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SJ REI Journal August ‘09 Debut Issue! San Jose Real Estate Investors Association - The Definitive Source for Investors The Inside Scoop on California Real Estate Bruce Norris is an active in- vestor, hard money lender and real estate educator with more than 28 years experience. He has been involved in more than 2,000 real estate transac- tions as a buyer, seller, builder and money partner. Renowned for his ability to forecast longterm real estate market trends, the release of his book “The California Come- back” in 1997 gained him much notoriety and the accuracy of this extensive report led many California investors to financial freedom. His 2006 release, “The Cali- fornia Crash,” is an indepth look into the California market correction and the statistics be- hind Bruce’s predictions. His latest, award-winning report, “Category 5,” goes into great detail why Bruce isn’t ready to write “California Comeback 2” and what the real estate community should ex- pect in the coming years as the market continues its correc- tion. Geraldine Barry, President of the SJREI Association, chat- ted with Bruce regarding his National Forecast with Fannie Mae’s Chief Economist Douglas Duncan currently serves as Vice President and Chief Economist for Fannie Mae, coming from the Mort- gage Bankers Association (MBA), where he served as Se- nior Vice President and Chief Economist since 2000. In that senior leader- ship role, Duncan served as a primary spokesperson on economic and mortgage market developments and DR. DOUG DUNCAN Chief Economist Fannie Mae BRUCE NORRIS President The Norris Group Most consumers aren’t aware of how affordable homes have become in today’s market. The variety and quality of homes now within reach of the average American family is greater than most people realize, according to www.Realtor.org. For more information, flip to page 18. Continued on page 4 Continued on page 3

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Page 1: SJREI Journal Debut Issue

SJREI JournalAugust ‘09

Debut Issue!San Jose Real Estate Investors Association - The Definitive Source for Investors

The Inside Scoop on California Real EstateBruce Norris is an active in-

vestor, hard money lender and real estate educator with more than 28 years experience.

He has been involved in more than 2,000 real estate transac-tions as a buyer, seller, builder and money partner.

Renowned for his ability to forecast longterm real estate market trends, the release of his book “The California Come-back” in 1997 gained him much notoriety and the accuracy of this extensive report led many California investors to financial freedom.

His 2006 release, “The Cali-

fornia Crash,” is an indepth look into the California market correction and the statistics be-hind Bruce’s predictions.

His latest, award-winning report, “Category 5,” goes into great detail why Bruce isn’t ready to write “California Comeback 2” and what the real estate community should ex-pect in the coming years as the market continues its correc-tion.

Geraldine Barry, President of the SJREI Association, chat-ted with Bruce regarding his

National Forecast with Fannie Mae’s Chief Economist

Douglas Duncan currently serves as Vice President and Chief Economist for Fannie Mae, coming from the Mort-gage Bankers Association (MBA), where he served as Se-nior Vice President and Chief Economist since 2000.

In that senior leader-ship role, Duncan served as a primary spokesperson on economic and mortgage market developments and

DR. DOUG DUNCANChief Economist

Fannie Mae

BRUCE NORRISPresident

The Norris Group

Most consumers aren’t aware of how affordable homes have become in today’s market. The variety and quality of homes now within reach of the average American family is greater than most people realize, according to www.Realtor.org. For more information, flip to page 18.

Continued on page 4Continued on page 3

Page 2: SJREI Journal Debut Issue

AUGUST 2009 • SJREI JOURNAL 2

elcome to the SJREI Journal. Our new publication is filled with great insight and practical information for all level

investors. This issue includes interviews, how-to’s and practical information from attorneys, investors, realtors and economists that will assist you with acquiring a property in order to facilitate your retirement or assist with creating cash flow to supplement your current income.

The stock market can be financially rewarding, if not tumultuous, but we at the SJREI believe that diversification is vital for your financial security – don’t put all your eggs in one basket!

My husband, Stuart, and I started this organi-zation seven years ago. Having purchased two small apartment buildings in Stockton, Calif., we wanted to connect with other investors to decipher what they were doing to be success-ful. We were surprised to discover that no such group existed in the area, and we decided to start our own, hence SJREI was born.

We started in a local cafe with 10 people, and now, we currently host 300 to 400 people at our monthly meetings. Friendships and alliances have been forged, which have proven to be an incredibly valuable asset to all concerned. We have cautioned investors about certain invest-ments and encourage complete due diligence, one of the foundational pieces of effective in-vesting. See Jeffery Hare’s article (included on page 5).

At SJREI, we focus on providing a venue where investors can network, collaborate and share in-sight on their investment strategies and become educated through the informative speakers we host each month. Over the past several years, we have evolved and grown as an organization providing content rich programs that have not only benefited us greatly, but also our commu-nity of investors.

We frequently host speakers who address a myriad of topics, including market timing; a presentation in 2005 gave SJREI members ad-vanced warning of the impending financial cri-sis and the housing crash. My husband and I took this warning to heart and liquidated our own California holdings, including our primary residence at that time. Other members followed suit and benefited financially from advanced notice of this timely information.

Buying real estate because your brother-in-law recommends it is not a good strategy. Exploring the details and understanding the financing op-tions, economic drivers for the neighborhood, completing a cash flow analysis and exploring your exit strategies are all critical components to successful investing.

We have one of the best buying opportunities of our lifetime on the horizon. We have the op-portunity to buy property in California that can cash-flow and yield a greater return over time, more than other investments and with less risk. Running the numbers and buying right – essen-tially making smart investments are keys for the buy and hold investor, and this is not the mar-ket to flip in especially for the faint of heart.

In this premier edition, we have lots of articles that will educate you as your explore this path and assist you so you can invest prudently. En-joy the read, and we look forward to your feed-back so we can continue to provide you the in-formation you need to become a confident, self-sufficient investor. Happy investing!

Geraldine BarryGeraldinePresident SJREI

SJREI TodayNotes from Geraldine’s desk

W

408.264.3198www.SJREI.netGeraldineSJREI.blogspot.com

Our mission at SJREI is to provide a venue where all levels of investors can become educated, build solid relationships with other investors and expand their knowledge on real estate investing and to facilitate them making wise, profitable investment decisions.

SJREI Journal Staff:

Geraldine BarryPublishing Director

Belle LiProduction Manager

Andrea FrainierEditor-in-Chief

Page 3: SJREI Journal Debut Issue

AUGUST 2009 • SJREI JOURNAL 3

performance for the MBA, a trade group that make the ma-jority of all residential, multi-family and commercial real es-tate loans in the United States.

Duncan has been elected to the Board of Directors for the National Association of Busi-ness Economists and has been listed in the “Top 100 Most Influential People in Real Estate” by Inman News. Dun-can received his Ph. D. in Agri-cultural Economics from Texas A&M University and his B.S. and M.S. in Agricultural Economics from North Dakota State Uni-versity.

Here is a summary of an in-terview Geraldine Barry, SJREI President, conducted with Dr. Duncan recently.

How do you like your job at Fannie Mae – you came on board around the time that the financial crisis was beginning to escalate?

I joined Fannie Mae four months before it went into con-servatorship, about 14 months ago.

