Friday, February 25, 2011

Why shouldn't I write offers on Short Sales?

Short Sales (aka Short Pays, Subject to Lender approval etc.) are everywhere in this Real Estate market. These are sellers who bought or refinanced when their property was worth more than it is today and now they owe more on their mortgage than the property is worth. These sellers are frequently referred to as "underwater" or "upside down" on their houses. When trying to buy a property short sales are usually a waste of time to write offers on. This is because of several reasons; the sellers typically have no motivation to sell because they have not been paying their mortgage for many months and the longer they get to live in the house rent free the better it is for them. They have no inclination to show the property and will usually leave it a mess because of resentment or because they had rented it out and tried to make some money "skimming" by collecting rent after they stopped making mortgage payments. The sellers owe more on their mortgage than it's is worth, sometimes by hundreds of thousands of dollars, so their lender has to approve any offer that comes to them because ultimately the lender will take the loss. Many times the agent listing the property will price the it artificially lower than market to try and attract attention and offers. They usually get a flurry of offers and send them off to the seller's lender for approval of the sale. Sellers lender(s) can take anywhere from 2-18 months to respond to an offer and when they do, they almost always counter offer at a price that is in line with the market value of the property. This price is usually much higher than what the agent listed it at and so the buyers, thinking they were paying X are suddenly asked to pay Y. Banks are not stupid, they know very well what the property is worth and they're not going to entertain lowballing. If after the several month delay there are buyers still interested in paying the higher price, the property will sell but usually most buyers have moved onto other opportunities. Essentially, offering on short sales is like agreeing to wait a long time to have the price increased by an unknown amount.

That being said, we have had success snagging short sales using a shotgun approach. Since writing an offer does not obligate a buyer to anything until the seller accepts it, we have had buyers write several offers at a time on properties they had only driven by and not been inside. A few of these offers do eventually come back and if they haven't found anything by then they can see inside, do their investigations, accept the counter and go into escrow. This method takes lots of patience and some chutzpah (its counter intuitive to most people who haven't bought real estate in such a down market to make offers with only a drive-by). This method can work well with the current abundance of distressed and upside down properties on the market.

Thursday, February 24, 2011

Price differential by type of sale (Short Sale, Regular Sale, REO)

This reaffirms what we already know, the best deals come from REO a.k.a Bank Foreclosures.
Despite usually being in rough condition and having to deal with institutional non-responsive sellers, buying an REO is consistently the best value.

Tuesday, February 15, 2011

On the differences between Residential and Commerical properties

This is a commentary on some of the differences between buying residental (1-4 unit) and commercial (5 or more unit) buildings as investments.

When you mention apartment building, you step into a whole bigger world of income properties. The financing requirements for 5 or more units are completely different than 1-4 unit Fannie/Freddie backed bread and butter mortgages. Commercial lenders want 30-35% down and the rates are higher and rarely fixed over 10 years. The loans cost more to get, but that's because 5+ unit buildings tend to make a lot more money. The cost per square foot is usually much lower in multiunits, and decreases with size of the building. Conversely because you're packing them in the revenue is much higher on these multiunits than a fourplex. A 4000 square foot 2+1 4plex at $1200 per unit is beaten out by a 4000 square foot 1+1 8 unit at $800 every time.

Compared to the flood of buyers for 1-4 units (especially single family houses), there are a scant few buying up apartments. It's an awesome time to buy because the commercial market is going through the same foreclosure mess that residential went through in 2008-9 and the banks are giving these places away. The only buyers I see out there are organized investment funds, some from NY and most from Malibu/Santa Monica/Newport Beach. The property price tags are higher than single family or small income properties, so these funds rarely pay all cash like we see happening in the residential market. They too have to get financing for the properties. The biggest investment funds of all, life insurance companies, usually hold sizable commercial property portfolios and many also lend on the big deals (Office towers, Shopping Centers, Etc.). The old saying "Big Money Never Loses" is applicable here. Commercial Real Estate can be extravagantly lucrative.

But for all that pep talking buying a commercial property is a serious endeavor and is probably biting off more than you can chew for your first rental property. Most of the big fish start with 2-4 and get the hang of it before going for 8 or 10. There is ample learning material out there to get into the lucrative realm of commercial real estate.