The Norris Group

147-TNG Radio – I Survived Real Estate 2009 11-7-09

This week The Norris Group Real Estate Radio Show and Podcast presents Part 8 of I Survived Real Estate 2009.

This week The Norris Group Real Estate Radio Show presents Bruce Norris’ segment of I Survived Real Estate 2009.

Delinquencies have exploded. From July 08 to July 09, we have gone from 5.3 percent to 9.7 percent delinquencies. The inventory of REOs has gone down, because banks have not taken back as many as they should. Some people have not made payments in 14 months. Trustee sales have also declined during this same time period. We had 28,795 trustee sales in July 08 and then we progressed to the 9.7 percent delinquency rate. We are currently 306,000 trustee sales short of where we should be. That averages 25,000 homes going out per month in the future. We have not peaked at delinquencies, and according to reports, we will soon be at 13 percent delinquencies. At 13 percent, we will be releasing 70,000 homes per month. Bruce does not believe that we can have a positive market if these statistics are true.

FHA is going to have a large number of defaults next year. They once had a 203K loan for investors in which investors could buy a property and include the repair bill in the loan. A lot of people would use this kind of loan and they would buy up to 7 homes and use them as rentals. Bruce thinks this would help clear up a lot of inventory.

Bruce thinks that Fannie and Freddie programs should be expanded so that qualified buyers can get unlimited loans. We are currently stuck at 10, and many investors are capped out because they exchanged their homes out of California and moved their investments to another state. Those investors cannot sell their property and come back to California.

We are currently giving away homes for 8,000 dollars. That money is coming from tax payers. Bruce thinks that we should just let people take these homes for no down payment. We will have people walk away, but the next buyer will be able to easily take it. Under this kind of proposed program, it would not matter if the buyer qualified or not because this loan can be continually passed down. These houses could go to investors with a 5 percent interest rate. This program would not have foreclosure, because the problems would be solved by the next buyer. The people who have recently foreclosed on their homes will not be able to qualify for homes, which may keep them out of the market for the next few years. We could just reintroduce these people as buyers if they did not have to qualify. This is not a program that we have never seen before. We are trying to solve this problem by selling the next house to the owner occupant who was shoved into home buying by the nonsense financing of 05 and 06.

We are already doing zero down deals. When Bruce sells a property, he usually pays part of the closing cost. The person getting 3.5 percent down on a 100 grand purchase is getting an 8,000 dollar check; that is better than nothing down. If you just had nothing down and these people qualified, we would get rid of a lot of homes.

Bruce and many other investors believe that we need to get rid of the FHA 90 day flip rule. When an investor fixes a property, which may only take 3 to 4 weeks, and they sell it within 90 days, the investor is believed to be guilty of fraud. The lender has to pay the cost for this, because the investor will subtract the amount that he or she must pay the lender for the property. We need to start looking at investors as people who can help this problem. At some point, we must either choose to not foreclose, or we must pay catch-up in a painful market.

Bruce asks Christopher Thornberg if he expects the dollar to lose value, and how the value of the dollar impacts interest rates. As the trade deficit gets wider, the dollar goes up. Now the trade deficit is going to close, so the dollar will get weaker. There is very little doubt that the dollar will weaken. Interest rates are undoubtedly going to go up. The federal reserve has increased the money substantially and that money is going to cause inflation. The Federal Reserve is either going to let inflation happen, which will raise interest rates, or they will fight inflation by selling the long range securities they bought, which will also raise interest rates. One way or another, interest rates are going to go up. In the shorter run, it will be faster to allow inflation to occur, because that would bail out the asset markets. In 1982, the mortgage rate was 18 percent, because of the fear of inflation.

Bruce thinks that we can absorb a higher interest rate and still have a good real estate market, because the combination with the cheap price could absorb a double digit interest rate, just like in the 70s. Thornberg says that a 1 percent increase in the mortgage rate means a 10 percent decline in prices. Bruce disagrees with this, because between 1974 and 1980 we had a tripling in real estate prices and interest rates doubled. Thornberg tells Bruce that he is talking about the real mortgage rate, which is the mortgage rate minus the rate of inflation.

