Why NOT to buy in the USA?

[lumix]

Guys, great thread and tip my hat to your knowledge.
This is my first reply, so hopefully works out fine.
Perp, With your combined knowledge and positive attitude a creamy deal is sure to land for you. Appreciate you detailing your experience.

Without raining on the parade, I was reading some info regarding multifamily homes. I normally read through this site (excellent detail level and able to check past performance) to keep track of the US banks and bumped into this. IMO worth a read and hope it helps, Jason

" Reggie, FANTASTIC presentation.

CONUNDRUM: Single Family is deflationary at the moment but Multifamily pricing is in a bubble thanks to Fed’s flooding of liquidity (Greenspan on steroids); and the impact of artificial demand from single family foreclosures.

Quick History:

My company bought 9,500 apartment units in Arizona ($550M) during the last cycle (2004-2006). We sold our Phoenix portfolio (5,500 units) in June 2007 for a record price. Our remaining properties in Tucson were whacked when the market turned.

I have been sitting on the sidelines waiting to jump back into the market. I have not bought any properties to date.

Observations:

Single Family foreclosures have been extremely high in Arizona; one of the highest rates in the country. We are running 50k foreclosures per year minimum; there are 75-100k VACANT SF homes sitting in limbo that the banks won’t address due to ROBO signing issues and/or fear of selling at such a loss that they will cripple their puffed/fictitious balance sheets. SF homes built in the 2000 era are selling for $40/sf…..

Arizona is one of the unique states whereby the is a significant supply/demand imbalance of housing inventory. We built way to many homes in the 2004-2008 period. Not that many MF units but a ton of SF units.

The apartment market was on its *** until SF foreclosures took off.

We have only created 700 new net jobs year over year and our population has slowed to a trickle due to lack of jobs and people not being able to sell their homes in the states they typically migrate from. We lost 250k jobs between 2007 and 2010.

Apartment Net Effective Rents (NERs) are accelerating at parabolic rates now, thanks to the SF foreclosures. It is not job growth or population growth, statistically speaking. Foreclosed home owners are renting like crazy due to lack of credit.

By this time in the NER recovery, I would have bought at least 2k units. However, I have not pulled the trigger because of prices being paid.

My belief is that you only make big profits contrary to liquidity flows; meaning, during the last cycle, we purchased properties at 8% cap rates when debt was slightly higher and there were fewer buyers and on very depressed NOIs. We sold our properties after growing NOIs, and when cap rates compressed to 4%.

Right now it is very reminiscent of 2006 and 2007 when liquidity was running rampant. Buyers are posting non-refundable earnest money deposits at the signing of the contracts and closing for all cash in 20 days…$20-plus million properties.

Currently, I believe the buyers who are buying on 4.5-6% cap rates may be shocked when the bond markets get rocked and interest rates are forced up. The increase in interest rates (cap rates following interest rates up) will have a much greater impact on value of these properties than NOI growth.

Questions/Conclusions:

Based on your presentation, how are NERs effected by SF foreclosures on a short term and long term basis? I understand your inflation, deflation and stagflation points, but there are other large factors effecting the supply/demand fundamentatls; albeit, artificial demand from single family foreclosures.

Properties are transacting like crazy and at extremely high prices.

Liquidity is running rampant.

My partners are wanting me to buy properties because NERs continue to recover rapidly.

I have advised my partners to be patient and wait for the interest rates to pop up and values to decline.

I don’t believe we have felt the full impact of the vacant SF homes because the banks are sitting on them and it is a matter of time before they will have to sell even though Fed policy has been designed to inflate SF housing when actually it is deflating.

I have been waiting for the bond market to back up (I believe that is very close now that Gross pulled out of T’s along with many other bond investors) and interest rates to spike.

In short, I have to believe we will be seeing a huge adjustment in pricing soon.

REGGIE, ANY THOUGHTS YOU COULD PROVIDE WOULD BE GREATLY APPRECIATED.

