James R. Samsing's Real Estate Blog

The local markets I serve, Litchfield Park, Goodyear, Avondale, Surprise and Glendale, Arizona (West Valley Phoenix) have been some of the hardest hit areas in the nation. Many of our local communities have witnessed price drops in excess of 50% from 2004-2008. I field calls almost daily from homeowners who purchased a property in 2004-2005 and who are now more than 200% upside down! Dealing with sellers in this market has been depressing and difficult, and like many of you I have been longing to feel good about my market again.

However, recently things have started to "seem" different. Maybe it's just me, or maybe it's just my local market, but the last 30 days has begun to "feel" like productive real estate activity is picking up. I can't exactly put my finger on why I feel this way, but there are a bunch of silly little things I've noticed recently like regularly running into other agents with their clients at listings, or the number of business cards left on coffee tables.

Sure, I could point to a lot of recent positive statistics about home resales, low interest rates, and government stimulus programs. Or I could discuss the fact that most bank owned homes receive multiple offers in a week, and how it's becoming more common to see sold prices in excess of list prices on CMAs. Those are tangible proof of a bottom, right?

But I could also point to the wave of foreclosures on the horizon, the continuing international financial crisis, rising unemployment, blighted communities abandoned by developers...yada, yada, yada. Or I could just post a video about a former Wall Street executive delivering pizzas or driving a cab. 

But whatever the numbers, my gut is telling me something has changed. I believe in the idea that demand for residential real estate ownership is relatively constant, and that affordability and population demographics are the biggest drivers of appreciation. So perhaps when I see school bus drivers and Wal Mart employees buying homes that senior executives could barely afford 3 years ago, it sparks my instincts? Or maybe I remember commuter cities in Southern California during the mid 1990's when similar signs pointed to a recovery in those markets that had been decimated?

Or could it be that I just want to believe so badly that things are getting better that I have exaggerated little positive signs into macro economic indicators?  

So which is it? Has the real estate market finally reached a bottom? Is it beginning to level off? Or am I crazy and we are still skiing down a steep slope?

Then again, maybe I should stop worrying about it and just get back to work. I have a multiple offer situation to deal with on a bank owned home that just came on the market yesterday...

Search Foreclosures Here

I started investing in foreclosed properties in 1996. I can still remember the very first investment property I ever purchased. It was at a live auction of HUD homes located in the Inland Empire of Southern California. I had spent weeks investigating about 300 properties for sale and had narrowed my list to about 25 homes that I would buy if the price was right. I was 25 years old and in debt up to my eyeballs so I could afford the 25% down payment required for investors. I was planning on using credit cards to pay for improvements and make the house payment until I could repair and sell the property. But that didn't worry me because I was young, smart and going to be the next Donald Trump...

As it turns the auction was an incredibly intimidating place and I was scared to death. There were amped up auctioneers running around, pointing at people and shouting at the top of their lungs. I thought twice about bidding because I didn't want one of those sharks to come running over and hover near me. When the first of my 25 homes came up for bid, I was thinking of holding back and that maybe I was getting in over my head.

5 minutes later I was being ushered into an escrow room to sign paperwork for the $57,000 house I had just bought. I was young, inexperienced, and leveraged to the gills. But I was lucky, and in spite of many mistakes, I still managed to earn a small profit on that first house.

Today after years of investing in real estate I have learned much. And although markets change, there are certain universal truths about investing in real estate that don't. I have struggled explaining this during the recent boom years, when it seemed that I was always "raining on the parade" of potential investors seeking to earn easy money in a hot market. But today is a new world, and opportunity abounds for those willing to invest intelligently.

For those that are thinking of taking the plunge, here is my advice for investing in residential real estate; particularly foreclosures:

1. The "real" value of real estate is set by the marketplace. Unless you are sticking a gun to someone's head, chances are the price you pay for a home is close to what the house is worth in its present condition. Do not be fooled into thinking it is worth substantially more than what you are paying because if it was, somebody else would be buying the home for a higher price. And most definitely don't pay attention to what the home sold for 3 years ago. If I had a dime for every time a Realtor told a client "This foreclosure is a steal at $200,000...just 3 years ago it sold for $500,000!" Yeah and 3 years ago I was 20 pounds lighter, didn't have any grey hair, and thought owning stock in Fannie Mae and Lehman Brothers was a good idea. The point is to be realistic about the potential value of a home; especially if you are thinking of flipping for a quick profit.
2. Never buy a home with a net negative cash flow. EVER. And make sure you get your numbers right. Evaluate local rents so you are absolutely certain of the amount you can lease the property for. Assume that 25% of your gross rents will be eaten up by vacancy, maintenance and general tenant neglect. Don't forget to include debt service, insurance, taxes, association and management fees when adding up your costs. I've never understood why some investors are willing to lose money in the short term in order to gamble on long term appreciation! Would you buy a stock that required YOU to pay a dividend each month to hold on to it??? 
3. Stick to single family detached homes, with a minimum of 3 bedrooms, 1.5 bathrooms, and 1000-1200 sq ft. Avoid condos, townhomes, planned unit developments or anything with shared walls. There are three reasons for this. One, single family homes historically appreciate faster/hold their value better as a result of a larger pool of buyers who prefer a detached home. Two, condos and townhomes typically come with greater operational costs in the form of HOA dues lowering net cash flow. And three, investors are more at the mercy of the decisions of others when it comes to their investment. <<shiver>>  
4. Unless you are a licensed contractor, or Tim "Tool Time" Taylor, avoid major renovation projects. I know, you've seen all of those shows on Bravo and HGTV and think you can do the major repair and flip deals. But let me tell you from past experience that it just takes one big mistake about the cost to cure a property to empty your pocket book. Besides, in most markets today you don't need to deal with major renovation projects in order to find a solid investment opportunity.    
5. Buy the worst house in the best neighborhood.