Bruce asks Thornberg what the statement “Unemployment is a lagging indicator” means. Thornberg says that means that “the labor markets are the last to go into the toilet and the last to dry off.” Bruce asks if that means “when labor improves, every other category of real estate should have already started to improve”. Thornberg says that residential real estate leads commercial. Now, we keep waiting to hear about the collapse in the commercial market, but we are not seeing this at all. Thornberg says that this sort of lead and lag mentality can be exaggerated.

This is why Bruce brought this up, because in the last cycle, employment improved in California from 1994-96 but we did not have a price increase until 1997. If we do not have price increases, builders will not build anything. Bruce asks if you can have an improved labor market if builders do not have any work to do. Thornberg says that these two factors do kind of work together. The prices started to go up after the labor increases from 1994-96. Thornberg reminds Bruce that in the early 90’s we lost zero space, defense, and migration. In that market, the real estate was hampered by the excess supply. Thornberg takes issue with the idea that we should subsidize the building of new homes, because he believes that we have too many homes. Thornberg believes it would be a bad idea to subsidize the construction of homes when there is already too much inventory. Bruce says that some builders have been fixing existing inventory, and Thornberg believes that is all the builders can really do.

Robert Toll made 700 million dollars between 2000 and 2007 because he was selling too many houses at too high of a price, and now he wants tax payers to bail him out.

Bruce Norris asks Rick Sharga if people foreclosed for different reasons in 2008 versus 2009. Rick says that the reasons are not as different as the press would lead you to believe. The media has jumped ahead to the next wave of foreclosures. We are looking at a 3 wave foreclosure tsunami. The first wave began in the first quarter of 2006, because of the subprime meltdown and ARMs. The MBA numbers suggest that 33 percent of the new foreclosures are unemployment. That means that 2/3 of the foreclosure activity is not employment related.

What we are really seeing is increasing levels of foreclosure activity from the first wave, which is being made worse from the second wave. The second wave is about to pick up steam. If unemployment peaks around the first quarter of next year, we will see the foreclosures related to that peak around the 3rd or 4th quarter next year. That will be just in time for them to be augmented by the next wave. This next wave will be caused by the option ARMs. Many loans are going to reset, and people will owe more on their reset loans than their original loans.

Strategic defaults are going to be a problem. In the past American culture, people honored their contracts and chose to make their payments. Now people are realizing that the house they bought is worth half of what they owe, and they are wondering if it is in their family’s best interest to keep paying. If someone is only 10 percent upside-down on a loan then they will probably stick with the loan, but if they are upside-down by 50 percent then they will probably default.

Thornberg asks people if their credit or their equity will hear quicker. Thornberg says that most of these people will have their credit heal faster. Sharga responded to Thornberg with a story about a Coldwell Bankerk agent that was fired. This agent counseled her customers to default on their current loan after qualifying and buying a second house. Bruce feels that there is still a lot of character being shown in California; a state with a 9.7 default rate that has had a 50 percent value drop.

There is a proposal being supported by 16 senators to increase the tax credit to $15,000 dollars for next year. The current $8,000 dollar tax credit started at $15,000 dollars, but it was then taken down to $7,500 dollars, and then it was increased to $8,000 dollars. MBA is supporting an open $15,000 dollar tax credit. That includes owner occupied and second homes. Every time someone buys a house, they spend an average of $7,500 dollars. That money goes into places like Home Depot, Lowes, Porter Paint, and furniture companies. MBA’s economist estimates that if the $15,000 dollar tax credit was approved today, then an additional 400,000 purchases would take place over the next year. $7,500 multiplied by 400,000 is a lot of money. David Kittle would argue that when these people begin to buy these homes that they would most likely be buying a foreclosure. The government is going to have to spend money to bail out that market anyway, so David thinks this is a better option.

Christopher Thornberg believes that this proposal is ridiculous, because you cannot expect the government to continuously subsidize everything. However, Christopher does think that there is a reason for governments to provide these opportunities, because the market can get into a death spiral. Temporary credit causes a short term burst in sales to stabilize the market, but then you must stop subsidizing and let the markets fix themselves.

One year ago, Fannie and Freddie were put into conservatorship. They were not too big too fail. If the government had allowed everything to fail, things would have been ten times worse than they are right now, but these problems would be over by now. We need to allow businesses to fail. Independent lenders are going out of business, because they cannot get warehouse line capacity. This is because the Obama administration has put on a capital requirement which forces these lenders to put a dollar into reserve for every dollar they lend. One year ago, we had 120 facilities that gave warehouse lines to lenders, but we now have only 12. As individual mortgage bankers go out of business, all the money is being funneled to Wells Fargo, Chase, BB&T, Bank of America, and Citi.

