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Month: December 2016

A Property Management Company and Its Role

Posted on December 31, 2016 in Uncategorized

This article explains what a property management company does. It cites some of the benefits of using one.

A property management company is established by people for a specific purpose, which is to control and manage real estate. There are now so many of these types of companies in the world and all have the sole purpose of taking care of pieces and parcels of land at the behest of the lands owners.

Main Responsibilities

The main responsibility of this sort of establishment is the act of managing residential, commercial and industrial real estate. In doing so, those in charge of the company controls various aspects including managing and controlling personal property, physical capital assets and equipment which have been acquired and accumulated through taking care of several pieces of land and real estate. The manpower, processes and the systems that are involved in running the establishment are all included in a property management company. It involves so many direct and indirect things that one can say that it is just like managing another company. The financial, the people and the micromanagement of so many things are included in it.

Primarily, it always centers on real estate and property. While real estate is easily understood as land, property can be anything else such as companies, corporations, buildings and other things. The financial aspect is one focus which is crucial. There has to be gains and incomes for the outfit to be successful and for its clients to want to continue being with them. There are many cases of there being no clients, and the property management company only takes care of its own properties, assets and finances. Other possible problems that may need supervision are possible litigations that the owned real estate properties may be involved in as well as legalities concerning the tenants who may be leasing or renting the areas. In many cases, lawyers are employed specifically to litigate for real estate and other forms of property Landlord and tenant relationships should be clear and concise to be able to have a long lasting and tension free one. Lawyers are also usually involved in the drafting of contracts as well as the implementation of the conditions within these. There are laws that are primarily aimed at minimizing conflict between the landlord and the tenant and these are the common ground for most contracts unless there are other agreements stated otherwise. State wide and municipal laws and other rules and regulations which are focused on real estate and property are applicable for most contracts and lawyers are very useful when it comes to these aspects.

A property management company not only stops with managing and controlling pieces of land and buildings, the acquisition of additional properties is also another primary concern. Adding to the roster of properties involved in the company is yet another goal for it. After such acquisitions, the newly acquired property is then managed the same as the others contained in the establishment. The responsibility of each and every piece of property that is currently within that of the company is shouldered by it. Therefore, a property management company has a lot of responsibilities and roles under it.

Returns on Real Estate vs. Stock Market

Posted on December 28, 2016 in Uncategorized

There is always going to be debate amount investors over the returns on Real Estate vs. the Stock Market. Each side has their valid points and it is mostly going to be up to the investor to make his own decision.

Real Estate has a long history of being a stable and secure investment. The Stock Market, by comparison is a relatively new creation. The value of land and property dates back to the very beginning of recorded history, but does this ancient historical value really have much to do with today’s investment market. The supporters of the Stock Market will be quick to point out that they recognize Real Estate’s historical value, but will be quick to point out that “that was then, and this is now.”

When you take a look at the average return on investment (ROI) figures for the modern era from 1926 to 1996, you find that it is pretty close to being a tie. Small stocks slightly outperformed Real Estate during this period, 12% to 11%, although Real Estate edged out the Dow Jones Industrial Average by 11% to 10%. These figures indicate that there is not much difference between Stock Investments and Real Estate Investments according to historical return figures.

There are several major differences between the management of both investments. Stocks are easily transferred. They can be bought in smaller lots or large lots. There is much similarity between Stocks of different types. Real Estate investments take a bit of time and effort to complete the transactions. The transactions costs tend to be high. The idea of an inexpensive piece of Real Estate does not mean anything at all the same as an inexpensive share of Stock. All of these factors seem to point to Stocks as being better.

But administrative details and transaction costs do not have anything to do with the rate of return. In fact, if initial costs on Real Estate transactions are higher, and historically they end up performing as well, it is obvious that once they are in your portfolio, they are going to outperform most Stocks. Also, the trick to successful investing is not graphing what happened in the past, but predicting what is going to happen in the future.

