Banks and Commercial Lending Bust

Seven more banks were closed by the Feds on Friday, bringing the year-to-date total of bank failures to 106. Meanwhile, Capmark (formerly GMAC Commercial Holding Corp.) is heading into bankruptcy.

Hat tip to Karen De Coster for the original post.

Weekend Edition, Oct. 24-25, 2009

The Commercial Real Estate Bust Begins
UK commercial mortgage backers face $1.6 billion loss

Unsustainable Earnings
Analyst Bove cuts Wells Fargo from "neutral" to "sell"

Fannie and Freddie Are Worthless
KBW downgrades target price of FNMA and FHLMC common stock from $1.00/share to $0/share.

The Truth About Foreclosure

Against my better judgment, I listened to another snake-oil presentation from EWI today. The email sent promised to show me how to get financing for my deals. After over 90 minutes of software salesmanship (Google "Power Stream software" to read all the complaints from people who actually shelled out $2K for this) the way to get financing is to be one of the first 20 people to buy the software at the "special 50% off for Robert Allen's students price" of--wait for it--$2K.

The software is supposed to do all kinds of wonderful things for you, but the emphasis in the webinar was on the software's ability to locate properties in pre-foreclosure and allow you to find the "killer deals"--ones with a large spread between the amount in default and the current market value. This allows you to profit even in a competitive market by acquiring the property and either flipping it to another investor or retailing it. In other words, you acquire the property with a lot of equity built in. Keep that in mind as you read on.

Anyway, one of the statements made by the shill instructor ("one of the nation's foremost experts on Real Estate in this market") struck me because, as a former RE licensee, I do happen to know the law of foreclosure in California. I don't have the exact quote, but the following is pretty close:

If you see a second mortgage while researching pre-foreclosure properties, don't worry about it. It just means they're second. If the first forecloses, the second gets wiped out, so it's in their interest to negotiate with you for pennies on the dollar.

Uh, not so fast there, Mr. Foremost-Expert.

In California (please keep in mind that I am only writing about California) we don't use mortgages. We secure real estate with deeds of trust. In a trust deed system, the trustee holds naked legal title to the property as a neutral third-party between the beneficiary (lender) and the trustor (borrower). The trust deed contains a power of sale clause, allowing the trustee to repossess the property (foreclose) if the trustor defaults (mortgages generally can only be foreclosed by court order).

Foreclosure under California law is a six-step process:

1. The beneficiary notifies the trustee of a default.
2. The trustee or beneficiary executes a Notice of Default. This Notice must be recorded in the office of the county recorder where the property is located at least three months before Notice of Sale is given. A copy of the Notice of Default must be sent to all parties with a recorded interest in the property, a category that includes junior lien holders.
3. During the Statutory Reinstatement Period, which runs from the date the Notice of Default is executed up to five days before the date of sale, the debtor or any junior lien holder may reinstate (bring current and restore) the loan. From the end of the Statutory Reinstatement Period until day before the public auction, the debtor may redeem the property by paying off the defaulted loan in full, plus interest, costs and fees.
4. If the loan is not reinstated, the trustee then files a Notice of Sale. The Notice of Sale contains a general description of the property, and states the date, time and place of the public auction where the property will be sold. The Notice of Sale must be published in a local newspaper at least once a week, for at least 20 days prior to the sale date.
5. 21 days after the Notice of Sale is filed, the property is sold at public auction. Until bidding ends at the foreclosure auction, the debtor or any junior lien holder may redeem the property by paying the defaulted loan in full plus any costs and fees allowed by law. Otherwise, highest cash bidder wins (first lien holder, or holder of debt being foreclosed, may bid the amount owed without having to put up cash). Property that does not sell at auction becomes Real Estate Owned (REO).
6. Trustee's Deed is given to buyer. Sale is final; no right of redemption.

Proceeds from a Trustee's Sale are distributed as follows:

1. Trustee--fees, costs and sale expenses;
2. Beneficiary--full amount of unpaid principal and interest, charges, penalties, costs and expenses;
3. Junior lien holders--in order of priority;
4. Debtor--any money remaining.

So, if you are looking at a property with a ton of equity in a seller's market, why on Earth is it in the junior lien holder's interest to negotiate with you "for pennies on the dollar," when he can protect his position by bidding on the property himself, or simply ride out the foreclosure and get paid from the proceeds of the Trustee's Sale?

