anecdotal evidence head-on. Again, many people point to these multiple-offer situations as evidence we have hit bottom. The thing is, there were many multiple-offer situations going on this time last year. Many. Why do you suppose that is?

I will grant you – there are more this year than last year – more properties getting multiple offers, and more offers getting submitted. Competition is, certainly, stronger this year. So let’s take a look at those charts again, at another key bit of information: the amount of inventory available.

Despite what you may have heard from certain interest groups (California Association of Realtors, National Association of Realtors, ahem), there is not a great selection of homes to choose from on the market. This time last year, there were 1,042 single-family residences available county-wide. Now, there’s just 787 available – that’s a drop of 24.5%. Simply put, there is a lot less to choose from this year than last year – creating more competition for those homes which are available. Good news for sellers, that’s for sure!

The overwhelming majority of these multiple-offer situations happen in the low end of the market – in Salinas, that would be under $250K, in Watsonville, under $350K, in San Jose, under $450K. What kind of homes are selling in these areas at these prices?

Bank-owned homes, that’s what kind. Only foreclosure real estate can sell at those prices. Well, that’s not true – short sales can also occur at those prices, and some people who have had their homes a long, long time may have enough equity in them to compete with all the REOs and short sales. However, I’d bet my bottom dollar that upwards of 75% of all of these sales are bank-owned “REO” foreclosure properties, probably another 10-15% are short sales, and the rest would likely be probate sales and whatnot.

As it happens, there is a distinct lack of REO inventory on the market right now – and again, at these price points, the vast majority of the market consists of REO properties. This inventory shortage comes just at the time when sales hit their peak – the hot time of our real estate market tends to be March through August, that is when more buyers are out shopping compared to the rest of the year.

So why is there a lack of REO inventory? Has there been some dearth of foreclosures, has the foreclosure crisis abated? Not hardly. Change has come, and during the transition, while all this TARP business and Making Home Affordable initiatives were getting going, the lenders had some self-imposed moratoria on foreclosures. That, and many states (including California) enacted laws to lengthen the time it takes to carry out a foreclosure – and that has served to really tighten up the inventory of these low-end properties.

These multiple-offer situations we are seeing now is simply the combination of a very constricted inventory coupled with the seasonal increase in real estate sales.

The good news for home buyers is that this, too, shall pass. The various moratoria have been lifted and the clock is already winding down on the laws lengthening the time it takes to foreclose on a property. What that means is that Notices of Default (the first step in the foreclosure process) are still near, at, or over record highs.

Here is what I predict – and I’m probably wrong, but I’m going to go out on a limb here. I predict that in 2-3 months, we will begin to see more REO inventory on the market. That puts us in the July-August time-frame. In 3-5 months, we will be seeing a lot more REO inventory coming onto the market – just at the time that the peak buying season is ending. We will see a significant increase in REO listings – and a continuing drop in real estate values, as supply once again exceeds demand.

Another interesting wrinkle is that many of these coming foreclosures are not bottom-rung properties. Many of these upcoming foreclosures are in solid, middle-, upper-middle, and wealthy neighborhoods. I wonder, what’s that going to mean for the market as a whole? Personally, I think it’s going to put increased pressure on the bottom of the market, as many people who were looking at buying a lower-priced “starter” home may now be thinking of stretching to go for one of these “premium” foreclosures which I expect we’ll be seeing.

And that doesn’t even begin to address the elephant in the room – the sad state of the local and national economy. There is a whole lot more to the picture than just the simple supply of foreclosures and demand for affordable housing.

So let the debate rage! We’ll see which way the chips fall, and I look forward to the market data from September, October, and November of this year. As the late Paul Harvey used to say – stand by for news!

Tags: affordable housing : bubble burst : california association of realtors : Capitola : declining market : forecast : foreclosure : home prices : home pricing : home values : housing crisis : Making Home Affordable : market data : median home price : multiple offers : notice of default : parks : probate : real estate : real estate industry : real estate sales : realtor : realtor anecdotes : REO : short sale : TARP

Posted by SantaCruzBroker at 1:01pm
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Santa Cruz’s Newest Resident

April 29, 2009

And again, a shockingly long time has gone by since my last blog post. But this time, I’ve got a really good excuse. Just about 3 1/2 weeks ago (April 4, 2009), my wife and I welcomed into this crazy mixed-up world our first child, Aiden Santiago.

I’ve got so much to say on the subject of Aiden Santiago, I hardly know where to begin! There’s so much to talk about on the subject of being an expectant father, the birth, and now of course, being dad to a newborn. But there’s one thing I want to comment on, because I think a lot of expectant parents in Santa Cruz are asking themselves this:

Sutter, or Dominican?

My wife and I did the tour of both Sutter and Dominican. We have friends who have had babies at both facilities. We registered at both facilities. If you talk to people about this, many people will favor one or the other – the general consensus seems to be that both are excellent places to have a baby, but that the food at Sutter is better.