Bruce asks Joseph Magdziarz who has the final say as to what a property is worth. Is it the appraiser, the review appraiser, the underwriter, or is there a boss of the underwriter. The problem with government subsidies is that we cannot find the real market. When subsidies are affecting the market, we cannot find the true demand and supply balance. An appraiser usually has the opportunity to observe the property. An AVM is just an awful valuation model that may tell you which appraisal should be reviewed based on statistics. Joseph thinks that it is wrong for lenders to use AVMs to turn down an appraiser’s opinion. You should stay with you appraiser’s opinion, or you should get a review appraisal done. Unfortunately, that is not going to happen. We must remember that government intervention only postpones the eventual. We need to have a free market.

Joseph talked to five major builders in his market area. Most of them build 700 to 800 homes per year. One had taken 3 permits out this year, and he told Joseph that he never wants to own lots and subdivisions. He hired The Appraisal Institute to come up with a pricing mechanism, but he wanted a real value, because he did not believe that he could build his properties for what he could sell them. In most companies, the underwriter has the final say in the value of the property. Bruce asks if there is a boss of the underwriter who can trump the underwriter’s decision. The speaker claims that his company does not do this, but this may be true in other companies. One of the problems that Joseph has come across is that many of the underwriters are not certified, yet they are responsible for second guessing someone who is trained in appraisal.

Bruce asks what happened to the buyer’s ability to look at the market and say, “I’ve seen all the vacant houses that are listed for $75,000 and I want to buy this property at $135,000.” The system is trumping the buyer’s decision as if they have no idea what they are doing. Bruce provides an example of how this problem is affecting his company. Bruce bought a property in Moreno Valley for $50 grand and he fixed with $35 grand. When he attempted to sell the property, he got six offers within 48 hours for $120 grand to $122 grand. From Bruce’s perspective, that states market value. There were six buyers looking at all the market inventory and they thought Bruce’s property was a better deal than the other property’s priced at $120 grand, and they also thought his property was superior to the properties being sold at $75 grand. The appraisal for Bruce’s property came in at $102,000, and the review appraisal came in at $85,000. Bruce would not have been rewarded for his efforts if he sold the property at $85 grand, so he no longer makes the effort to buy and sell in Moreno Valley. The consequence for this is that there could have been a $120 grand comp for the entire neighborhood to enjoy, but now they have a $50 grand comp to look at, because they did not let the buyer determine what market value is. Bruce chose to keep this property and rent it for $1,150 dollars. The value of owning a house is being topped at half of rental value. Bruce thinks that is ridiculous.

Tommy tells Bruce that this problem would not have occurred if the property had been sold through an auction. Auctions are not contingent on financing. Most of the homes that Tommy sells are financing, but the buyer already knows what they are qualified for. In Tommy’s entire life, he has never had an appraiser dispute a house price that was sold in an auction.

Christopher Thornberg says the problem is that the banks worry about the appraisals, and they are not under the assumption that buyers are concerned about the appraisals. If we allowed a system where we had recourse mortgages again, then we would have deals in which buyers could buy houses above the appraisal value. However, the buyer would have to sign a deal which would allow banks to take the buyers assets if the buyer goes bankrupt. Bruce interrupts Thornberg, exclaiming that what Thornberg is proposing is that the appraisal system is correct. Bruce feels that we must respect the buyer’s decision more than that. Thornberg explains that the bank does not know that Bruce had six offers. They are under the assumption that there is only one accepted offer, and the appraisal came in at less than that offer. The bank is worried that if the buyer cannot pay his mortgage, which is half of rent, then they must turn around and they can only sell that property for $85 grand. If the buyer could sign a secondary note, making the deal a full recourse loan, then it shouldn’t make a difference.

Bruce asks John what the percentage of his sale price to his cost is in this market. The sticks and bricks costs about $50 dollars per square foot, but that does not include the land and the additional fees. In Fontana, John has built homes in the last 5 years that are now repos. John’s company tried to sell to people who were qualified and had good FICA scores. At that time, Wells Fargo was very nervous about the Alt A and subprime loan. John’s competitors would sell to anybody including investors and people who were not occupying the properties.

