Your Questions About Real Estate

Mark asks…

Should I quit now? 10 pts?

I’ve been a commercial real estate agent for 5 years now and for the first 4 years it was going fine. However, as many of you know, commercial real estate loans are going bad, and along with it, many banks are not lending. My brokerage is a very specialized brokerage. It is a car wash brokerage. Many commercial real estate brokers specialize in hotels, office buildings, apartments, etc. My business partner and I specialize in car washes. Unfortunately for us, most banks will not lend money on a car wash. They are still much more lenient on apartments, hotels, offices, but car washes have been very very bad investments for banks coming out of the real estate boom. As a result, I do not see my brokerage doing ANY deals this year, or in the near future. In the meantime I’m running out of cash and fast.What should I do? Since I’m technically self employed I have plenty of time to search for a job, but the reality is that if I was truly serious about leaving this career now, I would simply quit and start a new career asap. I’m 29 years old and started doing this right out of college. I feel confident that I can take a pay cut and start a new career somewhere else. At this point it seems almost inevitable that I’m going to have quit soon. My question, therefore, is does it make a difference if I search for a job only part time, or should I quit now and put all my effort into finding a job now while I still can afford to pay 3 more months rent, and still have some money for food?
I appreciate the optimism guys but at this point a change in course is highly unlikely for me. My business partner just started our new marketing campaign and we are indeed headed in a new direction: apartments. However, I have about 4 months left before I’m broke, and since we are untested in the apartment market I think it would be prudent to either (a) jump ship now or (b) get a new career.

The Expert answers:

Ahh, right up my avenue. I’m also in commercial brokerage. Here’s an analogy for you (as much as I hate them), you have to know more than one dance to survive in this market. So you could very easily switch specialties. The language is a bit different but performing and calculating return is similar. Not the same but similar. If you’re losing cash fast, consider taking on a REIT or another large group and work with them exclusively for a while. I am still pretty busy and by some stroke of luck I am further along this year than I was last year collectively. We simply cannot keep doing the same thing and expecting results. Another avenue is to work with owner occupiers. Banks are more inclined to loan to them then even proven developers at this point. Just keep in mind that the ones that are standing at the end of all this will be the ones leading the pack when it goes back up. Also remember when it does come back to live well below your means and you will always be steady through the hard times. I do and did so I’m not getting the same spanking so to speak. :) And finally, if you learn another area of CRE, you can always bounce between the two. I specialize in land and investments so I am always working between the two. Investments is a relatively broad term but take your CCIM with your free time and you will love it! Good luck.

Jumping ship and ending it now sound like the same option. Am I missing something? I think you should move toward multifamily, start with some short sales and forclosures (work with the banks) and get a part time job to stretch out the 4 months to 6-8 which should be plenty of time for you to take down and close 1-2 deals. You may also want to do some deals on your own to keep more of the commish.

Maria asks…

Should I call it quits?

I’ve been a commercial real estate agent for 5 years now and for the first 4 years it was going fine. However, as many of you know, commercial real estate loans are going bad, and along with it, many banks are not lending. My brokerage is a very specialized brokerage. It is a car wash brokerage. Many commercial real estate brokers specialize in hotels, office buildings, apartments, etc. My business partner and I specialize in car washes. Unfortunately for us, most banks will not lend money on a car wash. They are still much more lenient on apartments, hotels, offices, but car washes have been very very bad investments for banks coming out of the real estate boom. As a result, I do not see my brokerage doing ANY deals this year, or in the near future. In the meantime I’m running out of cash and fast.What should I do? Since I’m technically self employed I have plenty of time to search for a job, but the reality is that if I was truly serious about leaving this career now, I would simply quit and start a new career asap. I’m 29 years old and started doing this right out of college. I feel confident that I can take a pay cut and start a new career somewhere else. At this point it seems almost inevitable that I’m going to have quit soon. My question, therefore, is does it make a difference if I search for a job only part time, or should I quit now and put all my effort into finding a job now while I still can afford to pay rent, and still have some money in the bank? 10 pts for best answer.
Well I’d like to continue doing something in the real estate world, but I don’t have time to just limit it to real estate so I’m applying to all kinds of jobs. I’m in Los Angeles so jobs are far and few. If all else fails I’m thinking of joining the Navy as an Officer.

