Buried in New Business

We are Buried in New Business

Hello Team:

I want to thank you for all your kind words and encouragement. Before today's topic I wanted to clarify a few items for those of you that have asked. -- You can see the other blogs I have posted for more detail. While I would like to be able to take all your calls, eMail and posting your comments would be the most efficient.

Most of you know that CalFirstFinancial is a real estate brokerage that provides real estate financial planning services and mortgage services simultaneously with real estate brokerage services. For those of you that asked, the reason we are called CalFirstFinancial instead of "Geen Bush Realty" is simply because our focus group studies indicate the public holds Bankers in higher regard than they do Realtors. Not fair? -- You're right. Its not a fair world.

All of our Agents basically get paid twice - once for the real estate brokeage services and once for the loan. Because of the related refinancing loans we do for many of our clients, our Agents make more than 50% of their income from the mortgage side of the business.

Take your real estate commissions -- more than double them and that is what a Cal First Agent makes.

While we are very competitive with our pricing for all our services we rarely loose a client due to price. You see, we do not charge for our real estate financial planning services. We simply get paid real estate commissions and loan fees like you do. What we provide our clients is value. Our mission statement is --- "We Make Our Clients Wealthy"

While we are making our clients into multi-millionares, building their retirements and securing their children's future. The last thing they do is quibble with us over a few dollars in loan fees or commissions.

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Candidly, if you aren't providing bundled services and providing true financial consulting value for your clients, you and your firm will probably not be economically viable in the future.

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With that said, I wanted to share one of our current training pieces that addresses today's market conditions in Southern California. The sales volume in our Market place is off significantly, but our business is expanding considerably and I wanted to share the reasons why to help you expand your business as well. Its a big market and there is certainly plenty of room for all of us.

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Note -- The training memo below is geared to the Southern California market place, I think the mechanics could help many of you in our industry. To get value out of this that will really help you acquire more clients you will need to roll your sleaves up a bit, get your mortgage calculator out and go through the example so your really understand what is going on here. Then and only then will you be able to have a meaningful discussion with your clients and sphere of influence. If you are not familiar with mortgage fundamentals (shame on you), sit down with your loan officer and work together to verify the calculations so as a team you can move forward. The memo follows:

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Hello Team: This is a call to action. You will hear many alleged experts pontificate about the real estate market. The problem is that many of these "alleged" experts don't really know what they are speaking of and merely have an obligation to fill column space or air time. It's one thing to wave your arms and make a lot of noise, its quite another to have the knowledge and math skills necessary to get down to a real interpretation of events. Don't be intimidated. You will hear me say again that we are not advancing the frontiers of physics. We do need a working knowledge of residential real estate brokerage, basic mortgage skills and a reasonable command of 8th grade algebra -- Or -- you need to be working for a Broker that does. There are some very cool movements in play at this very moment that require your detailed study and attention. If you think this old conservative seems excited, you are right. The stars have entered a very rare alignment that indicates the beginning of a very rare opportunity. The foundation of this phenomena is based on 3 straight forward principals that rarely fall into optimum synchronization --

1. Low Interest Rates
2. Strong Economic Growth -- with very few clouds on the horizon
3. Temporarily Softening Housing Prices (again with no recession -- this is extremely rare)

Brief Window -- The downside is that this window will be fairly brief due to rising interest rates. Despite all the political rhetoric you hear in the news, the economy is expanding at such an astounding rate that the Fed is still generating gigantic rate hikes (1/4% increments) in a continued effort to slow it down. They will be successful and when they are, the high interest rates will knock out the rare opportunity that is just unfolding now. I know short term rates and long term rates are only loosely connected, but they both respond to the same economy. Trust me, mortgage rates are going up. I have been doing this for a long time and my crystal ball tells me that 8++% mortgage rates are not far off.

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I want to lay out the framework for a detailed discussion you should be currently having with your clients regarding the current outstanding Market Opportunity for expanding your client's residential holdings in Southern California. I have been tracking this kind of detailed data for over 30 years from the perspective of a market analyst, principal investor, high volume tract home builder, real estate agent and real estate broker. I can sincerely advise you that it is rare to find the Southern California acquisition opportunities that this data foretells. Clarification -- I want to be sure you understand I am speaking of soundly structured reasonably long term real estate investments. I am not speaking of "quick buck" or "quick flip" deals here. Those opportunities do exist, and can be a topic of another paper, but the thrust of this message is for conservative, smart, safe investment that will outshine traditional financial market opportunities and insure a sound retirement and long term prosperity. April's Housing Market figures are not in yet and will not be available to you for a few more weeks. I do expect a somewhat further softening of prices which will further enhance the current opportunity.

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Executive Summary & Conclusion -- I will give you the detail below, but this is the bottom line:

1. Engage your clients in meaningful discussions now while these opportunities are crystallizing. Rising interest rates will soon erode this opportunity.
2. Have your clients get all their paperwork in order for smooth painless financing actions
3. Review the attached market analysis data for macro analysis of optimum purchase opportunities
4. After your "Macro" analysis, study your selected zip codes in detail to be sure you understand that particular local neighborhood's dynamics
5. Restructure equity now through refinancing to provide liquidity for optimum investment opportunities that are here now, but will continue to optimize over the next 30 to 60 days
6. Begin making significantly below market offers to smoke out the very best deals.
7. Act now before everyone else figures out what's going on. before erosion of these opportunities begins.

