Minnesota Real Estate Investors Association, Inc.

We live in uncertain times.  After the mortgage meltdown and the almost collapse of the financial industry, the real estate market has been going through several ups and downs.  The median sales price in my area went from its peak of $238,000 in June 2006 to a low of $138,500 in February 2012, back up to $210,000 in June of 2013 and we are on our way back down, currently sitting at $179,850 for January 2014.

There have been some wild swings in the past few years and the people that understand that and have kept a close eye on the trends, and have not been afraid of the market have made a lot of money the past few years.  However, I have seen most people sitting on the fence and haven’t done anything.  I can understand the feeling of uncertainty and being afraid to make a mistake, but let’s face it, if you’re afraid to make a mistake, you will never make it big.

You’re probably thinking right now “That’s easy for you to say Mike; you’ve been at this for a long time and have more experience than I do”.  While for many of you, that may be true, however, for your info, I have probably made more mistakes than most of you ever will, and I am still making mistakes.  But that is not holding me back.

That is one of the most common traits I see from those who are successful, even in this wild and uncertain market.  They are not afraid to make a mistake, and often do, but they don’t let that hold them back.

Everyone wants to minimize their risk of making a mistake and losing money or damaging their credit, myself included.  However, I see way to many people with paralysis of analysis and never do anything.  So what’s holding you back? 
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This spring the market was chugging along just fine.  Then a 30 year fixed rate loan increased to just under 5% and the market came to a crashing halt. During the months of August and September, one of our largest local lenders saw a 72% decline in new and refinance mortgage applications and retail, renovated properties seemed to just sit there if they were priced a little high. 

Interested rates dropped by a mere half percent and houses that were sitting there started selling again and mortgagee applications returned to the same levels as they were in June and July.

I am assuming that the Feds will keep rates low for the foreseeable future because the economy is still too fragile, as evidence by less than a 1% rate increase in the real estate market.

“Get Off Your Butt and go Buy a House.”  This is a statement I had heard years ago from an old friend when I was complaining about being a broke struggling want to be investor, so I listened to her and did it. That was back in the late 90’s and it was a good ride for many years.  But the last few years have been tough on a lot of real estate investors, me included.  Many of us had to hunker down, retrench and then recover from our battle wounds.  The length of recover was/is directly proportional to the magnitude of your original symptoms.  Some people unfortunately didn’t have the financial or emotional strength to weather the storm which I completely understand as I was almost one of them.  But now it is time to look forward and plan for the future rather than having to deal with repercussions from the past. 

I understand that there will still be a few things we all need to deal with from the past few years as we move forward, but move forward we must, and this is the year to do it.  Even though last year was a relatively good year for real estate investing, it was still a tough year for many investors because of all the competition and the lack of inventory on the market.  I personally struggled finding rehabs as well.  Between my partner and me, we looked at over 400 properties, make close to 200 offers and only got one MLS offer accepted.  Looking back, off all the properties that we made offers on that sold, they were all in multiple offer situations.  Even though we had plenty of cash to buy and always offered quick closings without contingencies, we were always out bid with very similar offers.  Many of those other properties that didn’t sell are still on the market and still overpriced. 
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The new headlines catch phase is “Robo Signer”. These robo signers have been signing foreclosure documents at a rate of up to 1 document per minute. That’s 5,000 – 10,000 per month. Everyone knows that it is not physically possible for these robo signers to have read every document. That is the reason everyone is calling for a moratorium on foreclosures. Or is it?

If everyone was upset with the fact that these robo signers were not reading all the documents, then why wasn’t everyone upset that congress has passed health care and over a trillion dollars in stimulus programs while all along admitting that no one could possible read all of it before voting on it. So ask yourself, are they really upset that the robo signers didn’t read the documents. If you are honest with yourself, then the answer would have to be no.