The Expert answers:

The big question should be, do you know what you want to do? What is it that you really love doing, and can you make money doing it? IF you know, then absolutely change jobs and go into your new career full bore. If not, then you are going to have to find a way to make money until you find your niche. Ultimately, you know you are going to have to move on sooner than later.

James asks…

They are robbing the FDIC to bail out the rich?

“Federal Deposit Insurance Corp. Chairman Sheila Bair said she expects her agency will finance as much as $500 billion in purchases of residential and commercial real estate loans.”

I’m sorry, can some other please read this news story from yesterday very, very, very carefully, and tell me, does it or does it not explain that a private investor can put up $7000 and acquire $100,000 worth of real estate with the government matching $7000 and loaning $86,000 from the FDIC?

http://news.yahoo.com/s/ap/20090324/ap_on_go_ca_st_pe/bank_rescue_88

So, for $14,000, a private investor can acquire a $200,000 property, forget the $14,000 matching grant, and slowly repay the government $172,000?

What happens if that investor defaults? Who covers the loan payments to the FDIC so that it will stay solvent?

Since when does the FDIC make billions in loans?

The last I read about the FDIC a few months ago said it did not have enough money then to cover everyone’s deposits if the banks all collapse.

Why then would it be tapped to send $500 billion out its doors on a dubious economic rescue plan with full understanding that the whole plan is a risk and may fail?

The rich bankers will get their money from the government loans as speculators and the naive rush to get these properties that they won’t be ablle to make money off of in this economy — lol, the banks cannot make money off of them, by what magic will the private investor using government money to get them from the banks be able to make money off them?

So, the banks and those who own them will be held up for awhile, but when the problem behind this economic mess is not truly addressed, they will run the risk of failing again and there will be no money in the FDIC to cover the consumer’s deposits? But the rich will have their money, courtesy of $500 billion from the FDIC?

Oh my.

Is that what is happening here?

The Expert answers:

Not any private investor. Just the hedge funds and other very fat cats. The government is not in this for nickle and dime. They want investors that can buy a billion worth at a time. The idea is to make the rich richer at the expense of the tax payer of course. Unless I misunderstand this, which I very well might, I do not think the FDIC is involved. That agency is in business to absorb failed banks. Of course once a bank does fail the agency does sell the assets of the failed bank to another bank or rather maybe pay another bank to take them.

Nancy asks…

IS Time to Sell BOA ?

WASHINGTON (AFP) – - The US government extended a new lifeline Friday to Bank of America, injecting another 20 billion dollars in capital and guaranteeing shaky assets to help it weather the grinding financial crisis.

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The bailout for the largest US bank by assets is aimed at helping Bank of America absorb broker Merrill Lynch, which faced a meltdown last year as the credit crunch intensified.

A joint statement by the US Treasury, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) said the government would invest 20 billion dollars in the bank, on top of a 25-billion-dollar injection last year under the Troubled Asset Relief Program (TARP).

Additionally, the government “will provide protection against the possibility of unusually large losses” on 118 billion dollars of assets backed by residential and commercial real estate loans, the market for which has been frozen due to the housing meltdown and credit crisis.

The banking giant will pay the government a dividend of eight percent on the investment and agree to limits on executive compensation. The bank also agreed to implement a “mortgage loan modification program” to limit foreclosures that threaten to undermine a recovery in the housing sector.

The announcement came hours before BofA released its fourth-quarter earnings. The Charlotte, North Carolina-based bank posted a loss of 1.7 billion dollars, after managing a profit of 268 million dollars a year earlier.

The results stem from soaring credit costs and massive write-downs. Merrill Lynch, which was not included in the results, lost over 15 billion dollars in the quarter.

The bailout comes with US authorities scrambling to avert a further collapse in the banking sector that could deal another blow to an ailing economy. A similar deal was announced last year with Citigroup.

