ThirdStake

Once again I have copied and pasted the Cromford Reports Market Summary for the beginning of April below.

I think you will find many interesting things in this data. First and foremost…supply is down and demand is WAY up! This is GREAT news for investors.

You will also see that the number of closed sales in metro Phoenix is the 5th highest on record! This is truly amazing knowing the market that we were in in 2005.

One more thing…according to the data more properties were bought 3rd party at Trustee Sale than ever before. Now is the time to buy at the auctions…let us show you how.

It appears that the trend of low supply and high demand will continue for a little while. I would strongly encourage you to strike while the iron is hot…buy property now and bank those profits. Happy investing.

Market Summary for the Beginning of April

The most impressive thing about the month of March 2011 was the huge unit volume of closed sales. We are currently showing 9,901 closed sales on ARMLS for all areas and types. That is the 5th highest monthly total ever recorded on ARMLS and the second highest sales volume ever for the month of March. The only months which have surpassed it were June 2005 (10,213), August 2005 (10,002), June 2004 (9,973) and March 2005 (9,949). Please see the long term sales chart to see how significant this number is.

Meanwhile demand is accelerating while supply is falling quickly. This is reflected in the Cromford Market Index™ and can be see here in graphical form.

Supply is falling in almost every geography and price range but is most noticeable at the price ranges below $150,000 and in the outskirts of the valley, particularly in Maricopa (city), Queen Creek, Anthem, Casa Grande and Buckeye, This largely due to enthusiastic buying of homes built in the last 15 years which can be found for sale at a discount of 70% or more compared with their price at the time of construction.
Trustee sales in Maricopa County hit a high number of 5,226 in March, due to the trustees catching up from the Bank of America moratorium in November last year. Notices of trustee sales were only modestly up from February at 5,397, which is not an impressive number given that March contained a lot more working days for lenders than February. As a result the number of homes pending foreclosure dropped sharply during March to the lowest number since March 2009.

Third parties buying at trustee sale made a new record with 1,379 purchases (26.4% of the auctions). This is by the far the largest number of properties ever purchased at trustee sale. Another 3,842 properties got no bids and went to the beneficiary to become REO inventory. This may help slow the fall in the REO inventory listed for sale of ARMLS.

Lenders seem to have noticed the enthusiasm of buyers and having allowed the average list $/SF of REOs to fall between April 1, 2010 ($87.56) and March 20, 2011 ($68.84), they are now increasing them again and the average list $/SF has popped up 3.5% in just the past 2 weeks. Asking prices for short sales and pre-foreclosures seem to have stalled at around $79 to $80 per sq. ft. Normal listings have been increasing in list price for some time, reaching a low of $185.93 on September 24 and rising by 4.5% over the last 6 months to hit $194.37 today.

While average sales prices are very slightly higher in March compared with January and February, there is still no clear sign of a significant trend forming. The median sales price has been stuck at $110,000 for three month now., again with no sign of a major move either up or down over the short term.

With the balance between supply and demand changing quite quickly for the better over the last four months, we are down to an overall inventory level of 4.2 months based on the monthly sales rate. This can be regarded as a “normal” reading for the time of year (it is below the 4.5 we measured in 2002 at the same point in our last “normal” year). This goes a long way towards explaining why prices have stabilized once again.

Currently the trend is for supply to fall further and demand to increase, and if this continues then at some point it is likely to lead to prices moving higher. How soon and how much, it is too early to say. However it is not too early to say that prices are unlikely to fall to any significant degree while this situation persists. Last year the disappearance of the tax credit at the end of April caused the market to deteriorate suddenly in May and pricing fell sharply between July and September. At the moment we see no indication of a similar interruption to the recovery process that is now under way.

© 2011 Cromford Associates LLC

The Cromford Report released its early March data for Phoenix Metro. I wanted to publish it here and follow it with a few comments. Here is in its entirety:

This morning a good friend of mine forwarded a video to me that I thought was one of the best that I have seen yet on the subject of banks and why they choose short sales and foreclosures to loan modifications.

For those of us who live in this country we are all aware of the housing crisis that began in 2007. Some of us know the ramifications of this more so than others. But, all of us know at least someone who has had to deal with a bank regarding their mortgage.

I have been in the foreclosure business for over 10 years. During this time I have purchased many, many properties. But, I have mostly worked the Trustee Sales (foreclosure auctions).