It has been a very educational and challenging time. We had an untenable underwriting en-vironment, and now, we, at Fannie Mae, are taking this op-portunity to take a fresh look at what has happened, re-evaluate and implement changes to help with the recovery and move for-ward.

What are the political and free market factors that affect when loans will loosen up for investors?

Several things must happen: First, investors must be confi-

dent that banks have accurately accounted for and reported the quality of their assets so their balance sheets are sound. This

includes credit card problems and commercial real estate problems.

Second, holders of private capital have to believe that the government has stopped changing the rules in markets so private property represented in the terms of financial market contracts are secure.

Third, house prices must reach a floor. This will assure investors of collateral values generally.

Fourth, consumer credit qual-ity must stabilize. Household balance sheets have a signifi-cant distance to go to be stable. What is your opinion on loan modifications and its effectiveness?

The recidivism rate broadly measured is more than 50%.

The housing price declines are unprecedented, and people have homes that are worth dra-matically less than they paid for them, which is discouraging.

As an economist, I would say modifications are not helpful, with increasing losses to people two years into this disruption.

Do you believe moratori-ums on foreclosures are useful, or are they just prolonging the inevitable?

We have no current data on the moratoriums and their ef-fectiveness. We are beginning to explore data in California for that.

Practical considerations, such as temporary loss of unemploy-ment, carry a borrower through this difficult period, and in some cases, can be useful.

When did home ownership peak in the United States?

Home ownership peaked at

69.3%. Currently, it is at 67.5%, and that number continues to decline.

What is a sustainable rate of home ownership?

Analysis of the data going back

to the 1960s suggests that 65% is a sustainable rate. That means we have 2.5% decline to reach that rate - for every one percent decrease, 1.1 million families lose their homes.

They rent or recombine caus-ing household formation rates to slow dramatically. This is more typical during a recession where unemployment is high.

What are your thoughts on the current economic crisis? This is bigger than most of us have experi-enced. Will it take longer to turn around?

Housing would seem to be ap-proaching a bottom as defined by sales levels and starts the last few months. That is, however, not a precursors to some dra-matic rise nor is it necessarily a sign prices will stop falling.

More realistically, housing is starting a transition back to its normal state wherein local mar-kets are differentiable.

The reason people were shocked by the decline in house prices was that their intuition was damaged by hearing only about national averages. The fact that there had never been a national average annual house decline since World War II lulled them into thinking it could not happen.

In fact, at almost all times, there are some markets in which prices are declining, but more have rising prices, so the aver-age across all markets is rising.

Additionally, if you adjust for inflation, the average price of

housing in the United States has fallen for extended time periods in the past.

This is the deepest recession that most employees have ever been through – most businesses do not have a knowledgeable workforce on how to navigate this. We have a lot of underem-ployed people, and job losses will continue until the middle of next year, and it will take more time to experience any kind of significant growth.

You mentioned that 2010 would be the bottom of the real estate market? When do you think we will start to see appreciation?

I believe a housing recovery is a long time off, but we should see a slower pace of declines in the third quarter and stability in sales volume, but we could be five to seven years from a recov-ery depending on what employ-ment does in the meantime.

What are important economic statistics that are a reference point to determine where the economy is headed?

I look at private sector pay-roll – this is a great indicator of business confidence. Public pay-roll must be supported by taxes from the private sector – if pri-vate sector revenues start to fall, overall revenues decline.

Any optimistic thoughts to share on the economy?

Long run demographics are very positive. People think the baby boomers will leave a big gap in demand as we hear so much talk about the boomer genera-tion and meeting their needs, but our population growth sta-tistics are very strong, so this is not going to be an issue.

>> Interview with Chief Economist of Fannie Mae (continued from front cover)

Page 4: SJREI Journal Debut Issue

AUGUST 2009 • SJREI JOURNAL 4

thoughts on the current market in Califor-nia.

What are you currently seeing in the marketplace, and are you still buying bank-owned real estate?

We are still buying REOs, which are properties reprocessed after foreclosure, and also trustee sales. Due to the morato-riums, California has an artificial shortage of inventory.

The lender inventory should increase dramatically in the next six months, allow-ing for many more wholesale deals. We buy only vacant properties.

Since there’s no escrow for this transac-tion, we close our purchase the same day we evaluate the property. Generally, price it right and get it turned around quickly with minimal repairs.

Are you pursuing auctions to purchase?

We are not pursuing auctions at this time. Right now, the Multiple Listing Ser-vice (MLS) is leading in wholesale deals produced.

The trustee sale buys have started to be-come profitable because of the lenders willingness to lower the opening bids. That inventory is generally cleaner and more ex-pensive.

I’ll be very excited about auctions when “absolute” (when one buys and is guaran-teed acceptance) becomes a more perma-nent feature in the auction world.

What are your thoughts on commercial real estate?

Commercial real estate will be the next shoe to fall. I would expect prices to tum-ble next year, which will create great buy-ing opportunities for apartments and other commercial properties.

As you know, I auctioned off my office building in Riverside, Calif. in 2007 in an-ticipation of this market.

Are you buoyant about being able to find great cash-flowing income rentals – to buy and hold?

Regarding buying and holding, it is one of my new passions!

I feel we have such an incredible oppor-tunity to get real estate while it’s on sale. The 2010 and 2011 prices will be compa-rable to a liquidation sale.

In 2008, we averaged paying about 28.8% of what someone owed on the property.

I have never seen opportunities like this in California. We are currently dealing with a historic opportunity and a rare oc-currence in California.

What do you think the price bottom of the market will look like in California and in the Bay Area?

I think the price bottom will depend on some things that are a bit unpredictable

Will the moratoriums continue?Will they keep changing the rules until

people who are over encumbered take the bait?

I’m referring to the new 125% refinance of an over-encumbered mortgage.

Will that help prevent some foreclosures? Yes.

Will it reverse the trend to such an extent we head back up in price? No way!

The price bottom will be reached when five factors we follow give us signals the worst is over.

A bottom and the first year of improve-ment look virtually the same. You can only tell the difference after the fact.

How do you think past and future California foreclosure moratoriums will affect REO availability and pricing this year?

Just recently, prices have been propped up due to lack of inventory. I believe it is temporary, so it doesn’t worry me at all.

If someone can figure out how to make a homeowner, who owes 250% of what the

home is currently worth, want to keep it, that will surprise me. Many homes can be foreclosed on despite the new morato-rium.

It was politically motivated and should have little long-term effect on the way they are approaching the over-encumbered owner. Most of the effort is focused on re-ducing the payment, not the loan balance.

If they reduce the loan balance, they cre-ate an even bigger problem. You can’t make the system appear unfair or you will create an avalanche of foreclosures.

You have studied how appraisal procedures have changed? How negatively will this impact flipping in California in the coming months and the next few years?

I think the changes in the appraisal code will be detrimental as long as bank-owned properties dominate and a buyer made a reasonable decision to pay more than the median price for a property.

Once the number of lender-owned prop-erties diminish, the median sale will be owned by an occupant.