“The objective of this program is to foster financial market stability and thereby to strengthen the economy and protect American jobs, savings, and retirement security,” the Treasury said.

But some analysts were skeptical and Bank of America shares fell 13.7 percent to 7.18 dollars after a dive of 18 percent on Thursday.

“These measures have seemingly removed a worst-case scenario for equity holders, but they show just what a mess Bank of America has managed itself into,” said Patrick O’Hare at Briefing.com.

Even as other banks reeled, Bank of America appeared healthy enough to buy up troubled mortgage lender Countrywide Financial last year as well as Merrill Lynch.

But Robert Brusca at FAO Economics said the bank “simply bit off more than it could chew.”

Peter Cohan of Peter Cohan & Associates consulting firm said Bank of America rushed to buy Merrill without a full understanding of its troubles.

“The numbers clearly show that without Merrill, Bank of America would be in relatively good shape, but with it, Bank of America is a financial basket case,” Cohan said.

Standard & Poor’s said it could downgrade the bank’s credit rating and warned that BofA faces the possibility of “further write-downs” from Countrywide and Merrill Lynch.

BofA has already received 25 billion dollars in capital injections from the TARP, a US financial bailout fund set up to help rescue mainly banks reeling from financial turmoil triggered by a home mortgage meltdown. That included 10 billion dollars for Merrill Lynch.

Under the latest agreement, BofA will absorb the first 10 billion dollars of losses and the US taxpayers will cover the next 10 billion. Any additional losses will be shared 90 percent by the US government and 10 percent by BofA.

The government aid comes as the banking sector remained in deep trouble from the real estate meltdown and subsequent credit crunch that has led to around one trillion dollars in worldwide losses.

Citigroup announced Friday a quarterly loss of 8.29 billion dollars and said it was splitting into two businesses in an effort to restore profitability.

Bank of America on September 15 announced it was buying Merrill Lynch for 50 billion dollars in stock, scooping up the Wall Street icon battered by the housing and credit crisis.

While giving a lifeline to a troubled Wall Street giant, the deal created the world’s largest financial services company.

The announcement came at the close of a tumultuous weekend that saw Wall Street rival Lehman Brothers seek bankruptcy protection, leading to an intensification of the crisis in the global financial system.

They cant even survive after M&A with bad debts out b4 they M&A so a waste of taxes-payer $ . so i have a chance to sell it .
I not invest in all companies that have been bailed out is as good as they dead.

The Expert answers:

Unlike most people’s advice, I’m going to say to “never catch a falling knife” (you learn this after you are burned a couple times).

I’d have to say that you should look at the future and try to put your money where it has the best potential to gain value.

Forget about BofA and think of where your money should be. If you believe that BofA has the best potential going forward, stay with the stock. If another investment is a better place, move your funds there.

Managing your money is like driving. Always look at where you are going and not where you are at.

Carol asks…

To those who don’t believe we are in a recession…lets discuss?

I form non bias opinion on answers. I will provide evidence on why we are in a recession. If you don’t agree then that is you’re own decision and it is respected by me. However I will challenge you to see what parts of this info is not seen in the market…and why it cannot be defined as a recession.

THIS IS LONG BUT IT PROVIDES REASON FOR WHY IT IS A RECESSION:
The public was addressed by the secretary of state three weeks ago with the state of our economy. It was concluded there was a sign of recession on way. However, many believe this started in November as did the subrime lending create decrease in mortgage lending. I am one of those people. I don’t believe that subrime lending was the only cause. So since subrime lending fiasco started two consecutive periods ago….this indeed has led to a economic fall. GDP is important…and I have seen it fall also…but it has not reached two consecutive periods…but it will, no doubt. (that is my own opinion) Note that the GDP-growth (real seasonally adjusted annual rate) for the last quarter of 2007 was 0.6[31] as revised on February 28, 2008. It was 2.2 for all of 2007.