More importantly, no one is going to negotiate with you at all unless you become a lien holder: as an outside investor, you lack standing. That looks like cash up front, time, accountants, lawyers, to me: it doesn't look like the material of easy, same-day flips with one-day transactional funding. Don't worry about the funding, though, because the software peddler's transactional funding source (it's a partnership, not a loan) has your back: if the deal doesn't close in a couple of days, you don't have to pay back the money if there was no misrepresentation on your part (and there probably will be, if you follow the advice of the gurus). The funding partner will shoulder the risk and help market the property, it's just that his percentage of the take goes up over time. If the deal turns into a real mountain of dog poop, the funding partner knows which workshop, boot camp, etc., referred you, and exactly which fraudulent technique he can cite to drop the whole, steaming pile back into your lap.

And for God's sake, don't think you'll get creative with some sort of leaseback to the homeowner in default. It's illegal in several states, about to be illegal in others, and just begging for a lawsuit everywhere. It's as simple as this: you have to get the owner off the deed and out of the house. Period. No exceptions.

Be careful when you play with the kids from Nothingdownland.

The Housing Trap

From Casey's Daily Dispatch (scroll down for article), another sign that U.S. housing has still farther to fall.

Casey also debunks (again!) the myth of your personal home as an investment:

IRS data show that during these years [1997-2007], as Americans pocketed $5,312 billion in capital gains, they simultaneously shelled out $5,252 billion in mortgage interest and real estate taxes – a difference so small as to be a rounding error. Over the same period, homeowner costs rose 122% for mortgage interest and 112% for property tax, while personal income increased by a paltry 63%. The cost of home-sweet-home ownership was eating Mr. & Mrs. Suburbia alive.

Fannie and Freddie are worthless

In spite of taxpayers being soaked to the tune of $98 billion to keep the two government-sponsored lenders afloat, leading bank analysts Keefe, Bruyette & Woods (KBW) have downgraded their target price on each from $1.00/share to $0.00/share. That's right, zero!

Fannie and Freddie account for 68% of all mortgage loans generated to date in 2009. Translation: the Feds are still pushing people to take mortgages they can't afford; the Feds' two sponsored lenders, with preferential access to capital, are sitting on great, steaming heaps of toxic paper; the Feds and their lapdog press will somehow find a way to scapegoat the private sector when the government's own scheme comes tumbling down (again).

Read the full story here.

Education of a Real Estate Investor, Days 17-26

Wow, I haven't posted in over a week! That doesn't mean I haven't been engaged. I'll pick up where I left off:

• I met with Bob from Silicon Valley REO on Monday. Here in Silicon Valley, it is a seller's market with respect to under $300K starter houses. There is less than one month's inventory of these on MLS; most sales now are overbids. The buyer's market is in the over $600K properties.
• I missed the Bay Area Real Estate Investing Community meeting in Milpitas last Thursday, due to a schedule conflict. It seems mostly a venue for playing Robert Kiyosaki's Cashflow 101 board game.
• I am still waiting to hear from Platinum Funding about FHA loans on commercial properties.

I was called by one "lender" last week. I immediately recognized it as a scam. They would loan to me on the condition I made the first six months worth of payments up front. I'm pretty sure this is illegal. I Googled the "company" again this week and, sure enough, the fraud complaints are starting to roll in. The website has been taken down.

I may be on to a legitimate source of joint venture (not loan) funding. They do require that you incorporate, which I have not yet done. I'm a bit skeptical, since I came across it by way of one of the snake-oil peddlers. Stay tuned.

Education of a Real Estate Investor, Days 15 - 16

If you are with me so far, you may have noticed that the previous blog posts appeared all at once. I decided to migrate these posts from my self-hosted blog at Escape The Village as I felt the topic Education of a Real Estate Investor really merited separate consideration. Rather than spend money and time registering another domain name and setting up another blog, I decided to set up here on Blogger.

The Trump University commercial real estate webinar was interesting. Of course, there was a $1,000 course you just had to buy and which was discounted 50%, to a mere $500, for webinar attendees but only for 24 hours after the event: "If you're not able to get in now, you probably never will be able to." I guess I won't ever be able to, since I didn't happen to have five C-notes in my jeans, bank, or anywhere else. I'm doing some fact-checking now though, just in case.

I went to Meetup yesterday and found Bay Area Real Estate Investing Community. I signed up for their meeting in Milpitas next Thursday evening.

I spoke briefly with an agent from Silicon Valley REO today. We set an appointment for Monday in his office to discuss my goals further and formulate a strategy.

I contacted Platinum Funding about FHA loans on commercial properties. The agent was closing a deal at the time, so I left my number and am awaiting a call back.

