Let start with the potential first “good” news of the year for most of us, the recession may end by the end of the year. According to Ben Bernanke Chairman of the Federal Reserve and outlined in this article from the AP, “Stocks up on Bernanke remarks; focus now on Obama” by Madlen Read and Tim Paradis, while the economy is in deep trouble, we could see some significant improvements by the end of the year.
In Part 2 of our current review of values and markets and in previous post we acknowledged couple of points. Real estate markets with low medium credit profile crashed first and now we are seeing stabilization. Location, is becoming even more important in today’s lending environment, both for commercial and residential properties. From a Hard Money perspective it is one primary factor for approval.
Expending on location in addition to the credit quality of borrowers the quality of the urban planning of the market in which a property is located will make a difference. Maybe because I grew up surrounded by architects, discussing urban planning and quality of life, I pay attention to these details. A striking example is downtown Sacramento CA. The city in the past 15 years or so has seen great improvements, its downtown area has been well upgraded. While values are falling, downtown Sacramento is steel very appealing. However, neighborhood further out, requiring families to have 2 or more cars are seeing accelerated losses in values.
Markets with low and medium credit profiles are starting to get out of the wood, while markets were borrower had what is considered A+ credit rating are now tumbling. They started to get depressed during the 4th quarter of 2008 and I would predict that 2009 will be one of the most difficult year ever for these markets. I believe that we may see lost in values ranging from 25% to 50% depending on location, regional economic factors etc… These markets are just starting to get affected. They are suffering from the lay offs of white collars employees. The silver lining is that most likely we will see these markets behave the same way as the medium and low credit profile markets. With this in mind we can anticipate a beginning of stabilization by the end of 2009. Interestingly, our real estate timeline correspond with the timeline of Mr. Bernanke to get out of the recession.
We need to keep in mind that this analysis primarily applies to residential real estate. Commercial real estate, will behave differently and in part in correlation to residential. Today hard money lenders understand well the values of properties in these low and medium credit markets and approve loans quite easily. However, in A+ credit markets we are seeing more uncertainties.
Tuesday, February 24, 2009
Monday, February 23, 2009
Values Are Down But There Is a Silver Lining – Part 2
What has been the motto of real estate location, location, location is truer today than ever. Location both affect commercial and residential real estate values in ways not seen before. In this post today, I want to start reviewing how location affects properties values and the state of the market in these different locations. For private lenders it is a crucial element of approving loans even more so since “conventional” banks are giving location a higher importance in their approvals.
Private lenders are in general regional lenders in a number of cases we are able to fund nationally. In part this is due to lending regulations, however, it is also due to our ability to understand markets. We could make the argument that one reason today we are in the mess we are in, is because the same lending and underwriting criteria were applied across then United States. Thus market differences and nuances were not taken into considerations.
Before moving forward with location, lets go over one crucial elements, the availability of capital. We have learned since August 2007 that if there is no money available to borrow and buy in this case real estate, then no transaction will happen. No Transaction means, no demand, no demand means prices are going down. Until buyers comeback with capital to buy properties value are not going to stabilize. Once enough buyers start making buys then a bottom has been achieved.
Different locations represent different types of borrowers and different market profiles. If we stay within the residential market we are able to see a couple of interesting patterns. The real estate markets first touched by the down turn are now starting to stabilize. These markets are in general in the blue collar neighborhoods. Properties in these markets are trading in general at 25% to 30% of their former market values. Borrowers did not have the best credit profile, they had lower reserves and lower paying job. When credit started to tighten they did not have the reserve needed to survive a change in lending policies. These markets have been depressed now for 18 months. Based on what we are seeing, I believe that we are starting to see price stabilization. Numerous investors are moving in and buying properties at 25% of their former values.
Even in these markets, there are differences. The markets that are seeing stabilizations are the ones that are closer or within larger metropolitan areas. Markets that are further away are not yet at the bottom. The way to measure this is by realizing that no investors are interested in buying properties that are further away at current prices. In addition, no private lenders are interested in making these loans yet. This may change when property are being exchanged at 15% or 20% of their former market values. Something we will follow.
Private lenders are in general regional lenders in a number of cases we are able to fund nationally. In part this is due to lending regulations, however, it is also due to our ability to understand markets. We could make the argument that one reason today we are in the mess we are in, is because the same lending and underwriting criteria were applied across then United States. Thus market differences and nuances were not taken into considerations.
