The Norris Group

This week Bruce is joined by the Hedge Fund Relationship Director of UBS, Bill Richards. Bill travels the globe spreading the good news about Hedge Funds. He serves as a director to seven nonprofit organizations. He has been working with hedge funds since 1983.

Bill has clients all over the world. Most of his contacts are made through emails, but his favorite way of meeting people is still face to face. In his younger days, when he was a security salesman, he would always go to see his business partners face to face. It is a much better way to communicate. Bruce asks if many people think differently about the subject because the younger generation is used to communicating via text messaging. Bill thinks that using messaging is not as effective as personal communication because messaging systems have a character limit. Bruce thinks that people react to people completely differently when they are face to face in comparison to when they are using messaging systems. When people meet in person, they do not just look at you as a client, they also begin to see you as a friend.

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4 Ways to Listen

1. Click HERE on the player launch below to stream our shows as you surf the web.
2. Visit our Radio Archives to download shows in mp3 format.
3. TNG Real Estate Radio Show is now on iTunes! If you have iTunes installed click HERE or simply do a search for "The Norris Group" while in iTunes.
4. If you use an RSS Reader: Click Here

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Bill has an annual meeting that he calls “The Best and the Brightest” where he discusses new concepts with interns. Julian H. Robertson Jr. from Tiger Management opens up the summer series of this event. 24 interns attend this meeting with Julian. There are about 500 summer interns around the world. Potential applicants can apply at UBS.com. This is a fantastic opportunity to meet some of the brightest people in the world. Next week the cofounder of Serious Satellite Radio will be speaking to the interns.

20 years ago there were not many people who knew what a hedge fund was. Bill made his first investment in a hedge fund during 1983 in order to support his oldest son in the future. Thanks to his investment, his son lives independently in Sacramento.

Bruce asks Bill what a hedge fund is. Anyone who wants to learn more about hedge funds should do a Google and search for Alfred Winslow Jones. A hedge fund is basically a safe insured investment which prevents you from losing too much in case your investment goes bad. The key to hedge funds is your net exposure. Most hedge funds average a next exposure of 30 to 40 percent. The net exposure is the difference between your longs and your shorts. The lowest net exposure that Bill has seen is 10 to 15 percent. Right now these markets are extremely volatile, so they are hugging close to shore.

In the real estate business, there are major changes in business rules that occur every month. Bruce feels that a hedge fund manager would need to have a crystal ball in order to predict how the market is going to change, because it can change very quickly. Bill says that hedge funds are a large global industry and that it gets a bad representation from the press. However, some of the world’s best investors such as Julian Robertson and Warren Buffet have been involved in hedge funds.

Bruce asks Bill how someone becomes involved in running a hedge fund. Most hedge fund managers have a good undergraduate education, they have are well educated in mathematics and accounting, some work experience, and they often go to popular business schools like Stanford or UCLA before going back to Wall Street for more experience.

Bruce asks if companies like UBS get their investors involved in some of the hedge funds. Bill says that UBS does do this.

Bruce asks Bill what hedge funds are typically invested in. Bill says that long-short equities are a great way to make money. People who do long-short equities try to find the best companies in the world and then they buy them. They also try to identify the worst companies and invest against those companies until they break down.

Bruce asks Bill what the difference is between hedge funds and real estate investment trusts. REITs are longer term investments. REITs assemble various commercial real estate properties, and then those properties are used for giving investors dividends. Bill likes hedge funds because they invest broadly around the world. Hedge funds also give the investor the ability to invest in countries that aren’t being hurt economically and financially.

Bruce asks Bill about how hedge funds are regulated. The new administration has made it clear that they plan to have all hedge funds register with the SEC. Hedge funds deal with prime brokers who are affiliated with investment banks and all of those prime brokers are regulated as well.

Bruce asks if Bill thinks that there is more regulation coming. Bill does think that there is more regulation coming, because of the recent problems that have come up.

Under the previous administration, hedge funds had the option to register with the SEC, but very soon they will all be required to register with the SEC.

Bruce asks if people are required to have a net worth requirement before they are allowed to invest in hedge funds. The two classes of hedge funds investors are 3C1s and 3C7s. The 3C1 has a minimum net worth requirement of $1 million dollars and certain liquidity requirements. The 3C7s have a minimum net worth requirement of $5 million dollars. Many hedge funds being created right now are adopting the 3C7 structure.

Hedge funds are allowed to freely invest in other countries. The investors travel the world.

Bruce asks if Bill has met some of the smartest people in the world. Bill has met some very interesting entrepreneurs. Bill suggests that anyone who wants to learn more about great investors should read “Julian Robertson: A Tiger in the Land of Bulls and Bears” and “Soros” by Michael Kaufman.

Bruce asks if people who invest in hedge funds are allowed to ask for their money back. Most hedge funds have a one year lock up, and then a quarterly liquidity after that which requires prior notice to get out of investments. They are not a market fund. They only use a portion of your assets. A lot of the best hedge funds are moving to a 2 to 5 year lock up.

Bruce asks how bad situations, such as the one with Bernie Madoff, affect the willingness of people to take on risk. Bernie Madoff was a massive blow to investors. Investors are now requiring more transparency from hedge funds.

Bruce asks if there was much speculation that occurred in the hedge fund world. Bill says that there was a large amount of growth in the Funds of Funds Business which may have gotten ahead of itself, but Bill thinks that most people who invest in hedge funds are sophisticated.

Bruce asks Bill what he thinks hedge funds are looking to invest in now. Bill thinks that the greatest opportunities in life occur when there are the greatest problems. Right now, hedge funds are looking for companies who are being penalized by the market. This is creating many opportunities, and there are multiple new hedge funds being created in Manhattan.

Bruce asks if investors around the world are more or less willing to invest than Americans are. Bill thinks that what makes America great is that we attract the best people from all around the world. He thinks that if everyone is agreeing then everyone is wrong.

Bruce asks Bill what he was able to take away from his experience during the Vietnam War. He says that there is no better place to learn about leadership than the U.S. military. Tough times create a tough individual.

Bill is involved in many non profit organizations. Bruce asks if the wealthy are very generous towards causes. Bill says that they definitely are. People with great wealth always give back to society when asked.

For more on UBS, visit UBS.com. Thank you Bill for a great interview.

This week Bruce is joined by John Mauldin from Millennium Wave Investments. John is a New York Times best seller author, and he is the writer of “Thought from the Front Line e-letter”, which goes out to 1.5 million readers every week. He is frequently interviewed on TV shows around the world.

Bruce begins by asking John what his company does, and who his typical client is. John helps investors find investment managers that will work best for them.