At the free EWI seminar, the instructor emphasized sounding like a seasoned investor. I don't even try, for three very good reasons:

1. The first time I say something stupid, the cat's out of the bag;
2. I need help, and having the commission check tied directly to the quality of the mentoring creates a win-win situation;
3. The surest way to make an expensive mistake is to have your broker thinking you know more than you do.

Education of a Real Estate Investor, Day 14

Not much activity today. I did register with Silicon Valley REO. I won't be able to access the site until my account is approved by an agent there.

There is a Trump University webinar tomorrow evening on commercial real estate investing. I hope I'll pick up some pointers I can put to use immediately, since I do have a source of hard money for commercial property.

Education of a Real Estate Investor, Day 13

I finally connected with the second hard money outfit I saw advertised in my local newspaper. It turns out, they've only money for commercial real estate. They will go 75% loan-to-value (LTV) on buildings and 50% LTV on land. In Santa Clara County, commercial vacancies are near 50% (the city of Sunnyvale has the highest commercial vacancy rate at 52%). I'll keep my eyes open, but I think it will take a heavy dose of luck to find a property that someone is selling even though they are making money on it.

Like the HomePath Mortgage program, which is available to owner-occupants or investors, the HomePath Renovation Mortgage (owner-occupied only) also requires 3% down and 660 FICO score. So far, all of EWI's talk about hard money loans and imperfect credit loans through HomePath is just that--talk.

Having sampled the free wares of the snake oil salesmen, and having seen how many of them have moved on to other snake oil like affiliate marketing (internet marketers marketing internet marketing products by their internet marketing buddies to internet marketing newbies) I have resolved to waste no more time on them. There is money to be made out there, but not the way the mountebanks say it is.

Education of a Real Estate Investor, Day 12

As I suspected when I began this project, there are a lot of snake oil peddlers out there.

It is very obvious that most of these "gurus" (which you invariably see spelled "guru's" as if an apostrophe means "Look out, here comes an 'S' ") are not making their money in the matter they claim. Here are a few examples:

• One such guru's "Privacy Policy" tells you he "may not" sell your personal information, but that you should "expect" he will. Why does he need a few bucks from selling telemarketing lists if he's making a gazillion dollars in real estate?
• Another guru's website is so plastered with affiliate marketing ads and pop-ups as to be nearly unreadable. Again, why the need for all this if he's doing so well in real estate?
• I watched a 92-minute (advertised as 70 minutes) "free webinar" by another expert. He kept professing that "time limits" wouldn't allow him to share all of his great "techniques." He never lacked time to pitch his expensive training program, however, which consumed almost the entire presentation. The few techniques he did discuss were merely common platitudes of the "Chicken Soup for Whatever" variety.
• My personal favorite is the guy with the flashy video trailer for a new (and doubtless expensive) software program he's releasing in January. The website is full of "testimonials" to the greatness of the software, even though there is no description anywhere of what the software actually does. The mountebank himself says he "can't tell you" what the software does. I clicked a training link on his site, where he and an associate spent six minutes hemming and hawing over something on the web called "Google."

I did receive, via UPS, the "Multiple Streams of Income" package from EWI I was promised for attending their free, three-day event. The whole package weighed in at 11 pounds. So far, the book doesn't thrill; it is mostly regurgitations of Mr. Allen's earlier works plus conventional wisdom you can find anywhere. I have to laugh when he talks about network marketing and affiliate marketing as roads to wealth. So far, I've lacked both the time and the motivation (given what I've already seen) to wade through the workbooks and CDs.

By the way, if you want to know how Robert Allen made however much it was he made in one day on the Internet, here's the secret: he spent nine months pre-selling his mailing list before he issued his challenge. You can do it, too, if you don't need the money for nine months and have a mailing list like Robert Allen's.

At EWI, I was advised to concentrate for 6-12 months on assignment of contracts. I was told to round up my investor network first, then go hunting. This technique also is known as "bird-dogging." It still requires a certain amount of up-front cash for inspections, appraisals, and earnest money deposits. My own advice on the last is not to enter into a contract that specifies a non-refundable earnest money deposit. If the property fails inspection (according to your own criteria) you don't want to be out both the the inspection fee and the deposit.

I've played phone tag with a funding source for a couple of days now. I'll post results when we finally have a chance to speak.

Education of a Real Estate Investor, Days 6 - 11

There hasn't been much action this week, with the paying job consuming far too much of my time (and no overtime, since I'm salaried) and my internet connection down for a couple of days. I had way too much fun shooting trap with a couple of friends today, but I needed a break.