The price differences will be small, or at least minimal enough to be explained by the appraiser and accepted by a lender.

Solve that problem and it will be back to business as usual. Form 1004 MC asks the appraiser to consider median value.

The median comparable sale (the one ex-actly in the middle of all comps) in Sacra-mento County and Riverside County would have to be a vacant REO.

Want to meet Bruce in person and listen to his most updated market insights? Come to SJREI’s Oct. 1 meeting and his Oct. 3 seminar. For additional informa-tion and to register for the event, visit www.sjrei.net.

>> Interview with Bruce Norris (continued from front cover)‘I feel we have such an incredible opportunity to get real estate while it’s on sale. The 2010 and 2011 prices will be comparable to a liquidation sale,’ Norris says.

Page 5: SJREI Journal Debut Issue

n investor found a great deal on a trailer park with the intent to build

a self-storage facility. After he purchased the trailer park, he found out the city wasn’t issu-ing any new development per-mits.

Another investor discovered shortly after closing escrow that a commercial property he had already purchased was not zoned for the intended use, and it would take a year and thousands of dollars to get approved.

A 30-minute conference with a land use attorney might have cost $200, but it could easily have saved these inves-tors 100 times that amount.

These costly mistakes could have been avoided if the in-vestors did their due dili-gence.

But what exactly does due diligence really mean, and what is required? How will I know when I’ve done enough? What happens if I don’t?

Simply put, due diligence is the process of investigating an investment you’re interested in, inside and out.

Real estate investing can be very profitable, but it involves risks.

The amount and type of due diligence required will depend on your tolerance for risk, the amount of your investment and the cost.

You cannot eliminate risk, but you can take steps to re-duce it. Due diligence also helps reduce the probability of costly legal problems.

The three key steps to a suc-cessful investment strategy are: plan, research and act. Start by taking a good look at your plan. What are your per-sonal and your financial ob-jectives?

Your financial objectives should support your personal objectives. Develop a backup plan and an exit strategy.

Consider meeting with a fi-nancial planner, a tax advisor, an attorney and a realtor.

Determine what your op-tions are; fine-tune your goals, and evaluate what is realistic and achievable. Include your spouse in the process.

• Evaluate your investment op-tions in light of your personal and financial goals.

• When do you need to see a return on the investment?

• Do you want to focus on residential or commercial property?

• Do you prefer a certain geo-graphical area?

• Do you want to buy trust deeds, tax liens or provide hard mon-ey loans for other investors?

• Do you want invest by yourself or combine resources with an investment group?

• What will be your source of funds: savings, equity line of credit or self-directed IRA?

The most effective way to learn more about your options is to join and attend a real es-tate investment group, talk to other investors, ask lots of questions and listen carefully.

Once you find an investment

opportunity that is consistent with your plan, you need to do your research.

Find out who is behind the investment, what are the risks, where it is located, when you will get a return on your in-vestment and why you should proceed.

You need to learn about lo-cal conditions, zoning regula-tions, local economic factors and neighborhood demo-graphics.

Contact the local planning department; consult with a land use attorney; talk with lo-cal real estate professionals.

Don’t forget local weather conditions – finding out about floods, wildfires, windstorms and tornados after the fact are not good.

Now, it’s time to act. If the investment is consistent with your plan and you are comfort-able with the risks, proceed, but get everything in writing.

Have an attorney review the documents and help you spot potential red flags or missing information.

Consider the legal expenses in terms of helping you to avoid a total loss of your investment, or worse, getting caught in un-expected and costly litigation.

Investing in sound financial planning, professional tax ad-vice and qualified legal counsel as part of your due diligence may yield the biggest return on your investment.

Plan, research and act. It’s all due diligence.

DUE DILIGENCE| By Jeffrey B. Hare

Due Diligence for Real Estate Investors

JEFFREY B. HARE Attorney

AUGUST 2009 • SJREI JOURNAL 5

How to uncover potential deal breakers when investing in property

A

Jeffrey B. Hare, Attorney at Law, provides client-focused outcome-oriented legal services to his clients.

Specializing in real estate and land use law, Jeffrey combines legal expertise with practical experience as a real estate investor and entrepreneur to help his clients develop a clear and comprehensive strategy designed for a successful outcome.

He is the author of the web log “The Legal Dirt on Real Estate Investing.”

Reach Jeffrey at:

Phone: [email protected]

Blog: JeffreyHare.wordpress.com

Page 6: SJREI Journal Debut Issue

AUGUST 2009 • SJREI JOURNAL 6

New Tax Laws Can Put Thousands in Your Pocket

RICHARD SMITH Accountant

Richard Smith & Associates

here’s no debate that times are tough. No one is immune from the current econom-ic meltdown, which has left many people

scrambling to pinch their pennies. The news is full of stories about bailouts, the recession and unemployment.

In order to get the economy going again, the government has implemented new tax laws to put a little extra cash in your wallet.

Now is the time to prepare for next year’s taxes, and check out these new tax laws as they may be applicable for your circumstance.

Working credit This law is designed to give a $400 tax cut to most working people, while working couples receive a $800 tax cut. This rebate is handled by reduced withholding at work.

Social Security Recipients get a “one-time” $250 payment in May or June. The extra pay-ment goes to anyone collecting social security, supplemental security income, railroad retire-ment, veteran’s disability or pensions.

Sales tax from new cars. Taxpayers can deduct the sales tax of automobile purchases made on or after Feb. 17, 2009, but there are limita-tions. Only 2009 automobile purchases count, and only the first $49,500 of the cost counts. The deduction also phases out if your income ranges from $125,000 to $135,000 ($250,000 to $260,000 for a couple). Bonus depreciation was increased to $8000 for new automobiles purchased for business during 2009.

Lost your job? When you collect unemploy-ment, you are taxed on the income. For 2009 only, each person avoids tax on the first $2,400 of unemployment insurance collected.

Homebuyer credit The new credit affects any 2009 purchase before Dec. 1, and a tax credit of $8,000 applies. Best of all, there’s no repayment unless it ceases to be your main home within three years, but there is a phase-out as income reaches $75,000 ($150,000 for couples). There is an election to treat any qualified home as if it were bought Dec. 31,2008.

Energy credits return The popular energy credits in ’06 and ’07 were designed to give homeowners an incentive to make eco-friendly

improvements to the home. It included credits for insulation, exterior doors, windows, sky-lights, insulated roofing material, non-electric furnaces and water heaters. Currently, the cred-it return has tripled to 30%, and investors can get up to a $1,500 credit for 2009 and 2010.

Education credits Hope Credit was designed to reduce the cost of the first two years of col-lege. For 2009 and 2010, the credit is more liberal. The maximum credit amount has in-creased from $1,800 to $2,500, and it now cov-ers four years of post-secondary education. The new credit has been amended to include books and course materials.

Depreciation issues Two provisions were extended to 2009. First, businesses may elect to expense up to $250,000 of equipment that is normally depreciated. Second, “bonus” depre-ciation, which allows a write off for 50% of the cost of an asset, then depreciation for the bal-ance.