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4 Ways to Listen

1. Click HERE on the player launch below to stream our shows as you surf the web.
2. Visit our Radio Archives to download shows in mp3 format.
3. TNG Real Estate Radio Show is now on iTunes! If you have iTunes installed click HERE or simply do a search for "The Norris Group" while in iTunes.
4. If you use an RSS Reader: Click Here

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John has a new series of books called “Eavesdropping on Millionaires.” Bruce asks John what has surprised him most about wealthy individuals. John says that he was surprised by how many of them felt a need to be in the market, and how many of them have rode the market all the way to the bottom. They did not have a sense of preservation. They did not understand they had won the race, and that they could stop running. They could have lived a comfortable lifestyle, but they continued to invest, and they have lost a large amount of their net worth. This is unlike anything we’ve ever seen. From here we are creating a new “normal.” This time it really is different. We’re watching a new generation become frugal. Savings rates are increasing from 0% to 5%.

Bruce asked John if it is more painful to go backwards financially then to have never been there before. John thinks that it is. John found some stats from David Rosenberg showing that people 55 years and over have seen an increase in employment. John says that people need to be careful when they are listening to people who are anticipating what will happen in the financial future based on what has happened in the past because the underlying forces in our current market are much different than they were before. Statistics also say that the boomer generation has not accumulated any wealth for 12 to 15 years.

Bruce asked John if most people become millionaires because of earning power or investments. John says that everyone has their own path. A large number of people who become financially successful are good savers. Many of them save 20 percent of their earnings. Most lived a frugal lifestyle and saved diligently. The number of people who made money investing is not as big as you would think. John’s company has surveyed 17,000 people, and they have found that it is harder to become a millionaire through investing than it seems.

Ludwig von Mises once said, “It may sometimes be expedient for a man to heat the stove with his furniture. But he should not delude himself by believing that he has discovered a wonderful new method of heating his premises.” When Bruce looks at how we are solving the crisis that started in 2008, he wonders if we are hurting our future by what we are doing. John thinks that in the short term, the answer is “no” but people disagree with him.

The problem we have started 15 years ago when we started leveraging ourselves and we started selling securitized mortgages that were not going to be paid. We have a certain amount of deleveraging pain that we are going to have to go through in order to get through this problem. We can do it in one year or ten years. One year means 25 percent unemployment and breadline depression. If we work through this problem over 10 years then we will experience slow growth, 10 percent unemployment, and difficulty in recovering the stock market.

John would rather take the longer route. John thinks that the Fed did the right thing by stepping in and putting liquidity into the market. People associate credit with cash which it is not. The level of credit that the world is using is imploding. There is far less credit to finance our future. The Fed can print money right now without creating too much future inflation. Someday they will have to stop and they will.

John thinks that the stimulus package idea was not a bad idea, but the way that we have created it and used it is wrong. We used the stimulus package to finance political objectives rather than actually doing things to stimulate the economy. We are borrowing money that our grandchildren will have to pay instead of building infrastructure they can enjoy.

We are planning on going into debt $1 trillion dollars per year for the next ten years but you cannot finance that much money that quickly; there are not enough takers. We were running a $700 billion dollar trade deficit, but that money came back and was invested in some sort of debt. That allowed us to create a large deficit, but now we only have $300 billion dollars worth of trade debt, which means that we have to go out and find $1.7 trillion dollars of money to buy more bonds. John thinks that we will probably raise taxes.

John says we could suspend all these new projects like healthcare like Republicans but there’s no chance that will happen. If this were the path, the dollar would become stringer but we’d still have to work through deleveraging and the housing problem. But, it doesn’t destroy the dollar. John feels the current administration’s solutions will only work for so long. The bond market will implode eventually if this keeps up and it’s an ugly scenario. If there are a enough democrats that come along that agree that the huge deficits aren’t good, taxes will roll out to keep paying for these programs. As long as the deficit is growing as fast as the nominal GDP.

John thinks out of these scenarios the last solution will result.

Bruce asks John if he thinks that we have seen the bottom of the housing market. John does not think we have. He thinks that housing problems will continue through 2010. We have more foreclosures coming. If you are at the point where you would like to buy a house, this is a great time to do so.

More coming next week. Visit thenorrisgroup.com or John at johnmauldin.com.

This week Bruce is joined once again by John Mauldin from Millennium Wave Investments. John is a New York Times Best Seller and is writer of the highly acclaimed “Thought from the Frontline” e-newsletter.

There was a time when we thought that making loans to anyone that can buy a property was the wisest thing. Bruce asks John if we have discovered this to be untrue. John says that the answer is clearly yes, but making loans to people who can pay them back is still not a bad investment. What we began to do was use a model to predict who could pay off a loan and who could not. These models made us think that we did not need to be as careful about how we lent money. These models assume what is known as a bell curve, but in the real world there is no such thing as a bell curve. In the real world, there is a thing that we call “fat tail.” This means that when you get down to approaching zero, the curve starts going back up at the end. Mathematicians say that this should only happen every 10,000 years, but this seems to happen once every 4 years. You cannot model this sort of phenomenon and it is arrogant to think that you can. Yet we trained two generations of economists and MBAs in such things. Then we unleashed them on investment advisory firms and brokers, and these economists created these models saying, “If we start here, and save this much money, then your stock market investment will grow over time.” People believed them because they were smart people, but they were smart people using bad theories. Some of these theories won Nobel prizes.

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4 Ways to Listen

1. Click HERE on the player launch below to stream our shows as you surf the web.
2. Visit our Radio Archives to download shows in mp3 format.
3. TNG Real Estate Radio Show is now on iTunes! If you have iTunes installed click HERE or simply do a search for "The Norris Group" while in iTunes.
4. If you use an RSS Reader: Click Here

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One of the books that John recommends reading is “The Black Swan”, which claims that it is arrogant to think that anyone could figure out these models so easily. In the book he says that “A black swan event is retrospectively obvious.” Looking back, we could have seen that loaning money to people who did not have to prove much would have a bad ending. When John first started looking at collateralized debt obligations (CDOs) during the middle of 2006, he discovered that people were taking the worst part of a mortgage backed security (the bottom five percent) and grouping them together, which created a brand new security. They would then create models for rating companies who would then take that bottom five percent and call 70 percent of it AAA. When John discovered this he thought, “All you need to have is a five to ten percent drop in prices to make everything go down to zero.” You would think that if people from different areas of the United States could figure this out then the people actively investing and lending would be able to figure this out even quicker. Not only did they not figure out the problem they were creating, but they actually bought some of the garbage they were creating and they put it into their banks. This is why companies like Merrill Lynch, JP Morgan, and Citi with really bad paper. `

Bruce asks John what the current mood is towards the U.S. and capitalism in general. John thinks that it is more skeptical, and rightly so. A lot of the third world thought of America as this shining city on a hill, but they also thought we were rather arrogant because we told them how they should run their banks. We were not doing the things that we told other people to do. The epicenters for bonds sales were located in California, Nevada, and Florida but we sold all our bonds to Europe and Asia. This is going to come out within the next 6 months to a year. They are going to have write down far more money than they currently are. European banks are in far worse shape than American banks.