Nouriel Roubini has outlined a harsh 12-step scenario.[32]

U.S. home prices will fall between 20% and 30% from their peak. NYTimes chart ALSO TODAY IT WAS ANNOUNCED THEY HAVE FALLEN 60%
Losses to the financial system from the subprime disaster, as high as $300 billion, are now spreading to near-prime and prime mortgages.
The recession will lead to a sharp increase in defaults on other forms of unsecured consumer debt.
Monoline insurance companies will take losses on their insurance of residential mortgage-backed securities, collateralized debt obligations and other asset-backed securities products, which are much higher than the $10 billion-to-$15 billion rescue package that regulators are trying to arrange.
The commercial real estate loan market will soon enter into a meltdown similar to the subprime one.
Some large regional or even national banks that are very exposed to mortgages, residential and commercial, may go bankrupt. Bear Stearns Companies, Inc. collapsed on March 16, 2008, and was bought out by JP Morgan Chase.
Banks’ losses will grow as a result of hundreds of billions of dollars of leveraged loans on their balance sheets at values well below par, currently about 90 cents on the dollar.
Once a severe recession starts, a massive wave of corporate defaults will take place. Typically U.S. corporate default rates are about 3.8% (1971-2007); in 2006 and 2007 this figure was a rather low 0.6%. And in a typical U.S. recession such default rates surge above 10%.
The “shadow banking system” (as defined by Pimco, it is composed by non-bank financial institutions that borrow short and in liquid forms and lend or invest long in more illiquid assets), will soon get into serious trouble.
Stock markets in the U.S. and overseas will start pricing in a severe U.S. recession and a sharp global economic slowdown.
The credit crunch that is affecting most credit markets and credit derivative markets will lead to a drying up of liquidity in several financial markets, including otherwise very liquid derivatives markets.
A vicious cycle of losses, capital reduction, credit contraction, forced liquidation of assets at below fundamental prices will ensue, leading to further credit contraction
Any questions?
John…man are you serious…”labeling”?

C’mon…now. GDP is gonna say the same thing I pulled off wikipedia. So what are you getting at? You have to come out with something more than characterizing my question as labeling. No offense…i mean you are the only one that answered in 30 minutes. So its looking like people aren’t conflicting with a recession being here. Thats good.
Good answer though.
Piatchi..thats a great analogy…lol. Bear Sterns was baught by JP Morgan and Chase when it had substancial losses…but hey it DID survive the depression. Just take a look at any site it will give more info. Thanks for answer.

The Expert answers:

According to the NBER’s guidelines for what a recession is, it certainly would point to the fact that we’re in a recession. It doesn’t take a weatherman to tell me that it is raining outside when my roof leaks.

Lets face it— companies net profits have fallen, the housing market is a complete mess, consumer confidence has dropped significantly (although not a dramatic drop in the timeline of the suspected recessionary period)

You mentioned Bear Stearns already, but I’d like to add that Bear Stearns survived the Great Depression. It seems rather ironic that it would fall apart in a non-recessionary period.

Are we in a recession? I say yes, and some people may disagree, but I do know my roof is leaking.

John asks…

To those who don’t believe we are experiencing a recession? Why is this?

I form non bias opinion on answers. I will provide evidence on why we are in a recession. If you don’t agree then that is you’re own decision and it is respected by me. However I will challenge you to see what parts of this info is not seen in the market…and why it cannot be defined as a recession.

THIS IS LONG BUT IT PROVIDES REASON FOR WHY IT IS A RECESSION:
The public was addressed by the secretary of state three weeks ago with the state of our economy. It was concluded there was a sign of recession on way. However, many believe this started in November as did the subrime lending create decrease in mortgage lending. I am one of those people. I don’t believe that subrime lending was the only cause. So since subrime lending fiasco started two consecutive periods ago….this indeed has led to a economic fall. GDP is important…and I have seen it fall also…but it has not reached two consecutive periods…but it will, no doubt. (that is my own opinion) Note that the GDP-growth (real seasonally adjusted annual rate) for the last quarter of 2007 was 0.6[31] as revised on February 28, 2008. It was 2.2 for all of 2007.

