Saturday, December 29, 2007

Looming Mortgage/Credit/Debt/ARM Crisis Was Plainly Visible To Those Who Took Time To Look

I just read a most troubling story on CNN Money. The report stated that top economists were predicting this time last year that the worst of the housing issues were behind us, the market had bottomed out, and that real estate (residential real estate, that is) was going to rebound in 2007.

Now, first off, I do NOT remember seeing reports like that. Perhaps I missed them. What I do know is that anyone who understands the fundamentals of the economy, and knew the house of cards our loan system was built on, could see the housing market ready to come crashing down. Government had been pushing lenders for years to make loans easier to get, to make housing more affordable. So they lenders did just that.

- But at the same time, some really lousy lenders got into the game and made fortunes lending to people who were high risk borrowers and who probably never stood a chance of paying back what they borrowed. Those lenders made out like bandits and collected incredible fees.

- At the same time, some borrowers -- not necessarily high risk -- bought far more home than they could afford, or needed, out of greed, or "keeping up with the Jones," or because they were talked into it by a lender or real estate agent.

- At the same time, some investors bought houses to flip without understanding the market. They took out no documentation, no money down loans because they were convinced the market would continue to boom. But they never looked at the market. All the signs were there to show it was going to crash very soon.

- At the same time, virtually EVERY one of these borrowers across all categories signed on for adjustable rate mortgages, ARMs. The problem is, the lower than market interest rate ARMs all were good for three to four years, after which the rates would be adjusted upward. "But that's no problem, Mr. and Mrs. Smith, you'll be doing even better by then, right?" the lender would say just before closing. During that time, Mr. and Mrs Smith frequently (not always) put new furniture and new cars on credit. Now, the Smith's are facing mortgages that are going to jump, as their scheduled interest rates spike.

Folks, this has been coming for several years now. I have talked about this issue hitting us all in the face with other agents and lenders for nearly three years now. For people to say "no one saw it coming" is a flat-out falsehood.

Another reason why I prefer investment real estate -- TO HOLD FOR INCOME, TAX BREAKS, AND INDEFINITELY DEFERRED CAPITAL GAINS, and NOT TO FLIP.

End of rant.

Thursday, December 27, 2007

President Bush Authorizes Extention of Terrorism Risk Insurance Program

Good news out of Washington DC for a change. The commercial real estate market and the health of the nation’s economy as a whole will benefit from the reauthorization of the federal government’s terrorism risk insurance program, which President George W. Bush signed into law.

In a story in National Realty News, The National Association of Realtors took credit for long advocating passage of the Terrorism Risk Insurance Revision Extension Act to maintain a strong commercial market. And you know what? This extention is a very good thing for investors.

"As the leading advocate for real estate issues, NAR commends President Bush and Congress for enacting the federal terrorism insurance backstop," said NAR President Richard Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, Calif. "We especially thank Rep. Barney Frank (D-Mass.) and Sen. Christopher Dodd (D-Conn.), the chairmen of the House and Senate banking committees, for their leadership in guiding H.R. 2761 to passage. The potential unavailability of terrorism risk insurance would have had a devastating impact on many commercial financing agreements and could have negatively affected the commercial real estate market."

Simply put, the terrorism insurance program, initiated after the September 11, 2001, terrorist attacks, has helped stabilize the commercial real estate industry. The new law, NRN reports, will extend the program for seven years, covers both foreign and domestic acts of terrorism, retains the "trigger level" at $100 million of damages at which point federal assistance kicks in, and establishes a blue ribbon commission tasked with recommending a long-term private market solution.

"TRIA reauthorization will strengthen the economic security of the commercial real estate market by reducing the uncertainty of terrorism coverage availability and by covering many forms of terrorist activity," Gaylord said.

In the long term, many in our industry feel the best solution should focus on what private markets have been unwilling or unable to do. Gaylord, commenting on this very issue, has strongly urged a process be created whereby businesses (investors) may purchase insurance for the most catastrophic conventional terrorism risks; provide adequate insurance capacity in all major commercial real estate markets, particularly in high-risk urban areas; and provide meaningful insurance against all types of terrorism risks. Gaylord says this extention does just that.

I'm not so sure, but I'm not in favor of government intervention to a large degree. The markets should arrive with tools that address these needs. In time, they will.