The federal first time homebuyer tax credit allows you to get the credit regardless of whether or not you paid any taxes. The state program only gives you as much credit as you have already paid in taxes. John must decrease his prices to encourage buyers to buy his homes. His homes are more expensive than foreclosures, so he must show the value difference between his homes and foreclosures.

John says that builders are not building 225,000 homes as Chris mentioned previously. Builders are currently only building about 40,000. John’s company will only build about 70 homes this year.

The video of the live event is not being aired online HERE.

You can visit isurvived2009.com to learn more about our sponsors and speakers.

146-TNG Radio – I Survived Real Estate 2009 10-31-09

This week The Norris Group Real Estate Radio Show and Podcast presents Part 7 of I Survived Real Estate 2009.

This week The Norris Group Real Estate Radio Show presents Bruce Norris’ segment of I Survived Real Estate 2009.

Robert Toll made 700 million dollars between 2000 and 2007 because he was selling too many houses at too high of a price, and now he wants tax payers to bail him out.

California has a 9.7 percent default rate, and its home values have dropped by 50 percent. Bruce thinks that shows a lot of character, and that there are still plenty of people honoring their contracts.

SOMEONE believes that if they had purchased a home that turned out to be a terrible deal, he would be furious with his banker and the appraiser. The buyer on our system has always been on an island by himself. The Realtor does not have a fiduciary responsibility to the buyer unless they are contractually working with the buyer, the lender has underwriting standards but is not responsible for the buyer to make the payments, and the guys at Bear Stearns apparently did not have any fiduciary responsibility either. SOMEONE’s realtor told him that if you don’t have someone to write a mortgage for you, then use this person. That has worked very well with our system, because everyone played by the rules, but within the last five years, all the rules seem to have flown out the window.

Bruce asks David why 60 to 70 percent of loan modifications fail, and if principal reductions should be part of loan modifications. The lender does have a fiduciary responsibility, because they have buy-back agreements. There are many loans coming back from Fannie and Freddie, and they are asking the lenders to take them. The lenders do have responsibility, but the broker does not. There is recourse for the buyer in situations in which the buyer has committed fraud, and 80 percent of the loans going into foreclosure, in California, have fraud committed on them. That means that loan officers, Realtors, appraisers knew what they were doing. Even many borrowers are knowledgeable of the fraud that is occurring. David gives an example of a gardener who was told that if he stated an income of 15,000 dollars a month and falsely claimed to own a nursery, rather than his true income of 1,500, that when the value of his property went up the person helping him get the loan would split the money made on the deal.

Bruce recently talked to the president of a company in California who just bought a pool of mortgages for 335 million, and their face value was 25 cents or less on the dollar. He was in the subprime business, and he is probably responsible for creating the same paper that he is now buying and making a fortune on. David thinks that is shameful. David thinks that Barney Frank is one of the most intelligent people in Congress, but his policies are wrong. A year ago, 8 out of 10 of those subprime loans were still being paid on time, but now that number is 7 out of 10. It was not the products that were bad, but the subprime product was given to the wrong people. 50 percent of the 30 percent who have failing subprime loans will not lose their homes. That means that 85 percent of the people who got a subprime loan will not lose their house, but the media pushes it the other way.

David thinks that some loan modifications should include principal reductions, but not all. People in David’s industry once manually underwrote loans, and people had to qualify. That is what we are doing today, and we are making the best loans that we’ve made in 15 years.

People are asking lenders and servicers to use tools in a way that they were never designed to be used. Loan modification, forbearance, and workout programs were meant to be used on a case by case basis, but now we are trying to use these programs as mass market products. Now people are looking Obama to wave a magic wand over all the problems that are occurring. Short sales were supposed to be a rare occurrence for when someone has fallen on bad financial times at the same time as their house lost value. Now we are wondering why we cannot ask a single loan officer to do 100 short sales per day, and that is how many files they are getting. The tools we were using to fix this problem were not meant for the volume of activity we are seeing. Tommy believes that auctioneers can help fix that problem, but they have to sell at the proper value. Most people who have invested in the stock market have an equity that is off by 30 percent. Yet stock investors don’t think that the government should come up with some sort of modification or a cramdown for those sorts of mistakes. Tommy believes that people should know that real estate does not always go up. We have sold the concept that when you buy a home it will go up in price, and people have speculated on that concept, which is what caused all the problems we are currently seeing.

