New Plan for Freddie / Fannie

found this fantastic video by reading this post in Noah Rosenblatt’s Urban Diggs blog (great blog about NYC real estate that I read quite a bit). Bill Ackman is proposing a new plan to solve the Freddy / Fannie problem and bring liquidity back to the market. This solution is not via a government bailout, but rather proposes a balance sheet restructuring (basically converting their debt to equity, in order to affect the crazy D/E ratio – currently at 129:1 – Yikes!!!).  I am not going to rehash Noah’s post and the video – they both do a great job explaining it. Check it out!

Video: http://www.cnbc.com/id/15840232?video=793726867

Mortgage Mess and Real Estate Investing

I bet it would be impossible to find a real estate blog that didn’t post anything about the mortgage mess today / over the weekend. It’s not that the credit crunch / mortgage industry collapse hasn’t been on everyone’s mind since a year ago. But a new wave of panic is sweeping us today, after IndyMac failed on Friday, and Freddy and Fannie are so unstable (after a precipitous slide in their stock price) that they need to be propped up by the government. So naturally, I ponder what that means for the real estate investor.

First of all, let’s take a step back. Why did IndyMac fail? Well, because like other banks in a similar situation, a large portion of their business was subprime loans. If you make loans to people who can’t afford the house, as long as they say they can and state that they make enough money to buy it, which part of this approach is sound strategy, exactly? Unfortunately, the mortgage markets weren’t too concerned with the future.

So as the market started crumbling and the bottom fell out from under, why did the banks still refuse to do short sales?  (A short sale, for those who don’t know, is a deal that a buyer (retail buyer / investor / etc) negotiates with the bank, for a sale of the property for less than what’s owed on the property).  This was a very necessary step, in my opinion, as values had dipped under the amounts that were owed.  If only banks worked with these buyers to do these short sales, along with mortgage workouts, it would have largely mitigated the mess, and banks would be straddled with a lesser inventory of houses. And as we all know, banks need liquidity, not houses, to exist. The idiotic thing is that these same properties, if no one buys them, get foreclosed on (huge expense for the bank), get seized and get auctioned off for less money than the proposed short sale. If I have an outstanding loan of $10, wouldn’t I rather take $7 from a buyer today, than sell it for $5 tomorrow?  Duh! Instead the banks made it so difficult for an investor to do these short sales, with the process dragging on for months. With such an abundance of foreclosures and deals to be had, no wonder so many properties end up going to auction. From my personal interaction with real estate investors, the frustration with the banks’ loss mitigation departments (those who end up working out the short sale deals) has been palpable. I spent some time perusing blogs and blog comments written by investors, who lamented that IndyMac exhibited many of the same behaviors. IndyMac had a chance to recoup some of the money they ended up losing due to the bad paper, and they squandered it. I am not, in any way, suggesting that short sales are a cure-all. I believe that it was important to pursue all avenues, one of which is short sales, one is mortgage workouts / loan modifications, and other steps. Hopefully, the next bank straddled with foreclosing properties, will be a bit better at short sales.

So now that IndyMac failed, and other banks with similar patterns are likely to fail, for the same reasons as stated above, the credit problem is only going to get worse, and the panic is going to get out of control.  Which concerns me as an investor and as a technology entrepreneur building a web-based resource for investors. If there are no funds available for investors to buy investment properties, the investment industry is going to go the way of the mortgage industry.  But not so fast! Investors, the good ones at least, are extremely creative, nimble and entrepreneurial ; they find opportunities at times when everyone runs and screams that the sky is falling. The deals are abundant. And yes, prices will likely keep decreasing, especially as the mortgage mess shrinks demand (many homebuyers who were in the market for a house, now will have to go back to renting, because they can’t get a loan). However, an investor who is good at doing the short sales, and other such strategies, can max out the deal anyway by getting it at very low prices. To finance these properties, a creative investor will look to non-traditional avenues, such as seller financing and private money. As far as my business, MeetMOJ,O is concerned, we are going to do just fine, as we extend our matching model to private money lenders and other alternative sources of capital.

So next time someone asks me what I am doing, and I answer “I am building a web-based community for real estate investors”, and that person looks at me like I am insane, I am going to insist that this is a great time to be an investor. If you know what you are doing, of course.

The Beginning of the End?