Bruce asks if this is because they have lent to emerging countries, or because they have invested in mortgage backed securities. John thinks that both of these options have created problems and other things as well. Western European banks took a huge chunk of Eastern European debt. Austrian banks lent more than the entire Austrian GDP, so the Austrian government could not rescue the Austrian banks if they wanted to. A lot of European banks also lent money to Asia. The UK is in better shape because they have their own currency. Businesses are not making as much money. Ireland is deflating by about four percent every year. There are some serious problems going around the world.

Bruce asks if there is any other time comparable to this downturn. John says we’ve never gone through anything like this worldwide. John says that world trade is down 10 percent and equipment orders in Japan are down 80 percent. Japan is doing their best to destroy their currency, but they are having trouble doing it, because if their currency rises then their products will be more expensive.

In California, there are currently about 240,000 properties in some stage of foreclosure. Today, there is a new moratorium. Bruce asks John how he feels about moratoriums. John thinks that moratoriums are just delaying the inevitable. It is not unusual for lenders to have a loan balance worth $200,000 dollars more than what a house is worth. Fitch recently said that 50 percent of people who bought their home after 2005 are under water on their mortgage payments. They are also estimating that home values will go down another 12.5 percent. This is a very difficult environment. Bruce says this says something about American character.

The problem is that if prices continue to decline and unemployment continues to go up, then you are going to have a much bigger problem. John estimates that unemployment will rise another one percent. It is going to be difficult to entice businesses in Southern California to hire people. If you compare taxes between California and Texas, it makes sense that people would want to move out of California. It is hard to attract people to your state when you are raising taxes. The states that have the highest taxes are losing the most population. John says that Florida was hit harder than California but Florida will come back faster than California because they have a low tax environment and people want to go there to retire.

In one of John’s news articles, he discussed Gary Schilling’s thoughts on solving housing problems. Gary’s idea revolved around creating demand. Gary said that about 800,000 people come into America every year. For the next two years, if these immigrants can buy a home and maintain their lives, then they could get a green card. Within a year, all the vacant homes on the market would be taken. They would also have to live in the home they are buying in order to receive the green card. There are countries such as Canada and Australia who do this. They are searching for immigrants with education and money to come into their country. One of the biggest competitions in the world is to attract young, educated workers. There are only two ways that you can make an economy grow: you can either increase the number of workers or you can increase their productivity. We’ve got a boomer generation who is trying to retire, so we need to be bringing in more educated middle class entrepreneurs. John thinks that we need to have a more welcoming immigration policy.

Bruce says that investors, who are having difficulty getting financing, are having trouble right now. There are a lot of properties in bad condition that investors could fix and make valuable but they cannot get the money to do the job. We have destroyed 40 to 50 percent of the financers for housing construction and development. We destroyed the shadow banking system which helped special investments. They are gone and they are never coming back, so now we need to make new structured security vehicles that investors will feel confident in. This is something that is going to take some time to develop, but John thinks that in 10 years we will be much happier.

For more information on John, you can visit JohnMauldin.com. Join us next week as we launch I Survived Real Estate 2009!

This week Bruce is joined once again by Shelley Kaye, the president of REOMAC. She also works with InSource Financial Services where she handles bulk sale purchases.

Bruce first asks Shelley if lenders generally fix the properties when they sell them. Shelley says that it depends on the market and the lender but usually fixes her properties. She does not want to bring the prices of a neighborhood down; she wants to enhance a neighborhood. She knows a large number of other agents who work with lenders to fix properties and they make a lot of profit that way. When you support the value of a neighborhood, you also enable some people to get a refi instead of losing a property. Everybody wins when people fix properties.

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4 Ways to Listen

1. Click HERE on the player launch below to stream our shows as you surf the web.
2. Visit our Radio Archives to download shows in mp3 format.
3. TNG Real Estate Radio Show is now on iTunes! If you have iTunes installed click HERE or simply do a search for "The Norris Group" while in iTunes.
4. If you use an RSS Reader: Click Here

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Bruce asks Shelley how REO agents feel about auction companies. For the most part, the auction companies and agents are working in a partnership, and in many cases, the agents are still earning a commission. In the past, if a property went to an auctioneer then an agent would not be paid. The agents do open houses for auction companies, and they bring in buyers. In the 1990s, the agents didn’t make a commission so this time is much better. The auction company couldn’t function as successfully if it weren’t for the agents who are also bringing the buyers.

Bruce asks Shelley how REO agents feel about investors. Most good REO agents have a pool of investors that they work with. The problem that agents have is determining who is an investor and who is not. Real investors are easier to work with because they understand the market place, and they are not unrealistic about property values. Agents like working with investors because they know what they want and they understand how lenders do business. Most investors will close quickly. One of the dilemmas that agents have with wannabe investors is that they do not check up on their properties, they do not understand what it takes to buy an REO from a lender, and they do not understand what they are planning to do with a property. Investors must need to know what they are doing and they must do their homework.

In today’s market, an investor needs to be able to look at a property and quickly determine the repair cost and the appraisal to be competitive, because many properties have multiple offers. They must understand so many facets of the business from how much prices are declining to how much the house will rent for.

Bruce asks Shelley if she thinks that short sales will be more attractive to the lenders now than they were in the past. Shelley thinks that they will be more attracted to short sales, because there is a lot of cost in processing a foreclosure. The biggest problem she sees with this is that loss mitigators are not experienced enough to understand what is occurring in the market place. Time is their biggest enemy.

Bruce asks if loss mitgators, asset managers, and ever really talk before something goes to trustee sale. When Shelley worked at Option 1, she would talk to the loss mitigation department. They had formulas to determine how much they would lose in specific deals. Unfortunately, many of the people who work with loss mitigation do not understand the market.

Bruce says The Norris Group has noticed a big change in opening bids at the trustee sales. They are making more sense. Bruce asks if people often communicate with REO agents, prior to trustee sales, to determine accurate prices before the trustee sale. Shelley says that lenders are always getting a broker price opinion. The biggest problem is that they do not get to see the property, so sometimes people give high bids. Lenders always consult with agents and get a BPO (broker price opinion) of some sort.

Lenders pay around $45 to $50 for a drive by broker price opinion and $75 to $100 for an interior BPO. When agents do drive by BPOs they are determining the price by just looking at the outside of the house, so they do not know what damage there might be inside. Bruce says the paperwork is very much similar to that of an appraiser’s.

