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I’ve been saying it and I’ll keep saying it. The best deals in today’s market are REO or bank owned properties. Witness this story:

Back story: Earlier this week I blogged about a foreclosed house that had been reduced 57% in price from its peak sales price to its current asking price. In response, commenter “E” maintained that 57% was no big deal and that he could easily find a foreclosed house discounted 75% or more. Taking up the challenge, I responded that if he could find the house, I would drive over and take a picture of it. No slouch, “E” quickly found this listing from Redfin.com.

So about two hours ago I motored over to Highland Park and shot the picture you see. By my math, the house is being offered at a discount of 77% from its peak sales price, but it’s a listing that raises a few questions. I’ll explore them below.

from the LA Times blog.

Its a fact the most motivated sellers are banks, period. After working on both sides of the transaction as many time as I have I can tell you that moving these properties is an urgent matter for lenders. Look for a free course from me on this site about how to find, negotiate, and profit from bank owned (REO) property in the coming weeks.

Now we’re 2 years later and the property pictured on the left, a bank owned multifamily (that’s right ‘REO’) is on the market for $205,000. Last sales price? $380,000. The bank bought it back for $331,708. Now it’s on the market for $205,000. HOLD THE PHONE - these numbers are starting to make sense.

At $380,000 this thing would not even pay for itself, now at $205k we’re talking cash-flow. And guess what - you’ll pay less than that for this and you can probably negotiate up to 6% back in closing costs.

Banks don’t want to own property. They HAVE to get rid of it. They are the most motivated seller’s in this market and they have tons of inventory. Bank owned property and REOs are hands down the best opportunity in today’s market. Go find yourself one today.

Massachusetts Foreclosures Are Still On the Rise

MASSACHUSETTS FORECLOSURES:The Warren Group today reported another drop in home prices and attributes much of the fall to foreclosures. While foreclosures provide some of the best buying opportunities the market has sen in years, the vast numbers of them are weighing on the overall market. The Warren Group reported:

The median price of single-family homes in Massachusetts fell 12.3 percent in July, marking the sharpest decline in monthly home prices since The Warren Group, Banker & Tradesman’s parent company, began tracking the housing market in 1987.

The median price for single-family homes sold in July dropped to $320,000 from $365,000 in July 2007, according to The Warren Group.  The year-to-date median price is $316,000, a 9.7 percent decline from $350,000 a year ago. Prices have decreased in every county this year except for Nantucket, where they have flattened.

“The good news in July was that home sales didn’t decline as precipitously as they have in the previous six months of the year. Unfortunately, prices dipped even more than they did this past April, when prices were 12 percent lower than a year earlier. The drop is a dramatic turnaround from five to six years ago when prices were escalating by double-digit percentages,” said Timothy Warren Jr., CEO of The Warren Group. “Foreclosure activity has certainly dragged down home prices and will continue to affect the overall market.”

Of course what this means is more bank owned property (REO) and more opportunities for the individual investor.

It seemed for some time that it was (nearly) strictly the residential multifamilies (2-4 units) but now we’re seeing some of the stronger commercial borrowers are facing more problems. Tight credit and dashed condo dreams are likely the root of most of the multifamily trouble you’ll see around here. Its not for lack of tenants that these properties are in default.

What does this mean to you? Maybe not much but consider this, one of the tenets of savvy investors is that you zig when everyone else is zagging. If you constantly follow the rush of capital from one investment to the next you will arrive late and leave late. This means you’ll be buying high and selling post bust. That won’t get you anywhere you want to be.

People get caught up in the crowd mentality it is the root cause of investment cycle booms and the busts. When your old aunt betty starts flipping homes, guess what it’s about over. When everyone was buying tech stocks and then your barista is giving you hot stock tips, you know it is time to sell.

Conversely when the whole world is down on US real estate what should you be doing? Duh. “But Brecht we’re not at the bottom yet!” and I say back to you that you should be buying based on the NUMBERS. There are so many deals out there today and rates are still so low you can’t afford not to buy.

The best buyers that I am working with today are people with cash and equity. Know how they got that way? They are people who were sidelined during this past buying frenzy. The last time they bought anything was more than 10 years ago. Now they’re coming back out of the woodwork. Are they buying like crazy? No. They are picking and choosing and making smart buying decisions based on property with predictable (sometimes improvable) returns.

I recently got a call from a gentleman whose family and property I know of but whom I did not previously know personally. This family sold off dozens of multifamilies starting three or four years ago completing the liquidation about 18 months ago. Guess why he called. They’re buying again, that’s why.