So what exactly is my idea of a good investment opportunity in today's environment?

In the local markets I serve, Litchfield Park, Goodyear, Avondale, Surprise and Glendale, Arizona, we have an abundance of banked owned, government owned and short sale homes. A large number of them were built between 2000-2005, are located in newer communities, have relatively minor cosmetic repairs needed and can be rented for positive cash flow. An investor could purchase a home in these areas today for under $60K cash and rent the property for $800-$900/month. Or the investor could leverage, put 25% down, and still achieve a similar "cash on cash" return. Do the math. That's a 13+% annual return with below market rents! Hell, even if the tenant skipped every other month's rent payment (50% vacancy) the investor would still earn 6-7%. And that's without any appreciation in the value of the property.

I know there are a lot of "stung" investors out there who rode the recent real estate boom only to lose a large amount of money in the last 2 years. And I know that rising unemployment and general economic problems are scaring away many would be investors. But I can tell you from personal experience, now really is the time to acquire property in a sensible way that can offer exceptional returns. The market has finally shifted back in favor of the conservative investor...

Search Foreclosures Here

Far be it for me to disagree with the venerable Mr. Warren Buffet but I just about choked when I read his recent comments regarding mortgage lending and the housing crisis. In his Annual Letter to Berkshire Hathaway shareholders Mr. Buffet indicated that "home purchases should involve an honest-to-God down payment of at least ten percent." This paradoxical statement immediately follows his observation that "commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called upside down loans)."  So if foreclosures don't occur because of the absence of equity, then what exactly is the purpose of the down payment?

As a mortgage and real estate veteran of nearly 20 years, I am frustrated that the media continues to focus on low down payment and "liar loans" as the primary cause of the current housing crisis (with rising unemployment a legitimate 3^rd strike). I am particularly concerned that this misinformed analysis of mortgage defaults is missing key elements of risk and is shaping government lending standards (which now represent the vast majority of the mortgage market) in a way that is counterproductive.

For example, what benefit was derived by HUD's recent increase in the FHA 203B program from 3.0% to 3.5%? Does the government actually believe that a home buyer putting an extra .5% down payment is less likely to default? This while FHA still allows people to qualify with total debt in excess of  50% of their take home pay and with ZERO cash reserves. I guess HUD would rather have their borrowers put every last dime they have into a house rather than save a little for a rainy day...

Personally, I believe that zero/low down payment loan programs can perform at high rates under any market condition within the context of proper lending guidelines. These guidelines would include full income documentation, debt ratios in line with FNMA/FHLMC (28/36), A DISPOSABLE INCOME REQUIREMENT to ensure that borrowers have enough variable income to afford non-housing items, a liquid reserve requirement the equivalent to 6 months of housing payments, and mortgage insurance to provide 25% coverage for the lender. As a lender I would much rather have a borrower with a more solid capacity to repay and cash reserves rather than a consumer leveraged up to their eyeballs so they can put 10% into a home purchase.

But no, all I hear from business pundits today is that we should be requiring people to put more money down when they buy a home. Like 10% "skin in the game" is really going to make a difference in ANY declining market. Tell that to my neighbor who paid $800,000 for his house 3.5 years ago, is being transferred and is trying to sell his home for $320,000 today. 

Fortunately there are a few low down payment options still available. FHA offers $100 down payments on HUD owned properties in addition to their standard 3.5% down payment requirement on non-HUD listings (down payment can still be a gift). FNMA is currently offering 3% down payment loans with no mortgage insurance on its REO listings. And of course there are still "zero down" VA and USDA loans for those who meet the requirements.

The markets I serve, Litchfield Park, Goodyear, Surprise, Avondale and Glendale, AZ have a decent selection of HUD & FNMA REO properties that I can show to clients looking for a low down payment option, so it hasn't affected my business as much. But I can't wait for the day when sensible lending guidelines return and these programs will be more widely available.