Bruce asks Shelley if she has people in her company that are being affected by the new appraisal rules and the Home Valuation Code of Conduct. Shelley says that she does not know if agents are being severely affected by this new rule, but she does know that the closings are taking longer. They are also getting paid half as much for the appraisals when dealing with the new management companies. Shelley is glad that steps are being taken to prevent fraud but she thinks that these new rules are hurting appraisers. It’s important to have arms lengths transactions but the Realtors can sometimes point out subtleties in the market that appraisers wouldn’t get to on their own. Agents can actually help arrive at the proper price. Bruce feels that same about the appraisal issues and how they are affecting investors in the market. Bruce feels that these new rules are unfair because they assume that people who make deals quickly are looking for trouble. In reality, over 90 percent of the people who do their business quickly are doing so simply because they are trying to be efficient and helpful. Shelley agrees with Bruce’s feelings on this.

Bruce saw a chart that showed that 35 percent of Option ARM borrowers are behind in payments, 72 percent of Option ARM owners owe more than their house is worth, and California has 58 percent of all those loans. Shelley says it is astonishing and there are also statistics say that those in loan modification plans often go back into default. Our government really hasn’t considered the whole picture. Bruce feels that there are many homeowners that are making their payment because that’s what they signed up for. But it will be important for prices to be supported within a reasonable amount of time and we won’t be saving everyone. We have had a 70 percent home ownership percentage, but historically that percentage has been around 62 percent. Bruce thinks that the home ownership percentage will go down to 62 percent which will leave a lot of vacant homes. Shelley thinks that we need to turn these empty homes into affordable rental units. If investors are buying these properties then they need to be careful not to raise rent. Bruce says that the market usually controls rental prices. If there are enough rentals then the price will come down, and that is occurring in some areas in California.

Bruce asks Shelley what she thinks about shadow inventory. Shelley says that there is a lot of unlisted inventory out there. A lot of lenders have been told by their management that the burst of the bubble is coming within the next 60 days. She doesn’t know if they have been holding that much of the inventory or if the moratorium has caused the problem. The next 60 days she says she is hearing it’s going to explode.

Bruce says in San Bernardino County, there were 40,000 trustee sales in 2008, and there were about 22,000 sales. Bruce asks if other states are looking at California’s situation and wondering why Californians are so worried. Shelley says that there are some states that have been hit less than others, but for the most part, everyone is feeling the same pain. Bruce asks if California is going to experience more trouble within the next 18 months, and if higher priced inventory will be affected. Shelley says that is true and that some of the higher priced inventory is going into the foreclosure market, and more prime inventory is going into default.

Bruce says he hears advertisements for attorneys every day for loan fraud and workouts. Bruce asks Shelley if lenders are having trouble with people looking for loopholes. She does not know if there are many attorneys looking for loopholes, but there are attorneys looking to stop specific attorneys from doing this.

Bruce asks Shelley if she was president for a year, what national policies she would implement to help housing recover. She would focus on creating jobs so that people can pay for their homes. She thinks that principalities and municipalities need to cooperate with buyers and lenders. Programs need to be set up so that people can work on properties and fix them up. More 40 year mortgages need to be put in place, so that payments become more affordable. She would also want less moratoriums being placed on the market so that the problems can fix themselves. Some people should have never been in homeownership to begin with. More incentives need to given to lenders who work with home owners.

Bruce asks Shelley if it might be good to create a short term policy that would forgive foreclosures faster than before since this scenario got so out of hand. Shelley thinks that would be a good idea because people are losing their good credit. The government should really talk to the industry that’s at work so they understand what’s happening the in marketplace. For more information visit www.reomac.com.

This week Bruce is joined by Shelley Kaye, the president of REOMAC. She also works with InSource Financial Services, where she handles bulk sale purchases.

Bruce begins the radio show by asking Shelley what REOMAC stands for. REOMAC stands for Real Estate Owned Managers Association. It was founded in 1985 by a group of REO asset managers, who met during the California downturn in order to exchange business ideas. Originally the members were only asset managers, but now the group is composed of anyone who can compliment agents and asset managers. Because the market has significantly changed, the lenders are using other sources to help sell their properties. REOMAC membership has grown substantially, because networking is very important during these difficult times. Right now, REOMAC has stopped accepting new members because they are trying to reformat the organization so that people who want to join can get into the organization. The organizations bylaws say that the membership must be balanced so there are currently more agents that are wanting to join. There are currently four levels of membership that Shelley explains.

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4 Ways to Listen

1. Click HERE on the player launch below to stream our shows as you surf the web.
2. Visit our Radio Archives to download shows in mp3 format.
3. TNG Real Estate Radio Show is now on iTunes! If you have iTunes installed click HERE or simply do a search for "The Norris Group" while in iTunes.
4. If you use an RSS Reader: Click Here

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The cost of being a member of REOMAC varies by category. The lenders pay $75 dollars per year, the outsource members pay $150 per year, and their affiliate and broker members pay $375 per year. REOMAC holds about ten to twelve meetings per year around the country and they also have two conferences. Their most recent conference was in Rancho Mirage, and over 2,500 people attended.

Bruce asks Shelley if REOMAC also has members that deal with commercial lender-owned properties. Shelley just implemented a commercial committee this year because REOMAC knew that as the market turned around that would be another phase of default. In their last conference, REOMAC had a session on commercial real estate, and many people were interested.

Bruce feels that commercial real estate is going to be the next market to get hurt. The agents who are prepared for this market will have a lot of business. Shelley agrees that agents need to be prepared for the commercial market because the down economy is affecting every area of business.

Bruce asks Shelley if REOMAC has its largest number of members in California. Shelley says that California does represent its largest member population which is partially due to the fact that REOMAC started as a California organization. When Shelley joined REOMAC in 2001 there was not much business going on with lender owned properties. Subprime loans were going crazy and people were recognizing that people could go in and buy a home. At that time REOMAC had about 300 REOs in the entire company. Last year, REOMAC had closer to 20,000 REOs.

In 2008, lenders were overwhelmed by the number of defaults in their portfolios. They were unable to sell their inventory faster than it was coming in. Bruce asks Shelley if there are agents who have been thru this cycle before saying that there is a difference in how their properties are being handled this time. Shelley does not think there has ever been such a bombardment of properties. Bruce says that asset managers once talked to REO agents, and there was some type of communication on a regular basis, but now their communication relies on email, and this is sometimes frustrating for an agent. Shelley agrees and disagrees with that statement. Agents are busy in the field as well. Most of the lenders went to online systems, and since you could do all your business online, there was less need to speak to agents.

Bruce says that in 2008, there was a challenge in pricing properties correctly and the lenders took a lot of losses that they could have avoided if they had just listened to their local agents. Shelley does not think that the lenders necessarily needed to listen to the agents because when agents work for a lender they are appraisal driven. The appraisers and brokers were disagreeing with each other. Nobody could keep up with the speed in which property values were dropping. It took a while for everyone to understand what was occurring in the market place. People had many years of increasing prices, so it was hard to fathom that prices were dropping as quickly as they were.