Nouriel Roubini has outlined a harsh 12-step scenario.[32]

U.S. home prices will fall between 20% and 30% from their peak. NYTimes chart ALSO TODAY IT WAS ANNOUNCED THEY HAVE FALLEN 60%
Losses to the financial system from the subprime disaster, as high as $300 billion, are now spreading to near-prime and prime mortgages.
The recession will lead to a sharp increase in defaults on other forms of unsecured consumer debt.
Monoline insurance companies will take losses on their insurance of residential mortgage-backed securities, collateralized debt obligations and other asset-backed securities products, which are much higher than the $10 billion-to-$15 billion rescue package that regulators are trying to arrange.
The commercial real estate loan market will soon enter into a meltdown similar to the subprime one.
Some large regional or even national banks that are very exposed to mortgages, residential and commercial, may go bankrupt. Bear Stearns Companies, Inc. collapsed on March 16, 2008, and was bought out by JP Morgan Chase.
Banks’ losses will grow as a result of hundreds of billions of dollars of leveraged loans on their balance sheets at values well below par, currently about 90 cents on the dollar.
Once a severe recession starts, a massive wave of corporate defaults will take place. Typically U.S. corporate default rates are about 3.8% (1971-2007); in 2006 and 2007 this figure was a rather low 0.6%. And in a typical U.S. recession such default rates surge above 10%.
The “shadow banking system” (as defined by Pimco, it is composed by non-bank financial institutions that borrow short and in liquid forms and lend or invest long in more illiquid assets), will soon get into serious trouble.
Stock markets in the U.S. and overseas will start pricing in a severe U.S. recession and a sharp global economic slowdown.
The credit crunch that is affecting most credit markets and credit derivative markets will lead to a drying up of liquidity in several financial markets, including otherwise very liquid derivatives markets.
A vicious cycle of losses, capital reduction, credit contraction, forced liquidation of assets at below fundamental prices will ensue, leading to further credit contraction
I agree. One “economist” proceeded to call me every name in the book and told me i don’t understand propensity. This is nothing but coin-tossing guestimations.

The Expert answers:

We are in a recession. It started back in the fall. By the time that the economists recognize it, it may very well be over. That is how they work best, in hindsight.

Steven asks…

can anyone tell me if i herd this right?

Today on the news they were just telling us the American people what their plan was. Obama seems to be content with it so i dont know. But
i must say this doesn’t sound like what i thought he was trying to do.

Federal Deposit Insurance Corp. Chairman Sheila Bair said she expects her agency will finance as much as $500 billion in purchases of residential and commercial real estate loans.

okay so let me get this right.. The banks screwed us cause well their good talkers. Screwed themselves. We pay money we dont have. Alot of americans lost their homes due to greedy banks and people making us loose our job and our homes in forecloser. And now with our money they buy our homes with our money?

http://cosmos.bcst.yahoo.com/up/player/popup/?rn=3906861&cl=12618169&ch=4226720&src=news

Wouldn’t it been better to just buy the houses from the start and let us stay in their and have some sort of i.o.u. policy?

what do you think?

The Expert answers:

Yeah don’t you know that’s Obama policy.. Sneaky sob ain’t he? It appears he can only coast off ‘bush did it’ for so long.. Now he is gonna tax the hell out of us to cover his spending.. You know that the news also said his total spending would total 7.8 trillion dollars as a whole.. Thats projected spending mind you.. Wheres the money coming from?? That’s more than george washington up to bush jr combined with all the presidents in between is what they said..

Donald asks…

Other than Reagan appointee greenspan keeping interest rates low, how did the govt. cause the housing bubble?

