Sean O’Toole with PropertyRadar #404

Norris Bruce

Bruce Norris is an active investor, hard money lender, and real estate educator with over 30 years experience. Bruce has been involved in over 2,000 real estate transactions as a buyer, seller, builder and money partner.

Norris Bruce
October 17, 2014

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On Friday, October 24, the Norris Group proudly presents its 7th annual award-winning black-tie event I Survived Real Estate. An incredible lineup of industry experts will join Bruce Norris to discuss perplexing industry trends, head-scratching legislation, and opportunities emerging for real estate professionals. Proceeds from the event benefit Make a Wish and St. Jude Children’s Research Hospital. This event could not have been possible without the generous help of the following platinum partners: Auction.com, HousingWire, PropertyRadar, the Apartment Owners Association, the San Diego Creative Real Estate Investors Association and President Bill Tan, InvestClub for Women and Iris Veneracion, San Jose Real Estate Investors Association and Geraldine Barry, MVT Productions, and White House Catering. For event information, visit isurvivedrealestate.com.

Bruce Norris is joined this week by Sean O’Toole. Sean is founder and CEO of PropertyRadar.com, the only company that tracks every foreclosure in California with daily updates on all trustee sales. Prior to launching PropertyRadar, Sean successfully purchased and flipped more than 150 residential and commercial foreclosures. Leveraging 15 years in the software industry, Sean used technology as a key competitive advantage to build his successful real estate track record. He had years of experience in other start-up companies, and he brought that expertise to the industry.

PropertyRadar is not just a foreclosure tool anymore but also offers other services. It was a natural thing for them to expand beyond foreclosures as it was always part of his vision. As a real estate investor, he started off investing in foreclosures, but back in the early 2000s as foreclosures went down and down he had to find other investing opportunities. He would drive around looking for vacant houses and people who were tired of being landlords. He knew there was an additional tool set needed for investors. Being a real estate broker and being able to find and target a market and get to know it and reach the customers in it was very critical for realtors. This was the natural evolution for them.

Bruce said the ease of finding information since he started years ago has changed. He would go to a HUD auction and literally have to make copies of a Thomas Guide map page, look up the property, and put little xs on it. Nowadays he does not think people could possibly appreciate how much easier it is. This leads to two things. They think it is so easy sometimes that they are casual in appraising a property. They also think that expense-wise the cost per month is expensive when they really do not realize how much more it used to be. They are definitely spoiled and have no appreciation for how much work it is to pull information together or whatever it was like before services like Sean’s made it so easy to access.

Sean has a wide range of clientele. Bruce asked what feedback he is getting from them regarding where the market is going. Sean said you are definitely hearing from their investors and customers that it continues to be hard to find properties. It is still a reasonably competitive market on the buy side. On the other hand on the sell side, it is slowing down a little bit and taking a little longer to unload the properties they have bought if they are flipping. It is a little bit more challenging on that side as well. In a way this is good for them because they provide people with lots of new opportunities for funding deals. It is bringing them back to PropertyRadar to help find the other possibilities. What they did yesterday is not working to the same degree it did a couple years ago.
Bruce said if we are talking about an area like San Jose or San Francisco, Bruce wondered where they are relative to the peak of the market and if it is still a hot market today. Sean said it is. Silicon Valley is a very special market because technology, specifically that coming out of Silicon Valley, is leading the world and one of the strongest parts of the economy right now. It continues to attract people to the area with very well-paying jobs. If you look at affordability in that area, it is at an all-time low. However, that is looking at the population that is there and not the population that is coming. What you really have in that area right now is a situation of displacement. Folks have been pushed out if they are not a technology person.

Bruce had an interesting speaking invitation. He went up to San Jose and spoke in front of 4-500 Chinese investors. After he finished, there was a Q and A where there was a gentleman who said he bought a home in San Jose for $1 million, and now it was worth $2 million. He had owned it for a couple of years and was going to hold onto it until it was worth $7 million. He thought this was a lot of expectation for one property, yet he did not have his context. Within just a month ago, he got his context that he was from Beijing. Here, Bruce knew somebody who owned three properties, $50,000 for two and $100,000 for one of them. They sold them for $500, $500, and $2 million. When you have a combined multiple of 15 and you take your money to someplace else, you would expect it to do well. You would probably have unreasonable expectations, and there is no question from all reports he has heard that a lot of property got built in part of the world that is, unfortunately, sitting vacant. When you bring that kind of money in from the outside, you have in pockets undue stimulus. This is where Bruce has landed because he looks at what he thought was going to happen to the market and it didn’t. He is really having to look at things that have surprised him.