In the past, when there was a decline, the appraisers would notify the seller that they were deducting three percent per month to accommodate for what was occurring in the market place. In this downturn, people were not doing that because they did not understand what has happening. They did not have the proper statistics. If they were looking at comps, that would not work. If they were looking at stats that were even 90 days old, then the broker would have a poor understanding of what they would get for their property. Appraisers give you information from data, rather than what is going on in the market place. The lenders started to realize that the agents were their best source of information.

Bruce asks Shelley if it has been difficult to keep up with all of the rule changes that have been applied to the foreclosure process. Shelley says that it has been difficult for everybody, because there have been times where people were about to sell a property, and in the middle of the process, some sort of law changes. Laws have been made on both the national and state level. Bruce asks Shelley if a lot of states are having moratoriums. California did for a while but the lenders are the ones that have really put the moratoriums in place. When Fannie and Freddie started doing this, everyone else followed suit.

Bruce asks Shelley if there is any chance for a national moratorium. Shelley hopes not, and she thinks that nobody truly believes that the moratoriums are doing anything other than delaying the inevitable. When someone creates a moratorium for 9 months it messes with your business model and you have to staff up for that. The moratoriums are affecting the REO agents and the lenders. While the moratoriums may keep people in their homes temporarily, it may also be putting other people out of work, which will lead them to losing their homes.

A new rule has just been created that protects tenants after the foreclosure sale. This rule allows anyone who has a lease agreement to stay inside a property during the entire time of the lease. Shelley says that the wording in this new law is vague and unclear, so attorneys are trying to interpret the meaning. The problem with this rule is that it turns lenders into landlords, and that is not the intent of any mortgage or loan process. This is expensive for any lender that exists and it will put fear into the next lender who takes over the property. Shelley says that some people worry that this law will scare away potential investors who buy properties from foreclosure sales. Bruce confirms this belief saying we will not buy a property with a tenant. Shelley wonders who will be collecting the rents as well. Will the agents collect the rent? But why would they do that if they are not going to be able to sell the property? The system is not set up to handle this.

Investors won’t touch this because typically when buying at trustee sale the investor has not seen the inside of the house, has not met the renters, and have no idea what the lease agreement says.

It is difficult to determine what a valid lease is, and whether or not a property is actually something you want to keep. Bruce fears that people will take advantage of this law by faking people into believing that they are legitimate tenants, and that they have the right to take charge of the lease. It seems difficult for the lenders to do this without taking on a lot of losses. The longer they hold on to their properties the more expensive it is, and the less they will be able to make on them. This law may also turn them into a landlord with many other responsibilities and they are not ready for that.

The cities in California have passed a law that allows the city to fine lenders $1,000 dollars a day for things such as brown lawns and green pools. Bruce knows cities that have hired code enforcement people who are paid just to check up on these things. This is actually occurring in Chicago and other cities as well. This is unfair because there are many occasions where the lender does not have the property vacant so that they can repair the property. The cities are just putting the lenders in a position where they will have to spend more and more money. Cities need to be in partnership with the owner of those properties. Cities are starting to fine properties right after they go into foreclosure but they are not fining the occupant or the owner.

This week, Bruce is joined again by Randy and Mike Grigg who head Elite Auctions. Randy Grigg is President of Elite Auctions and Mike Grigg is the Chief Auctioneer.

Last week, Bruce, Randy, and Mike discussed a Riverside auction in which a man bought a home out of the MLS. Because of the price deterioration in the market, Bruce said that the man should flip the property via auction. In the end, the buyer earned a large profit after the property sold. Bruce asks about the costs to market.

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Randy and Mike Grigg discuss marketing and advertising and what the auction company does to attract attention. They are also able to show all their results to their clients, so that they know where their money is being spent. Bruce asks Mike and Randy how many people showed up to a particular open house they had. They had approximately 60 to 80 people come in to view their property. They typically have a successful auction when there are that many people attending their open house.

Whenever someone attends one of their auctions, they always ask the attendees how they heard about their auction. Only about 30 percent of their attendees go to the open house. In this case, the winning bidder did not go to the open house. The winning bidder owned rental properties in that same area, and he was attracted to the property from a post card advertisement. Altogether, 38 bidders showed up at the auction, and they all had $5,000 dollar cashiers checks. The home being sold needed paint, carpet, and the kitchen was in bad shape. Just down the street from their auction, REDC was selling similar inventory for $98,000. The final sale price for this house was $147,400. The investor bought the home for $75,000. What a fantastic deal. They closed the property in 12 days.

Bruce goes on to discuss what people consider to be a “deal”. Bruce believes that if that buyer owned homes in that same neighborhood then he might have paid more for every house that he owns than that particular one. People are used to thinking that real estate is so cheap, that they have forgotten that real estate used to be 2 or 3 times the current price. Sarah, Bruce’s daughter, bought a house very recently. From Bruce’s perspective, her deal was the interest rate she received. The market was at 5%. The man who bought this property knew the area he was buying in, so the purchase worked well for him.

Auctioning properties is challenging right now, because buyers are very cautious. In a market where prices are escalating quickly, the auctioneer will be ahead of the prices in the MLS. The consumers prove how much the auctioned property is worth when there is competition. Bruce believes that his properties in Rosamond would have sold better if they had been auctioned. Bruce is surprised builders don’t use this method instead.

Bruce asks what Mike’s duties are as the president of the California Auction Association. Mike’s main duty is following California government legislation in regards to real estate auctions. He also assists other auctioneers by showing them what they need to do to be a legitimate auctioneer. Mike arranges conferences where speakers come and talk about their specialties. The main goal is to better California’s auctioneers, so that they can offer better service to their clients.

Bruce asks Mike if there are California rules that trump national rules and vice versa. Mike says that auctioning rules vary greatly state to state, and that California is actually very lenient. Mike would like to see more legislation to stop people from holding deposits for lengthy amounts of time after the bid is rejected from the lender. Bidding on behalf of auctioneers is also something that needs to be addressed by legislation. Instead of an auctioneer having to be licensed like a realtor, there should be a separate real estate auction test. It’s very different.

Bruce asks Mike what C.A.R. thinks of real estate auctioning. Mike does not think that C.A.R. views auctions as a bad thing. There are some Realtors that view auctions as a threat to their business, but it is not. Mike and Randy pay Realtors if they bring in buyers and sellers.

Approximately 10 percent of the time a Realtor represents a client for his auctions. Occasionally, Realtors get confused by the process because they are not used to that method, but Mike does not feel that this has affected his ability to close a deal. In the United States people have viewed auctioning as a necessary evil. Bruce asks Mike if he thinks that auctioning will have a strong foot hold in the real estate business in the future. Mike thinks that auctioning will become more important for real estate sales in the future. California seems to be far behind the rest of the United States in regards to understanding the value in auction sales.

Bruce believes that the key going forward is to have repetitive clients. If investors get the idea that they can efficiently sell houses in auctions then it would be constantly viewed by retail people as a respectable selling method. Mike believes that as the real estate market returns many of the big auction houses will go back to land auctions, but Mike and Randy’s business will stay as a local California business.

