Jason Hartman: Welcome to the Creating Wealth Show. This is your host Jason Hartman and this is episode number 286 and our guest today will be Sean O’Toole with Foreclosure Radar. I think you’ll find this to be a very insightful and interesting interview when our guest comes on. But first, just a brief discussion of some specific properties and specific investment opportunities in four or five different markets in which we operate. And I’ve got one of our investment counselors on the line here with me and that is Molly. Molly, how are you?
Molly: I’m doing great. How are you doing, Jason?
Jason Hartman: Good, good. And you’re talking to me from San Diego, California today. I love this geography. It has become almost meaningless, as I said on one of the recent episodes, it still means something but geography ain’t what it used to be. We’re giving another example of that today with you in San Diego, me in Phoenix, and our listeners all over Planet Earth.
So first of all, let’s talk Molly, about one of our newer markets and that is Birmingham, Alabama. As most of our listeners know, my mother moved to Alabama several years ago and I’ve had her on the show talking about that and how much she loves it there. But she’s not in Birmingham. And I want to talk about Birmingham because this is really one of our bargain-priced markets.
Different markets, of course, have different great assets to them and some liabilities to them as well. But one of the big assets that Birmingham has is it’s just so inexpensive. I mean, if you’re a starting investor or you’re the type of investor that likes to accumulate a lot of properties and you want to make them inexpensive properties. And why would you want to do that? One of the reasons is maybe because you just like bulk diversification. If you always wanted to have multiple units in apartment buildings because if you have 16 units or 116 units, for that matter, and one or two of them are vacant, not much of your portfolio as a percentage basis is vacant. And you can do that with single family homes in the lower-priced markets.
So when you look at Birmingham, you’re looking at a market that is priced about 50% the price of a comparable property in, say, Phoenix which is a market that’s very hard to operate in. And it’s about maybe $40,000 less on average than a property in Atlanta. And really, it’s about half the price of Dallas, in many cases. So again, this is kind of a bargain market.
But Molly, what are some of the highlights of the Birmingham market and why would someone want to consider it? And then we’ll look at a specific property.
Molly: Okay. First of all, it’s the largest and most populated city in the state of Alabama and it’s also, as you said, one of the most affordable places to live in the United States right now. I believe the cost of living in Birmingham is about 6½% less than the average cost in Alabama.
Jason Hartman: And by the way, we should mention, the average cost in Alabama is pretty low to start with.
Molly: Exactly.
Jason Hartman: When you look at that on a national average, which I have a feeling is what you’re going to mention next, it’s a lot, lot less expensive than the national average. So, what’s the national number there?
Molly: It’s 13% less than the national average.
Jason Hartman: Fantastic!
Molly: It’s got some great employers. It’s got Honda there; it’s got Mercedes. It’s got universities there. It has BellSouth. It’s a booming business area.
Jason Hartman: And the economy is pretty diversified in terms of manufacturing, higher education, medical, banking. Those are really the top employers but I love manufacturing. That’s one of the reasons I really like the South and the Southeast so much. You look at all these auto manufacturers. When you get away from the big three and the old school Detroit economy that’s based largely on Unions and Democrats, two of my least favorite things – had to throw that in! Nobody’s setting up an auto plant in Michigan anymore, are they? But they are in the South. And like you said, you’ve got Honda, you’ve got Mercedes. And in these white-torque states that are friendly to employers that don’t require people to join a union to get a job, you’ve just got this burgeoning manufacturing sector and it’s really a great thing.
Molly, what about home prices?
Molly: Home prices are historically low right now. And over 46% of the local population are currently renting. So that’s what makes it just an incredible investment opportunity. That, coupled with, as you said, the price points. I talk to investors everyday and I talk to them about the prices in Birmingham. As you’ve mentioned on podcasts in the past, people have reverse sticker-shock. They think that the price is the down payment when that’s the actual full purchase price.
Jason Hartman: That’s so funny you say that. With both of us, both you and I being from California – you, still in California – I really got my start talking to California investors. Now, we have a global audience. We have plans from all over the world. But what I would always say a long time ago to those California investors is I’d say, “Look, when you’re looking at properties on a nationwide basis, be careful taking your California brain to these other markets because everything looks so cheap. And just because it’s cheap doesn’t mean it’s a good investment or a good value. A lot of times it does but not always.” Like you said about reverse sticker-shock, I think that’s just kind of a funny thing.
I’ll give another story. Having known you for so long, Molly, back when we were in traditional real estate in Irvine, California together. And you worked back in the day at Merrill Lynch and I worked at RE/MAX. This was a long time ago, folks.
Molly: That was before Prueba. Merrill Lynch, oh my gosh! I forgot that. That’s a long time that’s why I forgot it.
Jason Hartman: Actually Molly, it gets worse. It was before the Internet.
Molly: Before Al Gore invented it?
Jason Hartman: Yeah, right. A lot like that story. The Internet was invented at UCLA in 1969. That was really the start of the Internet. And Al Gore – I will admit though, one thing Al Gore did do is he was responsible for promoting the Internet and I believe, he actually either was the promoter or the signor on the Arpanet bill, formerly Internet that was just for defense to the public sector. So that will give him a little credit as much as I don’t like Al Gore.