Business losses generate a “net operating loss,” which can be used to recover taxes paid up to three years in the past. A new law allows carrying such losses back to the fourth or fifth prior year.

Alternative Minimum Tax (AMT) Patch was designed to make wealthier people pay their fair share of taxes, but it has begun to affect ordinary citizens. A new law gives a one-year patch to keep the tax from affecting nearly 23 million returns. It also protects several personal tax credits from being erased by the AMT.

Bonus depreciation can be taken on new cars in addition to regular depreciation. The maximum regular depreciation is $2960 if car is purchased for 100% business use, or $2368 if 80% business use.

veryone can reduce income taxes by mak-ing it a priority. Many taxpayers make the mistake of waiting too close to yearend

before they even think about their taxes. With a sleuth of new tax laws, the time is now to create a new tax strategy that may save you thousands of dollars in deductions.

Don’t wait too long, because by planning ear-ly you can create your own stimulus package!

TAX LAWS | By Richard Smith

T

E

Richard, who is an Enrolled Agent and licensed by the IRS, and his team have prepared taxes for individuals and coporations for more than 30 years.

Richard is an active real estate investor who has more than 100 houses in his portfolio plus a large multi-family building.

Reach Richard at:

10050 N. Wolfe Rd. SW2-140

Cupertino, CA 95014

Phone: 408.446.5551

[email protected]

www.richardsmithtax.com

Page 7: SJREI Journal Debut Issue

ending to investors in mid-2009 is rife with changes. From a macro level, lending criteria has moved to standards that were seen in the

’90s. Today, and for the foreseeable future, inves-tors can count on simplifi ed, yet rigid, underwrit-ing standards.

Here are some specifi cs on what we are currently seeing.

Appraisals: All appraisal values appear to be suspect, so oversight continues to be heavy. Pro-tect yourself with strong contingencies in the con-tracts you write.

Credit: Default rates for loans to investors whose credit score is more than 740 is considered to be over the market threshold. The result is missed opportunity for investors who have poor credit and minimum score standards as the market col-lects new data to determine what does work.

Income: Without any exceptions, both the pub-lic and the lending industry breathe easier with

income documentation standards. This primarily affects real estate speculators, not real estate in-vestors.

Assets: It takes money to make money. The dust has been brushed off this line of thought, and it has been reinstituted into underwriting criteria. For example, down payments refl ect guidelines of the early 1990s, which rewards higher down pay-ments with better interest rates.

Loan classes: The Federal Home Loan Mort-gage Corporation continues with a maximum of four mortgaged properties. The Federal National Mortgage Association’s relaxed their ruling ear-lier this year to a maximum of 10. Most clients are challenged with fi nding lending sources willing to package a loan with the restriction of only being able to resell to one investor. However, lenders do exist in the market that will do this. Public outcry and political pressure has trimmed the palette of loan options to 30- or 15-year fi xed rate and fi ve-year fi xed rate, and interest rates continue to stay low despite weak fi nancial news and speculation

around defi cit spending.

urchase closing timeframes are staying on the longer side due to the additional dili-gence being performed at the lenders and

underwriters desks. Thirty-to 45-day timeframes are currently the

safest, because strong usage of safeguards and contingencies in purchase contracts is the best defense against loss of deposit.

Nonperformance by the borrower is seen as the primary contribution to our extremely high contract cancellation numbers, which is es-timated to be close to 50% (this number does count short sale contracts).

One of the most beleaguered areas of fi nance is lending for investors with more than 10 mort-gaged properties.

Lending does exist, and pricing is higher and qualifying is easier. These loans are not pack-aged to be sold on the national and internation-al market, resulting in more sensible decisions. Documentation standards are still fully in place as these institutions are overseen and audited by federal regulators.

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LENDING | By Mike RyanAUGUST 2009 • SJREI JOURNAL 7

Lending for Investment Property Owners

MIKE RYANMortgage Broker

Michael Ryan & Associates

L

P

Phone: 408.986.1798

[email protected]

Page 8: SJREI Journal Debut Issue

hile today’s residential market is flooded with foreclosed properties,

the resulting devaluations in many parts of the country are creating unique opportunities for long-term investment buy-ers.

With many consumers in-creas-ingly concerned about liquid-ity as a result of the reeling economy, investors are turning to their retirement accounts to take advantage of an incredible buyer’s market.

Since the credit market is effec-tively in neutral, investors are scooping up properties in some areas for less than 50% of ap-praised value, with all cash pur-chases with their self-directed IRAs.

For example, on July 6, I heard from a real estate broker in

Florida that he was able to pur-chase a 2,800 square ft. home on a golf course in a gated-com-munity (and needing no repair) for $100,000.

It was listed by the bank that foreclosed on it at its appraised value of $200,000, and it sold two years ago for $440,000!

Although we may not yet have reached the bottom of the market for residential real es-tate, and the window of oppor-tunity will likely stay open until the third or fourth quarter of 2010, the opportunities today have the dual potential for sig-nificant appreciation in the five to 10 year timeframe and the production of positive cash flow during the holding period at to-day’s prices.

Experienced real estate inves-tors, brokers and realtors are taking action now, recogniz-ing that more foreclosures will follow early next year as ad-justable rate mortgages (ARM mortgages) sold in 2007 kick in with a vengeance in the first quarter of next year.

At PENSCO Trust, we have seen a 26% increase in IRA real es-tate purchases (to $26 million) between the first and second quarters of this year.

Most of this increase was asso-ciated with foreclosures in the residential market, however, we have also seen quite a few real estate syndicators buying up unimproved land (undeveloped lots), with the idea of condition-ing it through entitlement in

time for the next upswing in the real estate development sector.

In some cases, they are buying at 10 cents on the dollar. These deals are not for the faint of heart and may require a longer holding period, so they are not suitable for anyone with liquid-ity needs.

Another avenue self-directed IRA investors are pursuing is to provide credit to others for the purpose of buying real estate.

With traditional credit markets almost nonexistent, borrowers are getting needed funds from IRA investors looking to in-crease their investment yield on their retirement accounts.

Such investors may offer the down payment, first mortgage or second mortgage or even be-come a co-tenant on a purchase when the buyer does not have the necessary funds.

For example, one investor may locate a great investment prop-erty, but not have sufficient funds to buy the property.

By combining forces and funds with an IRA investor, who may participate through an equity investment or an extension of credit, they can acquire the property.

It is important when invest-ing in real estate with a self-directed IRA, that you choose a competent IRA custodian with a strong track record.

Good custodians will help you

to understand the rules and the process, easing your entry to self-direction.

In addition, it is very important that your custodian is geared to execute in a timely and accurate manner, as real estate transac-tions can close very quickly and earnest money deposits fre-quently have to be made from your IRA on the same day to se-cure the best opportunities.

PENSCO Trust is proud of the fact that we generally get all real estate transactions funded on the same day they are autho-rized by our clients, and, in al-most all cases, within 48 hours.

Certainly, investing today is more challenging than in a bull market, but some things are certain.

Real estate values are down in most areas of the country, building has almost come to a screeching halt and demand will eventually catch up to supply, at which time prices will rise.