Bruce asks Randy what kind of perception change has taken place in the auction industry. Randy thinks that much of the public still view auctions as a fire sale, but many investors believe that it is an effective way to sale inventory. It depends on who you talk to.

Bruce discusses how variable the results can be when selling properties through auctions. The right person for the sale may or may not be attending. Often the problem with auction sales lies within the seller’s expectations. When people own properties, which they have assigned a feeling of value to, it can distort one’s perception of whether or not a property is being sold at the right price. Randy believes that houses sold through auctions are priced properly about 80 to 90 percent of the time.

Bruce asks Mike how different it is to auction real estate in comparison to other auctions. In real estate you do not get paid immediately. You have to go through escrow, and you have to understand how to deal with Realtors. An antique seller is not going to understand real estate, just as a real estate auctioneer will not understand antiques. In the rest of the auctioneer industry, you usually get paid immediately after the sale. Online auctions are also much different than the on site real estate auctions that Mike and Randy handle.

Bruce Norris is joined this week by Chief Economist for the California Association of Realtors, Leslie Appleton-Young.

Bruce starts by asking how many members C.A.R. currently has? In 2009, she estimates there are 160,000. Peak membership was in 2007 when there were 211,000 members. The numbers are better then both originally thought they would be.

Things have really changed and people are doing very different things than they were two years ago. More work is out there for REOs, working with investors, and first-time buyers.

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Bruce asked if the membership encouraged by what you were able to say for 2009? Leslie says the market, in terms of transactions, has seen the worst. The market bottomed, in terms of sales, in the fall of 2007. We had over a 25 percent increase in sales in 2008. The problem is that there is a lot of uncertainty right now about everything, but particularly about the economy. That is what is hard to gauge right now. There has been a lot of initiative coming out of Washington that has not yet had a chance to impact on the street. It is easy for an economist to say “jobs are a lagging indicator”, which they are, but this restructuring could go on for a while, and it could get a lot worse.

Leslie says she is able to carry a message that the distressed REOs and short sale component of the market is bottoming, and slightly improving, with respect to prices. Sales have gone up sharply in the regions of the state, such as the Inland Empire, where you have a significant amount of the listing inventory falling into the distressed category, so that housing is extremely affordable. There are parts of the state where homes are selling below replacement cost. I think that is very encouraging, but there is a cloud over the country and the world, because it is uncertain how long this recession will be. That will have an impact, and I do not think anybody knows.

Bruce says that the hardest part about this real estate downturn is you have to consider so many factors that you have never had to contemplate before. The local, national, and global economy comes into play. Leslie says we have political issues, we have environmental issues, we have swine flu, and we have the economic issues that are really difficult. Housing is just one part of it. Clearly, subprime started the ball rolling about 3 years ago. There is no doubt that this is a systemic issue related to risk taking, transparency, fee driven events with no accountability, and so on. In order to rebuild confidence there needs to be some major changes in how these industries are regulated. That is happening in Washington now.

Bruce says typically when you start down the path of regulation there’s a danger of over-regulation. Leslie says that is possible, but there needs to be more regulation now so that people know what they are getting when they make an investment. That is what is really crippling the lending market. Investors do not want to have anything to do with mortgage backed securities, because they do not trust the paper. There’s no way around it because you need this intangible item called confidence and trust, which is not going to come back on its own.

Leslie says she never thought she would never see the statewide media and home price drop 38 percent in one year. Bruce says he agrees. Investors are buying properties right now at prices we have not seen since 1987 because of the REOs. The median price is probably not highly accurate because there is a mixed inventory.

Leslie says that is absolutely true. She debates average versus median with people all the time. The issue is the fact that it is the moderate and low end of the market that disappeared in 2006 and 2007, and the high end was maintaining until September of 2007 when you could not get a jumbo loan. In 2006-07, the market contracted, in terms of transactions, by more than 20 percent during each of those two years, and yet the median home price was at a very high point.: The high end was still going strong, but that all changed in September 2007. One of the themes, in remarks to C.A.R. membership is “leverage your local market knowledge”, because a national, statewide, regional, or county statistic is not going to be enough. It will not be accurate for the decisions that your clients are making with respect to a particular neighborhood.

Bruce talks about a recent survey where the customer was asked, “What will the direction of prices be in 1, 3, 5, or 10 years?” The dominant answer was “I do not know”, and yet they still bought and Bruce was surprised. Leslie says there are a lot of things going for the market right now. The federal government is buying rates down to 4.5 percent, there is an 8,000 first time home buyer tax credit, there is a 10,000 dollar state income tax credit for construction, there is the FHA financing, there is conforming loan financing that is fairly readily available, and you are looking at prices that are half what they were 3 years ago. Bruce says that interest rates are also 2/3 and the affordanility number is way high.

Leslie says if you look at PITI in the last two years, you can see that it has been cut in half. Bruce talks about his 24-year old daughter and purchasing her first house. It is a big thing when you have your first chance to own a home. It’s an FHA purchase, in which she will have $4,000 or $5,000 dollars down, will receive an $8,000 dollar check from the federal government. She previously rented a room for $700 in another area, and her payment on a perfect fixed house is $804. Bruce says most families have two incomes so he doesn’t think there has ever been a time where California real estate has been this affordable.

Leslie says she challenged an audience last week to examine what their assumptions are about price appreciation over 3, 5, and 10 years, and to make sure that was not driving their decision. It was important for them to understand that housing prices come down.

Bruce says that is part of this issue. There were a lot of realtors, investors and home owners that were very accustomed to just owning a house that created an extra $50,000 to $100,000 dollars whenever they wanted it. Leslie says homes won’t be seen as a piggy bank any more.

Leslie challenges everybody to look back at the past 3 or 4 years, and study it, and be engaged in the public policy debate that is going on in Washington. Look back at the post World War II period up until 2002, you can see that housing debt was different. People treated the home ownership process very differently. It was hard to get a mortgage. Foreclosure and getting into trouble was not viewed as an option. That did not happen unless there were extraordinary circumstances. The fact of the matter is there were a significant number of people who refied out of reasonable loans into risky loans. Many of the deals that went on during the boom were cash out, so people were put in harm’s way.

Bruce says important is the velocity of this downturn. Leslie uses a slide from the late 70s that shows it took 5 years for the market to shrink about 60 percent. In the last 80s and early 90s it took 5 years for the market to shrink. This time it has taken 3 years for the market to drop 44%. Prices are typically sticky on the way down because if the market is not good then why would discretionary sellers decide to sell. In the last couple years there has been a lot of nondiscretionary sellers.

Bruce says that the job issue doesn’t look like it will be solved immediately. Leslie says the big question, in regards to the housing market, is the economy. The problem resides within job losses and confidence. The problem is not that people cannot get financing, particularly conforming financing and FHA.