But what were we actually saying there? Here we are on the tangent. Oh yeah, reverse sticker-shock. You probably experience this too although I never talked to you about it specifically but I sure did. When I would work with relocation clients as a traditional realtor, their companies would say, “Hey…” Back in the day when companies actually used to move to California – that really doesn’t happen anymore. Now, they just leave California. But back in the day, companies would move to California and they would send their employees, their executives out to look at properties in Southern California. And I remember touring people around that were from other states, all across the country. And they’d come out and they’d look at property and they had massive sticker-shock, Molly. I mean, they were just thinking, “Gosh, I have to spend 3, 4, even 5 times what my home is worth in…” wherever they’re from, whether it be Arizona, Illinois, Georgia, Texas, whatever, Colorado, it doesn’t matter. It was all pretty much the same back in the day. They usually wouldn’t move. They wouldn’t want to do it. If their company was opening up a branch out here or just moving their offices out here, they just wouldn’t want to do it. They wouldn’t want to move to California because it was just so, so, so expensive. Now, that’s what I call sticker-shock. And what you’re talking about is reverse sticker-shock. But, any comments on that?
Molly: Yes, I remember the same exact thing. And keep in mind, this was back in the ‘80’s where pricing was a third of what it was today. But I’m sure you remember as I do back when interest rates were 13%, I think, when I started in the business. And in 1990, they dropped down to 10%. There was that whole flurry of refinancing because interest rates had dropped to 10% or just below 10% and that was unheard of for the last 10 or 15 years prior to that. So prices were more affordable then. Payments were higher because interest rates were higher. Today’s interest rates make things so much more affordable plus pricing outside of California is so affordable. It’s a win-win for everybody.
Jason Hartman: Yeah. People don’t buy a property on the price. They buy it on the payment. But now, you can really buy it on both. It’s amazing, though, that a place like Birmingham, 46% of the population are renters and they’re in a bargain market. They’re in a market they should be buying. One of my sayings and the regular listeners have heard me say this before but I always say, “Invest in places that make sense so you can afford to live in places that don’t make any sense at all.” And oddly, we were both home owners in Southern California and now, you are a renter in Southern California, I am a renter in Arizona in a high-end property here. It just makes so much more sense to rent your own high-end home and to rent low-priced properties to other people who aren’t smart enough or financially mature enough or willing to delay instinct gratification enough to buy in that market because they should be buying in Birmingham. They should be buying in Memphis. They should be buying in Atlanta. In all the markets in which we do business, it makes sense to own your own home there and to buy it. But unfortunately there’s a larger renter population and with the current election, there’s destined to be a lot more renters in the future as most of America grows a little bit poorer, frankly.
So, tell us about a specific property that you picked a pro forma off the www.JasonHartman.com website here. I mean, I can’t believe how good the numbers look here. By the way, we’re going to talk about several other markets, folks. So, just hold on for a few minutes. But let’s just talk about a specific property in Birmingham.
Molly: Okay. I’m looking at a property that’s 1536 square feet. It’s three bedrooms, two baths. It’s priced at $62,900. So with 20% down, you’re looking at total cash including closing cost to close escrow of $17,863. It’s renting for $900 a month.
Jason Hartman: Folks, before we move on to the rest of the pro forma, this is only $40 per square foot — $40 per square foot for a property that was renovated in October of 2012. Last month, it had a renovation. Forty bucks a foot. Amazing! Okay, what’s the projected rent here?
Molly: Projected rent is $900 a month and the tenant will be in place when you close so you’ll be cashing from day one.
Jason Hartman: So, pre-rented property. And the cash flow here is projected at $243 per month or $2916 annually. And here’s the number that I just love. And Molly, what is the cash-on-cash return pro forma here?
Molly: It’s 16%. It’s just incredible.
Jason Hartman: 16% annually. So folks, if the property goes down in value which would be amazing if it’s $40 a square foot. But say this property – say the economy just wholly collapses and this property is only selling for $20 per square foot, about 1/4, 1/5 the cost of replacement or construction in my estimation and as long as you can maintain that income and expense ratio, you’re going to get 16% cash-on-cash and an overall return on investment here of 31% annually. Unbelievable! Unbelievable! Bargain priced market – Birmingham.
Anything else you want to say about that before we move to the next one?
Molly: No. A year ago, Memphis was a great marketplace. It was a marketplace where a lot of people were starting their investment properties. People have been kind of priced out of the Memphis marketplace or inventories have come become so low but Birmingham seems to be more of that starter investor community now.
Jason Hartman: I’m actually surprised you’re saying that. People are priced out of Memphis? I think Memphis is still a pretty low-priced market. I mean, the low-priced markets we have are Indianapolis, Memphis, and St. Louis, and Birmingham, of course. But Memphis, is that getting too expensive?
Molly: Okay, let me rephrase that. Maybe instead of being priced out, the inventory levels are lower and the prices are going up. So, investors that purchased a year ago have seen great appreciation and now they’re going, “Hey, wait a minute. I don’t want to pay this much more for the same property that I could have purchased a year ago for a much lower price.”
Jason Hartman: So yeah, people get a little spoiled because folks, you just have to realize the housing market has recovered pretty dramatically in the past year. And you just can’t duplicate the deals you used to in any market. That just goes for everywhere. I don’t know, maybe Detroit, it’s still a disaster, in my opinion. Maybe you can get the same deal you got there a year ago. But you can’t in any of our markets. It’s just you have to adjust your thinking.
Let’s look at a property in Indianapolis. And here, this property is brand new – brand new property. Now before we do that, did you want to mention any highlights about Indianapolis as a market that’s been perennially interesting to us? I own several properties there and we’ve done lots of business there for many, many years; but maybe a couple of just highlights on Indi to refresh people’s memory, Molly?