How long that takes is anyone’s guess, but some like those odds better than investing in the stock market.

Choose your own poison, but eventually you have to take ac-tion to keep your wealth grow-ing.

IRA INVESTING| By Tom Anderson

Self-directed IRAs are Buying Lots of Real Estate

W

AUGUST 2009 • SJREI JOURNAL 8

Poor credit and limited finances don’t have to stand in the way of investing

TOM ANDERSON CEO/PresidentPENSCO Trust

Contact:

www.PenscoTrust.com

Phone: 415.274.5608

Page 9: SJREI Journal Debut Issue

hile most Americans still tend to view home ownership as part of the

American Dream, the current real estate cycle encouraged peo-ple pursuing this dream to make emotional, rather than prudent financial decisions, which led to a huge increase in the volume of foreclosures.

As everyone needs a place to live, most people will consider renting until they can recover their credit score and financial health in order to qualify to own a home again.

The opportunity to rent to own, especially when the monthly pay-ment is close to market rent and

the option price is greatly be-low what they paid for the same house five years ago, provides an attractive alternative.

As an investor, I love the rent to own option as an exit strat-egy, because it provides great advantages to buyers and sellers alike, in addition to contributing to the community by maintaining a higher percentage of home-owners versus renters.

A typical rent to own arrange-ment involves a preset purchase price and term, a set monthly payment (a portion of which is usually applied towards a down payment) and a nonrefundable option payment (which is also

applied towards down-payment upon execution of actual pur-chase at the end of the term).

The market conditions for rent to own exit strategy for investors are perfect right now in many Bay Area markets because of the high amounts of foreclosures, prices that are frequently below the cost to rebuild and a large pool of buyers.

• The ability to get a higher price for a house based on a future sale date

• Sellers can, if they choose, charge higher than average rent. It is important not to be greedy as it may lead to disputes down the line if a buyer fails to execute for some reason that is not necessarily their fault

• A nonrefundable option fee, which is a consideration from the future buyer for the rent-to-own opportunity

• A rent-to-own agreement reduces the likelihood of maintenance and excess land-lording activities as tenant buyers treat the home as though it is their own

• By offering a rent to own option, you have an increased market of: – Renters who realize they can own for the same monthly payment as rent– Homeowners who lost their homes and have credit issues but want to own again– Investors with credit or cash issues but want to take advantage of historically low prices

Buyer Benefits• Ability to get into home ownership with less out-of-pocket expenses compared to

the usual costs associated with getting a conventional loan

• Option money applied towards down payment of house

• Monthly rent credits accumulating towards down payment instead of buyers having to come with lump sum and closing costs all at once

• Opportunity is not driven by credit score

• Working with an individual as opposed to a bank creates a better platform for mutually beneficial negotiations due to less “red tape”

Market conditions are ripe, and there’s plenty of perks for both buyers and sellers

Seller Benefits

Considering a rent-to-own plan?

CAROLINE HEGARTYInvestor

WRent to Own: Your Ticket to the ‘American Dream’

AUGUST 2009 • SJREI JOURNAL 9

RENT TO OWN| By Caroline Hegarty

Caroline Hegarty is a real es-tate investor based in Vallejo and specializes in rent to own exit strategies along with flipping houses. She can be reached at 707.704.4904 or at [email protected].

Page 10: SJREI Journal Debut Issue

TEXAS INVESTING | By Tom Wilson

Selecting the Best Investments in a Perfect Storm

AUGUST 2009 • SJREI JOURNAL 10

This graph illustrates the tremendous migrations to Texas that continue in 2009.

TOM WILSONOwner/Investor

Wilson Properties

Tom Wilson has bought and sold more than 1300 units, mostly in DFW, including three condo conversion projects, two syndications and seven multi-family properties.

Currently, he is focusing on a program of reselling rehabbed and leased DFW foreclosures to investors. He is active in real estate investment clubs and provides mentoring to new investors.

Reach Tom at:

[email protected]

www.tomwilsonproperties.com

Phone: 408.867.1867

Economic drivers, strong employment, cash flow and more

don’t recommend being a real estate inves-tor, unless you have a well-defined strat-egy, quantitative goals and are dedicated

to go by the numbers and not by unsupported advice or emotions.

My engineering training and 30 years of ex-perience managing high tech profit centers in Silicon Valley taught me how to analyze for the best return on investment in any market.

Today, the principles remain the same. Any-one can do it, however, one needs to be very disciplined and educated about the submarkets and products, or ride the coattails of someone who is.

The primary parameters for selecting the best investment markets are:

• Rent to purchase price ratio• Population growth and inward migration• Employment and business climate• Housing affordability• Location• Cost of living• Rental market• Current and projected market conditions

Now that speculative investing for fast profit has gone the way of the last supermodel, the

I

Page 11: SJREI Journal Debut Issue

wise investor is focused on cash fl owing assets and safe harbors in this perfect storm.

Are there markets that have weathered the storm well, are su-perior in many of the parameters above and have had relatively calmer waters during these past few tumulus years?

Indeed, my experience in more than 1300 investment unit trans-actions in the past 10 years has revealed that that DFW is one is the best in the United States.

The strengths of DFW are:

• Fourth largest and fastest growing MSA (Metropolitan Statis-tical Area) in the United States

• The highest rent per invested dollar for a major economic cen-ter in the United States, and therefore the highest cash fl ow

• Broad-based economy that has outperformed the United States’ average by two times during the past decade• No. 1 ranked business climate in the United States; no state

income tax• Leading MSA for corporate headquarter relocations and

expansions• Most aff ordable housing of top 20 cities ($129,000 median

July ’09)• Central location in the United States attracts companies desiring time zone and distribution competitive advantages• DFW airport is the second largest in the United States and fourth largest world• One of lowest cost of living major MSAs, yet above average

household income• Highest millionaire growth rate in the United States• Strong rental market (95% July ’09 for single family homes) • Very landlord friendly.• One of safest harbors in the United States for real estate and

economy, especially in past few years• Excellent long term growth projections.

Yes, the national economy crisis has affected even DFW, but not signifi cantly compared to other MSAs.

Texas is the second most populous state, so there are indeed many home foreclosures, especially since there is such low cost housing and consequently a high percentage of subprime loans, but in spite of this, Texas foreclosure rate is only 17th in the coun-try.

Historically, the last economies to slow down, are the fi rst to go back up. I don’t know when DFW will start appreciating again,

but I believe it will be before many other areas, and our window of opportunity to invest optimally in any leading area may be shorter than we think.

Right now, I prefer to invest in homes over commercial and multifamily products because homes have more liquidity, are gen-erally lower risk and appreciate faster.

Even in a good region, one must be very careful though in se-lecting the right product, neighborhood and professional service and management team.

Make sure you rely on resources that have a lot of investment experience in that region.

If I’ve learned anything in investing, it is that variations in per-formance from the median can vary tremendously in any general geographical area, and only experienced professionals can help you minimize that risk. I believe that the wise will not wait and see, but act to grasp the best opportunities of our lifetime when everyone else is hiding from this perfect storm.