Bruce says in Riverside, 45 percent of the buyers are under water. Then other people are out of work, or under employed. When you add up these pieces you realize that you need the new buyer to emerge, or you need to attract migration to California, and jobs play a part in that. We are going to have a challenge in the next 18 months while we find out who is going to buy all this stuff.

Leslie says she’s been floored by the first time buyer response, and the affordability is clearly the trigger, but there were a significant number of people who were on the sidelines waiting for this to happen, and they timed it right.

Bruce says there is a definite shift to the type of buyer. It’s really geared towards a first time buyer.

Leslie says she thinks most buyers are getting fixed-rate loans. She doesn’t know why anyone wouldn’t get a fixed-rate loan.

One of the things said in a recent survey was that 56 percent of people qualifying said that on a scale of 1 to 10 of difficulty in getting through the financing they had a scale of 9 or 10, over half the people found it pretty tough to get that loan closed.

Leslie says it was a survey that was done in the middle of last year, so it will be interesting to see if the scale changes when we do it again this year. Leslie’s hope would be that the Obama initiative helped that. Another issue with difficulty is not that the funds are not available, but you have got to document everything. You have got to have a very strong FICO score, and you have got to have your W2s. The problem is not that the money is not there, it is that they want to make sure that they are going to get their money back, and who can blame them?

Bruce says you have to set up the next set of loans to be safe, so when there is another mortgage backed security in our future that it is actually as advertised. Leslie says transparency is critical for us to get our market back. She said on many occasions that rapid price appreciation trumps underwriting. She does not think we can count on that any more. It is an incredible risk to take.

Bruce said the projected median price for 2009 was around $250,000 and he wonders if that is where we’ll end up. Leslie says $250,000 is a reasonable number. When CAR calculates a statewide median for the entire year it is recalculated from scratch. It is not the average of monthly median. They include everything that is sold during 2009 into the bucket, and then get the median. What I am seeing in the market today is that the price softness is at the high end. It is not a huge factor in the market right now because that is a small part of the overall sales. I thought it was very interesting in our March data that we saw an increase in the median home price from one month to the next. It is likely that we are bouncing around the bottom in terms of prices. There’s a lot of talk about multiple offers at over asking price.

Join Bruce and Leslie next week as they continue the conversation.

Bruce Norris is joined once again by Chief Financial Officer with Leivas and Associates, Susie Leivas.

Bruce starts by asking about 1031 exchanges. Many California real estate investors took money out of California to dodge the price declines and are now bringing it back into California. Bruce asks Susie to expand on the 1031 exchange concept. They start by talking on what like-for-like means.

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Susie says like-for-like means you can buy any real estate. However, it can’t be personal property. You can switch from investment single family residence for land, as an example, as long as it is an investment property. Boot can happen if money is not spent in an exchange. So when a replacement property is not of higher value and there’s extra left over in the exchange, if it doesn’t get reinvested in like-kind, that left over portion can be taxable. When you close escrow on the property you sold, you only have 45 days to find a replacement property and 180 days to close. If an agent suggests backdating the paper work, DON’T DO IT. Backdating can cause you tax penalties and jail time. The IRS takes this fraud seriously.

Out-of-state ownership of property could require investors to file for that state tax. Depending on the filing status and age of applicant, the Federal Government has an amount cap and after that is hit, the gross amount must be filed. Many states are the same. Check with your tax professional. In California, investors must report their world-wide income which goes on the Federal and California State return. If there is an additional state, they can give you a credit for filing in an additional state which is dollar for dollar.

Worldwide income is required and Bruce asks if investors can deduct world wide losses. Susie says she’s never had a client do that so she’s not sure.

Bruce and Susie talk about precious metal sales and if they are on the honor system. The process doesn’t have an escrow and it’s hard to track. Susie does not know if the IRS has a way of tracking. If the IRS was tracking, they would be looking for deposits that seem odd.

Bruce asks about refinancing properties and 1031 exchanges. Susie says there will be deductible interest issues and there could be a tracing problem.

Bruce talks about credit lines and investors. Many investors in California don’t realize rules about limits on deductible interest. Only $100,000 is allowed. Beyond that, if it can’t be proven that the dollars aren’t spent on home improvements, it’s not deductible. There’s a one million dollar cap on mortgages.

For rentals, it’s a different category. The money just has to be traced and used for that property. You can take out money of one and invest in another but it has to be traceable.

To be declared a real estate professional, there are several categories. 50% or more of everything you do must be real estate related and 750 hours are required. Susie gives an example of a teacher couple who has a rental and how the IRS might look at their situation.

Bruce asks about the forgiveness of debt for an investor versus a regular consumer. A 1099C will be given for the amount of forgiveness. As an investor, the only way out of debt completely is to declare bankruptcy or file for insolvency. The test for insolvency is when you put together all the assets and liabilities. If liabilities exceed the assets, you can claim insolvency. At that moment, the debt is permanently wiped out.

In the past, if a consumer submitted a fraudulent return to a lender and the IRS got a hold of it, the IRS will use that for taxes. For stated income loans, she is unsure of how that is being handled by the IRS.

Bruce asks about an investment rental property that receives repairs and how that is handled in taxes. Susie says the repairs would be capitalized and made part of the purchase of the property. Residential real estate is a 27.5-year asset and it would be deducted over time. Points and financing costs have to be amortized as well.

Dealer status means you are in the business of buying and selling real estate. Intent is key here. Did you mean to buy a property as an investment or was it to buy, fix and sell? This matters for self employment taxes.

Bruce talks about entities. There are S and C Corporations. In C Corps, there are no capital gains. As a dealer in C Corp, it might be a good entity. Before year end, the investor needs to make sure all profit is out of the business by way of bonus and payroll. Social security and Medicare will be paid on that. Things might change soon because of this administration’s intent of foxing social security. Check with your professional tax advisor.

Bruce asks if people can write off home price declines and Susie says no.

Bruce says many investors went into many states that had different recourse rules. People need to understand the difference between recourse and non recourse states.

Bruce and Susie talk about the difference between tax credits and write offs.

Thanks so much Susie for the interview. You can find Susie and her team at leivasassoc.com. Next week join Bruce and Chief Economist of the California Association of Realtors, Leslie Appleton-Young.

Bruce Norris is joined this week by Chief Financial Officer with Leivas and Associates, Susie Leivas.

Susie started working in the tax field at 13 years of age. Susie goes into a little detail of the family business and how she got started in the industry. Leivas and Associates does tax returns for individuals, corporations and trusts. Susie sees more audits comings as the State is more cash tight. Susie as an enrolled agent can represent clients during audits.

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An Enrolled Agent (EA) is a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals.

The IRS is getting tough as to who they will work with. If you’re not an attorney, enrolled agent, or CPA they won’t want to speak with you. There are different types of audits. Susie describes how the IRS is tracking how many returns the business and she personally accomplishes in a season. Every year the IRS could be looking for different things as red flags.