Is it the beginning of the end for the U.S. real estate downturn? Mark Zandi, Chief Economist from Moody’s Economy.com certainly seems to think so (CNN interview aired earlier this week). This discussion comes on the heels of the NAR report stating that existing home sales have actually improved from January to February 2008, but the median price is more than 8% down vs. last year. Methinks that inflection point is happening right now, because prices are finally low enough for people to get back into the market.

Zandi points to this latest increase in sales as the point where homes are starting to stabilize, putting us at the beginning of the end of the downturn, a process he still predicts to be very long. Home sellers are now “capitulating”, lowering listing prices to be in line with the market, and making the deals more attractive for the buyers. Additionally, the mortgage rates are low enough to stimulate homebuying activity. Finally, after decades of home prices outpacing salary growth, homeowners can somewhat afford to get back into the game. According to Zandi, “prices have been declining for two years. I think we’ll see another year worth of declines. We are down 10 to 13 percent from their peak. I think they’ll decline another 5 to 10 percent between now and the spring ‘09 selling season. So it’s not over. We’ve got a ways to go. “

So here you go. There is one good year left of rock-bottom housing prices, after which they should continue to climb back up. We as investors haven’t had an opportunity like this in several decades, to get into a property at a price low enough to produce positive cash flow. This is an opportunity not to be missed. I would like to re-emphasize from my recent blog post, that this real estate environment is a perfect time to acquire a property that you hold for the long term and rent out, and not designed for a short-term flip.

Top 10 Ways to Sell Your Rehab

Selling a house in today’s market is not for the faint of heart.  But if you are one of those investors who loves to buy shabby houses with lots of problems and rehab them into beautiful homes and sell to retail buyers, these quick pointers ought to help.

1. Price to  sell
2. Market and advertise the heck out of it
3. Hire a super-duper agent
4. Consider curb appeal
5. Be frugal, don’t overimprove
6. Instead avoid deferred maintenance
7. Don’t forget the driveway
8. Keep with neighborhood style and current style
9. Have open houses 
10. Staging is key

1.  Cash is king

Setting the right price is key to selling your house quickly and maximizing your profit.  Price is more  important than ever in today’s market, which is characterized by inventory that just keeps stockpiling. But each house has that magic selling point at which it becomes more attractive than the competition.

The trick is to price it well from the beginning instead of starting high and dropping the price. Most people selling property, even in today’s market, have an unrealistic expectation of the selling price.  Research has found that houses whose prices had been changed sell for less than homes whose prices had never been revised. The longer a house sits on the market, the more it becomes stigmatized in the minds of buyers–and the harder it is to sell.

So you must do your research.  Study comps (check out online resources like zillow.com and trulia.com), ask a few realtors whom you trust and who are real experts on the local market. Figure out what your competition is charging.

2. Become a marketer

Marketing and advertising are super important right now. You must capture the buyers’ attention. Place lots of ads in the paper and on the web, as well as post your property on sites like realtor.com, zillow.com, etc.  Whatever everyone else is doing, do more of it.  Put signs in the yard and around the community, talk to everyone you know, leave flyers around the places that your target demographic may frequent: bars, cafes, restaurants, grocery stores, gyms.  Figure out the profile of the buyer.  Is your house in a “B neighborhood”?  Then your target market may be someone moving up from a “C neighborhood”, because finally the price is right.  Leave some flyers around some of those neighborhoods. Are you targeting renters?  Leave some business cards on the premises (but don’t break any laws or upset the landlords).   Join local investment clubs and send notices through them.  And don’t forget about Facebook and other online venues where your target demographic may hang out.

3. Hire a super-duper agent

 Yes, you may need to hire a realtor with a proven track record for success.  In a market where houses are selling like hotcakes, you may get away with selling it yourself. But today, you must pull out all the stops.  Make sure that the realtor can get the job done, ask your investor friends for referrals.  You want to partner up with someone who understands real estate investors and what your objectives are vs. a homeowner.  And pay them.  Pay them more than your competition would.  Guess whose property they will show first?

4. Don’t curb your enthusiasm

To be competitive, you must also make sure your property is easy on the eyes.  Be sure your home isn’t an eyesore on the outside. At the very least, buyers visiting your home will expect a decent paint job. If the body of your house is in good shape, you may just need to touch up the trim. In addition to being attractive, a quality paint job (two topcoats) also protects against destructive effects of moisture, mildew, and the effects of the sun.

Clean up your yard as well; it’s one of the first thing potential buyers see before entering your home. Depending on the condition of the yard, you may also opt for some landscaping.  But don’t go nuts; the NAR recommends that you spend no more than 1 or 2 percent of your home’s value on sprucing up landscaping before you sell.  And if the season is right for blooms, place flowerpots around the entry and in the patio.