Before moving forward with location, lets go over one crucial elements, the availability of capital. We have learned since August 2007 that if there is no money available to borrow and buy in this case real estate, then no transaction will happen. No Transaction means, no demand, no demand means prices are going down. Until buyers comeback with capital to buy properties value are not going to stabilize. Once enough buyers start making buys then a bottom has been achieved.
Different locations represent different types of borrowers and different market profiles. If we stay within the residential market we are able to see a couple of interesting patterns. The real estate markets first touched by the down turn are now starting to stabilize. These markets are in general in the blue collar neighborhoods. Properties in these markets are trading in general at 25% to 30% of their former market values. Borrowers did not have the best credit profile, they had lower reserves and lower paying job. When credit started to tighten they did not have the reserve needed to survive a change in lending policies. These markets have been depressed now for 18 months. Based on what we are seeing, I believe that we are starting to see price stabilization. Numerous investors are moving in and buying properties at 25% of their former values.
Even in these markets, there are differences. The markets that are seeing stabilizations are the ones that are closer or within larger metropolitan areas. Markets that are further away are not yet at the bottom. The way to measure this is by realizing that no investors are interested in buying properties that are further away at current prices. In addition, no private lenders are interested in making these loans yet. This may change when property are being exchanged at 15% or 20% of their former market values. Something we will follow.
Tuesday, February 17, 2009
Values Are Down But There is A Silver Lining: Part 1
A few days ago, I went to a real estate investors meeting to better understand what small investors are looking to buy and the information they were receiving. One of the primary topics of discussion was about foreclosures, values and how to buying bank owned real estate or REO. Bank owned real estate value is currently one of the primary indicators of property values, thus an important topic.
Before countinuing, let me pass this little tip. I met a property auctioneer and for few minutes we talked about the process and what was happening at auctions. One of the most interesting pieces of information was that most properties auctioned are never bought. Banks, put properties though auctions but in 99% of the cases they repossess them.
Private money lenders are concern about property values 100% of the times. Not only they have to look at the value of properties today but they need to think about values few years later when their loans expire. This is in part a reason why when we approve loans the property valuation will be more conservative than a government sponsored lending institution. Keeping a close tab on what the real estate market is doing, where it is headed, is one important task of private lenders. To value a property we all have slightly different approach methodology. We use a combination of different tools, such as appraisals, automated valuation systems etc.. in addition our experience and understanding of local markets will be complimentary tools.
Numerous reports in January came up with the following pieces of information, property values dropped on an average 18% year over year. California has 4 of the top five markets that lost the most values. Number of sales of properties that have been previously owned has increased. The question is why are we seeing an increase in sell but a decrease in value. The answer is investors and in some cases first time home buyers leveraging low interest rate. Current home buyer are not upgrading or downgrading as it is a really bad time to sell a property.
More about valuation and market in our next post.
Before countinuing, let me pass this little tip. I met a property auctioneer and for few minutes we talked about the process and what was happening at auctions. One of the most interesting pieces of information was that most properties auctioned are never bought. Banks, put properties though auctions but in 99% of the cases they repossess them.
Private money lenders are concern about property values 100% of the times. Not only they have to look at the value of properties today but they need to think about values few years later when their loans expire. This is in part a reason why when we approve loans the property valuation will be more conservative than a government sponsored lending institution. Keeping a close tab on what the real estate market is doing, where it is headed, is one important task of private lenders. To value a property we all have slightly different approach methodology. We use a combination of different tools, such as appraisals, automated valuation systems etc.. in addition our experience and understanding of local markets will be complimentary tools.
Numerous reports in January came up with the following pieces of information, property values dropped on an average 18% year over year. California has 4 of the top five markets that lost the most values. Number of sales of properties that have been previously owned has increased. The question is why are we seeing an increase in sell but a decrease in value. The answer is investors and in some cases first time home buyers leveraging low interest rate. Current home buyer are not upgrading or downgrading as it is a really bad time to sell a property.
More about valuation and market in our next post.
Tuesday, January 27, 2009
Getting a Hard Money Loan Is Not Easy
Such as everything in today’s lending world there is reality and there is fiction and there is borrower’s reality. Recently I received an email from a broker, asking me if we were really funding loans ?. At first I thought that this was a weird questions, however, giving it a second thought I realized that this was an important concern from brokers and their clients. Today, I will try to go over why loans are approved and funded and why some are not approved and funded.