One of the most compelling arguments for Real Estate investment is the matter of finite space. There is only so much land and only so much improvement can be made to it. Corporations and other types of business entities have no such finite limit. The expansion of the Stock Market into the electronic world that led to the “dot.com” bust recently is an example. Since Real Estate has limits on its ability to expand, it would seem likely that it will continue to increase in value as it grows more and more scarce. Real Estate managed to hold its own against the Stock Market during the period of the Stock Market’s great advancement and growth. The future could very well belong again to the Real Estate investor as it once did in the past.

TACT Program – Solving the Real Estate and Banking Crises is Simple

Posted on December 25, 2016 in Uncategorized

There have been numerous articles and books written on the theories or reasons behind the residential real estate bubble and its bursting in 2006, which led to what will likely be remembered as the Great Recession. I can add that I am not one of the parties that share the blame. I was living in Europe from 1994 – 2007 and did not even own real estate in the US during most of that time period! Chalk that up to luck, not prescience.

I would like to focus on what can be done to get out of this mess. The answer is surprisingly simple, although as so many things in life that are simple, it will not be so easy to implement due to the number of banks and organizations involved. They need to change or eliminate the policies, guidelines, and artificial barriers these organizations created to stop the free market from correcting the situation.

The easiest way to understand the solution, is to realize that a bank’s balance sheet is far stronger when it has a performing mortgage loan, rather than a bank owned (REO) property on its books. A REO property is in reality a liability to the bank, inhibiting its ability to borrow and lend. A performing mortgage loan is an asset that can be sold in the secondary market, or used to borrow against to make more loans. The situation is similar when a bank has a performing mortgage loan (even at a lower face value), rather than having a non-performing loan that exceeds the value of the real estate backing it.

In the simplest terms, the solution is for the banking industry to use some of the same strategies as real estate investors currently use since bank loans are not available. Investors whose livelihood depends on the returns they earn on their invested capital, do not wait until a buyer comes along with the ability to get financing. With few mortgage loans being made, there are very few such buyers. The investors package financing in with the property sale to have a competitive advantage. The only step the banking industry took in this direction over the last year was their proposal to allow former owners to stay in their homes as renters. The banking industry lacks property management skills, so they picked the worst strategy to try. The banking industry needs to focus on providing financing to sell the homes, not to get into the rental business.

I have been working on this solution for 18 months and so many naysayers told me it could not be done, that I initially believed them. Fortunately I heard about a gentleman across the country that had been working on the same concept. He had sufficient success acquiring bank owned properties from small local banks, that he started holding seminars on the topic. He coined the phrase “Bank Seller Financing” and pitches it as a great way to acquire properties. He appropriately cautioned that this was not a phrase that would get a positive reception within the banking industry, since “seller financing” was viewed as competition by mortgage lenders. I am indebted to Michael P. Watson and his seminar for rebuilding my determination to expand this simple solution to resolve a massive problem – the US housing market crisis.

Let me summarize the US residential real estate market issues, as if there was a US real estate market. In reality there are many sub-markets with varying degrees of these problems and opportunities. Detroit, Cleveland and Buffalo (where I was born & raised) are very different real estate markets than Las Vegas, Los Angeles, Phoenix (where now I live and invest), or most metro areas in Florida. The key issues are:

– property values have declined, in some markets precipitously,
– many homes are now below their mortgaged value, and far below their “market value” during the bubble,
– banks have too many properties they own due to foreclosure,
– banks are faced with many non-performing loans and the prospect of even more foreclosures,
– some counties (like Maricopa County where I invest) are sending out ridiculously low assessments for 2011 and scaring more homeowners into turning their keys over to their lenders, and
– with the current high unemployment rate the majority of people believe that real estate prices will continue to decline, despite evidence to the contrary.

As a case in point, I was shocked when investors at a recent meeting of the Arizona Real Estate Investors Association (AZREIA) were polled about whether they believed housing prices would fall further, are near bottom, or are rising. Approximately 75% felt they would decline, 14% said it was at or near bottom, and 1% (including me) felt they were rising. All of those investors have access to the same very detailed market data, so I was shocked how differently we each filter that data based on what the media and the gurus are saying.