Bruce asks if a tax preparer pushes the envelope if the IRS could audit their entire clientele. Susie says she does know of cases where that has occurred so it’s important you have a person who knows what they are doing. Susie describes red flags for the IRS including negative taxable income, extremely high business expenses, and anything really out of ratio. The IRS uses computers and then people to check for inconsistencies. A CPT 2000 does not mean a person is being audited.

Bruce asks if there was any significant change this year to policy. Susie says no big stuff but the stimulus bill has changed some things including college credits and automobile purchases. Some got passed during tax season.

Bruce asks how this year has affected her clients. Susie says it’s been a depressing year. People are getting laid off, furloughs, pay cuts, and overtime has been cut. She thinks most Americans are a paycheck away from bankruptcy and we’ve learned to spend too much. She says this year was a very different year than last year.

Bruce asks how this cycle feels compares to the 90s and Susie says this year feels worse. In the 90s, Susie heard issues from mainly businesses. Individuals are really concerned and don’t see an end in sight.

Susie says people 60 and over know how to save money. People who are younger really don’t understand savings and it’s a real issue. Bruce says people confuse home equity with a savings account. Susie says real estate was seen as a check book and that she’s very surprised at how much people had started to pull out of houses.

Susie says people don’t look at the full picture when making purchase decisions. They seem to mostly care about the payment, not about terms. Susie saw many people become second homeowners and almost 100% were financed. Very few people own anything free and clear. Many people are retiring now with major debt. The old way of thinking was to get rid of all debt and then retire. Social Security was meant to be a supplement and around 70% rely on Social Security as their only form of retirement.

Susie says she was expecting the foreclosures to hit sooner and so far her clients haven’t gotten hit so hard. Part of her job is to pick people up so she’s been preparing herself for those conversations. She was ready last season. She got a little this year but not as much as she expected.

Susie says if people have yet to pay their taxes, they need to as soon as possible. Once you file, the IRS is willing to do payment arrangements and it’s really easy. If it’s really bad, she thinks the IRS will probably compromise and negotiate considering the current climate. The ability to pay will probably be more of an issue.

Susie and Bruce talk about people who don’t file for years and the process of going about getting into the system. Susie says the state is more aggressive in going after late payments. Bankruptcies can wipe out debt but it depends. Not all debt is forgivable. Bruce asks about insolvency and how that plays into the IRS.

Susie says Congress made some changes to help homeowners with acquisition debt. The state didn’t do the same. Susie says the every year the amount a senior can make before being taxed changes.

Susie and her team can be reached from their website at leivasandassociates.com. She will join us next week for part two.

Bruce Norris is joined once again by past President and current Chairman of the Board for the National Auctioneers Association and co-founder of Williams and Williams Auctions, Tommy Williams.

Bruce starts by asking if there is a different process in selling real estate and cattle. Tommy says there is a slight difference but he’s hoping the audience will still understand. He says cattle auction goes a little faster and is a little more entertaining.

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1. Click HERE on the player launch below to stream our shows as you surf the web.
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Auto auctions generate close to 50% of the proceeds for auctions. The end buyers are typically dealers. There are both dealer and public auctions but some are only available to dealers.

July 13-18th is an auction reunion in Kansas and Bruce asks who attends. Tommy says over 1,000 auctioneers will attend and bring families. It is the best and main time of year to attend education for the auction industry. Over 60 seminars will be available.

Bruce asks about Tommy’s family history in the auctions business. Tommy says there was a little family history but he fell into it on his own. Tommy’s son Dean is an attorney and didn’t plan to be in the auction industry. Tommy moved the business from Illinois to Oklahoma and Dean visited while in school and ended up later partnering. Tommy says he has six grandkids and he thinks a few might be interested in the business.

Bruce talks about the model Williams and Williams has chosen and how it is different from other auction houses. Tommy says online auctions are a very viable way to sell items and Williams and Williams does conduct online auctions. However, Tommy says a property will earn 10% more on the lawn then it will bring online or in a ballroom setting. It’s significant and matters. There is more expense in having these types of auctions.

Tommy describes the difference between absolute and seller reserve auctions. Tommy says the absolute auction is by far the best and motivates the buyer to the ultimate level of bidding. It also attracts the most attendance which is key for the best price. Tommy says many can’t stomach absolute so more are sold with reserve.

Tommy says it not impossible for very experienced auctioneers make mistakes. It’s complicated and not as easy it may look. Advertising has definitely changed over the years. The newspaper has dropped in value each and every day and online advertising has gotten more important. The auction companies track the marketing process very carefully to see where most people are seeing the information.

Tommy says when the word “sold” is uttered, in an absolute auction, it is the most binding contract you can enter into. It is different in a seller reserve. Bruce talks about dealing with deposits in real estate now and how difficult closing can become. Tommy says he thinks 10% down should be at stake to make sure the buyers are truly qualified. Tommy says he doesn’t like the current way real estate is sold because of these issues as buyers can tie up your property will no ramifications if they don’t come through.

Tommy describes how the auction business is commissioned. Williams and Williams gets commissioned directly from the seller. Some lenders require, however, a buyer’s premium. Many more auctions are charging buyers but Tommy actually likes charging the seller. He thinks the buyers see the auction in a more positive light and the premium isn’t seen as a tax on their purchase.

Bruce asks about Tommy dealing with lower priced areas. Tommy says there are minimum fees that must be charged. There does become a point where auctions can’t sell a property because it doesn’t cover the fees.

Bruce talks about lenders not foreclosing on properties because there is more owned on the property then it is worth so lenders don’t do anything with it. Tommy says this issue is really serious and most people aren’t hearing about. Tommy says he’s seen some neighborhoods where 80% of the neighborhood is vacant. There’s almost no choice but to tear them down as they become magnets for vandalism, squatters, and drug labs. Bruce says it doesn’t even have to be an old areas and Tommy sounds surprised. Tommy says that’s why these homes have to be given occupants whether they are investors or owner occupants. Empty properties are not good for neighborhoods.

Bruce talks about Orange County and the FDIC leasing space to set up shop to deal with assets. He asks if Tommy has heard of that and if Williams and Williams were involved in the RTC situation. Tommy says they were slightly involved with the RTC but dealing with government is difficult. Tommy had not heard of the offices being rented in Orange County. Tommy is worried the FDIC will warehouse the properties and it will make the problem worse.

Bruce brings up a new term he saw on the Williams and Williams website called “auction referral cooperative.” Tommy says this is a way to establish a network of like-minded auctioneers that refer one another. There’s no financial obligation and they are simply looking for other auctioneers of the same mind and there’s a referral fee involved.

Thank you Tommy as always for joining us on the show. We look forward to seeing you again this year on September 11th, 2009 for I Survived Real Estate 2009. See more on Williams and Williams at Williamsauction.com.