Molly: Well as you know, Indianapolis never really saw the bubble or the burst that a lot of the other metropolitan areas saw. So, it’s been a kind of slow and steady marketplace without a lot of drama highs and lows. So, it’s always been a great place to invest. It also has a lot of education, health care and finance, plus it’s got great sporting events. They’re bringing in a lot of business. So, it’s a slow, steady, great opportunity city that’s just right in the center of the country. It’s a wonderful area.
Jason Hartman: Yeah, crossroads of America. One of the things I love that you just said, you said it doesn’t have a lot of drama. So, I guess folks, this might be the way to think of it when you’re investing. When you invest with our philosophy, any town that wouldn’t make for a good reality show is probably a good place to invest. Not a lot of drama, as Molly says. I love that. It’s a pretty good way to look at it.
This property without a lot of drama is just over 1600 square feet and looking at the pro forma here, priced at $1049. And Molly, how much do you need to put down on this property?
Molly: Total cash invested with closing cost and 20% down is $21,819.
Jason Hartman: You kind of cut out there for a moment. It’s $21,819. And go through the rent projection and the cash flow.
Molly: The rent projection is $1,150 a month and so that gives you a net cash flow of $338 a month or $4,056 a year, which is huge.
Jason Hartman: Based on this pro forma, the cash-on-cash return here folks, 19% annually with some pretty conservative assumptions in the pro forma. By the way folks, you can just go look at these pro forma and see all of the numbers. There are dozens of numbers on them at www.JasonHartman.com in the property section. But 19% cash-on-cash. Property drops in value to zero, maintain the income and expanse you’ll get the cash-on-cash return.
But the other thing to note is say the property, in terms of an income and expense ratio perspective, only performs half as well as projected. Your cash-on-cash return would be 9.5% annually and that’s before you get any tax benefits or any appreciation benefits or anything else. That’s just cash-on-cash. The most simple form of measurement. And Molly, the overall return on investment projection there is?
Molly: 44%. And this is a brand new home, a brand new construction. It will be completed right after the first of the year.
Jason Hartman: 44% annually. Fantastic! Let’s move to the greater Atlanta metro area now and let’s look at a property there and a couple of highlights. We had our Atlanta property tour just about a little over a month ago, I guess it was. But Molly, what are some of the highlights of this market and then let’s look at a great property there.
Molly: As you know, it’s one of the fastest growing metropolitan areas in the United States. It’s headquarters to Coca Cola, AT&T, and Delta Airlines. And 75% of the Fortune 1000 Companies have some sort of a presence in the Atlanta area. And we had a great response, as you said, on our road tour and it’s a booming area. It’s a wonderful, wonderful area.
Jason Hartman: It is. And this is one of the markets folks, that’s really hard to get inventory in. But here is a property and I love the looks of this property, by the way, that we have. This one’s in Stone Mountain; really, really nice looking house. Not that looks are the big deal here. What we’re looking for is returns. But I will admit, it has some impact, no question about it. It’s kind of like saying when someone’s trying to fix you up on a blind date. Well, she has a great personality.
Molly: Oh my God! You just took the words out of my mouth.
Jason Hartman: Oh really? Okay, so this one is just over 1700 square feet and $44 per square foot. Molly, go through some of the other details here.
Molly: It’s $76,900. Total cash invested is $19,840. The gross estimated rent is $850 a month which gives you positive cash flow $237 a month or $2844 per year.
Jason Hartman: So, almost $3000 per year in positive cash flow based on the pro forma here. Again, assumption is very conservative and cash-on-cash return, 14% annually. 14% annually cash-on-cash. What’s the projected overall ROI, Molly?
Molly: 31%.
Jason Hartman: 31% annually. Fantastic! So let’s now talk about St. Robert, Missouri, a market in which I own. We’ve done a lot of business there over the years. And this is like one of these totally under the radar markets that nobody knows. It’s got the big military base, Fort Leonard Wood and the numbers are great. It’s new construction. Molly, one of the things I’d like you to highlight here is the special financing opportunity. So if anyone has maxed out and they’ve got their maximum number of 10 Fannie Mae or Freddie Mac loans or they can’t do the sort of the conventional financing for one reason or another. In St. Robert, we do have some special financing opportunities, right?
Molly: We do. We have commercial financing which as you said, is a wonderful opportunity for people once they’ve maxed out those conventional loans. The way we usually work with our investors is that we put a program together so that they max out those 10 conventional loans first and then go in to St. Robert and purchase either duplexes or fourplexes with their commercial financing. And the reason we recommend that is because if you do commercial financing before you max out your conventional loans, that commercial loan will count against you, against this conventional loan even though it’s not a conventional loan.
Jason Hartman: Yeah, right. And you’re saying conventional in the sense that it’s underwritten by Fannie and Freddie. But what we call this, folks, that Molly just alluded to is mortgage sequencing. We just did that with one of your clients a couple of months ago. Well, we do it all the time. It’s really nothing new. But mortgage sequencing is very important. You may shoot yourself in the foot when you’re trying to build a big investment portfolio if you don’t do your mortgage sequencing properly.
And one of the things you mentioned Molly, is duplexes and fourplexes. And I think the reason you mentioned that is because those are four units and under. Those are residential financing in terms the way the banks look at them. However, you could do this type of thing with an eight, 10 or 12-unit small apartment building like I have there and do the same thing as well. So, just fantastic financing. I believe, 10 year is fixed, right Molly?
Molly: I believe so.