AUGUST 2009 • SJREI JOURNAL 11

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the out of town investors with the highest level of professionalism and competence. We have created a model which will assist each investor with all their needs during every stage of their investment. Our Team is stand-ing by and ready to assist. We understand the fact that property management is an impor-tant part of the equation. We place a high emphasis on knowledge of each market area.

Pam Blanco, Owner/Realtor ®

2000 E. Lamar Blvd., Suite 600 Arlington, TX 76006 817-907-7347 Cell 817-549-0013 Fax [email protected]

PROFESSIONAL MANAGEMENT

Licensed Leasing Agents

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‘Right now, I prefer to invest in homes over commercial and multi-family products because homes have more liquidity, are generally lower risk and appreciate faster,’ Wilson says.

Page 12: SJREI Journal Debut Issue

BANK-OWNED PROPERTIES | By Howard BloomAUGUST 2009 • SJREI JOURNAL 12

How to find Bargains on Bank-owned HomesBank-owned properties offer good deals, but buyers beware

HOWARD BLOOMRealtor

Intero Real Estate Services

oday’s dramatic growth in the number of bank-owned properties, or real estate-

owned properties (REOs), have offered exceptional opportuni-ties within our own Bay Area and around the country.

Whether you’re looking to upgrade your personal resi-dence or purchase investment property for cash flow, apprecia-tion or tax benefits, REO may be the way to go.

Location, location, location!

While REOs offer great op-portunity, purchasers need to conduct the same due diligence used in any home purchase.

First of all, buyers need to be educated in the neighborhood they are purchasing: What are the market trends? What are current rents? Is it a high-crime area? How are the schools? What is the tenant profile?

Negotiation is key

Everyone wants a deal, and banks want to sell properties they have on their books, but they’re not giving them away.

Banks have a responsibility to their shareholders to get the best price they can and sell the property within a reasonable pe-riod of time.

• Do your homework• Know what the other houses in

the area have closed for• Factor in what type of repairs

are needed in order to make

the property a solid rental• Don’t get emotional about the

property• Determine a maximum price

that you’re willing to pay• Be prepared to walk away

If you don’t get your property, many banks will do a price re-duction every 30 days, so con-tinue to track your property.

Always read the fine print

Always read and make sure you understand the purchase contract and any bank adden-dum.

Most banks state that the ad-dendum will supersede the con-tract where they conflict.

The bank has never seen the property, knows nothing about the property, accepts no respon-sibility or liability for the condi-tion of the property and transfers all responsibility to the buyer to conduct a thorough investiga-tion of the property.

It is important to note that while our local contracts utilize an active method of contingency removal, many banks utilize a passive method of contingency removal that places the respon-sibility on the buyer to notify the seller of their intention not to proceed with a transaction with-in the timeframe provided.

Otherwise, the contract makes the assumption that the transac-tion is moving forward.

Failure to act according to the terms of the contract may place the buyer’s deposit at risk or sub-

ject the buyer to other losses.

Professionals can help get the job done

Always retain qualified profes-sionals to determine the condi-tion of the property. Be a smart investor.

Does it make sense to spend $500 on inspections to ensure that you are making the right de-cision on a $100,000, $300,000 or $500,000 investment?

While the banks don’t want to re-negotiate the contract, if you find unexpected defects, you can ask for the bank to repair it, credit the buyer or as a last re-sort cancel the contract.

If you want to get the best re-sults buying bank-owned/REO properties, retain the most qual-ified, experienced, responsible REO agent that you can find. It will cost you nothing, because the bank pays the realtor’s com-mission.

This is a once in a lifetime op-portunity to get REO proper-ties at highly discounted prices. If you have funds available, the time is now to invest in the real estate market.

Howard specializes in the purchase and sale of bank-owned properties .

Believing in what he sells, Bloom has purchased more than 50 bank-owned properties for himself.

Reach Howard at:

Phone: 650.947.4780

[email protected]

www.HowardBloom.com

T

Howard Bloom is a realtor for Intero Real Estate Services. Howard represents several major lenders in the disposi-tion of their REO inventory.

Page 13: SJREI Journal Debut Issue

What is credit restoration?

Hannah Fliegel is a credit restoration ex-pert, and her company, United Credit, as-sists clients in navigating the credit repair process efficiently.

United Credit begins with the dispute process in an effort to remove negative trade lines on a consumer’s credit report by challenging, inaccurate, obsolete or un-verifiable information.

Once the dispute process is complete, cli-ents are provided with strategies to boost their credit score and teach them how to maintain a good credit rating moving for-ward.

Hannah is also a real estate investor who maintains a credit score of 819 and services well over $1.2 million of mortgages. Home loans and lines of credit are drying up for investors who have less-than-perfect cred-it. By maintaining stellar credit, investors have more options for investment oppor-tunities.

Hannah has assisted hundreds of real es-tate investors in removing their short sales, foreclosures, deed in lieu and bankruptcies from their credit reports.

She also uses credit repair for all her lease-option tenants. She has earned the nickname the “foreclosure fixer” because

her high success rate of removing foreclo-sures from the record.

Why credit repair after short-sales, foreclosure or deed-in-lieu?

The damage to the credit score itself is caused by the late payments leading up to the short sale, foreclosure, or deed in lieu. Typically, it’s an 80 point hit.

From a credit stand point, there is little difference between a short sale, a foreclo-sure or a deed in lieu if the loan is a non-recourse loan and the lender forecloses by deed of trust.

Through the credit repair process, our clients can expect a 74% chance of remov-ing the foreclosure, short sale or deed in lieu from their credit reports.

Why credit repair after bankruptcy?

Typically, a consumer loses 120 points to their credit score when they file for bank-ruptcy. Once the bankruptcy is discharged, a client should sign up for credit repair.

If clients were to pull their credit report, they would see the bankruptcy as well as all the other negative trade lines that were in-cluded in the bankruptcy.

By signing up for credit repair, all the

negative trade lines that were included in the bankruptcy would be removed causing an immediate 60-point recovery to their score and a huge improvement to their credit rating.

Ironically, 50% of the time the bankrupt-cy itself will be removed from the consum-er’s credit reports.

Hannah Fliegel began investing in real estate in 2004. After having a pre-con-struction deal in South Florida go south and compromise her credit, Hannah dis-covered the world of credit restoration.

Hannah is living proof that lemons make great lemonade! A true entrepreneur, Han-nah is a mother of two and she is married to a litigation attorney, who is partner at an international law firm.

For SJREI Members, Hannah offers a special pricing of $399 for credit re-pair services.

AUGUST 2009 • SJREI JOURNAL 13

Why Maintaining Good Credit Matters

HANNAH FLIEGELCredit Restoration Expert

United Credit

www.HammeredCredit.com

[email protected]

Phone: 415.999.9348

CREDIT REPAIR | By Hannah Fliegel

The current state of the economy has left investors scrambling to boost their credit scores. Hannah Fliegel, aka the ‘foreclosure fixer,’ explains how you can easily repair a damaged credit score and instantly receive at least a 60-point boost.