5. Be frugal, don’t overimprove

As you rehab the property, make it look updated, but don’t sink all of your budget into a state-of-the art kitchen and bathroom. I recently read (the source escapes me now), much to my surprise, that kitchens and bathrooms remodels, long considered the most profitable improvements to undertake, may return only 50 percent to 75 percent at sale–and only if you sell a year after the project is completed.

Making too many changes is a game of diminishing returns. Think twice before adding expensive upgrades, and ask yourself if it’s a ”must-have” or a  ”nice-to-have.”  Sticking to a frugal rehab budget will enable you to price competitively, pay your realtor well, and make a nice profit as well.  So avoid expensive appliances and state-of-the-art systems. Even swimming pools can decrease resale value, as they cost a lot to insure and maintain, and many buyers don’t want the hassle.

6. Deal with deferred maintenance 

Rather, spend your rehab budget on items that will protect the home from deterioration and damage, such as roof replacement, plumbing and electrical upgrades. These items will help preserve the property’s value, and you will be able to score bonus points with the buyer by showing them proof of recently completed work. Brand new equipment and warranties that are in place on move-in day will make the buyer feel secure about this significant of a purchase

7.  It’s not your asphalt’s fault

If the driveway hasn’t been resurfaced in a while and doesn’t have major cracks, go ahead and reseal it.  Just pick up some asphalt resealer and a spreader at the nearest hardware store. It’s a quick and cheap way to make it appear more attractive.

8. Don’t “One-Up” the Joneses  

Make sure your house fits in with the rest of the neighborhood.  You’ll get the biggest bang for your buck by keeping up with the Joneses, not by going them one better.  So don’t add a third story on the house if all the other houses only have two.  On the flip-side, if most houses have three baths and yours has only one and a half, adding a new bathroom will boost the value of your home. The same goes for bedrooms.

Also, remember to update your house’s overall style, if it looks like it’s stuck in the 70s or the 80s.  But avoid making it too trendy to where the buyer will anticipate changing everything the very next year.   Stick with the basics; simple white or beige walls provide potential homeowners with a clean slate on which they can envision their own personal touches.

9.  Open your house to an open house

Hold open houses.  A picture is worth a thousand words, but a house that the buyer can touch and feel is worth a thousand pictures. Make sure that your open houses are well-attended, even if you have to invite your friends and fellow real estate investors to make it seem fuller.  If a homebuyer sees many other potential buyers in the room (i.e. their competition), she will be more likely to pounce on this great property.

10.  All the world is a stage.

Let’s face it, home buying is an emotional experience.  Some of your buyers may be buying their first home.  Make them feel at home, appeal to their senses and emotions. Transport them to a happy time in the near future when they have already purchased the house and are moving in.  When you hold open houses, stage the house: make it look inviting and ready for move-in. Furnish it to make it look like a home, and not just a house, but avoid cluttering up the property.  Clutter can make a room seem smaller than it is.  You can rent furniture for the duration of your open house.  There are even special companies that you may hire that specialize in staging. 

 

A bright, tidy home will sell a lot faster than a dingy one.  So open up the curtains, show off the fresh paint job, turn on the lights.  Hang guest towels in the bathroom, set the dinner table with the best china, and place fresh flowers in an attractive vase. Appeal to the potential buyer’s sense of smell as well. Clean carpets and drapes. Light scented candles.  To make it seem more homey and to make your buyers salivate (literally), bake something right before the open house.  You will be able to put out the muffins / cakes / whatever else you make to treat your visitors, as well as fill the house with the smell of freshly baked goods.  Yum!

Rents in Manhattan

In one of my recent blogposts I discussed the effect of Wall Street’s troubles on demand of rentals as well as for-sale properties.  Per this Fox News report,  rents for 1- and 2-bedroom apartments have already started dropping in Manhattan, while price of studios went up.  This, I believe, points to lessened demand for larger, more expensive housing units, and an increased demand for smaller, less expensive units.  As I discussed in my previous post, many Wall Streeters and other NYC employees may be opting to reduce their lifestyle in the light of general economic malaise / recession, and very possible layoffs.