Monday, December 10, 2007

Sobering Times For Mortgage Industry; Good Times Ahead For Investors

Inman News posted some sobering news this week. Announced job cuts at mortgage lenders and in the financial sector continued to decline in November from August peaks, but the ultimate impact of the housing slump on workforce levels may be delayed for months. That's according to Chicago-based outplacement consulting firm Challenger, Gray & Christmas, Inc., which tallied 5,528 announced layoffs at mortgage lending institutions in November. That's down from a peak of 30,892 announced layoffs in August. The total number of announced job cuts in mortgage lending for the year-to-date, 81,681, is more than six times the total for all of last year, 12,874.

The Inman story added that there have been 147,395 announced layoffs in the financial sector through November, compared to roughly 50,000 in each of the two previous years. "We probably have not seen the last of financial job cuts tied to the housing slump and subsequent collapse in the credit markets," said the firm's chief executive officer, John Challenger, in a statement. "In fact, many analysts are waiting for a major announcement from Citigroup in the coming weeks that some say could impact as many as 45,000 jobs.” Challenger Gray tracks only publicly announced layoffs, so actual job losses may be greater. But the numbers compiled by the firm provide an indication of industry trends, which may take longer to show up in government statistics.

In real estate -- where many layoffs are not publicly disclosed -- 3,275 layoffs have been announced for the year to date, Challenger reported. The firm put the number of announced layoffs in housing -- including the construction, real estate and financial sectors -- at 119,972 through November. That's a more than five-fold increase from the 22,814 tallied in 2006. Announced layoffs in the combined category totaled 10,537 in November, down from 31,746 in August, the peak for the year.

Large commercial real estate has been largely untouched by the credit or debt crisis, depending on how you want to describe it. Smaller investment properties, however -- doubles, 4-families, etc. -- are feeling some of the pain as buyers find it harder to get loans. Loans are not impossible to achieve, there are just a few more hoops and the ridiculous no-money down schemes (I never liked those) are practically a thing of the past.

With that said, the coming two years are going to be the time for investors to jump in as prices continue to dip. I know some readers will think this is piling on or negative during a rough patch, but my focus is investment real estate. The values will be there. I think I wrote this a few weeks ago, but some older agents are telling me they haven't seen investment opportunities like this for 30 years -- essentially the last time we had skyrocketing fuel prices and declining property values.

AND I DON'T MEAN FLIPPING INVESTORS! That is not investing. That's gambling! And that is part of what has created the credit/debt crisis. The reasons are complex, but we will come out of it. Nevertheless, if you are in a strong cash position, the next few months will be a good time to start picking up properties held by distressed owners. Whether you assume mortgages, or pick up your own to relieve the current owner of their burden, I believe the smaller, cash-producing properties to hold will be had at good values over the next 24 months.

Thursday, December 6, 2007

Taking The Helm Of CREE For 2008

Well, it's official. This morning I was sworn in as president for the 2008 business year of Columbus Real Estate Exchangors (CREE). This is an incredible organization and the best ongoing place for keeping tabs on the best investment real estate being made available in Ohio. For many, it is ongoing training and far exceeds CE that is required of real estate agents by the State of Ohio.

One of our honorees today, Randall Jackson (award for best deal over $1 million) stated that CREE's weekly meetings have benefited him greatly since, as an independent broker, he does not have the luxury of holding a weekly company sales meeting in the manner that giant brokerages do each week. Randall is an incredibly successful developer and that he views CREE as a sounding board and learning tool for his projects speaks volumes. Others speaking today echoed the same sentiment.

CREE is a group of about 130+ brokers and agents throughout Central Ohio, all of whom are Realtors. All specialize in the brokerage of investment properties, with particular emphasis on counseling our clients to build wealth utilizing the numerous tax benefits of IRS 1031 exchanges. Meeting weekly, we conduct regular marketing sessions, present properties we have listed for sale or exchange, and generally brainstorm and problem solve to help each other help our respective clients, whether they be buyers or sellers.

I have learned much in my tenure as a member of CREE these past several years. Being asked to run for president of the organization is an honor. Being elected by my peers, more so. But as outgoing president Ted Oatts, in a presentation of CREE's first-ever "lifetime achievement award" to veteran Realtor and educator, Furman Tinon, its better to pay forward. Legendary football coach Woody Hayes used to say that a lot.