Page 14: SJREI Journal Debut Issue

FORECLOSURES | By Jason Lee

Debunking the Foreclosure MythWill a second wave of foreclosures sink the Valley’s real estate market?

JASON LEEPresident

Silicon Valley REO

Silicon Valley REO specializes in:

• Analyzing of statistics and trends within the local market

• Providing a true understanding of the real estate investment process

• Putting together difficult deals by thinking outside the box while working with sellers, buyers and investors of all types.

AUGUST 2009 • SJREI JOURNAL 14

Will a second wave of home foreclosures hit Santa Clara County?

Some experts predict the next wave of home foreclosure will be enormous because a number of new laws have delayed the ef-forts of lenders to foreclose, ac-cording to RealityTrac.com.

When these delays finally ex-pire, this may open a floodgate of foreclosed homes.

It is predicted that Silicon Val-ley homes prices would drown under this wave!

However, the truth is a count-less number of buyers are frus-trated by numerous failed at-tempts to purchase a home amidst fierce competition.

Many investors have opted to

fire their agents and wait for the next big wave of foreclosures.

Crunching the numbers

The chart below tracks all bank-owned trustee sales in Santa Clara County since April 2007. (Chart 1). It has had many peaks and valleys in the last 12 months.

At the beginning of May 2009, the trustee sales numbers have hovered around 100 homes per week. Will it move toward 200 or 300 in the near term?

Will the market see more foreclosures?

The foreclosure process begins after the homeowner misses a

couple payments and lenders file a notice of default with the county.

After four to seven months, the county will conduct a trustee sale with the minimum bid usu-ally at the loan amount owed to the foreclosing lender.

If no one bids at least the min-imum price, the property be-comes a bank-owned home.

Legally, the lenders may ob-tain the property via a deed in lieu of foreclosure if the lenders are able to get in touch with the homeowners and, somehow, get the debtor to sign over the deed.

There is no way to account for the number of homeowners that are willing to sign such a deed and to give up their homes vol-untarily.

Silicon Valley REO1143 Story Rd. #250

San Jose, Calif. 95122

Phone: 408.998.1300Chart 1. Supply of bank owned since April 5, 2007.

Page 15: SJREI Journal Debut Issue

Chart 3. New bank owned listings vs. close of escrow since Oct. 9, 2008.

However, Silicon Valley REO has tracked the notice of defaults since April 2007. (Chart 2).

What will happen to home prices when the wave hits?

As of June 4, 2009, there are 349 active bank-owned homes for sale in Santa Clara County. The number of bank-owned homes that have closed in the week prior was 168.

Silicon Valley REO has about two week’s worth of inventory today versus 12 months of inventory in De-cember 2008.

Let’s examine the potential fact of the next wave: With 300 notices of default per week (Chart 2), 100 will be lost to short sales, 50 to loan modification, 20 to auction and 130 will become bank owned.

The tsunami of foreclosures experts predicted now looks like a sprinkle of rain upon a dry desert. (Chart 3).

Silicon Valley REO’s busi-ness model

Silicon Valley REO is a lead-ing firm with its own research department. We crunch the numbers so clients don’t have to do the work.

We predicted the imbalance of bank-owned homes last No-vember, and we know what will happen in the next six months in Santa Clara County.

We use the fundamentals of real estate to guide clients on every purchase. The numbers tell the story.

Chart 2. Notice of defaults filed since April 2007.

AUGUST 2009 • SJREI JOURNAL 15

Jason Lee is a realtor and President of Silicon Valley REO.

Page 16: SJREI Journal Debut Issue

he current economic downturn in the real es-tate market has resulted in

many California homeowners being in danger of losing their homes through foreclosure.

The California Home Equity Sales Contract Purchase Act (HESCPA), California Civil Code § 1695 et. seq., seeks to protect homeowners from over-reaching by real estate inves-tors, through the imposition of certain non-waivable require-ments relating to both the form and substance of most contracts for the purchase of California homes in foreclosure.

Criminal and civil penalties can result from violations of HESCPA. Criminal penalties can include a $10,000 fine and one year in jail for each viola-tion. Civil penalties can include an award of actual and punitive damages and attorney fees.

Penalties under HESCPA can be imposed in addition to any other remedies which may be provided for by other provi-sions of law. The statute of lim-itation for HESCPA violations is four years.

A recent case, Spencer v. Mar-shall, 168 C.A.4th 783 (2008), is instructive. In 1998, Alanna Spencer, a first-time home buy-er, purchased a condominium in Hayward, Calif.Several years later, the lender,

Option One Mortgage, filed a notice of default. At the time the notice of default was filed, the condominium appraised for $290,000, some $120,000 more than Spencer then owed on it.

Ryan Marshall “or assigns” pur-chased the condominium from Spencer for $200,000, about $30,000 more than Spen-cer owed on the property, but $90,000 less than the proper-ty’s appraised value.

The purchase agreement was reviewed by Spencer’s attor-ney and Spencer understood that the sale price for the con-dominium was less than its ap-praised value.

After the sale, Spencer filed a lawsuit against Marshall, seek-ing to rescind the deed which transferred title of the condo-minium from Spencer to Mar-shall, to quite title to the con-dominium and for compensa-tory and punitive damages.

After a bench trial on Spen-cer’s HESCPA claims, the trial court entered judgment against Marshall, awarding Spencer $70,000 in actual damages and $210,000 in punitive damages, for a total award of $280,000.

Another California statute seeks to protect homeowners in foreclosure by regulating the activities of “foreclosure con-

sultants.”

A foreclosure consultant is de-fined as any person (with cer-tain limited exceptions) who solicits, represents or offers to a homeowner the performance of a service for compensation which effectively will save a homeowner from foreclosure, or assists a homeowner in ob-taining the remaining proceeds from a foreclosure sale (“surplus funds”). Civil Code § 2945.1. The foreclosure consultant statute may be enforced either criminally or civilly.

Criminal penalties may include a fine of up to $10,000 and/or one year in jail for each viola-tion. C.C. § 2945.7.

Civil lawsuits may result in a judgment awarding actual and/or punitive damages, injunctive relief, and attorney fees.

The statute of limitation is four years from the date of the alleged violation. C.C. § 2956.6(b).

Damage awards, such as reme-dies under the HESCPA, do not preempt rights and remedies an aggrieved homeowner may have under other provisions of law. C.C. § 2945.6(b).

AUGUST 2009 • SJREI JOURNAL 16

Buying and Selling Foreclosed HomesUNDERSTANDING THE LAW | By Anthony F. Earle

ANTHONY F. EARLEAttorney

T

Anthony F. Earle is an attorney licensed to practice law in all California state trial and appellate courts, the United States Supreme Court, the United States Court of Appeals for the Fourth and Ninth Circuits, federal trial courts in the Northern District of California and the United States Tax Court.

He has served as a judge pro tempore for the Santa Clara Superior Court and is also a licensed Real Estate Broker.

Anthony Earle examines how California law can impact your investment

Phone: 408.786.1060800.515.7560

www.earlelaw.com

Page 17: SJREI Journal Debut Issue

FIRST TIME INVESTORS | By Chuck McCay

s a new real estate investor, it is critical that you devel-op a model for the type of

investments that you are going to target – single family homes, or small multi-units. As you pre-pare to invest consider your spe-cific goals, and create a strategy to reach those.