So if 1-bedroom units decrease in price, and studios increase in price, they just may become equal in price over time.  At which point, renters will move back into 1-bedroom apartments.  To all my renters, I say, get a short term lease for a 1-bedroom (if, in fact, there are deals out there), and go back out hunting for even better deals in 3-6 months.  If they started to drop, I think they will continue to do so.  And then, once you believe the rental market is at the bottom (largely depending on how this recession scenario plays out), lock yourself into a nice permanent low-priced lease (well, low-priced in Manhattan terms, that is).

To all my landlords, current and aspiring… Rack up on low-priced properties over the next year.  There are a ton of foreclosures. There are also a ton of non-foreclosures that have been on the market for quite some time (I think the average is 11 months nationally and 2 months in Manhattan, but don’t quote me on that).  So if you are buying on the island, I would wait until Manhattaners become more desperate to sell, as they are everywhere else.  Even though rents may be decreasing in Manhattan, they will surely go back up: the cultural, intellectual and financial appeal of the Big Apple is hard to beat).  Nationally, rents are up quite a bit, driven by increased demand (because people still have to live somewhere after they lose their homes, and foreclosures are only going up).  So now being a landlord makes more sense than ever: buy cheap, hold for a while, realize appreciation and rent out for cash in your pocket monthly. Perhaps we will see a similar trend towards smaller and cheaper apartments nationally.  So picking up some of those would be good  now.   But also don’t forget that you are buying for the long term, and rents will keep increasing over the years, while your mortgage will stay the same. Which means…  cash flow!!  A good and diversified assortment of properties will keep you well-covered, should demand swing towards smaller units, back to larger units, and whichever way it chooses to go.

Happy renting and landlording!

Humor and Real Estate: Forget the Bear! Forget the credit crunch. This little girl will devastate the NYC real estate market.

With the loom and gloom of current events about our beloved real estate market and economy at large, we could use some humor. I found this great video while reading real estate blogs, The Real Estate Bloggers post, to be specific. We can always count on Steven Colbert to infuse some humor into the otherwise grim world of real estate of 2008.

Blame the little girl!

(Ooooops, for some reason I can’t get the embedded video to work any longer. In the meantime, while I look into it, please click on this link to watch the video. It’s worth it, I promise!)

The Art of Real Estate

I love running. In fact, I am training for the NYC half-marathon this July (wish me luck getting selected by the lottery). I also love cool-looking buildings. What is the connection between these two seemingly unrelated facts? When I run, I love looking at buildings and getting to know neighborhoods on foot. Running gives you an advantage, because you get to cover more ground than when walking. I absolutely love taking new streets as I run and checking out buildings, new and old, and fully breathing in each neighborhood’s character. I live and work out of downtown Jersey City (Hamilton park), where there are a ton of little neighborhoods, all with a distinct personality. I am still pretty new here, and the weather is only now starting to be a bit more fit for outside runs (except for tonight), so I am aggressively canvassing the neighborhoods.

I was running by this very cool building yesterday on 2nd st. and Luis Munoz Blvd (see picture). It looks like an updated spin on a old industrial building. And although residential industrial-looking loft buildings are anything but a new concept, lofts captivate my attention like nothing else. This building is gleaming and new, but fits into the local landscape.

The condo market is a bit overbuilt on the riverfront, so when I see new buildings going up, I wonder how these units will get sold, especially in this market. I looked at a couple of units a year ago (I didn’t live in Jersey City then) to turn in to luxury rentals, but the financials didn’t make sense. Would be interesting to see how these riverfront properties have fared in this market, and if the financials make sense for an investor (I guess I have some investigating to do). The Waldo Lofts, however, stand distinctly apart from the other new construction.

This building stayed on my mind and I had to do some research. This building sits in the Powerhouse Arts District, which is set a couple of blocks inland, between riverfront and historic downtown where I live. I always wondered why it was called that. Digging around uncovered a New York Times Article that talked about the project in May of 2006, before it opened in September of 2006. Turns out that the Powerhouse Arts District (PAD, as I will now refer to it – I hope I get to be the first one to coin it!) is an 8-block warehouse district, currently being redeveloped as an artist-centric district. The basic premise is that a thriving artist community is good for the neighborhood and for real estate, as it raises the “coolness factor” and yuppies start to move in to be close to the artists. Usually this movement develops on its own, but in the PAD example, artists are being enticed to move and congregate around a particular area. Apparently, there is a fairly large artist community in Jersey City already.

Waldo lofts took this approach to new heights and installed industrial features into its brand new lofts, as well as set aside seven of its lofts to be sold below market value to artists who are certified by the city’s Arts Commission (this is actually required by regulation in every arts district building).