“2008 Nobel Prize in Economics winner Paul Krugman states that the notion “has been refuted up, down, and sideways.”[104] He also noted in November 2009 that 55% of commercial real estate loans were currently underwater, despite being completely unaffected by the CRA.[105] According to San Francisco Federal Reserve Bank Governor Randall Kroszner, the claim that “the law pushed banking institutions to undertake high-risk mortgage lending” was contrary to their experience, and that no empirical evidence had been presented to support the claim.[100] In a Bank for International Settlements (BIS) working paper, economist Luci Ellis concluded that “there is no evidence that the Community Reinvestment Act was responsible for encouraging the subprime lending boom and subsequent housing bust”, relying partly on evidence that the housing bust has been a largely exurban event.[106] Others have also concluded that the CRA did not contribute to the financial crisis, for example, FDIC Chairman Sheila Bair,[101] Comptroller of the Currency John C. Dugan,[107] Tim Westrich of the Center for American Progress,[108] Robert Gordon of the American Prospect,[109] Ellen Seidman of the New America Foundation,[110] Daniel Gross of Slate,[111] and Aaron Pressman from BusinessWeek.[112]”

Furthermore, if any conservative can actually explain how fannie mae caused it, be my guest.
Ashley Jade: Explain
@conservacunt: Then care to explain why milton friedman got a nobel prize?

The Expert answers:

Add President Clinton to the long list of people who deserve a share of the blame for the housing bubble and bust. A recently re-exposed document shows that his administration went to ridiculous lengths to increase the national homeownership rate. It promoted paper-thin downpayments and pushed for ways to get lenders to give mortgage loans to first-time buyers with shaky financing and incomes. It’s clear now that the erosion of lending standards pushed prices up by increasing demand, and later led to waves of defaults by people who never should have bought a home in the first place.

President Bush continued the practices because they dovetailed with his Ownership Society goals, and of course Congress was strongly behind the push. But Clinton and his administration must shoulder some of the blame.

In writing this blog entry, I’m following the lead of Joseph R. Mason, who is a finance professor at Drexel University’s LeBow College of Business, a senior fellow at the University of Pennsylvania’s Wharton School, and a consultant at Criterion Economics. Here is a link to a piece that he wrote on Feb. 26.

The Clinton-era document that Mason cites—“The National Homeownership Strategy: Partners in the American Dream”—was hiding in plain sight

on the website of the Department of Housing & Urban Development until last year, when according to Mason it was removed (probably because the housing bust made it seem embarrassing to the department). Mason credits Joshua Rosner of Graham Fisher & Co. With saving a copy of it before it was expunged.

The National Homeownership Strategy began in 1994 when Clinton directed HUD Secretary Henry Cisneros to come up with a plan, and Cisneros convened what HUD called a “historic meeting” of private and public housing-industry organizations in August 1994. The group eventually produced a plan, of which Mason sent me a PDF of Chapter 4, the one that argues for creative measures to promote homeownership.

The very worst idea in the plan, which fortunately never gained approval, was to let first-time homebuyers freely tap their IRA and 401(k) retirement-savings plans with no penalty to scrounge up a downpayment. That, HUD estimated, would have “benefited” 600,000 families in the first five years.

“” For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership.

Note the praise for “creativity.” That kind of creativity in stretching boundaries we could use less of. Mason puts it well: “It strikes me as reckless to promote home sales to individuals in such constrained financial predicaments.”

Lisa asks…

Real Estate Question???????

You are analyzing a commercial real estate investment that generates a net operating income of $5,000,000 which increases by 3.5 percent per year. The purchase price is $58 million, the land value is 20 percent of the total property value, the holding period is 10 years, the nominal income tax rate is 28 percent, the recapture tax rate is 25 percent and the long-term capital gain tax rate is 15 percent. A lender is willing to provide financing for the 10 year holding period with a 25 year amortization period for a fixed rate of 7 percent based on a loan to value ratio of 75 percent (25 percent equity). Calculate the before and after tax IRR and NPV based on a discount rate of 400 basis points above the going in cap rate and a terminal cap rate of 100 basis points over the going in cap rate. The cost of sale is three percent. What is the debt coverage ratio in year five?
I don’t expect anyone to do the math and answer this for me, but steps to solving it would be beneficial. I do not want the answer and I don’t want anyone to “do my homework” for me. It’s not homework either. I am just having a hard time figuring it out, especially the NPV and IRR. Any steps or comments would be much appreciated. Thanks :)

The Expert answers:

And we’re doing your home work, why?

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