Jason Hartman: And at incredibly low rates; a little bit easier and more creative on the qualifying for these mortgages too because they’re underwritten with some common sense rather than just a rule book. So good thing there’s [interruption].
So Molly, let’s talk about one of the properties here in the greater St. Robert market. This is actually in Waynesville. And this is a duplex where you can get commercial financing, really good commercial financing. By the way, most commercial financing isn’t that great. We’ve got a special relationship in this market and financing is really good on a commercial basis, a common sense basis. But talk a little bit about this one, 2300 square feet. What else?
Molly: It’s two bedrooms, two baths on both sides. It’s $167,500. As you said, it’s brand new construction. Total cash invested is $22,336. So that gives you a monthly cash flow of $258 or an annual cash flow of $3,096.
Jason Hartman: And we’ve got your vacancy factor, your management fees, everything built into these properties. Here are the cash-on-cash return projected, 14% annually. And the overall return, unbelievably good. What’s the number, Molly?
Molly: 43%. Huge!
Jason Hartman: Wow! 43% annually. If it only goes ¼ as well as we hope, you’ll still be making 11% basically on your money. That’s just phenomenal. Anything else you’d like to mention, Molly?
Molly: We’ve got great properties, great areas, and great opportunities to invest. So, it’s a great time to be out in the marketplace. It’s a fun time to be in the marketplace because things are stabilizing and interest rates are still phenomenally low. And it’s time to be, as you say, an opportunist.
Jason Hartman: Yes, definitely be an opportunist and exploit the heck out of our situation with some good income properties. Basically, you’re a commodities investor when you’re doing this. You’ve bought these commodities, you financed them for three long decades with fixed rate financing. I mean, what a phenomenal opportunity. What a phenomenal time to be a real estate investor; really, really good stuff.
Hey Molly, thanks for talking to us about this today.
Molly: Thank you.
Jason Hartman: Hey everybody, before we go to our guest, I just wanted to make a personal announcement because many of you have known my cute little dog that attended many, many of our events including Meet the Masters event and Creating Wealth seminars and so forth. Unfortunately, he passed away recently and it’s been a very, very sad time for me. In fact, I don’t think I’ve ever, ever had such a sad week in my life after I lost Puppy. So, I just thought if I can read it just to let you know what happened before we go to our guest here. I’ll try reading what I posted on Facebook when it happened. If I can try not to get too chocked up about it.
November 4th, I said: Thanks to everybody for the kind wishes and prayers for Puppy. Unfortunately, he left us this morning at 5:00 AM. I adopted him from Orange County Animal Shelter on a rainy day over 13 years ago. I loved him like a son every one of the 4,962 days since.
So what happened? He’s been sick since Friday and visited his regular Vet and the emergency Vet twice where I finally had to leave him in the ICU at midnight. The Vet called and woke me around 4:15 AM saying it was probably my last chance to see him. So I rushed over and found him alive but in a comma and not able to breathe without the ventilator. I made the decision to stop his sweet little heart since there was virtually no chance of recovery. Such a sad day. He will be missed forever. And then later that week, the following Friday, I was wrestling with the decision as to whether to cremate him or bury him. I had three other dogs that I had in the past over the years and had buried at the Sea Breeze Pet Cemetery in Huntington Beach, California. So I did decide finally to bury him in Arizona. Much to my surprise, there was only one cemetery for pets in all of the Phoenix Valley. So, as you can imagine, it was rather expensive because they have the monopoly and no competition. Something we’ve talked about in the show many times.
And I just thought I’d read the memorial that I put on Facebook the day after his burial. You know, it really did bring some closure. And the last week, I felt a bit better, quite a bit less sad even though I, of course, miss him very much.
And I said on November 9th, I said: Puppy’s funeral is yesterday ending our 13- year plus earthly relationship. He was my companion for 4,962 days as we lived in five different houses, travelled to many places, outlasted six girlfriends, started 13 companies and outlived my three other wonderful dogs. Thanks for the kind words, thoughtful deeds and support. Friends have been saying that this will bring some closure. I hope so. This has been the saddest week of my life. I will love and miss him forever. And then I just ended with a quote by Anatole France that said, ‘Until one has loved an animal, a part of one’s soul remains unawakened.’
So, for any of you dog lovers or pet lovers out there, dogs or cats, I’m sure you understand. It’s a pretty hard time.
Let’s go to our guest who is Sean O’Toole with Foreclosure Radar, an interview that I recorded maybe about a month ago, maybe a little more than a month ago. And again, these interviews aren’t necessarily super time-sensitive. The ones that are, we push them to the front when they were about the election and so forth. We got those up faster. But this one wasn’t too time critical. It’s maybe about four to six weeks old, something like that, as I recall. So, we’ll go to that.
But I also wanted to remind you we have very few seats left for our Meet the Masters event which is coming up January 18th in Irvine, California. So be sure to register for that. We probably only have 10, 12 seats left for it. It’s been selling very, very quickly. Register for that right away if you’re planning on attending at www.JasonHartman.com and we’ll look forward to seeing you there.
And again, thanks to all of you who knew about Puppy and for all the kind wishes and sentiments and so forth. They are very much appreciated.
We’ll be back with our guest with Foreclosure Radar here in just a moment.
Narrator: Have you listened to the Creating Wealth series? I mean, from the beginning. If not, you can go ahead and get Book 1 that shows 1 through 20 in digital download. These are advanced strategies for wealth creation. For more information, go to www.JasonHartman.com.
