Apparently the latest market idea from RM is going to be bringing Kiwis to buy cheap homes in America (especially in California) at mortgagee or foreclosure auctions. There is just a couple of small problems with this model.
In mid 2007 FASB and US-SEC changed revenue recognition rules for non-performing loans for lenders. This allows them to move the properties off the books to a third party entity. This transfer can yeild up to 100% of valuation thus no loss for the non-performing loan.
This entity may still be owned by the bank but through a trust. This is for the purpose of parking properties, doing work-outs and in-place leasebacks for defaulting borrowers until the market improves.
This devise arose out of a factual and historical accounting rule that was illogical. It effectively said a non-performing loan, even though secured by real estate, was worth nothing. This illogically assumed the property had no value and this assumption was a major determinant in the savings and loan crisis of 1987.
This 2007 change fixed the rules and protected banks from sudden write offs and cash reserves falling below FDIC and Fed manadated requirements by a having to recognize non-performing loans. Smart folks these Yanks.
The housing resale product that is making it to foreclosure auctions are the houses that are deemed less salable by the banks and least desirable by the investment community.
First rule of bottom feeding - Just because it's cheap its not necessarily a good buy. The majority of stuff that hits these auctions is junk; remote and 1 & 2 star neighborhood stuff because the best stuff has already been picked over, first in pre-foreclosure by the short sellers and second, by wholesalers who get first look at bank owned properties as they work with banks to dispose of this stuff in bulk. If it was so good, why would the thousands of short sale and wholesale operators who get first pickings of bank recoveries or REOs (meaning Real Estate Owned by the bank,) have taken a pass.
From direct experience and attending many of these events supporting auctioneers and wholesalers, the properties are seldom the sort of stuff that passes fundamental and technical muster for a good performing investment, no matter how good "the price."
Punters get sucked into these big real estate auction events with the promise of good deals. UK, Australian (Nigel Kibel's original plan) and Canadian real estate investment educators have been bringing would be investors to the US to try make a killing, only to find financing is not available for foreign residents.
A foreign buyer who needs to borrow money in the US to make the cash-on-cash gearing work will have a nearly impossible time getting a loan. It is tough for US citizen just buying a house, let alone an investment property. If you wanna play bring 50 to 100% cash and/or could borrow the difference from a hard money lender with fees at a brutal 24%.
Personal Real Estate Investor Magazine called the bottom of the market Q'1 2008 as we started to see the leading indicators like inventories contract in better neighborhoods. That is happening at an ever increasing rate. These auction inventories are growing further in lesser neighborhoods, confirming that these auctions are full of properties a serious investor probably would not want.
A NZ based investor looks at prices in the US and is amazed at the value one gets buying a property, but unless you are going to do the improbable and move the property to NZ, you are playing in a very different market in the US and need to dramatically downgrade value perceptions. There are tens of thousands of very efficient property wholesalers at work in the US.
These auction events are not for serious investors who have already skimmed the investment grade properties first. This is where you find the next round of bright eyed beginners destined for the ash heap of foreclosure.
Best: Andrew Waite
In mid 2007 FASB and US-SEC changed revenue recognition rules for non-performing loans for lenders. This allows them to move the properties off the books to a third party entity. This transfer can yeild up to 100% of valuation thus no loss for the non-performing loan.
This entity may still be owned by the bank but through a trust. This is for the purpose of parking properties, doing work-outs and in-place leasebacks for defaulting borrowers until the market improves.
This devise arose out of a factual and historical accounting rule that was illogical. It effectively said a non-performing loan, even though secured by real estate, was worth nothing. This illogically assumed the property had no value and this assumption was a major determinant in the savings and loan crisis of 1987.
This 2007 change fixed the rules and protected banks from sudden write offs and cash reserves falling below FDIC and Fed manadated requirements by a having to recognize non-performing loans. Smart folks these Yanks.
The housing resale product that is making it to foreclosure auctions are the houses that are deemed less salable by the banks and least desirable by the investment community.
First rule of bottom feeding - Just because it's cheap its not necessarily a good buy. The majority of stuff that hits these auctions is junk; remote and 1 & 2 star neighborhood stuff because the best stuff has already been picked over, first in pre-foreclosure by the short sellers and second, by wholesalers who get first look at bank owned properties as they work with banks to dispose of this stuff in bulk. If it was so good, why would the thousands of short sale and wholesale operators who get first pickings of bank recoveries or REOs (meaning Real Estate Owned by the bank,) have taken a pass.
From direct experience and attending many of these events supporting auctioneers and wholesalers, the properties are seldom the sort of stuff that passes fundamental and technical muster for a good performing investment, no matter how good "the price."
Punters get sucked into these big real estate auction events with the promise of good deals. UK, Australian (Nigel Kibel's original plan) and Canadian real estate investment educators have been bringing would be investors to the US to try make a killing, only to find financing is not available for foreign residents.
A foreign buyer who needs to borrow money in the US to make the cash-on-cash gearing work will have a nearly impossible time getting a loan. It is tough for US citizen just buying a house, let alone an investment property. If you wanna play bring 50 to 100% cash and/or could borrow the difference from a hard money lender with fees at a brutal 24%.
Personal Real Estate Investor Magazine called the bottom of the market Q'1 2008 as we started to see the leading indicators like inventories contract in better neighborhoods. That is happening at an ever increasing rate. These auction inventories are growing further in lesser neighborhoods, confirming that these auctions are full of properties a serious investor probably would not want.
A NZ based investor looks at prices in the US and is amazed at the value one gets buying a property, but unless you are going to do the improbable and move the property to NZ, you are playing in a very different market in the US and need to dramatically downgrade value perceptions. There are tens of thousands of very efficient property wholesalers at work in the US.
These auction events are not for serious investors who have already skimmed the investment grade properties first. This is where you find the next round of bright eyed beginners destined for the ash heap of foreclosure.
Best: Andrew Waite
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