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What recovery? Another Threat From Foreclosures

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The Chris Williams Radio Show

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Although the asking prices are up on homes in major metropolitan area, backlogged foreclosures could threaten those asking price gains.

Transcript

0:05 Introduction

Welcome to the Real Estate Report with Chris Williams of Blue Sky Capital. This is where you can learn about what's happening in real estate and how you can make big money in today's real estate market.

0:23 Tony Vignieri

Hello! And welcome to the Real Estate Report with Chris Williams. I am your moderator, Tony Vignieri. On today's show, how foreclosures are threatening the recent gains and the asking prices on homes. With me as always is Chris Williams, the CEO of Blue Sky Capital in San Diego. Hello, Chris!

0:42 Chris Williams

Hi, Tony! It's so good to be on the show.

0:45 Tony Vignieri

Great to have you. For our listening audience some insight on Chris and his real estate investment firm, Blue Sky Capital. Chris Williams is an expert in real estate investment, finance and syndications. In his 13 years in real estate, he has managed and directed real estate teams and handled more than 300 real estate transactions. He is the proud recipient of the Prudential's President's Award, award he won nine years in a row. In 2011, Chris launched Blue Sky Capital, a private equity firm in San Diego. Blue Sky Capital is helping to rebuild neighborhoods through their systematic and disciplined approached to buying and selling distressed real estate. Chris, in the recent report from trulia.com, which is the San Francisco-based company, that tracks real estate across the country, based on during the month of June, the asking prices on homes in nature of metropolitan areas went up which is a good sign. However, backlogged foreclosures could threaten those asking price gains. Chris, what are your thoughts on what they found?

1:50 Chris Williams

Well sure, Tony. We have seen an uptake in pricing, real estate throughout the major metropolitan area, down in Southern California we are seeing a small uptake and certain sectors of the market. However, the backlogged foreclosures can definitively threaten those asking prices and frankly we believed they will threaten those asking prices. See, Tony, the banks are setting on millions of properties that are currently somewhere in the foreclosure process and the banks have essentially hit the pause button on the foreclosure process so that they can honor the settlement agreement that they made with the 50 states attorneys' generals and what I've talked about earlier is a 25 billion dollars bank settlement. So the banks are currently going to the process to try to modify the mortgages of lots and lots of borrowers, but Tony this is destined to fail as the modification doesn't address the real problem which is negative equity also known as being upside down or underwater.

2:53 Tony Vignieri

Sure, sure.

2:54 Chris Williams

You've heard about this modification, Tony. Most of modifications are simply a small change to the rate and the terms and adding the past to payments to the end of a loan, but they're not a true modification, Tony. In many times, the banks will do the modification so that they get a newly signed note to make up or having for lost the original note. So, this way they can foreclose down the road which happens on about 65% of all loan modifications.

3:22 Tony Vignieri

Would you say was then metering it out this way and what you just described now. I hate to say what this way, but giving the banks the power in this whole process?

3:34 Chris Williams

Oh, the banks have all the power in the whole process. The banks have no pressure from the government to clear to these foreclosures with the agreement they made with the FDIC. They also have no pressure from their investors because the way that they're showing these non-performing loans on their balance sheet isn't showing up as a negative on their balance sheet. That's why you're seeing record profits from the banks. But how could that be? They have trillions of dollars of non-performing loans, yet they are showing record profits that doesn't make any sense. There are some accounting acrobatics going on with the way the banks are keeping their books and as perfectly legal. So the banks have all the power, they are slowly letting foreclosures out. In fact, the banks are now creating a supply constriction in the marketplace making it very difficult for companies like me to come in and buy steeply this kind of real estate.

4:27 Tony Vignieri

So again, with the banks doing it this way. You would see anything in the near future where they're gonna change that practice or they've gonna push this properties through?