Jason Hartman: It’s my pleasure. Welcome Sean O’Toole to the show. He is the founder and CEO of Foreclosure Radar, Foreclosure Truth, and www.ForeclosureLearningCenter.com.
Welcome Sean, how are you?
Sean O’Toole: I’m doing great. Thanks for having me.
Jason Hartman: My pleasure. So you’re up in Northern California, it looks like, right?
Sean O’Toole: Yeah. We’re actually based out of Truckee in near Lake Tahoe.
Jason Hartman: Fantastic! Your site is very well-known. I learned about it several years ago. You basically help people track the foreclosure market and see what’s going on as foreclosures are going through the process. A lot of realtors, investors, and government people use the site.
Sean O’Toole: Yes, absolutely. We’ve really differentiated ourselves by not only tracking the foreclosure notices but also what happens at the auctions each and every day.
Jason Hartman: Tell us a little bit about it. You track from the point of a Notice of Default, an NOD, or do you track delinquent payments even before it gets to NOD stage?
Sean O’Toole: No, we do track the public records specifically the Notice of Default in the states where that’s applicable, Notice of Trustee’s Sale, and then the Trustee Deed after the sale. And then we also track what happens down on the courthouse steps. So, is the sale postpone to a new date, was it cancelled, or was I sold? And if it was sold, who did it sell to? To an investor or back to the bank which has lots of uses especially on the back of the bank where they can see an early heads up on coming REO’s.
Jason Hartman: Tell us your thoughts on the foreclosure market. Everybody is concerned about the inventory hangover, you’re constantly hearing that phrase. Some say it’s not as bad as others say it is. Give us some guidelines on that.
Sean O’Toole: They’re both right, I think, is the big answer. We still have, in this country, far too many people underwater in their homes and delinquent in their payment. That said though, they changed the rules really after the banking collapsed in September 2008 in two ways. One, they changed the accounting rules to something from Mark-to-Market to Mark-to-Model which allows the banks and various investors to leave these assets on their books at inflated valuations. And then the other thing was is they changed the regulatory framework such that banks and services weren’t required to quickly foreclose on non-performing assets, instead could leave them on their books for an extended period of time.
Ever since then, we’ve seen a steady decline in foreclosure activity despite the fact that we still have this large hangover shadow inventory as some people like to call it.
Jason Hartman: There’s still a problem. No one will deny that. Are things getting better?
Sean O’Toole: It depends on what metric you want to use. If you’re looking at home sales and home prices, your very tight inventory; strong demand, multiple offers on properties in many markets. So some people would say that’s a sign of strength. And we’ve seen some price increases which some people would say is great. On the other hand, we have trillions of dollars of excess mortgage debt that are still left from the bubble years that were really making very little progress against. And we’re likely to be dealing with lots of folks in kind of a negative position in their home for many years to come which I think hurts the economy. And we’ll probably have some impact on housing market as well.
Jason Hartman: Are we going to inflate our way out of that? If you look at a market like Phoenix where you see prices up about 30% from the bottom, it’s pretty amazing that that’s happening in this type of economy. So the question would be – my company does businesses in many, many cities across the US. The question would be: did the down market, did it overcorrect, was it really not quite as bad as we all thought where price is not maybe sticky enough as things were dropping? Or is this a temporary blip? Many people are accusing the banks of holding so much inventory and not dispersing it into the market because they say they’re doling it out slowly so as not to hurt the market. What do you make of all that?
Sean O’Toole: I think it really depends on the market. There’s no question that some markets – the Phoenix area, Stockton, California, Las Vegas – overcorrected. Those saw a lot of investor interests and first-time home buyer interests because they were amazingly low prices that provided significant yields. Those yields have now begun to normalize and so some say we still have low inventory and that’s what caused prices to go up. I think it was just more of a yield normalization. And by that, given rent, you can get a decent return on investment. Some of these areas, the return on investment at the bottom got us as high as 15%. Now, it’s back in the 6%, 7% in many areas. Given that it has been investor demand primarily, I don’t see these yields going a lot lower.
So again, it depends on the market but I think we’ve seen most of the bounce back in many of these markets. And I think looking at return on investment is a good way to judge where you currently are. On the other hand, we saw some markets not fully correct and they probably still have some more to come back down to reasonable affordability levels versus rents.
Jason Hartman: Right, right. And I would certainly say California is one of those markets. But when I talked to my real estate friends in Southern California, for example, they say the market is booming. And they don’t have enough inventories anymore. What a massive change! And believe me, you’re in California, I’ve lived there virtually all my life. I am not bullish on California by any means but it just sort of shocking to get this kind of reports that multiple offers, people standing in line, builders holding auctions. I mean, what is this, 2005? This is crazy.
Sean O’Toole: Yeah, no kidding. Certainly in places like San Bernardino, Riverside, housing is a generation of lows in terms of payments as a percentage of income. So, affordability is very high in some of these areas right now. You know, California is really a tale of two markets. One is those markets – San Bernardino, Riverside, up north Sacramento, Stockton. And then you have on the other side Malibu, San Francisco, Newport Beach, Palo Alto. Those are two radically different markets.
Jason Hartman: And you know what tells me, by the way? That’s interesting that you bring up that tale of two markets because that tells me that we are again, it’s another way to witness the destruction of the middle class where the richer doing okay. I’m not saying they’re getting richer. But they’re weathering the storm pretty well, in most cases. And these poor areas are just not – they’ve just been very, very beat up. I guess we’d call them former middle class areas, maybe.
Sean O’Toole: I don’t think the story is completely [crosstalk].