Because of low barriers to entry into the real estate industry there are a number of people with limited experience who follow the band wagon. Today some of these activities are Hard Money / Private Money lending, Loan Modification, REO Investments etc.. The lack of experience creates difficulties for brokers and their clients, as brokers realized that what was promised will not be delivered. Another issue for brokers is that to lock a potential deal, they are being quoted rates and points from funding sources before a loan has been reviewed. Once the loan is underwritten, different terms are being given.
Loans are approved and funded if:
- Borrower(s) understand that they need to be flexible
- There is limited rate shopping as the solution is more important than the rate
- There is a package well put together
- Broker, Borrower and Funder work well together
- Borrower(s) are realistic
Loans are not approved and funded when:
- Borrower can not make monthly payments
- Properties is not well kept
- Ltv is high
- Borrowers have not realistic idea of value
The bottom line if a financing you requested is approved just take it.
Because of low barriers to entry into the real estate industry there are a number of people with limited experience who follow the band wagon. Today some of these activities are Hard Money / Private Money lending, Loan Modification, REO Investments etc.. The lack of experience creates difficulties for brokers and their clients, as brokers realized that what was promised will not be delivered. Another issue for brokers is that to lock a potential deal, they are being quoted rates and points from funding sources before a loan has been reviewed. Once the loan is underwritten, different terms are being given.
Loans are approved and funded if:
- Borrower(s) understand that they need to be flexible
- There is limited rate shopping as the solution is more important than the rate
- There is a package well put together
- Broker, Borrower and Funder work well together
- Borrower(s) are realistic
Loans are not approved and funded when:
- Borrower can not make monthly payments
- Properties is not well kept
- Ltv is high
- Borrowers have not realistic idea of value
The bottom line if a financing you requested is approved just take it.
Wednesday, January 14, 2009
What About Commercial Financing?
My first post of the year was optimistic and I continue to be looking forward to 2009. However, it does not mean that this year is not going to be really difficult. As 2008 was the death year for residential real estate 2009 maybe the year for commercial real estate. A good friend of mine, a hard money lender, made the point yesterday that he believes 2009 will be dramatic for commercial real estate. He believes that commercial properties have been over valued and with company failures numerous properties are going to be in default.
In an AP article “Down we go again: Faint…” the reporters goes over the most recent financial news and numbers and it does not look good. Bad results mean that companies are not going to expend and in numerous cases are going to contract. When companies need less space for offices, retail etc.. less income is being generated thus properties ability to service debt is reduce. More property owners are going to find themselves in difficulties and may decide to let their investments go.
Commercial real estate is in part regional and in part based on national trends as we are seeing a general downturn, we should expect a general downturn in commercial real estate. However, some regions maybe much more affected than other and in some cases for different reasons. Clearly Michigan is going to suffer tremendously even if the different auto companies stay in business. Areas with more diversified economy may see a smaller downturn than areas that are less diversified.
Commercial hard money lenders are going to be very selective with the type of financing they are approving. Not only we are going to be more demanding in regard to the general quality of the deal but, it is going to be more and more difficult to finance properties that are in distress situation. There will be still some flexibility available, however, this is not something that we should be expecting. In addition, as the demand for private money continues to increase, we should all be expecting that the financing process to move at slower pace than what we are used to.
In an AP article “Down we go again: Faint…” the reporters goes over the most recent financial news and numbers and it does not look good. Bad results mean that companies are not going to expend and in numerous cases are going to contract. When companies need less space for offices, retail etc.. less income is being generated thus properties ability to service debt is reduce. More property owners are going to find themselves in difficulties and may decide to let their investments go.
Commercial real estate is in part regional and in part based on national trends as we are seeing a general downturn, we should expect a general downturn in commercial real estate. However, some regions maybe much more affected than other and in some cases for different reasons. Clearly Michigan is going to suffer tremendously even if the different auto companies stay in business. Areas with more diversified economy may see a smaller downturn than areas that are less diversified.
Commercial hard money lenders are going to be very selective with the type of financing they are approving. Not only we are going to be more demanding in regard to the general quality of the deal but, it is going to be more and more difficult to finance properties that are in distress situation. There will be still some flexibility available, however, this is not something that we should be expecting. In addition, as the demand for private money continues to increase, we should all be expecting that the financing process to move at slower pace than what we are used to.
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