As I checked out the NY Times Real Estate section today, I came across another such endeavor in Dumbo (Down Under Manhattan Bridge Overpass in Brooklyn, for those not from around here). Two Trees Management, a father-and-son team of developers, owns 3 million square feet of real estate in Dumbo, are subsidizing rents for artists and art organizations, and have attracted over 1,000 of them. Like the PAD effort, this is designed to add value to the neighborhood, based on the basic assumption that yuppies follow artists. Unfortunately for the artists, this seems like a temporary offering: after the area gets sufficiently gentrified, these rents can no longer be guaranteed to the artists. So if the artist doesn’t mind moving, initiatives like these help him/her afford city living, amongst pricey real estate. I should have studied urban planning / development!

Update: Turns out, other people have used the PAD abbreviation. So I didn’t get to coin the term. Oh well… Better luck next time!

Focus is good for a tough market

A colleague has shared the following blogpost by Seth Godin with me. Even though it talks about how to stand out from the crowd as a real estate agent, I found it quite applicable for us, investors, as well. Especially in this tough real estate market, when sellers abound and the battle for buyers’ attention is only getting fiercer. How will you stand out as an investor wholesaling your property, flipping your property, or even trying to get your property rented. It’s through focus, says Seth. Become a super-expert in what you do: specialize in a zip code, in a particular property type, in a particular investing strategy. Possibilities are endless really, in creating a niche that is yours and only yours. Become that person that everyone will think of when they think of, say, a short sale, a lease-option, etc. Raise your visibility by giving talks, seminars, blogging. Seth gives a great idea in his post: have relevant clubs and organizations meet in your office. That’s one other way to become the hub and the absolute authority. Simply awesome! In short… Get creative. Do what others aren’t doing. And become an expert.

At the risk of sounding unoriginal… Use the current technologies to help you. Get out in the blogosphere. Get on Facebook. Get on Meetup. It amazes me how few real estate investors I know are on Facebook. Think about it.. If you are renting your apartments to the 20-somethings and 30-somethings, that’s where they are. So you have to be there too. And it’s a great way to spread your message very quickly and virally. (And besides, Facebook is no longer for folks under 35). Become the blogging / Facebook expert of lease-options in zip code 12345.

Here is to your wealth in 2008!

Cram Down Loan Modification

Senate Democrats are attempting to push through a controversial plan to allow bankruptcy judges to modify the terms of troubled borrowers’ mortgages as part of a larger package of foreclosure prevention programs. Allowing judges to “cram down” loan modifications over the objections of lenders could raise interest rates on mortgage loans by 1.5 percent or more, industry groups fighting the proposed changes to the bankruptcy code say. If the bill caused interest rates to go up by 1.5 percent, payments on a $300,000 30-year fixed-rate loan would increase by $300 a month. The bill would also mean higher down payments for home purchases and increased equity requirements for refinancing existing home loans.

The above is certainly likely to make the real estate investing climate slightly worse off than conditions are now (low mortgage rates, depressed housing prices). On the flip side, there are some positive points that the new bill (S2636) is going to bring to the table, which hopefully can curb the foreclosure frenzy.

Some of these positive points include: $200 million for pre-foreclosure counseling, and giving the authority to the state housing finance authorities to issue $10 billion in additional mortgage revenue bonds to refinance subprime loans and provide mortgages for first-time home buyers.

Opponents of the plan say allowing bankruptcy judges to change the terms of mortgages after the fact will raise the cost of borrowing, in part because investors who purchase securities backed by mortgages will have less confidence in their ability to collect payments or foreclose on properties.

The Most Fascinating “Guru” Website Ever!

I have to admit that after I stumbled upon this website by John T. Reed, profiling various real estate “gurus” – the good, the bad and the ugly – I could not tear myself away from my computer screen for several hours.

Real estate investing has been historically infested with the “gurus” and infomercials that prey on the less-than-sophisticated novice investor. Even though I myself am not an advanced investor by an stretch of imagination, it is quite clear from the get-go what some of these gurus are all about. I find this list a must-read, especially for beginners.

In the world of real estate investing, it is important to separate the truth from fiction, the good advice from the bad, and opportunistic schemes from ways to build real long-term wealth. We at MeetMOJO are committed to becoming a resource for real estate investors, so we will be working on providing the most usable and transparent information to our users and readers. Please share your experiences with our community, so that we can all become stronger and better educated.

Here’s to your success, wealth and health!