Jason Hartman: It’s just mass of oversimplification. I’ll be the first to admit.
Sean O’Toole: No, no. But I think you’re on to something important but I don’t think it’s completely rich versus poor in terms of income. There is another difference too which if you look at some of those wealthier cities, the coastal cities, et cetera, you see a lot more property in those cities that have been in people’s hands for a much longer period of time. There’s less turnover. There’s also far fewer new homes during the period of time that the bubble occurred. And they were much more stable in terms of amount of equity or one could say wealth in real estate. And so there was less need or turnover and there was less foreclosures in these areas simply because you had fewer people that were as highly leveraged as you had in the booming subdivisions that were being built up out in the cornfields.
Jason Hartman: So fewer adjustable rate loans, fewer subprime mortgages. I look at that as like I look at some areas of Newport Beach and Corona Del Mar where the homes have been in the family for a long time. And so, that’s certainly an aspect of it. That’s an interesting one.
Sean O’Toole: We even see that here around Lake Tahoe. But Lake Tahoe is decidedly, obviously there’s some very wealthy folks but the majority of people that live here are very decidedly middle class.
Jason Hartman: And a lot of service industry too.
Sean O’Toole: Lot of service industry.
Jason Hartman: What else would you tell us and what else should we know about what’s going on out there?
Sean O’Toole: I think the big thing is we just continue to see story after story of saying there’s going to be a foreclosure wave. I eluded this right at the beginning but the fundamentals have changed versus the 1990’s last foreclosure crisis where servicer banks were required to get non-performing assets either off the books or performing. It’s no longer true. And you add mark-to-model accounting on top of that, there’s a lot of incentive to what I call, extend and pretend.
Jason Hartman: Kicking the can down the road, tell us about extend and pretend. It’s interesting.
Sean O’Toole: Everyday we hear, Obama has asked banks to hold off on foreclosures until after the election. You know, he doesn’t have to ask. Those two rule changes are more than enough for the banks to follow the lead and do what is certainly in their economic best interest. Not foreclosing especially for a servicer is far more profitable and that they could continue to collect servicing payments on non-performing loans.
Jason Hartman: That’s interesting you bring that up because that really is a conflict of interest, isn’t it? They’re still getting paid for servicing this bad loan and the servicer is the one rather than the actual lender, in most cases, dealing with the person who is defaulting. And so, they may be fielding these phone calls but their incentive is to just let it go, right?
Sean O’Toole: Let it ride. And it’s certainly not to foreclose or foreclose quickly. So, I think people have this ‘banks want to steal our homes’ thing. Anybody that’s on that path is I think completely out of their mind because it’s certainly not the way the game is set up.
Jason Hartman: Let me just maybe take a little bit of issue with that for a moment, if I may. I agree with you that it’s not set up once you have a loan but if you back up and look at the much broader picture, a lot of people and this is almost bourse on conspiratorial that – and you look at like the history of the investment banks on Wall Street, Goldman Sachs is a great example. They had an article in Rolling Stone Magazine that got a lot of play, I’m sure you probably read it or heard about it a few years ago, accusing Goldman Sachs of being the giant bubble machine which is literally like creating cycles in the market; and of course the Federal Reserve and Central Banks in general. But the run-ups in prices with easy money policy and then trading these huge pools of fake loans around the world and the game of hot potato and greater fool, maybe there’s something to that. Do you agree?
Sean O’Toole: That trick exists to turn money and take a percentage of it, whether it’s going up or down. A lot of people think that they’re there to help people make earnings over time. But I think that’s absolutely BS. I mean, they did a churn. And bubbles create churns. Absolutely, they’re doing their best to create that churn and make fees off of it. But that’s always been the case.
Jason Hartman: Right, right. But when they fill it up with a bunch of junk debt and they sold the same loan 33 times in 33 different pools and it’s not even really there and no one can produce documents. That’s not legitimate behavior, is it?
Sean O’Toole: No, it’s not. But I guess there’s a question of who’s really to blame. They’re going to act in that way they have since the 1800’s so which is why things like the Glass-Steagall Act and other things exist. We, as voters, have become awfully complacent. Glass-Steagall is repealed back in 1999 or 2000. And where is the outcry from voters to put that back in place?
Jason Hartman: Yeah, there’s just a pretty minor outcry. I agree with you. Okay. You were saying, the extend and pretend, anymore to that aspect?
Sean O’Toole: I just think that people really need to understand that that’s the case. Shadow inventory absolutely exists but it’s not going to show upon our doorsteps, I don’t think any time in the near future. I don’t see any change coming even if we see Republican President Romney elected, I think this policy of extend and pretend will stay the same. His announced housing policy is, “We should offer more foreclosure alternatives.” Well, unless that’s backed up with, “And I know where to get the $2 trillion to help all those folks that are underwater,” it’s meaningless. Which I’d say for the current administration as well, so a completely non-partisan view there but there are no ideas coming out of Washington at all.
Jason Hartman: I know. It’s always two sides of the same coin unless you have Ron Paul, it’s the same game to one degree, a lesser or a greater degree.
Sean O’Toole: That _____ [0:43:00] some big differences fast.
Jason Hartman: Yeah, listen, I’m a big fan. In fact, I’m looking forward to having him on our show pretty soon. I think we’re going to get him so that’s good.
Sean O’Toole: It could be far uglier than anyone imagines but would put us back on the right track.
Jason Hartman: Yeah, it would be a painful pill to swallow but we’d take our medicine. In a few years, we’d probably be in really good solid shape again. That’s what I would kind of view that as.