It has always baffled me why the banks make, what seems like, such bizarre decisions regarding their bad assets. I have known for some time that the banks have little incentive to work with homeowners on a loan modification.

I have done much research on the subject and have spoken to many people that are truly “in the know”. The video that I want to share with you today gives not only a great real world example of why banks will choose a short sale/foreclosure over a loan modification, but it also explains the players and the money at stake for the ultra-rich that are in power.

I am happy to pass on this video to you. I am quite certain that you too will be outraged after watching it. In fact it is my feeling that if the American public were to fully grasp all that this entails there would be rioting in the streets.

Go here now to watch this short, 4 minute video. You will be glad that you did.

Today I thought that I would do something a little different. We have written so much text over the last few months that I thought that I would start incorporating some video.

Since we are a business that specializes in delivering below market value property to our clients in the fastest and most economical way possible I thought I would share with you a property that we just picked up for ourselves. This is the way it looked day one.

I will do an update video once the project is complete so that you can see the before and after. I will also do a post that shows the REAL numbers of this deal after we sell it. Click on the link below and enjoy.

New Fix and Flip

The following is the January mid-month Cromford Report. As stated in previous posts, the Cromford Report is a paid service and newsletter that we highly recommend. They are the best that we have found in charting trends, up or down, in the Phoenix metro housing market.

As you will read below there are some things that at first may give you pause. You may even say to yourself why should I buy to flip right now. I think as you read on you will see that third party traditional (non-bank owned or short sale) sales are doing quite well. You will also see that active listings are decreasing, which is a good indicator that supply is getting consumed to the point of getting us to a normal supply/demand balance. I hope you enjoy the report.

Mid Month Pricing Update and Forecast

Each month about this time we look back at the previous month, analyze
how pricing has behaved and report on how well our forecasting
techniques performed. We also give a forecast for how pricing will
move over the next 30 days.

For the monthly period ending January 15, we are currently recording a
sales $/SF of $82.16 averaged for all areas and types – down 1.3% from
$83.20 on December 16. Our forecast range was $80.67 to $83.97 with a
mid-point of $82.32. The actual figure is just 16c below the mid-point
of the range, so last months projection was unusually accurate.

Today the pending listings for all areas & types show an average list
$/SF of $82.77, a weak figure suggesting further falls in sales prices
ahead. We expect to see greater weakness in sales pricing over the
next month and our mid-point forecast for the average monthly sales
$/SF on February 15 is currently $80.71, which is 1.2% below today’s
actual reading of $81.68, and we have a 90% confidence that it will
fall within ± 2% of this mid point, i.e. in the range $79.10 to
$82.32.

It is clear that we have now fallen below the April 2009 levels and
overall prices are trending lower still. However the detailed picture
is more complex than appears at first sight.

Indeed, pricing for normal sales has actually strengthened over the
last three months, from an average of $106 per sq. ft. in October to
around $112 in January. This improvement in normal sales pricing has
little effect on the overall average because normal sales only
constitute 28.4% of sales. The other components of sales consist 50.4%
of lender owned properties and 21.1% of short sales and
pre-foreclosures. The pricing of short sales and foreclosures has been
particularly week in the last six weeks, falling from $82.78 on
November 30 to $77.45 on January 16. That’s a 6.4% drop in just 7
weeks and is the primary cause of the overall fall in prices. Sales
pricing for REOs has remained virtually unchanged at $63.70 over the
same 7 weeks, but this also negatively affects the averages because
REO market share has increased from 47.6% to 50.4% in the same period.

The high market share for REOs has an exaggerated effect on the median
sales price, which has dropped 8.5% from $120,000 on November 1 to
$109,850 on January 16. Note how poorly the median sales price
reflects the underlying change in average price per square foot which
fell only 2.1% over the same time. This supports our view that average
$/SF is a superior guide to pricing when a large quantity of cheap
REOs are flooding the market.

Price behavior also varies by dwelling type. Over the last six months
we see the following:

Monthly Average $/SF for:       July 16, 2010   Jan 16, 2011    Change
Single Family – Detached        $89.98  $81.85  -9.0%
Apartment Style / Flat  $94.69  $88.94  -6.1%
Townhouse       $80.72  $73.26  -9.2%
Gemini / Twin   $69.05  $65.74  -4.8%
Patio Home      $121.47 $102.21 -15.9%
Mobile / Manufactured   $34.99  $33.66  -3.8%

So we see a generally gloomy picture for sales pricing and no sign of
any improvement in the next four to six weeks. In fact we see
continued deterioration. We do not get too concerned about this
however, since sales pricing is a TRAILING INDICATOR of the market and
is the last thing to show any turnaround. When we look at other
measurements things are not so gloomy. This is because lower pricing
results in increased demand which is certainly making its presence
known at the moment.