Bruce asks Pat if the reason for buying homes has changed. Pat says that it depends on where you live. All real estate is local. In the crazy market areas, some people began to look at real estate as an investment. In places like Michigan, home prices were not sky rocketing, so people simply viewed homes as a place to live in. Pat agrees with Tommy’s perspective on how this real estate problem came about. Realtors have contributed to this problem by telling people that they can easily flip properties.

Christopher Thornberg believes that NAR hires economists to go out and produce ridiculous research, so that it can be used to support prices. The NAR never stood up in 2005 or 2006 and told everyone that there was a housing bubble. Pat believes that the NAR had very valid research. Thornberg debated economists from CAR and NAR who were telling him that there was no bubble. He frustratingly tells Pat that people should not view the NAR as an innocent victim on the sideline that was hit blind sighted by crazy people in California. Pat disagrees with Thornberg’s statement. She believes that the NAR’s economists did research in a credible way.

Tommy Williams moved to Oklahoma in 1985 immediately after he had experienced radical real estate devaluations in Western Illinois. He sold a farm at auction that brought 3,500 dollars an acre, but before he moved to Oklahoma, he resold the same farm for 1,200 dollars per acre. He met a lady who was trying to sell her house and he told her that her house would not sell for what she owed on it. She told Tommy that she had never heard of such a thing as a house that sold for a lower value than what it was bought for, and that she was going to tell congress that there should be a law forbidding homes to be sold for a decreased value. Christopher Thornberg jokingly asks if the woman trying to sell her house was Nancy Pelosi.

The 8,000 dollar tax credit was good for the industry. Bruce asks Pat if we would get the same result on a program involving a qualified buyer with no down payment. Pat is not sure if that kind of program would work. The NAR has seen a lot of qualified buyers sitting on the fence, because the media is saying that prices are going down. The buyers were unsure that they will be making a good investment. Now that the 8,000 dollar tax credit has come in, many of those fence sitters have chosen to enter the market. These new buyers are looking at low interest rates, choice in the market place, and affordability, but now there is less choice because the market is improving. Bruce asks Pat if we need to induce these buyers with a check. Pat would have said no six months ago. It bothers her to think that we need to pay off people to enter the market.

There is a proposal being supported by 16 senators to increase the tax credit to 15,000 dollars for next year. The current 8,000 dollar tax credit started at 15,000 dollars, but it was then taken down to 7,500 dollars, and then it was increased to 8,000 dollars. MBA is supporting an open 15,000 dollar tax credit. That includes owner occupied and second homes. Every time someone buys a house, they spend an average of 7,500 dollars. That money goes into places like Home Depot, Lowes, Porter Paint, and furniture companies. MBA’s economist estimates that if the 15,000 dollar tax credit was approved today, then an additional 400,000 purchases would take place over the next year. 7,500 multiplied by 400,000 is a lot of money. David Kittle would argue that when these people begin to buy these homes that they would most likely be buying a foreclosure. The government is going to have to spend money to bail out that market anyway, so David thinks this is a better option. Christopher Thornberg believes that this proposal is ridiculous, because you cannot expect the government to continuously subsidize everything. Chris thinks that this kind of spinning can cause the market to get into a “death spiral.”

The video of the live event is not being aired online HERE.

You can visit isurvived2009.com to learn more about our sponsors and speakers.

146-TNG Radio – I Survived Real Estate 2009 10-31-09

This week The Norris Group Real Estate Radio Show and Podcast presents Part 7 of I Survived Real Estate 2009.This show can be downloaded at: http://www.thenorrisgroup.com/blog/category/radio/

You can visit isurvived2009.com to learn more about our sponsors and speakers.

145-TNG Radio – I Survived Real Estate 2009 10-24-09

This week The Norris Group Real Estate Radio Show and Podcast presents Part 6 of I Survived Real Estate 2009.This show can be downloaded at:http://www.tngacademy.com/mp3s/145-TNGRadio_I_Survived_Real_Estate_2009_10-24-09.mp3

This week The Norris Group Real Estate Radio Show presents Bruce Norris’ segment of I Survived Real Estate 2009.

Robert Toll made 700 million dollars between 2000 and 2007 because he was selling too many houses at too high of a price, and now he wants tax payers to bail him out.