When there’s blood in the streets buy property. Baron Rothschild

The average multifamily sales price in Massachusetts dipped again in April but the decline has seemed to slow, an indication that prices may be nearing the bottom. The average sales price was $271,155 in April versus $279,524 the month prior and versus $369,066 in April of 2007. These are drops of 3% and 27% respectively. Yep I said 27% year-over-year.

I compile the commercial multifamily statistics quarterly from the tax records so this quarter obviously won’t be available until July.

• Average Multifamily Sales Price April 2007 $369,066
• Average Multifamily Sales Price March 2008 $279,524
• Average Multifamily Sales Price April 2008 $271,155
• April ‘08 3% less than March ‘08
• April ‘08 27% less than April ‘07

Data compiled from H3MLSPIN.

Recently we were talking with an investor who is out there beating the bushes and per usual the discussion of investment criteria came up. We wanted to know what makes a good investment… to him. He told us that he wants the property to pay itself off in 10 years, fair enough.

I got to thinking about what that means exactly. First I’m going to go ahead and assume that the down payment will be 25%. As I’ve mentioned previously we’re back to standard lending criteria, even conservative criteria, so forget the higher LTV stuff.

This investor isn’t so particular about the size of the property as much as he is the location. He’s enamored with a particular town close to Boston. He’ll by a duplex or a 3-family or a 6-family, really anything up to a million bucks or so. I’m going to go ahead and talk about commercial size multifamilies (5+ units).

First, I wonder about the idea of paying off an investment property. One of the beauties of real estate investment is leverage. Leverage is what allows you to control $4M in real estate with $1M in cash. The returns that you achieve in real estate are directly tied to your financing. Favorable financing terms can make or break an investment and, for the most part, when you you have a property with no leverage your return on equity is relatively low, but really thats an tangent.

So back to the 10 year rule. I suppose there are two ways to look at that. Either you want the property to throw off enough income that you can get into a note with a 10-year amortization or else you take the 25 (or 30) years but your net is equivalent, annually, to 10% of the purchase price. Well that sound like a 10 cap to me.

Example:

Property A is a 6-Unit in Malden

Income
• Each unit gets about $1000 so Potential Rental Income=$72,000

Financing

• Market rate 6.25%
• LTV 75%
• Total Expenses $23,000

Net: $49,000

A 10 cap on this property as you probably know would put the price of this property at $490,000. In case you’re wondering how to do that math, you take the net income of $49,000 and divide it by the cap rate, in this case “.10″, and we come up with $490,000. There’s one way to figure what you could pay.

It just so happens that if you got a 10 year note and you were able to get it at a DCR of 1, then with 25% down you could pay about the same for the property $485,000.

Truly this is all academic and what I guess I’m trying to say here is that whatever your goal is you can probably figure it in terms that will make sense to the rest of the investing community. In the above example the investor could simply say “I’ll buy anything at a 10 cap” and most folks in the business would (or should) know what you’re talking about.

Now to the Meat of the Matter
There are a lot of places you can get a 10 cap, but the better locations close to Boston aren’t among them. If you’re set on this kind of return you’re looking for a needle in a haystack. I’d go so far as to say that the only way you’re coming up with something like that is if you get into either

A) A value-add proposition where you are going to come in and really turn around a bad or deficient situation, or
B) You find some off-market deal where money isn’t the issue, time and discretion are.

Failing either of these scenarios you are very likely to pay quite a bit more for that property or else you won’t buy it because there are enough people out there walking around who will save you from it. The fact is that in the example above if the property is in good condition someone will probably pay well north of $500k more like something in the mid $600s, perhaps even more if its in the West End. I’d figure better parts of Malden in the high 8s to the high 6s and I have comps to prove it.

So what do you do? Well either you’re sidelined indefinitely sitting on the bench hoping to play, you go find another field, or you step up and swing knowing that the value of the investment over the long term is ensured because the fundamentals of the location, demographics, etc drive the desirability of the asset and will continue to.

Market prices are determined by the most that a buyer is willing to pay pitted against the least that a seller is willing to accept during one particular slice of time, and not by what you want to pay. Keep this in mind while you’re out there evaluating markets you want to invest in and plan to pay a dollar more than the next guy if you want to own the best properties.

Once the property hits the REO department the first order of business is to evict anyone in the property. In some cases those evicted are the former homeowners but in many cases the evicted are tenants. A proposal that would require “just cause eviction” for lenders would prevent those evictions. Lenders are not equipped to be landlords. If this were to become law you can bet that the foreclosure process will change significantly in Massachusetts.

On the surface it seems like this could be a long way down the road, but the fact is that Massachusetts law makers have been hustling to do something, anything, to turn the foreclosure tide. We might see this become reality sooner rather than later.

Foreclosuresmass reported