Since the beginning of December the Cromford Market Index™ has been
moving higher and is now well over the balanced figure of 100 which is
a positive signal. The current monthly sales rate and the number of
pending listings are both very strong for the time of year while
active listings have declined over the last two months. All of these
suggest a strengthening market. This gathering strength is still
unlikely to be reflected in sales prices for several months, but it
does look as though the spring buying season will be very busy in
2011. It will take more than one spring season to generate a market
recovery. However it does mean that the downward pressure on pricing
is starting to ease.

Since my crystal ball has proven, over the past 5 years, to have a large crack in it, I’m hesitant to make many prognostications about the future. But, as any investor knows, we are by definition prognosticators, with varying degrees of confidence in our conclusions.

So I am reading the Cromford Report with only guarded optimism this morning, seeing the first hints that some market dynamics are heading toward stability. That is a purposefully ambiguous, non-committal statement from the lips of a man who has had optimism smashed too many times over the past half-decade. But the numbers seem to speak for themselves:

• First, the month of November is indicating a 2.9% increase in the number of pending listings over October. That’s important. It suggests that the larger-than-expected slump in demand generated by the First-Time-Buyer-Tax-Credit seems to be abating. Fingers crossed.

• Second, new notices of trustee sale are down 17% in November over October, which is the lowest monthly total since March of 2008.

Cromford is anticipating another market drop in the near future (although not a radical one). But the fundamentals seem to be taking at least some of the sludge out of the bottom of this river, giving us a teaser of firm footing. Toes crossed, too.

Here’s to wading with you to the other side,

Brian

REO Listing agents tell me that they can often generate a higher sales price by under pricing an REO listing rather than by over pricing it. Skilled listing agents can then work the larger number of purchasers with subtle but clearly understandable clues as to where their offer stands relative to others, creating an auction. The frenzy can push the sale substantially beyond what a negotiated price would have been had the listing price been less aggressive.

Trustee Sales create this “bidding frenzy” every day. The very nature of the buying process pits one buyer against another to bring the highest possible sales price for the seller. And although the built-in obstacles usually keep the unsophisticated buyers at bay, every day emotional bidding propels many properties beyond a good price. In spite of the profits to be had, every day people at the auctions buy properties on which they are going to lose money.

Each time a successful bidder gets a property, he has to pay slightly more than any other bidder was willing to pay. A twinge of buyer’s remorse is inevitable, “Did I go too far?” And each time a buyer is outbid it’s because some other investor, who had studied those same comps and driven that same neighborhood, believed he could make a good profit paying a little more. The second highest bidder leaves scratching his head, “Did I stop too soon?”

Such is the world of trustee sales. There are great successes to be had, but pitfalls await the overly aggressive.

So what’s a bidder to do?

In a word: Stick to your number. The biggest mistake rookie investors make is to come to the auction having studied the comps, discussed their limits, driven the property, but with an ambiguous sense of what their stopping point is. They kid themselves into believing that somehow the actual auction environment is going to help them decide at what price they should really stop, as if the heat of bidding is a better place for rational decision making than an office with a spreadsheet on the screen.

No buyer wants to know they got beat by $100.00. The problem is you never know if that’s the case. You never know how much further that other bidder was willing to go. That’s why you have to pick and stick to a number.

Each time I put a number on a property for my own purchase I imagine the bidding scene: I see myself standing with the other bidders. The bidding slows from $1,000 increments to $500, then to $100. Everyone drops out except me and one other person, exchanging $100 increases. I hit my number, and the last remaining bidder adds $100 to it. The crucial question is this: “What is the number at which point I’m OK letting this other guy outbid me by $100?”

If I haven’t answered that question, I’m not ready to bid.

Best of luck,

Brian

Whether we are buying to hold or fixing and flipping, one of the most critical components of successful real estate investing is establishing and maintaining strong relationships with good vendors. A good vendor is one that is competent, price appropriate, reliable, stands by his work, and, perhaps most importantly, consistently moves work off his customer’s desk and not onto it by handling problems and making good decisions on the customer’s behalf.