Bruce begins by discussing the declining housing inventory. A declining inventory typically means that the market is doing well, because you have multiple offers being placed on homes. We currently have the highest affordability rates in the history of California. The volume of sales has gone up to normal, but we have high unemployment. Delinquencies have exploded. From July 08 to July 09, we have gone from 5.3 percent to 9.7 percent delinquencies. The inventory of REOs has gone down, because banks have not taken back as many as they should. Some people have not made payments in 14 months. Trustee sales have also declined during this same time period. We had 28,795 trustee sales in July 08 and then we progressed to the 9.7 percent delinquency rate. We are currently 306,000 trustee sales short of where we should be. That averages 25,000 homes going out per month in the future. We have not peaked at delinquencies, and according to reports, we will soon be at 13 percent delinquencies. At 13 percent, we will be releasing 70,000 homes per month. Bruce does not believe that we can have a positive market if these statistics are true. FHA is going to have a large number of defaults next year. You can visit isurvived2009.com to learn more about our sponsors and speakers.

Appraiser Joseph Magdziarz - The Norris Group Real Estate Radio Show

This week Bruce is joined by Joseph Magdziarz. He is the current Vice President of the Appraisal Institute and he will become the President Elect in 2010 and President in 2011. He has been associated with the Appraisal Institute for 38 years.

Bruce begins by asking if Joseph if he considers business nowadays to be usual or unusual. Joseph has seen similar conditions in the late 80s and early 90s, but for many people, this is a new experience.

Bruce asks Joseph to explain what is similar about our current market and the market of the late 80s. The declining prices of real estate but the cause of these declines is significantly different.

Something radically changed a few months ago in the appraisal business. The Home Valuation Code of Conduct (HVCC) agreement between the Attorney General Cuomo and Fannie Mae and Freddie Mac caused this change. A few years before the HVCC came out, Joseph was lobbying with Congress about the pressure being put on appraisers to make inflated home appraisals. People were happy with many appraisers, because they received high appraisals, but this problem put ethical appraisers out of business, because they would not cooperate with people who wanted their home values inflated. Some of the new people coming into the business may have given into the pressure to make bad appraisals because they did not have the established relationships with lenders that some of the well known appraisers had.

The goal number for an appraiser is market value. Bruce asks if that is still the goal that appraisers are shooting for. Joseph says that is what appraisers are trying to estimate but some of the values coming out are closer to distressed asset value rather than market value.

Bruce asks if something has changed in the appraising process or if the changes are coming in after the appraiser states a market value and someone attempts to correct them. The definition of market value has not changed since 1989. The methodology has not changed either. Joseph thinks that many appraisers have not experienced a distressed market such as the market we are currently in. The HVCC, and the lenders’ choice to move much of their business to appraisal management companies, have caused a lot of problems.

This is one of the first markets we have had in 10 years in which we have declining prices. It is legitimate to have a 90 day old comp that is worth less today than it was when you first got it. Bruce asks if the big problem is that we do not have enough fully repaired homes as comps in comparison to vacant REOs. Jospeh says it’s very localized. Joseph says this is a big problem in some parts of the country, but the real problem occurs when all the occurring sales are foreclosures and short sales.

