A friend of mine just email me the attached graph.

To complete a lenders foreclosure process the bank must go to an all cash auction at the court house.  The opening bid is typically simply the loans outstanding balance, but since 2008 the banks have been “dropping” their opening bid to sell the asset directly to an investor.

Purchasing homes at trustee sales come with a lot of risk:

• You buy the property with no warranty
• You are responsible to get the occupant out of the house
• You are responsible for back taxes and possibly other liens

According to the chart in April buyers paid 92% of retail value at the trustee sale.  On top of paying 92% the buyer has to catch up taxes, remove the occupant (usually by paying cash-for-keys) and repair the property. Paying 92% essentially means the buyer will have a total cost over market value.

Clearly these are landlords… but how long can this last?

The stock market is at four year record levels, manufacturing is coming back and we are seeing a lot of positive press on real estate.  Real Estate has caught negative press for over 5 years now, it seems hard to believe that we are that far along but 2007, 2008, 2009, 2010, and 2011 have all passed.

Warren Buffet recently said, “If I had a way of buying a couple hundred thousand single-family homes I would load up on them.”  Every day we learn of a new hedge fund that has plans to buy 100 million plus in single family housing.  From a guy on the ground floor, like me, I have really noticed there really isn’t much inventory out there and everything that does make sense is being chased by tons of bidders.

All this news doesn’t mean the banks aren’t sitting on a ton defaulted loans, but we’ve been talking about that since 2008.  I guess the real question is, how in control of the inventory are the banks/government?  Have they limited the supply to heavily?  Will they over correct and bring on too much inventory?

I have heard the average landlords last two years, I wonder how many people that seize the opportunity the news is talking about can handle being a landlord? I have more questions then answers, on the next couple of years, but I can say I am glad we started loading up on rentals in 2009.

Do you think 2012 will be the year that real estate starts going up again?  Give me your opinion in the comments!

Often times people ask me if my typical offer is a certain percentage of list price.  The answer is it depends.

House #27 taught me a lesson I will never forget.  It was listed at $63,000 and in superb condition (more or less ready to be rented).  After looking at it, I told my partner I thought it was a waste of time to make an offer as an owner occupant would pay a lot more.  I called the listing agent to see if he would represent us and he basically said for a $500 commission it was a waste of his time.  We sent in our own offer just above list price and three days later a highest and best request came.  We normally don’t go up much, but we decided to offer just over 73,000.  Two days later he called and said the bank had accepted our offer.  I asked him some questions and he said, you guys were the highest offer by over 10,000.  I was thinking “oh crap, what did we miss?.”  Apparently, we didn’t miss anything, it appraised as-is for 130,000 and we got a private loan for more then our total cost.  Two years later it is still a great rental.  There is nothing wrong with getting paid to buy a positive cash-flow rental.

House #79 is another example of not being worried about the list price.  This house was a total mess.  The bank originally had it listed at 185,000.  We sent in an offer at 110,000.  The bank lowered the price to 165,000.  We sent in an offer at 110,000.  The agent started asking us questions (proof we had seen the property, proof that we were capable to make the repairs) and after figuring out all the issues we ended up agreeing to buy the property at 100,000.  That is 60% of list price.

As you know your market, you will know the number that will work and not be as concerned about list price.

I try to buy a lot of houses and every so often I think I am pretty close and am disappointed to hear the dreaded No from a seller.  Sometimes they are less polite and use words like: “cheap”, “crazy”, “wasting my time”, etc.

Here are some of the things I remind myself when I hear no:

This is a Numbers Game

You are not going to buy every house you offer on.  But if you stay in the game long enough and make enough offers you will eventually get to a Yes.

There is Lots of Inventory

The market is big.  There are a lot of distressed sellers right now.  Don’t worry about the deals you miss, focus on the things you can control.

No can be Temporary

The percentage of escrows that don’t make it to the finish line is substantial.  If the Seller picks another offer don’t give up on the property.

Investors are Required

Owner occupants cannot buy most of the stuff I go after.  My job of revitalizing a neighborhood is required and should be profitable.

Be Relentless

Persistence pays.  Keep at it.  You will hit slumps, but you can only get out of them if you don’t give up.