Let me take a brief pause. We’ll be back in just a minute.
Narrator: Now is your opportunity to get the Financial Freedom Report. The Financial Freedom Report provides financial self-defense in uncertain times. And it’s your source for innovative forward-thinking investment property strategies and advice. Get your newsletter subscription today. You get a digital download and even more. The price is only $197. Go to www.JasonHartman.com to get yours today.
Jason Hartman: But overall, I know that it’s a mixed bag and the country is large and diverse as the United States. There are really about 400 housing markets. It drives me nuts. My hair just curls when I’m at CNBC or reading The Journal or something like that. I hear these experts talking about “housing market” because I can’t figure out where the heck that is. But you know, so it’s obviously a mixed bag. And I really divide it this way, largely of course, there are many other factors. But I divide it into housing markets with highland values and housing markets with free or very cheap land where investors, at least, are buying below the cost of actual replacement or construction. I know our clients are and I know I am personally. So, it’s really like the country is a tale of two markets in that sense maybe. And there are more [crosstalk].
Sean O’Toole: Truth in foreclosures as well. We have the non-judicial foreclosure market and judicial foreclosure market. They’re acting very differently.
Jason Hartman: I’m glad you brought that up. Tell us about the differences – non-judicial and judicial.
Sean O’Toole: The non-judicial market, because it doesn’t require the court’s involvement, a lot of people say it doesn’t give people a chance to get their say or whatnot. That’s not true. That’s why there’s a long notice period and plenty of time for people to intervene but it kind of moves more quickly. And if you look at Arizona, it’s one of the fastest moving foreclosure markets and I think they’re getting through their problems there faster results. Some of the other states have put up more legislation kind of slowing the foreclosure process and by doing that, slowing the market’s recovery.
But the judicial process where every single case goes through the court system is complete nightmare. It’s going to take far longer for those states to work their way through the system. People talk about foreclosure mills like they’re a bad thing. But they’re pretty necessary once you start thinking about the volumes. That has led us a lot of controversy around things like robo-signing but at the end of the day, the computer industry is a large part of the US economy and we trust our bank accounts to computers, we trust just about everything else in our lives to computers, insurance policies and everything else. And the idea that we can’t trust a Notice of Default that was generated by a computer and instead it has to be attested to by some $12 an hour employee to verify all the facts and sign with personal knowledge, it’s kind of idiotic. And there’s been all these distractions in the foreclosure process that have really slowed it down and I think slowed our recovery down. And I think some of them are completely nonsensical.
Jason Hartman: I would certainly agree with you philosophically. The same thing when it comes to government policy because the government policy we’ve had is basically put the fire out by throwing more gasoline on it, printing more money. But I think if we take the hard medicine, like we mentioned Ron Paul a few minutes ago, we would speed our way out of this problem. All we’re doing is extending and pretending, really, to use your phrase. But are you really, are you kind of like defending the MERS system, for example, when you say that?
Sean O’Toole: The MERS system made complete sense. The recording system in the United States is completely broken. I track public records. I start at the County Recorder’s Office. We have 3250 roughly county recorders in the United States. Each has their own systems implemented. The San Francisco County Recorder, for example, which came out and said a lot of foreclosures are illegal, which is absolutely a terrible analysis. But they tend to run two to three weeks behind from the dates something’s recorded. You can see it. Foreclosure sale legally happens before they even have the notice posted in their system. Recording system in the United States is completely broken. And yeah, I completely understand why the banks tried to build a system outside of that for tracking things as they change hands.
Jason Hartman: I get that you understand and agree that there should be a better system. But the system we have, there are flaws. I’ve had people talk about MERS on a show and give examples of these clouded Title issues and just huge problems with the system – wrong borrowers, wrong properties. I don’t know that I can’t even think of all the examples frankly.
Sean O’Toole: I think one thing that’s certainly common to this is the recording process – the entire process, from title all the way through are subject to errors. I’ve personally bought properties and received Title and they made a mistake and the APN was off a digit. I want to go sell it and had to resolve it. So these wrong info on foreclosures and the rest, it’s human nature. No one’s perfect, we’re not perfect. People make typos, Title companies sometimes accidentally grab the wrong legal description and attach it to the Deed of Trust which is why foreclosure processes throughout the United States provide ample time for people to say, “Wait, this isn’t me. I’m not in foreclosure. I’ve made my payments.” And there’s plenty of opportunities for those folks to come forward.
What I think is ridiculous is you get these anti-foreclosure folks using a handful of red herrings, errors do happen and then implying that all of these foreclosures are these other issues. And that’s nonsensical. Look, as many people are underwater, as many people are delinquent, we should be having a large number of foreclosures. And 99 out of 100 are completely valid. The notion that because the Deed of Trust didn’t change names at exactly the same time as the note or there was some issue with the person who originated the note didn’t transfer correctly to the current holder of the note. The law has a long standing concept to brand unjust enrichment which is if Joe lent you money and then Jim buys that note from Joe and there’s some problem down the line, it doesn’t excuse Joe who borrowed the money from having to repay it. There’s nothing in the law that suggests that anywhere, no matter what. Small mistakes were made or even large mistakes were made in the way the documents were handled.
If that note gets burned up, there are cases many, many years ago where people tried to burn down the bank that held the note with their debts so they wouldn’t owe the debt anymore. And the law long, long, long ago said, “No. Even if the note’s burned up, so long as you can show reasonably that you made the loan, and the other person didn’t buy the house free and clear, we’re going to give you the benefit of the doubt. If you can show that you put the money out, and the person who owns the house can’t show where they came up with the money, we give you that benefit of the doubt.”