Seasoned investors have a fairly specific set of criteria for buying property. They are very familiar with the area that they are buy-ing in, the price range they want, rents for the area and how much rehab they are willing to do.

Unnecessary renovations are expensive and impact the return on investment (ROI), so they do the work that will bring in the tenant or assist with getting the property sold. Additionally, they have their financing lined up, and exit strategies formulated prior to the close!

One of the more successful in-vestors I know has been purchas-ing in one California market at

the trustee sales; he does a very minor rehab and sells to a retail buyer. His purchase price is in the $100,000 range; rehab is less than $10,000 and his bottom line net is $15,000 to $20,000 in about 90 days.

I worked with another inves-tor on the purchase of a San Jose condo. These condos sold for a median price of about $380,000 in 2005-06. In December 2007, the prices had fallen to $275,000, and this year, the price point hit a low of $125,000.

The units are two bedrooms and one bath and rent for $1300 to $1600 per month. These will provide a reasonable cash flow and are positioned for significant appreciation when the market turns around.

In the Greater Bay Area, an in-vestor can find either great cash flow opportunities to purchase at a discount and flip, or find prop-erties that will break even while providing an expectation of solid,

long-term appreciation. Explore those that meet your criteria.

Your investment model will be built out with different types of properties.

Consider the following fac-tors: location, distance from your house, rental rates, vacan-cy rates, rent up times, access to good property management, schools, safety, age of properties and access to transportation.

Finally, determine the best strategy for acquiring the in-vestment properties that fit your model.

You might be working with a broker, buying at trustee sale or auction, doing mailers or door knocking in specific neighbor-hoods. Find what works for you, and go for it!

Chuck McCay has been a full-time real estate agent for more than 11 years and a broker/owner of his own company for the past five years.

Insights for the First-time InvestorHow to build an investment model that fits your experience and lifestyle

Collaborate with experienced investors to create your own checklist detailing the specific criteria that you want to use. The first part of your checklist will detail factors that will determine the type of property. Keep the following in mind:

A

CHUCK McCAYBroker/InvestorMcCay Homes

AUGUST 2009 • SJREI JOURNAL 17

Your experience:

• Buying and selling real estate

• Negotiating contracts• Management – projects,

people or tenants• Rehab property

Your goals:

• Create cash flow to replace your current income

• Create equity to fund your children’s education or your retirement

• “Chunk” income to provide cash at irregular intervals

Your financial situation:

• Are you a high income earner – more cash flow might not help?

• What is your credit score? • Do you have funds in an IRA or 401K

that could be moved into a self- directed retirement account?

• How much cash do you have?• Do you have possible partners?

McCay Homes3333 Bowers Ave. #130Santa Clara, Calif. 95054

Phone: 408.836.1091www.chuckmccay.com

Page 18: SJREI Journal Debut Issue

AUGUST 2009 • SJREI JOURNAL 18

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Bay Area Market Watch: Calling the Market Bottom

MARKET WATCH | By Geraldine Barry

uying at the bottom of the market is the ideal, but not always easy to accomplish.

The big question on every inves-tor’s mind these days is whether a particular real estate market is hitting a bottom.

Experienced market tim-ers who make a living predict-ing market patterns succeed by identifying trends in the past and current markets and project what is likely to occur. But, even seasoned market timers, such as Bruce Norris or Robert Campbell, who have had years of success in calling pricing trends in Califor-nia, don’t claim they know exact-ly when a bottom will occur.

There are a couple of data points that are helpful when de-termining which direction the market is headed. Inventory lev-els are a fundamental indicator of expected pricing movement; simple supply and demand.

Exploring past and current in-ventory levels for specifi c areas can be very useful. One expects property values to increase or de-crease as inventory levels move up or down.

GERALDINE BARRYPresident

SJREI Association

These charts demonstrate how inventory/supply and demand/price relate.

B

Geraldine Barry is an active investor and President of the San Jose Real Estate Investors Association (www.sjrei.net) providing timely real estate. SJREI provides information to investors on markets both locally and nationally, and creates a forum for investors to connect with like-minded people.

Reach Geraldine at:

[email protected]

www.SJREI.net

Phone: 408.264.3198

Page 19: SJREI Journal Debut Issue

I have included two charts of one of our markets of interest that demonstrate how inventory/supply and demand/price re-late.

Foreclosure numbers that are either in-creasing or decreasing provide a snapshot into the future of potential price changes.An increase in foreclosure numbers will generally result in price declines; a decrease usually means that inventories are tighten-ing, and hence prices will likely increase.The vast majority of foreclosed homes ulti-mately become real estate owned (REO, or bank owned).

Since banks are not in the real estate business, they are eager to sell. Thus, an increasing number of foreclosed homes in a given area not only indicates that there will be a future increase in in-

ventory, but also as REOs, the sellers will be motivated.

It should be noted that it may take as long as a year for the process of posted foreclo-sure levels to work themselves into the market, and then out as completed sales.

Affordability is another factor that drives sales and impacts inventory levels – most people are not aware that affordability as of April 2009 was 73.5%, according to Realtor.com, who also added that in the past year, the Housing Affordability Index maintained by the National Association of Realtors has increased 29% overall and 19% for first-time homebuyers, and is high-er now than at any time in the 28 year his-tory of the index. (See graph 1 on the front cover).

Finally, it should be noted that apply-

ing just a couple market timing indicators, such as inventory and foreclosure levels for movement, is not sufficient to get the com-plete picture of where prices are headed.

There are many other useful market fac-tors that can and should be explored. Ac-cording to Robert Campbell, economist and author, the following should also be considered to get a more complete picture:

• New Home Building Permits (housing starts)

• Interest Rates• Loan Defaults

However, as an investor, knowing your local foreclosure rates and inventory levels will give you some very important insights in determining the right time to buy.

AUGUST 2009 • SJREI JOURNAL 19

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Tidbits from the TrenchesWith Broker/Investor Jebb HenleyHow are credit market conditions impacting investors?

The continuing “credit crunch” means investors are experiencing delays and additional costs to obtain required financing to close deals. Conventional cash-out refinancing, previously restricted only by a limit on the total number of transactions and an investor’s credit score, is now subject to varied seasoning periods, higher contribution percentages and inconsistent application of the limits of the number of loans an investor may hold at one time.

What area are you investing in, and why?

I invest in distressed homes at a 40% discount from neighbor-hood sales. The homes can be renovated while maintaining a low property tax base and create strong income flows. Single family homes are maintaining a high occupancy which is rare compared to multi-family units.

Any recommendations to investors?

Stick to fundamentals: Buy low and stay flexible. Market conditions will continue to evolve in response to the crisis, and the large inventory of properties already in or headed for fore-closure will continue to put downward pressure on housing prices.

What do investors need to be aware of as they invest?

Look for areas with strong and diverse employment, steady housing prices, above average per capita income and educated work force.

Page 20: SJREI Journal Debut Issue

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