Bruce asked Sean if anything in 2014 surprised him, to which he said no. In the mid to third quarter last year he felt that we were going to start seeing sales slow down. They probably continue to see some price appreciation but also sales slow due to lack of affordability. They went up in price too quickly, and rates increased which put pressure on affordability. He expected to see slower sales, but not lower prices. After some period of time, we will probably start to see prices lower. It is played out exactly like this. Bruce still wonders about this.

When we talk about lack of affordability as the reason, then we should be able to look back and say that it was always with declining affordability is this occurrence of less volume. Now you have to ask yourself what is different this time, not that this is the answer. Sean said historical information is important, but you really do have to look at what is different. While we saw declining affordability using traditional measures leading up to 2007 and 2008, what you saw was real affordability using Pay Option ARMs dramatically increasing. What Sean saw was different this time was the fact that we have a tighter credit. 2008 is still recent enough where we have a little tighter credit issue than we did in 2006 on the Pay Option ARM. It gets to the point where years like 2004, 2005, and 2006 we had undue stimulus. Since then, in many ways we have had reverse stimulus. In 2009 and 2010 this was the case, and credit has still been tight although various reports show that it is loosening. The big question is really how loose it is and for whom.

Bruce asked Sean what direction he thinks it will go and what will be the reason it would go there. Sean said it is really tough because you have two camps out there. You have one camp that says we just created a disaster by loosening and need to be super tight. On the other hand, you have a camp that says housing is holding back the economy by not loosening. The question then is which camp wins. The mark of going out as the head of FHFA and WATT coming in points toward some possible loosening. DeMarco is a pretty careful steward of the taxpayer, whereas WATT is more interested in increasing homeownership opportunities. One is not right or wrong, but it is definitely different. What you have to do now is look forward and see where the bias is going to be, whether it will be for undue stimulus or reverse stimulus. Usually it is one of the two and not vacant. The pendulum is constantly swinging, and it swings from one extreme to the other. This is why they keep getting themselves in trouble and have such a volatile housing market. They are not volatile in the sense of housing markets where they can change pretty quickly. It takes a while for things to move.

Last year we got to the point where we were overpriced by about 10%. The market did not correct 10%, and it still hasn’t. It is in the early innings of this because from the time you see a shift and when it occurs in housing can be a couple of years. At the end of 2005, we saw a slowdown in sales like we saw at the end of 2013. We did not actually have a crash until 2008, which was two and a half years later. The housing market takes a while to play out, which is great because if you pay attention to the signals there is a pretty good chance you could keep yourself from getting hurt.

Bruce asked Sean if he feels in the next couple years we will more likely be flat or go down than go up. This is both nationally and in California as well. Sean said there are still pockets that are undervalued as well as possibly overvalued in areas such as Silicon Valley because of a fundamental change in demographics. Sean has friends in Silicon Valley who make $400-$500,000 a year who say they cannot afford to live there anymore. At some point you are going to have to sell a house to somebody who has a job instead of bringing in millions of dollars from somewhere else.

Bruce asked what the basis of the statement is that a home is overvalued. If you look at a chart, California has spent most of its career in the overvalued position and then gone up from here. If we are considering where we are overvalued, then we have spent a lot of time overvalued. Bruce wondered why it is overvalued and if it is because policies have now put a lid on where we are probably going to head. There have been plenty of times where California has been in that overvalued bucket, but there have also been times when California has been in the undervalued. It tends to be shorter periods of time in the undervalued bucket and longer periods of time in the overvalued. Sean said for him value is basically almost ownership versus rental.

The understanding is people are typically willing to spend 35% of their income to be an owner versus 25% of their income to be a renter. This comes down to the long-term discrepancy of what percentage of your income you are willing to give up to be an owner versus a renter. Ownership is more valuable to people than rentership. This leads to an obvious question. We have some deficits we have ignored for a while, but we are supposed to be improving them. Real estate would be one of those punch bowls where they start taking away some of the goodies. If you roll back to 1998 where despite talking about the value of long-term homeownership, they put incredible incentives on being a flipper. The policy before was taking out $250-$500,000 tax-free every couple of years by moving into a house and either fixing it up or being in the right place at the right time and stick your money under the mattress. In 1998 they had years of stagnant housing after the crash in the early 90s and they tried to do everything they could to get it restarted. Clearly that, among other things, worked because that was really a turning point for housing. The question is if this is good long-term housing policy if the value of the homeownership and everything else turns everyone into flippers and incentivizes them to sell every two years. This does not make a lot of sense to Sean as far as policy goes. It does not seem to incentivize things for long-term ownership. Some of these things should be publically addressed, but there is powerful lobbying between the Realtors Association and the Homebuilders Association who do not want these issues touched on. So far they have been pretty successful in protecting them.