In the end, we did go to Sutter – and the baby was delivered by unplanned C-Section after almost 20 hours of labor. Throughout the whole labor and post-op time at Sutter, I was just blown away by the staff. I could not imagine a more professional, compassionate, caring, and friendly group of people to take care of my wife and our baby.

Yes, the room was nice, the food was OK (except there is no WiFi available for patients or guests – grr!) – but the care we received there was just beyond description. I feel a deep and genuine debt of gratitude to the staff there – this is something that they do all day, every day – but I never got the feeling that they were just doing their job or punching the clock.

I’d also like to give a shout-out to the lactation center at Sutter. We went there a few times with Aiden so we could nail this breast-feeding thing. The nurses there were also fabulous – they spent a lot of time with us to make sure that baby Aiden and mom were connecting well and Aiden was gaining weight as he should.

And thanks, also, to all my friends and family who have written and called and come by to visit! Thanks especially to my mother who has been spending a lot of time with us here in Capitola, away from her home in Berkeley, helping us to adjust to our new life as parents. Thanks, ma!

Tags: dominican hospital : sutter maternity and surgical center

Posted by SantaCruzBroker at 8:42am
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Speculating on Santa Cruz Real Estate

April 02, 2009

I got a phone call the other day from a lady who was interested in one of my listings in Capitola. Unfortunately, the property had just closed escrow the previous day, and I let her know…being the good Realtor I am, I quickly brought up the MLS and tried to find some good “switch” properties for her.

I found one, and during our conversation, it turned out she was an investor, looking to buy a property for investment purposes. This came up because the “switch” I had found for her had higher HOA dues than the property she was originally calling on, but I explained that the “switch” would rent for considerably more than the property which originally interested her, and would in fact provide much better cash flow.

These days, though, the people who are investing for cash flow are not buying in the mid-county area (Capitola, Aptos, Soquel, etc.) – because the properties there do not cash flow without a huge down payment- and even then, if you were to put a huge cash down payment, you would have a poor cash-on-cash return of your investment. I suggested to her that she take a look in Watsonville, because there’s a place where you can get good ROI (return on investment) with a relatively low down payment.

She wasn’t interested in buying in Watsonville, though. Her feeling was that Watsonville would not be appreciating in the future, and that she felt that Capitola, Aptos, and Soquel would have much better appreciation in the future.

Ahhh. Here is an important distinction to make: this lady is not truly an investor. Real investors are in fact snapping up properties in Watsonville in droves. This lady is a speculator – she speculates that the values in Capitola and such will be going up farther and faster than they will in Watsonville.

We then spoke for a few minutes about future price appreciation. I indicated that it will be some time before prices start rising in the mid-county area, and that before they do, prices will continue dropping for some time to come – whereas Watsonville has fallen farther, faster, and is closer to the bottom. However, to an investor, it does not matter so much that the prices in Watsonville will continue to fall for some time to come. When a property is truly providing positive cash flow, it does not matter much that the value has dropped, if it costs you nothing to own it and instead reliably kicks off money every month that ends up in your pocket.

I don’t see the sense in buying something in, say, Santa Cruz that requires a large down payment, which does not provide much in the way of cash flow (and probably has a negative real cash flow, considering vacancy factor, maintenance, etc.), and will be heading steadily down in resale value for some months (or years?) to come, before someday eventually climbing back up to the price you paid for it, and then jumping high enough up over that price to justify the money you have spent on taxes, insurance, maintenance, and of course, the cost of the eventual sale (let’s not forget that 6% commission!).

On the other hand, it is patently sensible to me to buy a $250,000 3-bedroom house in Watsonville, put down 20% ($50,000), rent it out for $2000 a month, make $500/month after principal, interest, tax, and insurance – and assuming a 10% vacancy factor, you’re making a 10.8% return on your money every month. Now that is what I call investing! Who cares if the property drops in value the next 1-2-3 years? You’re making a 10.8% return on your $50K, where else are you going to get that? OK, I didn’t factor in maintenance and whatnot, but even so, you’d still be looking at a return that’s much better than you’re going to get in today’s stock market.

Having said that, there are investors who do work in the mid-county area and do well – however, these are people who invest in properties that are, typically, not in a condition that can be financed. They pay cash for the properties, do the repairs necessary to put them into a livable, easily-financed condition, and turn around and flip them in a short period of time. Typically, they are contractors, or investors paired with contractors. There are very few investment-grade properties in Santa Cruz county outside of Watsonville where you can buy, hold at a profit, and sell down the road for a net profit – without speculating on an eventual price increase to make it all worth the considerable risk.

Tags: aptos : Capitola : cash flow : investment : rate of return : return on investment : Santa Cruz : soquel : speculation : watsonville

Posted by SantaCruzBroker at 12:01pm
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