Thanks for you time, and keep up the fantastic work…"

The question itself is fairly interesting and reggie has plenty of good free info on his site.
His response in part is here, http://boombustblog.com/reggie-midd...te-still-sucks-despite-new-bubbles/#more-5392

 

[lawsjs]

Thanks for the interesting post. couple of comments.
1) Liquidity is NOT running rampant in US RE. I would describe it as running AWAY rampant
2) Increase in rates to what? The last couple of buildings I have bought have 6% ish money on them, inherited from pre Lehmans. Even that represents what 600%? (more like infinite in pure maths terms) over what you would get if you could get finance now. Australian rates are 9.5% on commercial properties today - anything less is by definition 'cheap' for us.
3) MFR's are predominantly valued on NOI. You argue (I think) that rents are rising (which I agree with) yet value's are about to collapse?
4) Why anyone would buy US treasuries right now (or anytime in the last 5 years) is absolutely completely beyond me, so I don't quite get the link. Bond markets will be interesting to watch, but treasuries??

I see a US currency reset as the biggest 'fear', but even in that case and a probable dollar drop, the relative values of rental backed valuations will remain solid - just not in foreign currency terms.

I think you are suggesting that SFR shadows will worsen the RE market and increase rentals. Most people here would agree with that I think. Where I lose the argument is that you say MFR values will collapse, or fall in some way. Given your suggestion of increasing renters due further RE foreclosures - how is this possible?

http://www.calculatedriskblog.com/2...paign=Feed:+CalculatedRisk+28Calculated+Risk)

I don't like Arizona - I think Pheonix is a silly name for a city Woolloomooloo is much better - just to pick one...

 

[lumix]

Lawsjs,

The "question" to Reggie that forms the bulk of the post is not mine unfortunately, as I wish my pockets were deep enough for 9500 units!
Therefore the "question" does not form my own views or observations which frankly are inconsequential next to someone like Reggie.

Did you get a chance to read some of Reggies RE responses / insights?

Reggie's background in part is property investment and his site has bucket loads of quality insights (plenty free) that will hopefully serve this forum well!

There are also a few video's of his which are worth a watch and his main website is, http://boombustblog.com

J

 

[lawsjs]

My questions stand as stated.

King Reg seems (to me anyway) to comment along the lines of your post.

 

[Monopoly]

Someone please correct me if I'm wrong, but my take on all of this buy USA:

1. Don't listen to ANYONE in particular buyer's agents (they're all sharks)
2. Do your own homework and then...
3. Book your flights, accommodation in your chosen area of interest
4. Walk (or drive) through the streets, talk to locals, get a feel for the place and most importantly...
5. Pay CASH for purchases (because finance is virtually impossible)

Am I missing something???

 

[Perp]

Liquidity is NOT running rampant in US RE.

I agree with all that you said, but like you, this was the statement which stood out the most to me. Liquidity is horrendous! The US lenders have, IMHO, over-reacted to the GFC and lending has gone from arguably too loose, to way too tight. Their reluctance to lend is keeping prices much lower than would otherwise be the case.

 

[Perp]

Someone please correct me if I'm wrong, but my take on all of this buy USA:

1. Don't listen to ANYONE in particular buyer's agents (they're all sharks)

I'd never say "don't listen to anyone"; I'd say you just have to be aware of the motivations of the person who's giving you information. Most of my best information has been completely free, from people who have no vested interest in my plans. Fellow investors, people who live in the area, local authorities (planning, housing, police, community organisations, local government, etc) are all rich sources of information, provided you ask the right questions.

Buyers' agents have a place, but I agree with lawsjs that their place isn't to flip you a property at way more than what they paid for it a few weeks ago. And charge you a few thousand for the privilege!

For those who aren't aware, it's much more common in the USA for both parties to have a realtor, and in fact, a not-insignificant portion of realtors only work for buyers and don't even bother with listings. Nearly all realtors work for both buyers and sellers. So any good realtor can be your buyer's agent. They're usually paid via a commission split with the listing (selling) realtor, so they don't even usually cost you anything! And, with respect to all Aussie real estate agents, both selling and buying realtors generally do a lot more for their commission in the US than their Aussie peers. They help you substantially with due diligence, write comprehensive reports, help you narrow down areas, often help you find finance, etc. My agent has produced hundreds of pages of area research (admittedly pulled from his sources, which doesn't reduce its value to me), lists of dozens of comparable sales including narrative explaining why each property may be more or less valuable than one that I'm looking at, given me leads for finance, and just generally been a great source of contacts and advice. The poor sod hasn't been paid a cent, yet, for over 2 years of work , but hopefully the day is coming.