4:40 Chris Williams

I think they have to. Why we think the -- Tony really, this increase in home values and this new excitement in the real estate market is a temporary bleep. It is unsustainable. If you look at with this graphic, right? Consider that the banks are the dam and there's a lot of water back behind the dam, which were non-performing loans, loans that are upside down. That dam is going to purchase some point, they can't handle that much pressure and so the only way for our national economy to recovery to a healthy economy and the only way for the real estate market to correct is to reset the values on this overinflated prices on these homes and this overinflated loans. They must go through the short sale process or they must go to the foreclosure processes and so we believe there is a second way for foreclosures coming. Look, there are statistics that show that the new filings for foreclosures are through the roof. Particularly here in San Diego and Southern California, the banks are starting the foreclosure process on many more properties than they did it over the past year, though the second wave is coming.

5:46 Tony Vignieri

Isn't there -- you know I hate to say this way, but a bit of smoke and mirrors is going on from the standpoint of -- we haven't heard a lot about this because we see in the midyear in the paper or other headlines that are showing that it -- you know things seemed to be bottoming out.

6:06 Chris Williams

Yeah. Well things are not what they seen. If you take a look at who is releasing those reports NAR, National Association of Realtors -- a group which I'm a member of, is publishing a lot of these reports which is in their best interest to publish these reports, they said things are improving. Also remember Tony, it's an election year, right? We have presidential election, congressional set of elections, it's an important year for us politically so as much good news as we can get is gonna be coming out, but look it is smoke and mirrors, it is unsustainable, things are not what they seen. We are a long way from over with this real estate correction and frankly the crashing of the economy.

6:47 Tony Vignieri

Got it. But you know, another interesting point that was made by Trulia is that they found rents are up over a year compared to last year major cities, was all those connected?

6:58 Chris Williams

It is connected. See, this is due to the millions of displaced homeowners from the real estate crash. People that are foreclosed upon or completed a short sale, they can purchase a new home, lending guidelines, even though rates are really low it is very hard to get a loan and people that have recent distress can't get a loan so they are forced to the rental market, it's a natural outflow. So, Tony when you couple the increase of rental demand with the decrease the new construction starts for new rental units, the result is an increase in rents.

7:33 Tony Vignieri

Sure and that's what we're seeing and again that's connected because we're not gonna see any relief on that until all of this other things are corrected, right?

7:43 Chris Williams

Precisely.

7:45 Tony Vignieri

You know we talked about this on previous shows, you just explain it again about how the distressed property has to work its way through the system either as a short sale or a foreclosure before we can get back to normal in the housing market. How does Blue Sky Capital help in, in this process?

8:00 Chris Williams

Well, we know we really do help in the process and Tony we see ourselves as part of the solution. We are out one house at a time, rebuilding neighborhoods here in San Diego. So let's just break it down for a short sale. Here's how we help. We are actually going door-to-door. We're talking to homeowners that we know are underwater in their homes and we also know they're behind other mortgages payments and we'll letting them know that they have options. They don't have to sit there and deal with the humiliating experience of being foreclosed upon. So we're working, we go and we'll talk with them, we'll explain the short sale process to them and when in fact will even buy their house from them and walk them through the short sale process so that they have a dignified grateful way to get out from under the asset. As it regards foreclosures, we're part of the solutions and we are down with the auctions, we're buying properties at the auctions so rather than that going back to the bank and sitting and languishing. We buy it, we rehab it, we put a good qualified borrower in there, a happy family, we take a house that we called a sad house. That's the water hasn't been run, the yard is dead, nearly painted and we make it a happy house. So we then make it a happy neighborhood. So again, we are part of the solution.

9:13 Tony Vignieri

Great. And this is on Blue Sky Capital just you know buying distressed properties, rehabbing them and then reselling, you're really helping people. Helping neighborhoods as well as helping the marketplace to heal.

9:25 Chris Williams

That's right.

9:27 Tony Vignieri

Another thing that as you are describing the changing landscape that's happening, we start this show a couple of months ago now. What do you see has changed from you know just the late spring now to mid summer?