No doubt, the world is filled with vendors of dubious quality. You can expect to run into your share of them. By the same measure, you’ll come across your share of good ones. The problem is the good ones are hard to catch. They are consistently busy and often already tied to a few key customers. In my many years in this business I’ve noticed that some investors consistently enjoy the loyalties of great vendors while others consistently blow through new ones every couple months.

Why the difference?

All of us get busy and overloaded in our work. We all have periods where we can’t return every call as soon as we’d like. The key is to be held in such esteem by your vendors that when their schedules are out of control yours is the call they return; to have such a strong reputation with them that they look for every opportunity to offer you their best price instead of waiting for you to pressure them into lowering it. Becoming one of a vendor’s favorite clients gives you incredible clout where you need it most.

But that means focusing your attentions as much on their business needs as your own. Make his profitability your concern. Let him know from the beginning that you understand his time is precious and that you will do everything you can not to waste it. The point is not to lower your expectations such that you sacrifice reasonable profit. That helps no one. But there are many things we can do that cost us little to nothing! To hold great vendors, be a great customer!

1. Don’t work the price so hard you leave him barely profitable and with no room for error. A vendor’s worst nightmare is going to a job day after day in which he knows he’s losing money.
2. Pay on time. This matters much more than most investors realize.
3. Call as infrequently as possible. Resist the temptation to make a phone call when an email will do. Communicate in a way that saves him time.
4. Expect the occasional error and be reasonable when it happens. If you have an active relationship with a vendor, you are both eventually going to make a mistake. How you handle those moments has a tremendous impact on that vendor’s loyalty to you.
5. Choose battles wisely. Any given relationship only has so many confrontations in it. Spend them wisely.
6. Confront problems privately, give praise publically. When things go right find a way to compliment a vendor to other people he cares about. When a vendor hears second-hand what wonderful things you’ve said about him, you’ll take a big step up his priority ladder.

Across every investor’s path great vendors inevitably wander. They’ll stick to the ones that become great customers.

Till Next Time,

Brian

Today, I wanted you to hear something from my partner, Brian Matlock, and co-owner of ThirdStake.  Enjoy.

By definition Real Estate investors share a common goal: We want to make money through real estate. Consequently, we spend much of our efforts finding “deals”. More often than not real estate investors end up purchasing distressed properties because they typically provide the best deal.

In today’s market there is an abundance of distressed properties and a number of specific channels through which to obtain them. These include Multiple List (MLS) Short Sales, MLS REOs, Trustee Sales, and a variety of third party REO auctions.

Each of these channels creates its own set of difficulties for buyers as well as potential rewards for those who overcome them. For example, short sales are numerous, offering plenty of attractive prices for investors. The downside is that seller performance is inherently unreliable and time consuming. Great deals are sometimes had, but the frustrations for shopping through this channel are extremely high. On the other hand MLS REOs are quite deliverable, but now draw dozens of contracts with every listing, and the dreaded request for your “Highest and Best” offer is virtually guaranteed. Getting a phone call returned from the listing agent, let alone hearing from the actual seller, can prove to be a rare experience. Trustee Sales have their own issues, requiring an all cash purchase within 24 hours and providing a much reduced opportunity for due diligence.

But this is not a post about which channel is best. Rather, it’s a post about focusing your attention and developing your skill set. All investors want good deals. And it’s tempting to constantly be looking at the various channels, hearing about the best deals those channels have recently provided to someone else, and always finding the grass a little greener in someone else’s yard.

The problem is that moving across venues complicates your buying process substantially, and makes it very difficult to become an expert in any one of them. Buyer’s that jump from one venue to the next will find new, unforeseen hurdles to overcome, and themselves at the beginning of a new learning curve.

Any of these venues is capable of providing good deals on properties. But to become good at your trade, you need to buy more than properties—you need to buy processes. That is, you need to build refined practices and relationships that help you systematically deal with the obstacles your particular channel presents. When you are better at that than most of your competition, your profits grow substantially, and every purchase makes you a little bet better equipped to strategically buy the next one.

At ThirdStake, we’ve committed ourselves and our clients to become experts in trustee sale purchases, not because it’s the only channel through which to obtain deals, but because we believe it is the best and that the efficiency of focus makes us more competitive. More important than finding the best channel is becoming skilled and efficient (an expert) in solving the problems that any particular channel brings.

The moral of this story? Buy processes, not just properties. Become an expert. You’ll get better deals.