Back to the issues, there is one key issue which is both the crux of the problem, and the crux of the solution. There is not enough money available to make mortgage loans to meet demand. Ask your friendly bank executive if money is available for mortgages and they will give you the party line – “yes, we are lending every day and have plenty of funds available”. Publicly available data on lending, current underwriting requirements, and government issued guidelines give a totally different answer. The truth is banks do not have sufficient reserves to make enough loans.

Since banks are not lending, hard money lenders and private mortgage lenders (like my company) cannot even meet 20% of the investor demand for loans, despite charging annual rates of 12-18%. If plenty of mortgage money is available, why do I get daily requests, far exceeding our capacity, for Private Mortgage Loans, Transactional Funding, Seller Financing, Contracts for Deed, and our Lease-to-Own program? Trust me, it is neither because of my good looks, nor because I offer rates below government subsidized bank loans.

Many people believe that demand for real estate is low, and that is depressing the market. The opposite is true in many markets. In the Phoenix market, sales in 2009 and so far in 2010 were on par with the peak years of 2004-2006. Pending sales are now at levels that make those earlier years look like slow periods. Incidentally, during the peak years the Town of Buckeye, where I live, was the fastest growing housing market in the US. By 2008 the bubble burst and about 90% of the properties for sale were distressed sales. Like the rest of the Phoenix market, sales now exceed the peak years, and I have prospective buyers asking for our financing help daily since they can’t get bank financing.

The solution to the real estate and mortgage crises is simple, and it is not new and stronger regulation. To the contrary, the more the government meddles the worse things will likely get. The banking industry, and I include the mother hens in FHA, Fannie Mae, and Freddie Mac along with the banks, need to eliminate the self inflicted policies they imposed and barriers they constructed after the real estate market collapsed. These policies are analogous to locking the doors once all the horses escaped.

I recently submitted a number of purchase contracts on bank owned (REO) and short sale properties (with non-performing loans). So to those that say there is no demand – I am ready and willing to buy hundreds of properties that meet my cash flow requirements, if the financing is available. There are another 100 investors like me in the Phoenix area flocking to the auctions, bidding on REO listings and on short sales. If financing were available, prices would be rising even faster than the 13% year-over-year increase we saw in April. That was not a misprint; Phoenix area prices rose 13% since April 2009!

Here are a few of the barriers to mortgage financing:

– REO properties require high reserves, inhibiting lending,
– non-performing loans require accruals and reserves, further inhibiting lending,
– bank REO, short sale and mortgage modification departments are understaffed,
– lending departments have policies to inhibit financing the sale of their own bank’s REO’s and short sales (notice the Catch-22),
– most mortgage loans help the bank selling the REO more than the one issuing the new loan (not a great incentive for issuing new loans),
– few investors and homeowners have FICO credit scores exceeding 720 (the new underwriting norm),
– individual investors, even those at the top of the Forbes 400 list are restricted to 10 mortgage loans in their name, regardless of assets, net worth and income,
– entities whether corporations or LLCs, as most investment funds are structured, cannot get mortgage loans regardless of their assets, profitability or book value, since those loans cannot be sold on the secondary market,
– bank executives are not aware of the conflicting policies they have put in place,
– too many separate governmental organizations regulate and “try to fix” the mortgage and banking industries, and
– there is intense pressure from the US Treasury for banks to buy T-Bills to finance the deficit.

To me it is very obvious from this list – banks do not have the money to lend due to their weakened balance sheets and reserve requirements. When distressed homeowners face this same dilemma, they reach into the bag of tricks investors use, selling their homes with seller financing, on a lease-to-own contract, contract for deed, or even turning over the deed “subject to” the investor taking over the payments.

Banking industry, meet the enemy – look in the mirror. It is time to heal thyself by implementing the TACT (Toxic Asset Conversion and Transfer) Program. Learn from and work with real estate investors and buyers to sell off your REO and short sale properties. You will strengthen your balance sheets and income statements, property values will continue to rise, fewer people will hand over their keys, and the real estate market will return to normal. This can be done in months, not in decades. For more detailed description of the TACT Program review other articles in this series.

Banking Industry: We have met the enemy, The enemy is us.