The coming year will be fun. It will be difficult. And this new role will be time-consuming. But in a small way, it is a means for me to pay forward and share continuing and ever-evolving investment knowledge with my clients, prospects, friends and family. My executive committee for 2008 is: Tony Yacoub, Ohio Commercial Real Estate, vice president; Amber Balo, Furman Tinon Real Estate, secretary; and Wendy Baldwin, Baldwin Realty Corp., treasurer.

I talk about the life-long learning that members of our unique organization gain each week, and paying forward. Being recommended at the top of the officers slate for 2008 by our nominations committee was a surprise. But it fits who I am in this way. Taking the reins for the next year is a way for me to finally pay back to this organization, to do something in return for the wealth of knowledge and education I have received. Education that has helped me help my investor clients -- no matter whether they own a twin single, or numerous shopping centers or multifamily complexes.

This may sound arrogant, but I am honored to have been asked to lead an organization that I believe is comprised of -- without question -- the most creative minds in commercial/investment real estate.

To my colleagues, thank you for your confidence. Cheers!

NOTE: I am headed to Cincinnati tomorrow for a meeting at our Pru CRES offices there on the RIISNet project. Over the weekend, I will post a brief writeup of the CREE Christmas Breakfast meeting from today, and give some insight into the award winners and why they were recognized by the organization this year for outstanding contributions to their clients

What To Buy When You're Wealthy

Not really specific to investments, but I thought it was fun for the holidays. I frequently have people ask me the best way to build wealth. I truly believe investment real estate is the way to go. Then people will joke and wonder, what would you do with the money if you became wealthy? Well, you could invest in more income-producing properties (not flips, but hold for true income, growth, etc.).

Or, you could consult Time magazine. Apparently this is how the super-rich spend their money.

Creativity Helps Keep Deals Moving

I recently was asked for an opinion, specifically to poke holes in a proposal, on a transaction that involved personal residencies in affluent New Albany, Ohio, a potential investment property, and a means to satisfy contingencies during a market that has been more than tough on the residential real estate business.

I could find no holes after analysis, and in fact had read of this scenario being tried in one other market. I recommended the parties also talk to a CPA to talk about any tax implications. We could find none, and all agreed it was a strong approach that others might mimic if the right circumstances warrant.

Now, you should know that despite the news about tens of thousands of lower- and moderately priced homes being in danger of foreclosure, most people don't realize there are problems among the affluent as well. Locally, I heard a number that shocked me. The statement was that one out of every three or four homes in New Albany, an extremely well-heeled area in northeast Franklin County in Ohio, have some sort of "financial issue." There are half-million dollar homes that are being rented -- owned by investors. There are homeowners who have problems with their lenders and the ARM fiascos. There are homes for sale, but many more homes are being offered in "pocket listings," listings that are not publicly advertised for any number of reasons (one might be that people do not want their neighbors to know the house is for sale or that there is financial difficulty).

So the scenario follows. A Seller in northeast Franklin County has a $2 million-ish home that is for sale. He has lowered the asking price to $2 million from a higher number, and is reluctant to drop it any farther. On at least three occasions he has been in contract with Buyers who could not perform the transaction because they were unable to sell their northeast Franklin County homes, valued at $750,000 to $800,000 each. He has already purchased a $3 million apartment overlooking Central Park in New York City. He needs to get rid of his Ohio home. The plan is this. He will leave the price of his home at $2 million. To make the transaction happen this time, and to satisfy the home sale contingency of the Buyer who is purchasing his home, he will buy the Buyer's home at approximately $750,000. As I said, this will satisfy the sale contingency of both parties' contract. Once in possession of the $750,000 home, he will either hold it and use it as a luxury rental, or list it for sale at that price for about 30 days, then lower it by $100,000 if it is not yet in contract. He is willing to take a loss just to get rid of the $2 million.

Consulting with a CPA found no problems with the plan. From what I was told, in the original Buyer's mind -- so far -- it is worth the loss to be able to complete the sale of the $2 million property. Interesting, yes?

In this market, no matter whether you are talking about residential or commercial/investment, creativity is the key.