2. Do your own homework and then...
3. Book your flights, accommodation in your chosen area of interest
4. Walk (or drive) through the streets, talk to locals, get a feel for the place and most importantly...
5. Pay CASH for purchases (because finance is virtually impossible)

Am I missing something???

I'd say no, you're not missing anything huge. Getting your own finance is virtually impossible (ie a new loan), but getting vendor finance, or assuming an existing loan, are both options which are much more likely to be achievable in the US than here in Australia. And the current buyers' market only increases your odds of pulling off that kind of deal.

Quite often you can buy with a) little or b) no money down by assuming the existing loan (provided it's not larger than the current value), and either a) paying the vendor a bit of cash for the difference, or b) getting the vendor to finance you for the difference.

 

[Monopoly]

Thanks Perp, that's just the kind of info I was looking for (much appreciated)!! Keep it up, I enjoy hearing about your journey, and hopefully one day soon, look forward to you reporting a win on your USA investment mission!

 

[lawsjs]

Sorry Monopoly, I thought you were making a statement (which I basically didn't disagree with) not asking for advice.

 

[Monopoly]

Sorry Monopoly, I thought you were making a statement (which I basically didn't disagree with) not asking for advice.

No that's fine lawsjs, it was bit of both. I guess I was summarising what I understood and was checking if I was on target or way off base. But thanks anyway.

 

[willair]

http://online.wsj.com/article/BT-CO-20110504-715638.html

 

[lumix]

Law / Perp

Easy to tell I have a high level of respect for Reggie and his team, good calls with data backed analysis.

Liquidity.
To place this in context, liquidity was in reference to the QE handouts.
Essentially the QE series cranked up the printing presses for fiat currency, pumped it into the economy and made its way to equities and especially commodities. All the focus is on precious metals but the real gains were most likely in soybeans, sugar and just about anything else that we consume.

IMO, liquidity does not guarantee banks will lend.
Think back to the not so distant past where the credit market almost seized, even interbank lending was at a halt. (Libor chart should show this)
Back in the day when banks were throwing caution to the wind and credit was available to everyone. No job, no chance of repayment, no problem!

Treasuries
Yes, the tbills yields are a joke.
You need someone crazy to buy them. Ben Bernanke is your man.

MFR Values / Collapse
Doesn’t sound like much chance of a collapse based on the types of deals Perp is throwing around.
In saying this, there is the possibility that the owners of foreclosed residential homes where possible, may seek alternative accommodation via MFR in the short term, later seeking to return once again to the SFR market. Creating opportunity in the process.

MFR Loans
Just had a quick look and found the following which indicates some lending is still happening.

“The pace of commercial and multifamily mortgage lending continued to increase in
the first quarter of this year,” said Jamie Woodwell, MBA’s Vice President of
Commercial Real Estate Research. “Commercial/multifamily mortgage origination volumes for the first three months of 2011 were the highest of any first quarter since 2002, and were nearly double the volume seen during the first quarter of 2010.”

http://www.mortgagebankers.org/files/Research/CommercialOriginations/1Q11CMFOriginationsSurvey.pdf

Cheers,
Lumix

 

[lawsjs]

Lumix,
Sorry - lost you. Go out and get me one or two of these MFR loans that you seem to think are growing on trees.

Then, and only then, pass the information on to Perp and the other 50,000,000 US real estate guys who seem to want them.

I want your golden contacts first.

You mentioned BB (1984 anyone??). The mere fact he is avidly buying anything he prints is feeding inflation. The only sector of the US economy this hasn't filtered through to yet is housing. As sure as god made little apples it will. My 'opinion' is that is what BB is pushing for. He needs QE to filter through to the worst affected sector of the economy before he will ease it. He is not a fool but only a fool would think he wasn't throwing petrol on a fire. Right now the big banks (bb again?? ) are feathering their own nests to bullet proof themselves against the armageddon they just faced. They are simply not being sensible (generous?) with the cash they have. Don't forget - these are the guys that FED subprime by forcing mortgages down deadbeats' throats simply so they could sell (in many cases pre-sell) the related CDO's. Normally (for those that don't know) you sold a mortgage then looked to pass on the CDO - the 'bond' if you will that held (for the investor) the ongoing interest payment, divided up into the aaa/bb+ etc. When people realised it was easier to sell the CDO to unknowing 'investors' and THEN find the mortgages to put into them - guess what happened...