Funding continues to be problematic. I'm still trying to get a hard money lender to return a call -- if, indeed, their email addresses or contact phone numbers are still valid. I called a couple of lenders who advertised in my local paper. The Umax rep told me, "No one is doing after-repair value (ARV) loans anymore; they all want to see some skin in the game." In this case, the skin is 40%. The other call went straight to voicemail, so I left a message and am awaiting a call back.

I am getting returns from realtors. Several of the properties I inquired about were under contract at the time but are back on the market now. I need to start networking more with potential investors.

Education of a Real Estate Investor, Day 5

The Coldwell Banker HomePath rep returned my call today. HomePath requires requires 660 FICO for investors. This option is off the table for me, for now.

I called the realtor on the local property I found, but the property already is under contract (Foreclosure.com still shows it as active). I asked the realtor to keep me in mind for any other investment properties that come his way.

I spent some time searching Houston and Dallas. Most of the properties I saw did not leave a lot of money in the deal--not enough to cover closing costs, in many cases. I'm going to keep an eye on it anyway, to see how the market prices really turn out and to evaluate other strategies for investing there.

Education of a Real Estate Investor, Day 4

Well, the Trump University foreclosure tool I mentioned in my last post is a bit of a bummer, just because the trial version is crippled. You can't see the actual photographs of the property unless you subscribe, so I'm still toggling between different sites. Thank goodness (OK, thank Opera; they started it) for tabbed browsing. It's bad form to cripple a time-limited trial, if you ask me.

I contacted realtors on 11 foreclosure properties in the Atlanta area today. So far, I've received one response. Tomorrow, I'll work the Dallas-Houston market.

I contacted two hard money lenders, one with some general questions and one with applications on two properties. I'm waiting to hear from them. I also contacted a HomePath lender and am awaiting a call back. I called HomePath to pre-qualify, since some properties are eligible for FHA loans both for owner-occupants and investors, at 3% down.

I spent some time yesterday at REI tips, listening to parts I and II of Norton's Secret Profit Formula. There are definitely some good tips there. Bob Norton is killing it in Detroit, probably the worst market in the country right now, and he's doing it from Utah! He does have some advantages though, being originally from Detroit and being a realtor and hard money lender.

Education of a Real Estate Investor, Day 3

I had my talk with the Admissions Director at Trump University this morning. He told me that their mentoring program looks for people who are passionate about real estate and would be doing this on their own, anyway. That pretty much describes me, since I don't have the cash or credit for their tuition now. I said that I thought the program would be most valuable to me as I move into more complex deals, such as commercial RE. I told him that I plan to get the tuition out of my first, self-directed deal. He agreed, saying this is what he would recommend.

I am keeping alert to bargains in my local market, but I am not wasting time actively working it. Prices are still stupid expensive here: in August, 41% of the sales that closed in Santa Clara County were overbids! Don't these people know there's a crash on?

On my way to pick up the twins from school, I stopped at my local Chase branch to inquire about their checking options. At this point, I want a second household account, specifically to hold money for the normal household expenses--rent, groceries, etc. I also want a separate business account. Chase has free checking options on both, so they're a good deal. The New Accounts rep was very friendly and knowledgeable.

After I picked up the girls, we headed to Fry's. I wnated to look at some multifunction units to replace my dead printer, obsolete (no driver support) scanner, and ancient fax (document feeder no longer works). No firm decision yet, but no cash, either.

Tonight, I will finish my spreadsheet and start emailing realtors. I plan to make my first offers no later than Tuesday.

Education of a Real Estate Investor, Day 2

I logged on to a free webinar by Trump University this evening. Investing in foreclosures was the subject of the one-hour session. We received a free, thirty-day trial of Trump University's foreclosure research tool, which is an enhanced version of Foreclosure.com. My initial impression is that it is worth the cost ($34.95/month) for a professional real estate investor, as it streamlines the research process considerably. You can do the same thing for free, but you'll spend time toggling between different websites for each property you want to research.

I attended a webinar last week, also by Trump U., on tax lien investing. That got me a follow-up phone call from one of their sales staff. I will be speaking with one of their Admissions Directors tomorrow morning about putting together a program that suits my present circumstances and future goals.

Frankly, I'll probably do at least one deal before I think too much about shelling out thousands for a mentoring program. The deals are still thick on the ground, but the window is closing. I've identified a number of interesting properties. I'll winnow those down to my top ten and contact the realtors (or banks, for any that haven't gone to realtors yet) by Friday. Keep it simple, do the due diligence, get the inspections, make the offer. I'm feeling less inclined to flip property right now, and more inclined to hold on for present income and future appreciation.