The definition of market value is the meeting of the minds between a buyer and a seller, each equally motivated and knowledgeable, and without undue pressure. If you have a bank with many foreclosures, they are more motivated than a typical seller would be. They will often dispose of those assets at a lower price which makes none of those properties a valid comp. The motivation of the buyer and seller is important when evaluating market value. TNG’s business is buying and fixing properties that need work. TNG typically puts $35,000 dollars into a repair job, and they typically end up with a property that is worth about $140,000. It is very hard to get $35 grand worth of credit. There seems to be a rule which only allows a ten percent credit limit for the kind of properties that TNG deals with. Bruce asks Joseph to explain this issue. Joseph explains that this issue relates back to a Fannie Mae/Freddie Mac guideline that says when you have an adjustment greater than 10 percent, you need to explain it. As the percent of adjustment increases, the sale becomes less comparable. There is no ten percent requirement. This is just a guideline, but unfortunately, some of the underwriters believe it to be a rule. Bruce has had trouble with this guideline. For example, Bruce had 6 offers on a property being sold at 122,000, but then the appraisal came at 102,000, and then the review appraisal came in at 85,000. That is far from what 6 buyers thought the market value was. In the end, Bruce did not sell this property and he kept it as a rental home. If an appraiser is not able to honor the market decision of a buyer, then the market price in some areas will go down further for no good reason. Part of this problem goes back to the HVCC stating that there needs to be a firewall between people originating a loan and people doing appraisals. At this time, that firewall is the appraisal management company. One of the main complaints that Joseph is getting is that many appraisals are being done by appraisers who are not experienced enough in their geographic region. Bruce asks how appraisers are assigned properties to appraise. Some companies broadcast assignments to everyone on their approved list, so the first person to sign up for the job gets it. The problem with the AMC is that they are not giving these jobs to experienced appraisers. The AMC is focused on getting these jobs done quickly rather than effectively. Better appraisers are missing out on jobs because they cost more. They are hiring people with not enough experience. The Appraiser’s Institute company has 26,000 members. Each one of these members receives notifications saying that they need to have the proper experience necessary to get jobs done properly, otherwise the Appraisers Institute will take aggressive enforcement against any member who accepts a job that they are not qualified for. These members are also given information on how to turn in unqualified appraisers. In July, the current president of the Appraisal Institute met with Congress to discuss this issue. He also reminded them a few years before that these problems were occurring, and they failed to act on those problems back then. These problems do not look like they will be dealt with until some time next year. A few bill are pending but nothing will be done until next year. Bruce asks if the Appraisal Management Companies has to be run by someone with an appraisal background. This is a problem that the Appraisal Institute has been lobbying for as well. There are appraisers who have had their licenses revoked that are now supervising other appraisers. Joseph thinks it would be better if appraisers were required to be licensed within their state. Bruce asks if communication is allowed between agents and appraisers who are working for Fannie or Freddie. Joseph says this is not forbidden. The loan officer is not allowed to communicate with the appraiser, but Realtors and management companies can communicate with appraisers. Appraisers have an obligation to verify information given to them about a sale. This is a misunderstood rule that Bruce has had difficulty with. Bruce has called appraisers who told him that he was not allowed to talk to them. Bruce asks Joseph about what the fee was for an appraiser before HVCC and what that fee is now. This is one of the five biggest problems that the Appraisals Institute currently has. Not all appraisal management companies are the same. In Chicago, GAMCO uses Appraisal Institute members, and they give designated members 90 percent of the fee, and they give non designated members 80 percent of the fee. What Joseph has heard nowadays is that management companies are starting to take 50 to 60 percent of the fees. When that happens, the better appraisers refuse to work for those companies. That leaves the new appraisers with the ability to get into the business, and they may not be qualified. Joseph fears that these rules may cause some very knowledgeable people leaving the business. Another problem with management companies is that they require a 24 to 48 hour turn around time. This does not allow appraisers to get to know the market value of a specific market. We now have the ability to use automated appraisals (AVM), but these automated appraisals are trumping appraisals made by actual appraisers. These automated appraisals are done on a statistical basis. The problem with these reports is that they do not use comparable sales. These automated appraisals essentially come up with a median value rather than a market value. These mechanical appraisers are not capable of looking next door to a certain property in order to obtain a better understanding of the value of the home being examined. Joseph is can be seen September 11th at our I Survived Real Estate 2009 event.

Auctioneer Tommy Williams - The Norris Group Real Estate Radio Show

This week Bruce is joined by Tommy Williams. Tommy is certified by the Auctioneers Institute. He is the founding partner of Williams and Williams Auction Company. He served as president between 1986 and 2000, and he became board chairman in 2001. He has conducted over 10,000 auctions all over the world. Tommy is also part of our I Survived Real Estate 2009 expert panel.

Tommy Williams has done auctions in multiple countries such as Puerto Rico, Canada, and his company is working with companies in South Africa. Bruce thinks that bank owned properties are probably very prevalent in other countries as well so their auction business has probably picked up. What has occurred in the United States has occurred all over the world. Tommy thinks that it is amazing that a country so far removed from the United States, like South Africa, has gone through the same economic swing. The entire world is experiencing the real estate bubble bust.

The United States auctioning business has gotten better. The number of auctions have increased, and auction popularity has increased for many years as well. However, the auctions are not making as much money because the real estate market prices are not doing well.