9:44 Chris Williams

Couple of things had changed. One is there is a very real shortage of inventory for the buyers to buy. Now the source of that shortage is artificial because it's the bank opting not to foreclose or not to approve short sales. So one thing is of the storage of inventory has caused an uptake in pricing, but what hasn't change Tony is buyer demand has not increased. So this is one of the reasons that people are fooled by what's happening. You see, with the buyer demand staying the same but the supply dropping, it looks like the market is recovering, it's not. We have a demand problem. We don't have a supply problem. The demand problem is we have millions of people that are either unemployed or underemployed and the demand problem have to do with the difficulties in getting a loan. Yes, interest rates are down below 4%, they may even go to 3%. But have you noticed that hasn't really stimulated things... [Crosstalk] It hasn't because it's not a rate-driven issue because the low rates doesn't solve the demand issue. The demand issue is that is very difficult to get a loan and until it's easier to get loans and until we have a healthy sustained supply from the banks we're gonna see the market where it is. So there are some of the few changes that I have seen since the spring.

11:09 Tony Vignieri

Great. And you know as we started the program, it's not another threat from foreclosures. I think some people want to bury their heads in the sand about this but you know bring it back to what we started talking about in the beginning of what you're seeing that's around the corner.

11:28 Chris Williams

Well, here's one thing that's around the corner that there is going to be a second wave for foreclosures. Just look at the foreclosures starts the new filings that the banks were doing. The banks right now have hit the pause button because they're trying to honor the bank settlement that they made with the attorneys general, that's great. It's not gonna work. It hasn't work in the past, it's not gonna work this time, they're not real modifications. We will see a dramatic increase in the number of foreclosures and so if you are a consumer that's held captains in an underwater mortgage in your house, I invite you to give us call and talk to us so that we can tell you what your options are. And not only well we manage the short sale process for you, but we will actually be the buyer as well. This way, you don't have a sign in your front yard, you don't have a lockbox on your door and you don't have afraid of a lookie loos marching through your house, looking at your house, we'll be the buyer and we'll also do the short sale. And Tony, this creates a great opportunity though for investors in the marketplace as well.

12:29 Tony Vignieri

That was my next question, Chris. That was the...

12:31 Chris Williams

Yeah, right. We are part of the solution. I'm sorry, I stepped on you. We're part of the solution for the homeowners that are stuck. We're also part of the solution for the investors because while there is enormous distress in the marketplace, there are people that have money in their IRAs or they have cash around and they wanna take advantage of this real estate correction, we're part of that solution too. We have really formulated a way to purchase property steeply discounted. Even in the phase of the bank holding back the supply, we got a new method that we're using. And so if you're an investor of the marketplace I think really the best thing to do is to give us a call and we'll talk to you about what we're doing and how we're going it to see if we're a fit for your investment goals.

13:11 Tony Vignieri

Right. We talked to you about that on a couple other shows too about that this is -- I think you indicated that this is the best time in 100 years to invest to the real estate, explain that again.

13:23 Chris Williams

It is, indeed. It's the best time on 100 years because of where interest rates are and because we knew there is a motivated seller in the marketplace. See, most of the time the seller on the marketplace isn't very motivated because there are an equity seller just trying to keep their equity, but we currently have a highly motivated seller in the marketplace which are these banks because they are already losing money. In fact, they've been compensated for that loss by having bought those loans discounted for the FDIC. So there is a highly motivated seller in the marketplace, so buyers like us can find great deal. Now, you have to know how to find a great deal. The supply constraints have made it difficult to purchase this kind of homes. My company is behind target year to date, but we formulated a unique approach to purchase those properties and I'm happy to talk to investors about that if they give us a call.

14:12 Tony Vignieri

Great. Thanks a lot. Let's give everyone our phone number, Blue Sky Capital which is (877) 424-7479 or (877) 4CHRISW. Well, thanks for joining us today. Thanks Chris. Thanks for everyone out there for the Real Estate Report with Chris Williams. We're on-air weekly to keep you updated and to keep you informed about what's happening in real estate today. I'm Tony Vignieri. For Chris Williams and the Blue Sky Capital team, have a great real estate day!

14:44 Closing

Welcome to the Real Estate Report with Chris Williams of Blue Sky Capital. This is where you can learn about what's happening in real estate and how you can make big money in today's real estate market.

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