Education of a Real Estate Investor, Day 1

My goal is to do something every day that gets me closer to my first investment property. My present strategy is to buy and repair, then either rent, flip, or assign the contract. This could also take the form of buy, repair, rent, then flip or assign. The objective of the first few deals is to bring in some quick cash to pay bills and finance future deals.

Yesterday, I called a local outfit that had affiliates in the Raleigh-Durham, NC area. I hung my RE Salesperson's license there when I had one. Their phone is disconnected and they have no web presence, so I assume they've gone out of business. I'm not surprised, since their business model was heavily connected to the inflationary bubble.

Since my credit is shot, I'm looking at hard money lenders for financing. Most require 680 minimum FICO score, but Google brought up a few that deal with bad credit. I checked out BadCreditMortgage.com, which bills itself as the premier nationwide residential rehab lender. You couldn't prove it by me. There is no mention of rehab loans in the online loan application pulldown menu. I tried sending an email from their Contact link and got a permanent delivery failure: "no such user." I did find a couple of regional lenders who do not require a minimum FICO score, but I have not yet verified their existence. If they do exist, they are in a couple of the markets in which I am most interested.

Following the advice on Scott Roemermann's Real Estate Investing Secrets website, I've begun work on a spreadsheet to help me better understand the numbers. You can use a commercial package, but Scott (How many times do you think I'm going to type Roemermann?) recommends building your own because you do get a better grasp of what the numbers actually mean and you can tailor the sheet to your own requirements. I use OpenOffice, a free office suite, rather than Excel. Google's offers a free, web-based spreadsheet as one of their online applications.

I've pulled a number of properties off HomePath, Fannie Mae's REO site, looking for ones that meet my specific criteria. I'll delve more deeply into what those criteria are in a later post.

Enlightened Wealth Institute

I've decided now would be a good time to get rich. With that in mind, I accepted an invitation to a free, three-day workshop put on by Robert Allen's Enlightened Wealth Institute last weekend in San Jose.

Our primary instructor was Gary Harris. Don Dockum, James Johnson, and Nick Lamagna were the other instructors, each of whom made presentations during the course of the seminar. Tony Rosenbum, reality TV star (Boot Camp) and owner of Motova8, Inc., provided the motivational talks, as well as training in "offensive" (versus defensive) credit strategies. Don, JJ, Nick, and Tony all were available one-on one before class (they were there an hour early), during breaks and lunch, and after class. I've no complaints about them. They all were very open and candid in their assessments and advice. They didn't beat up on me to get me to sign any contracts.

You will find a number of complaints about Robert Allen's various training programs, from people who shelled out big money to attend them, at Ripoff Report. None have been rebutted. Several were so badly written it made my head hurt too much to try to read them. Most of the ones I did read boiled down to, "I didn't read my contract with them." If reading your contracts is a low-priority activity for you, what in the name of all that's holy makes you think you've any business trying to be a real estate investor? You would be better off going to Las Vegas and putting all your money on either red or black. One well-written and apparently valid complaint was from a student who believed he did not get the training he was promised: according to him, two of the three days were spent driving around looking at property. Several of the other complaints alleged failure to perform the promised after-workshop mentoring.

Gary reiterated, a number of times during the seminar, that trying to put the techniques into practice on your own is a guarantee of failure. This is part of the upsell for the expensive Mastery workshops ($35,000 for the Platinum package) but it also is sound advice. They give you just enough information at the free seminar to whet your appetite -- and to be dangerous. I've been a licensed real estate salesman in the past. I've also completed my first year of law school, which includes Contract law. The potential hazards of the deals they described were very obvious to me. There are elements of risk in any investment: the idea is to know what the risks are, and to have a strategy -- preferably multiple strategies -- in place to mitigate them.

One of the problems with various "wealth building" schemes is that, by the time they reach mass circulation, the market is saturated. This is when the snake-oil peddlers strike because, by that time, everyone has heard of the big money to be made on eBay, or with Google, or by using your digital camera to create stock photographs, etc., and they readily lap up whatever the mountebank is peddling. The same applies here: although there is still money to be made, the insanely cheap deals available at the start of the real estate bust have already been lapped up. You'll have to work both harder and smarter to find them. N.B.: I think there is still plenty of bottom to be found in the residential RE market, so I fully expect to see Round 2 sooner rather than later. Commercial RE is headed for a big crash too, though few people are talking about that right now.

So, did I waste my three days? Not at all. I got some new information, met and exchanged contact information with some neat people, and, most important, got thinking outside the box of my daily routine again. I received what I believe to be sound advice from the instructors about improving my particular financial situation. Implementation begins today. Good or bad, I'll post my progress reports here.