I feel you are using mixed signals to back up your arguments. I can't quite get where you are coming from.

I am sure I am at one with Perp in saying that there is NO WAY Perps types of deals would exist if the finance market was anything close to normal. It is simply ludicrous to suggest that things are normal when a property has an asking price of some $700, with $200pa profit in it - and there is $100k+ a bit cash in it for the vendor AND a value of $1.1m+ 'certified' or on paper or whatever yet there is no financier willing to lend on it despite your assertion there is so much money floating around it isn't funny...

Housing of all types in the US is sick. It is sick because Wall St hasn't worked out yet how to quantify where its own financial modelling went so wrong. Blind Freddy could point out to them it was plain greed, but greed on whose part? Surely not the guys at the banks earning the bonuses by selling money on the back of real estate who knew NOTHING (or did they care?) about realestate??

 

[kathryn d]

When we purchased our apt building the vendor was using the annual rent roll based on full occupancy. However this vendor's track record for occupancy was on a major decline. Less than 50 % full when we purchased it.

I wonder what percentage is vacant in the property Perp is considering to buy.

 

[BayView]

Good luck.

Yes the PD's are good there. You can just go into any station and ask to see the files of registered sex offenders who live in your area and they open up a huge book with photos and addresses. (Bit of a shock though to find there's at least one in every street close by..)

We did that when we moved there due to us having a 5 year old boy. It was about 12 months into the trip mind you, when we found out.

Within 5 miles of us there were 32 KNOWN offenders.

 

[Perp]

I wonder what percentage is vacant in the property Perp is considering to buy.

It has high vacancies, yes. It's in the hands of a receiver who's not authorised to pay for management. So old tenants leave, but there's nobody taking any new tenants, for over a year now. I'm fully aware of all that and right on top of area supply and demand dynamics and have taken it into consideration.

 

[lumix]

MFR Loans
“Sorry - lost you. Go out and get me one or two of these MFR loans that you seem to think are growing on trees.”
You are lost because I didn’t state MFR loans were growing on trees, nor say they are easy to attain.
In fact IMO bankers are often tarred with the same brush and credit is relatively tight in many countries, Australia no exception.
Banks (including centrals) throughout time pull and push the credit levers too far, too late and contribute significantly to the detriment of the economy.

MBA Data
It’s fair to say “some lending is still happening” when the data supports this, with volumes in Q1 2011 89% higher than Q1 2010.
If you don’t like the MBA data take it up with them, don’t shoot the messenger.

“It is simply ludicrous to suggest that things are normal”
How you arrived at the conclusion that I believe the financial markets are normal right now, is beyond me. In fact, tell me the last time financial markets were normal or free.

Perp’s Deal
Perp’ deal on face value appears outstanding.
One day banks move from creating custom derivatives in a race to the bottom, the next day they are risk averse and won’t stump up hurt money for deals that make sense.
Perp is in the drivers chair for knowledge of where the speed bumps lay for obtaining credit for the deal.
I would have expected private money to be all over a deal like Perps and surprised they aren’t frankly. (would like to know why?)

Having a read of Perps RE experiences is pretty amazing and the free cash flow makes me drool.
L

 

[Token Funder]

Here's a reason...

Aussie Real Estate Agent Shot in Detroit

 

[Perp]

Aussie Real Estate Agent Shot in Detroit

My hubby just sent me this...

Having said that, that's a very rough area, so he was much braver than I intend to be.

Very sad news.

 

[sutnorinvest]

Thanks for the fantastic thread.

Hi Perp,

Firstly, thanks for this thread, it's great reading and I looking forward to hearing a success story from you soon.

Are you able to update us with the latest news on your current MFR offer?

Also, have you bought any property in the USA to date, or are you concentrating all your efforts on sourcing one of these large MFR deals?

If you have already purchased are you able to share the details?

Thanks,

Trace