So I realize people are pissed off with the banks. I realize people are pissed off at Wall Street. There’s no doubt they’re responsible for this bubble. There’s no doubt they’re responsible for repealing Glass-Steagall. But setting aside decades of law just because we’re angry, isn’t the right solution. We should be holding the banks accountable for these things, we should be holding politicians.
Jason Hartman: Well, obviously. No more career politicians, that’s my first thing. But hey, I wanted to ask you and this is why I kind of went on in tangent here a bit – your outlook. We started talking about the tale of two markets and talk about the land values and then the traditional versus non-judicial foreclosure markets acting differently. But what just generally speaking, I’d like to just kind of get your outlook on things and we’ve touched on it but do you think we’ve hit bottom? I know that’s a loaded question so feel free to dice it up. But I’d like to get your feeling because you see this first hand and you kind of have a tone, notice of tone of the sales and the pipeline and so forth. So, I just want to kind of pass you that general question.
Sean O’Toole: Big picture, I always look to the income approach to evaluation rather than the comparable approach _____ [0:52:37] there are multiple approaches to appraising properties. And if you look at the income approach, so what is rent for? And if I take those rents minus expenses, what kind of return on investment do I get? Just think about the overall return, not assuming leverage, not assuming that you’re borrowing anything to buy that house. And look at that. And then think about what the reasonable return is for that area.
If it’s prime ocean front property in one of the most economically strong areas of the country, you’d expect a pretty low return on investment. Something down to where treasuries are, a couple of percent return, right? If on the other hand, it’s in an area where you’re likely to get shot in the drive-by shooting, I personally would want a pretty high return on investment, maybe 20% or more. And so if you think about that and then you just think about and compare it to other investments, right? And then you think about, “Is this particular area, this market that I’m in, is it economically sound? Does it have a good base of employment? Is employment increasing or decreasing?” So, what’s that future look like? And I think where you can do really well in real estate is when you buy into an area that is economically strengthening or incomes are rising and you’re starting from a point where you have a good return on investment to start, I think you will always do well in those areas. And you think about a place where industry is declining like Detroit…
Jason Hartman: I was just going to mention the poster child for political disasters and union disaster is Detroit. Yes.
Sean O’Toole: It’s exactly the opposite. It’s an area that only a bulldozer will fix. And I think it’s a pretty simple equation at the end of the day. Look at that all right, compare it to what you’d get on a return elsewhere and then look at the local economy, is it improving or declining?
Jason Hartman: Good stuff. Give out your website, if you would, Sean? You have three of them. Do you want to just talk for a minute about those three websites and what you’re doing with all of them?
Sean O’Toole: So, www.ForeclosureRadar.com is our primary website where our business is located and it’s targeted towards realtors, investors, government agencies. We track all the foreclosures in California, Arizona, Nevada, Washington, and Oregon. Not only just the public records notices but the auction outcomes as well. And then we also have a blog called www.ForelosureTruth.com. And on the blog, we put up our latest foreclosure reports and from time to time, interesting analysis. For example, we were the first to see a divergence between how long it was taking to foreclose on low-end homes versus higher-end homes and saw that banks were more likely to foreclosure if you had equity or if you had a lower-priced home and are more likely to postpone or delay.
Jason Hartman: That’s interesting. Can I comment on that? I’ve always said that equity makes you a target for foreclosure as well as litigation, other problems. So, that’s why I love the idea of equity stripping. I love investment property but I like it leveraged. Oddly enough and it’s countering intuitive of most people think, more equity makes you safe where I think less equity in many ways makes you safer. And just look at whose getting all the bail outs? The people with no equity or being underwater.
The other thing though about that lower-priced and higher-priced properties, one possible aspect to that is not that the banks are playing favorites in foreclosing on lower-end borrowers sooner because I’m sure, in our politically correct society, someone will make and probably has made a big issue of that, but it’s the wealthier people, they know how to fight the fight. The might hire a lawyer, they might hire a loan modification firm, they might do it themselves. _____ [0:56:50] with the bank possibly whereas the less sophisticated person won’t. Is that a reasonable thing to say?
Sean O’Toole: That’s a possibility. We’ve also theorized that we know that banks actually are more likely to own the higher-end loans where [crosstalk].
Jason Hartman: Ah! Sell them off. Yeah. Good point.
Sean O’Toole: So, it also may have something to do with needing to maintain their capital ratios and be able to pass solvency test.
Jason Hartman: In other words, what you were saying is the higher-end loans, the jumbo loans or even the super jumbo loans are left in the banks’ portfolio. They haven’t sold them off to another investor.
Sean O’Toole: It’s more likely.
Jason Hartman: Very good point. Okay, go ahead.
Sean O’Toole: On the being overleveraged thing, there’s an old saying that if you owe the bank a little money, the bank owns you. And if you owe the bank a lot of money, then you own the bank.
Jason Hartman: That was probably a take-off on the J. Paul Getty saying where he said, “If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” It’s kind of funny.
Well, good stuff. Did you explain two or three of your websites?
Sean O’Toole: We just have the two.
Jason Hartman: So, there’s Foreclosure Truth, Foreclosure Radar, and another one.
Sean O’Toole: No, the Learning Center is part of Foreclosure Radar.
Jason Hartman: Okay, got it. Good. (Top image: Flickr | g7ahn)
The Jason Hartman Team
Transcribed by: Renee