So what is the real reason everyone wants a moratorium on foreclosures. Politics… In 3 weeks there is a major midterm election and this could be one of the most historic elections in our country. The politicians on both sides of the isle are looking for something to blame and point fingers at to make themselves look like they care and that all our problems are the banks. 
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Look at the drop starting on May 1st. This graph should be all you need to realize that the first time home buyers tax credit drove a lot of sales at the moment, but they would be sales that were pulled forward. In other words, if the tax credit wasn’t there, the sales would probably still have happened, but they would have been spread out over time rather than pushed back into April.

First of all, the banks are short staffed, so they can’t file NOD (Notice of Defaults) and complete the foreclosure process as fast as new borrowers are falling into default. The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics. That is the first part to Shadow Inventory.

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This has also created other problems. I had a closing that kept getting pushed back because FHA hadn’t review the file to release the funds because they were so backed up. We finally closed last week and from talking to the buyers at the closing, they just wanted to close before they lost the credit, but it wouldn’t have stopped them from buying, they just bought now rather then this summer when they originally planned on moving.

Only mere hours ago we all saw live the Dow drop near 1,000 points in a startling amount of time. As I’m writing this the market has “recovered” but such volatility will not leave the minds of those who have their savings and IRAs in a stock portfolio that is certainly showing more red than they are accustomed to. To think that such a small country like Greece can trigger such waves because of the liquidity has compromised the integrity of the stock market and the following stories, finger pointing and possible domino effect that may be looming will leave these investors looking for a safe haven.

Suddenly the idea of investing into private money secured by real estate is looking a lot better
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While the government wants us to believe that the recession is over and the economy is heading back in the right direction, all the indicators show something completely different. Housing prices in particular are heading back down in many areas, as I have predicted several times in the past on our weekly training calls.

CNBC even talked about it the other day on their Power Lunch news show.

Jobs are the biggest reason in my opinion. While the Unemployment rate has dropped below 10%, the number of people unemployed is still growing, currently over 17%. The unemployment rate only counts the number of people currently collecting unemployment benefits. It does not count the number of people whose benefits have expired and are still unemployed.
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Ok, ok, I know, flipping has never been illegal, but with recent changes in the mortgage industry, the lenders are coming back around and asking for our help again. Wells Fargo was actually the first major lender to change its stance on seasoning, but because FHA is a government program, this is huge. First, let me give you a little back ground so you understand what the hoopla is all about over FHA temporarily suspending its 90 day title seasoning rule.

Several years ago, when all was right with the world, some investors were taking advantage of a unique situation in the mortgage industry. The federal government wanted everyone to be able to take advantage of the America dream. So they lowered interest rates and loosened up the required mortgage qualification guidelines for Fannie Mae and Freddie Mac backed mortgages, including down payments. This actually made it cheaper and easier for people who normally would never have been able to qualify for a mortgage, get one with little or no money down.

These changes actually made it cheaper for a tenant to get a mortgage than it was to rent a property, because they could finance the entire purchase price, including their closing costs. If they were to rent a property, they would at least need the first month’s rent and a security deposit. But if they bought a house, they didn’t need any of their own money up front and their first payment wasn’t due until after they had lived in the property for one month. Plus, with a mortgage, the lender only pulled their credit report, and since most of these tenants never established credit, they didn’t have bad credit. Note that a credit report doesn’t show eviction notices or criminal history, which is where many of these tenants had records.
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May 1, 2003 HUD imposed a 90 Day Title Seasoning requirement for all new FHA loans. This was their big idea to help protect the consumers from the Big Bad Flippers. It only took 6 years and a housing market crash to show the elitists the errors of their ways. Now they need our help to fix their mess.

They finally came to their senses and temporarily suspended title 24 CFR §203.37a(b)(2), which is the 90 Day Title Seasoning Requirement. This is only a temporary suspension. Starting February 1, 2010 and expiring on 1/31/2011, First time Home Buyers who apply for an FHA loan will not have the 90 Day Title Seasoning Requirement. However, we as investors will still need to follow a few guidelines in order to Resell (Flip) our Short Sales / REO’s and Flips to First Time Home Buyers who are applying for an FHA loan.
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