Areas like Sacramento mimic areas like Riverside County. The FHA loan limit was lowered in Riverside from $500-$350. This has definitely been a reverse stimulus to where if you were a builder thinking you were going to sell something for $485, it is not happening. One of the studies they did was the ratio that usually existed between FHA and Fannie Mae loan limits. We are still way closer to the Fannie Mae loan limit than we have been in the last few years where it was completely out of whack. Bruce wondered if Sean heard any rumors of FHA actually getting back to a more normal ratio. This would mean it would be continually lowering to get to that number. Sean said he has not tracked it closely enough to be able to say, but he definitely thinks we should have some Federal backing for housing.

Ultimately there should be backing for housing that is affordable for folks. Based on areas of median income and spending 35% of your income on housing, you have to ask what a reasonable maximum price is. This is what the government should show up as a back stop to support this level of housing to the degree where housing goes beyond this. If private money wants to come in because they believe in that area and want to take full risk, not federally insured banks taking the risk, they could get bailed out by tax payers. With true private money coming in, let them lend to whichever one they want.

What is interesting about what is happening in the industry is there have been a lot of changes. First of all, hedge funds came in as buyers and made an offer on everything that moved. Now that money is showing up as lending to investors. They just made this natural shift because they want to be risk somewhat. By taking some of the investors’ money and the rest, they end up with a little less and still have decent returns. Bruce’s gut feeling is they will not have their volume satisfied with this crowd since there are only so many people who own 25 houses that they will someday land on the owner occupant with some loan programs that are safe but make the volume happen. Behind some of these things you have to remember there are real people looking to justify a way to continue make a living. You have a group of guys who work for hedge funds who have access to money, and they are out buying up single-family homes.

The powers-that-be say they don’t want to do this anymore, and this personnel needs to find a new job. To some degree they created a new job by going after that, although he does not know if those folks who were experts built up expertise to where investing lending can make the jump to residential lending. You can then take this same access and form a pretty tiny pool of money compared to residential lending as a whole.

Bruce asked Sean if he sees Fannie and Freddie going forward in some fashion similar to the way it is. He said he does not see any choice right now since we are in a regulatory environment or they have made lending essentially illegal. The pendulum has swung way too far on the regulatory side. He understands why, but what really bothers him is that all the regulation has been on this punitive stuff and focused on the foreclosure and qualification process. Not enough has been focused on the root causes around Gramm Leach Bliley and the Commodities Futures Modernization Act that really created the idea of “too big to fail.” They created an environment where banks could take on huge risk without bearing any of the risk. They have to filter it to the next guy.

At the end of the day, this whole cycle really rewarded the people who were some of the worst actors. We have consolidated most of the lending into a handful of institutions, and we have done it in a way where the lending that happens they get to make fees on and pass the loans through to Fannie and Freddie. Banks like Bank of America and Wells Fargo are the ones making those loans, and they are making the fees that they then pass onto Fannie and Freddie. This means they are still taking no risk. At the end of the day, we as voters should be taking some responsibility despite wanting to blame the banks. We put in the politicians that let the banks create this situation, and we let these politicians create a new situation that really only improves things in the long run. Banks have a pure monopoly on making government loans and making the fees with very little risk.

Sean O’Toole will be featured on the panel for the upcoming I Survived Real Estate 2014, where they will discuss things with peers from all different walks from the real estate world. The Norris Group would like to thank its gold sponsors for supporting I Survived Real Estate: Adrenaline Athletics, Coldwell Banker Town and Country, Elite Auctions, In A Day Development, Inland Valley Association of Realtors, Investor Experts, Jennifer Buys Houses, Keystone CPA, Las Brisas Escrow, LA South REIA, Leivas Associates, Pilot Limousine, Primary Residential Mortgage, Northern California Real Estate Investors Association, North San Diego Real Estate Investors, Real Wealth Network, Realty 411 Magazine, Rick and LeAnne Rossiter, Personal Real Estate Magazine, SONOCA Corporation, Southpointe Companies, Spinnaker Loans, Tony Alvarez, uDirect IRA Services, and the Council of Multiple Listing Services. See isurvivedrealestate.com for video of the live event and more on our sponsors.