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The attached Excel files contain our detailed market analysis data for both Orange County and San Diego County. These files contain multiple data sorts to help you easily highlight the unique characteristics of individual neighborhoods. The data is really very interesting and I expect will generate many fascinating conversations with your clients. While we have continuing sales volume declines, price increases continue in some markets. This combined with a strengthening economy with no recession in sight and -- rental rates which have been lagging a little, are going up make this engine crank.

However, the good news truly is that there is price softening occurring also and that is what generates the opportunity we should be discussing with clients now. This data indicates that now is the optimum time for our clients to expand their real estate portfolios for both investment purposes and primary residence acquisitions. Escalating Rates -- Escalating Interest rates will sweep these opportunities away even with some continued price softening. I will explain in detail ---

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Back End Ratios -- Virtually all our loans are governed by our client's back end ratios. All of you in our training program know what impact that has on your client's purchasing ability to qualify for loans. Use the Cal First Financial "custom" calculators I programmed for you to calculate the specifics. (Blogger's Note: the back end ratio is a measurement of client income compared to all the client's installment debt -- mortgage, car loans, etc.)

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Specific Example -- Assumptions -- Let's assume we want to analyze a transaction with:

1. A $500,000 Purchase price
2. Let's assume we will have a $400,000 loan amount and our client's back end ratios, credit, etc. will qualify them for this loan.
3. This means our client has $100,000 to put down and can cover the closing costs. ( For a Cal First Financial Client, this $100,000 would normally come through a re-fi of an existing property or the re-fi of a group of existing properties).
4. To pick an easy number, let's say our mortgage interest rate is at 6%.
5. To keep it simple let's assume the loan will have a 30 year amortization schedule.
6. Let's assume our client wants to be conservative, but the back end ratio will govern the loan amount our client can qualify for. This is normally the case for over 90% of our clients.

The Question -- Specifically, how much would the purchase price have to decline in order to equalize the effect on my client for a specific escalation of mortgage interest rate? Or, worded a little differently -- What will the impact be if the mortgage interest rate goes from 6% to 6.5%, then on to 7.0%, then, 8%, 8.5% and finally 9.0%. For those of you that use our "custom" Cal First Financial Calculators, the software we wrote for you will indicate how much our $500,000 purchase price would need to erode for our client to achieve the purchase if interest rates escalate to the following levels:

1. 6.0% -- $500,000 (our base transaction)
2. 6.5%? -- $479,000 -- a 4.2% reduction from $500,000
3. 7.0%? -- $460,000 -- a 7% reduction from $500,000
4. 8.0%? -- $426,000 -- a 15% reduction from $500,000
5. 8.5%? -- $412,000 -- a 18% reduction from $500,000
6. 9.0%? -- $398,000 -- a 20% reduction from $500,000

What does all this mean?

• It means if interest rates go up to 7% our client would need the purchase price to decline to $460,000 to be able to make the purchase.
• It means if interest rates go up to 8% our client would need the purchase price to decline to $426,000 to be able to make the purchase.
• 9% -- decline to $$398,000.

What's the bottom line? -- Prices would have to literally fall through the floor to offset the impact of the very real fact that interest rates are going up. Its not going to happen folks. The time to buy is now.

Social Tragedy? -- The tragidy is that when this door closes, many people will not have the opportunity to get into the game again down stream. We know in Southern California over the last 30 years residential properties have consistantly appreciated in the 7% to 8% range. During this last 30 years there have been wars, recessions, oil shortages and all manner of disasters and residential real estate appreciation still chugged along at an average in the 7% to 8% range.

Something is Different Now -- In the last 30 years their was reasonable elacticity of supply -- Need more houses? -- Torch a few orange groves and build. For all practical purposes there is no or very little elasticity of supply today. This one fact will probably generate higher average appreciation rates over the next 30 years and beyond.

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Bad Choices -- In our business, you will often hear conversations that include phrases like "... I am afraid real estate prices are softening, I think I will wait until next spring and see what happens..." Its pretty obvious conversations of this nature are a product of ignorance, but who is the ignorant party? You can't blame your client. Virtualy all clients like to think they are an expert, the truth is their expertise normally resides in other fields. Are you the ignorant party? Maybe possible, but I certainly hope not. If you are, you need to educate yourself or get into another line of work. What kind of an Agent are you? This is important. Many real estate agents and brokers with the very best of intentions, will improperly advise their clients as to what they think is the best course of action. There is no shortage of Ignorance in our industry.

• You are a Cal First Agent
• You are well trained
• You are not ignorant
• You can truly help your clients make positive life changing decisions
• These decisions will dramatically affect their retirement
• ... The lives of their family and loved ones
• And yes, the prosperity and well being of the community as a whole

Now, get off your back side and get out their and help someone. Your clients need you. Don't let them down.

Thanks, and --- Always remember -- I can help you!

Don Murray California First Financial -- Serving all of California Financial Planning, Real Estate Brokerage and Mortgage Loans DonMurray@CalFirstFinancial.com www.CalFirstFinancial.com Phone 

949-413-2240

--- We Make Our Clients Wealthy