In 2003-2008, the business for residential real estate went from $11.5 billion to $17 billion. The volume has gone up, but the pricing has gone down very far, so auctioneers have to sell larger numbers of units to achieve the same profit. In many areas of the United States, home prices are down 75 percent from their peak. Bruce recently bought two properties, from a lender, for 15 percent of the owed amount. This is not an unusual occurrence. In many of these cases, the original buyer had a very bad loan. Fraud is involved in many of these cases. A property that may have never been worth 10,000 to begin with may have been given a mortgage of 100,000.

It was common in the lower end of Moreno Valley to have a neighborhood in which each property was selling for $300,000, but now the price for those homes is generally around 100,000. The buyer and lending mindset was very different in 2005.

Bruce asks if the auction business has shifted to making the multi-property owner to be its main customer rather than the individual property owner. Tommy says that he hopes this is not true. He believes that if you want to build a successful auction company then you need to deal specifically with normal “end-user” buyer and seller. The focus of an auction company should always be to deal with private owners/investors. There are very few companies that deal with REOs, and that is not a long range way to build a business.

Deutsche Bank recently said that by 2010 or 2011, 50 percent of the owners in the United States will be upside down. That would have a profound effect on the amount of inventory that would be able to sign up for a one house auction. The most important thing about a house that is upside down is that the seller needs to sell their house. Either they cannot afford their house any more, or they have had a change in lifestyle such as a job transfer or a divorce. People need to sell their properties at the time they become a liability. If they go through a long foreclosure process then their property will deteriorate, and their neighborhood may deteriorate, and they will end up selling a property for less than they could have.

A Campbell Report that came out in which 1,000 agents responded to a questionnaire. These agents claimed that the biggest problem they were dealing with was a lender’s slow response to a short sale offer. It takes months. The auction business could help the lender decide what the value of a property is. Auctions can identity, with nearly absolute certainty, what the market place thinks a property is worth. If multiple people bid on a property, and the highest bid is $100,000 dollars, then you have discovered what the market value for that property is. It is frustrating to see lenders take such a long route to discovering the truth about the value of their property, and take a huge price hit in the process. Lenders have dealt with the problem of over valued homes in the worst way possible. Tommy had a neighbor who went through a divorce and had other life changes. This neighbor bought his property for about $650,000, and he started going delinquent on his payments. Tommy told him his house would sell for about $450 to $500,000 at that time. This neighbor believed Tommy to be correct, but his lender would not negotiate with him, so he went through the foreclosure process, and he eventually walked away from it. This home recently closed for about $370,000 and Tommy could have sold it for much more. Tommy has been trying to tell this story to congressmen and senators, so that these problems may be fixed in the future, but they will not listen.

This is one of the reasons why I Survived Real Estate 2009 is so important to Bruce. Every industry affects other industries. Fortunately for Tommy Williams, he has not had trouble with appraisers arguing with the price that homes have sold for at his auctions, because the value is proven by the market place. One of his colleagues sold their home, and their lender told them that they would not lend money on a home bought at an auction. The National Auctioneers Association immediately contacted them and asked them to explain this policy, but they would not. This problem did not occur with a small lending company.

The word “auction” has a bad meaning in the United States. Here, it means that you have a desperate seller. In 2004 to 2006, Bruce was receiving multiple offers on each of his “for sale” properties. If Bruce had thought to offer those homes in an auction, which would put each of those buyers in direct competition with each other, his selling prices would have definitely been higher. When the market is really over heated, that is when you want to have an auction for sure. Under desperate times, such as right now, the reason why you have an auction is because buyers will not show up if you use any other method.

On September 11, the builders will be attending the real estate event. Bruce thinks it would be a perfect partnership if builders started selling with auctioneers. Tommy has had this opportunity on two different occasions. At the time, everybody thought this was crazy, but the auctions were very successful. If Tommy was in the building business, he would launch his selling process with an auction. Bruce is planning on getting involved in building soon, and he plans on using auctions for selling his houses.

When you participate in the boom market, it is easy to sell, so you do not think about auctioning your home. Also, auctions are typically seen as an option that is only used in a tough market. The auction is viewed different ways in different countries. In New Zealand, auctions are one of the first options used for selling homes. Views towards auctions also vary in different states. States like Tennessee, Ohio, and Missouri have a much more positive view towards auctions than states like California.

Tommy has found it difficult to buy bulk properties within the last six months. There are opportunities out there, but good businessmen would not go after those opportunities.

We look forward to seeing Tommy Williams September 11th at I Survived Real Estate 2009.