The process of buying should be a math equation.  If you normally get 20% of what you offer on and you need to buy 5 properties a month you need to make at least 25 offers on properties in a given month.

I have heard widely varying reports on the amount of foreign buyers snatching up real estate in America.  The National Association of Realtors (NAR) recently released a report based on the 12 months ending March 2011.  8% of all sales where from international buyers.

Foreign Buyers definitely have their favorite states.

32% of them bought property in Florida

12% in California

9% in Texas

6% in Arizona

These numbers don’t really surprise me.  I thought Arizona might have been higher…

62% of these purchases were all cash sales. That sure brings some foreign money into our economy.

NAR also asked what they intended to do with the properties:

37% for primary residence

28% vacation house for personal / family / friends use

16% residental rental

13% vacation home and rental property

I would have guessed a lot more of the purchases were for investments.  65% are for completely personal usage and 13% are for vacation houses (personal and to rent).

What countries these investors come from…

31% North America

26% Asia

11% South America

3% Middle East

3% Africa

2% Central America

Nothing shocking here, I would have guessed the Middle East was higher, but maybe the political climate hampers that.

Every so often when buying a new property the escrow officer will email and ask me for a document called a Resolution to Purchase.  I said that I would provide one, I had a general idea of what they where after, but I had no idea what it specifically need to say and what was required.

After consulting with Google and looking around a bit I found a general idea of what they should include.

• the address of the property, in question
• the purchase price of the property
• the authorized parties signature

This should work just like any other Resolution in your corporation and go in your corporate document folder, or log book.

To make your life easy, I have uploaded a blank copy of the wording I use.

You can download it here.

Some escrow officers will also ask for this if you are refinancing or selling a property through your company name.

I get quite a few emails with visitors asking me about earnest money deposits and real estate owned properties.  Here is a good Frequently Asked Questions for bank owned houses and earnest money deposits.

How do I provide the Earnest Money Deposit with the initial offer?

Here is the way we do it.  With every offer we have a scanned copy of check written out to “___________ Escrow.”  The idea is, if the contract gets accepted you can just take the check and write the name of the escrow company agreed upon.  So after the fact you’d squeeze in “ABC” before the word Escrow.

What amount of earnest money deposit should I provide?

There is no correct answer for this.  It depends on the price range of properties.  As an absolute minimum it should be $1,000 (for bank owned properties).  Another rule of thumb is for cash transactions a minimum of 10% of the purchase price is requested.  We usually do $5,000 or $10,000.  If the market you work is not very competitive you can probably get away with less but remember this portrays how serious you are as a buyer.

Who holds the earnest money deposit?

I do not provide the physical copy of the check, just this scanned copy with every offer.  Every so often agents will request a physical copy of the check to hold in their office, or sometimes they even want a cashiers check.

Who should the earnest money deposit check be made payable to?

See my above example, we typically make them payable to”___________ Escrow.”

Will a $1 earnest money deposit work?

A lot of gurus suggest using a $1, $10, or $100 earnest money deposit on all transactions.  This is especially true for people who write hundreds of offers a day.  DO NOT DO THIS WITH BANKS!  This will immediately show you are not serious about buying the property and you are not confident in the research you have done.

Is the the earnest money deposit refundable?

In most cases, YES.  Unless you specifically remove all contingencies in your offer you have X period of days to do your due diligence on the property.  I am sure every state is different, but I believe in California you have 7 days (review the CAR form).  Be careful though, most banks issue addendum that heavily modify the Association of Realtor default contracts and sometimes they completely remove your due diligence.

When will I have to provide the earnest money deposit?

Most banks issue an addendum to the contract you sent to them outlining additional terms and conditions.  Once you sign and agree to this contract you usually have to provide the earnest money deposit.  Most escrow companies will request a cashiers check in cash transactions.  So you will have to go the bank and get one (cashiers check usually guarantee funds are available).

What should I do if I do not have any money for a earnest money deposit?

This is a tough question, you can either focus on dealing with other segments of the market (private party sellers, probate sellers, etc) who are more flexible on the deposit.  You could also partner with someone who will provide the deposit for you or save up.

I would recommend you do not try to “fake” that you have the funds, if you cannot deliver on your promise it will ruin your reputation and believe me banks keep track of agents/buyers who do not perform.

Sunday October 11, 2009, California Governor Schwarzenegger signed the Buyer’s Choice Act, Assembly Bill 957, into law. The new law prohibits owners (typically banks) of foreclosed properties from forcing California homebuyers to use a particular title company, Escrow Company or other real estate service provider. The Buyer’s Choice Act requires that a disclosure notice be provided to buyers informing them of their rights to choose their own real estate services companies to close their transactions.

I was pretty excited about this law passing last year.  Basically, when we first started buying the banks would force us to use their escrow companies.  Most of these companies would do a terrible charge, charge huge fees, take a long time and just be unpleasant to deal with.

The banks found a pretty simple way around this.  In California, the standard practice is for the Seller to buy title insurance and pay half the escrow fees.  To get around the law the banks basically say you can pick who you want, but if you do pick you have to pay ALL of the escrow fees and for your own title insurance.  That basically boils down to $800 – $1,500 per transaction, so for the most part we end up letting the seller pick.

Some tips for working with a new escrow officer:

• be polite and organized
• read all emails and instructions carefully
• most escrow officers prefer email or electronic communication, but if something is going slowly or wrong it is best to call and call often
• communicate when you are hoping to close and time lines as early as possible
• oftentimes a small group of escrow companies have the REO accounts, you’ll see the same names coming up, so don’t burn any bridges

ServiceLink is one of my least favorite escrow companies. They are a national company that has a corporate office in Pennsylvania and I have found they have been really hard to work with.  I found their paperwork has been standardized for all states and really hard to follow.  I just got a 3 page email on directions of all the crazy forms they require.

We finally closed House #52.  This property fell out of escrow 4x, went to auction once and finally was sold to us.  With this purchase we helped the real estate get rid of one of their dogs (a difficult property), if we didn’t buy it, it probably would have been pulled and sent back to auction.  This should buy us a lot of future credit the listing office.

Basically the story is, the City has added a huge violation to the property.  The listing office and other Buyer’s have gone to the code enforcement officer and tried to negotiate the fine only to later cancel the escrow.  The code enforcement officer was eventually sick of the Seller calling and eventually refused to negotiate.  Our solution was to tell the agent we will make an offer subject to the fine and try our luck negotiating with the City.

To give some numbers, we bought the property at about 38% of ARV, the repairs would be 14% of ARV and the existing fine is 17% of ARV.   By my math, even if we have to end up paying the entire fine we would be at 69% ARV. Of course our goal is to negotiate the fine down.

Other investors have had some success negotiating with this City, so we are hoping we can go in.  We have two strategies:

First step, we will schedule a meeting at the property introduce ourselves as the new owners, explain our goals and see if the City is willing to provide a discount.  Hopefully, their goal is the same as ours, get the property repairs to an acceptable standard.

If that fails, we are going to hire a lawyer and have him dispute the fine with the City.  There is no real rhyme or reason on these fees.  So I am hoping we don’t have to attempt this strategy.  The last thing I want to do is pick a fight.

I will update you on how the progress goes.  But I am thinking this should be one of the better deals of 2010.

The times keep getting even more interesting for all the Real Estate Investors out there.  It seems like pending sales have crashed and retail buyers interest is slowing down.  Most investors haven’t got the memo and are still putting out tons of offers.

At this time we don’t have a ton of retail inventory and we are still getting calls and showings on what we do have.  I am thinking inventory is going to start going up, prices will stop increasing and probably slightly drop.  There will definitely be even more of a “two tier” market.  Entry level stuff, or stuff that cash flows probably won’t get hurt as bad as the middle class, to high end houses (300k+ for us in the Inland Empire).

Does this change our strategy?  Not really.  We are still happy to buy, probably going to lower our purchase prices a bit.

I think when times will really get interesting is December/January when the market is already pretty slow.  But who knows, by then the government could add some more incentives back-in.

Buyer’s agent seemed burned out right now, they sent in hundreds of offers for some clients and now they’re disappointed they couldn’t pull in the tax credit.