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Cheeseburgers, Reese Witherspoon and Two Key Tips You Need to Know When Buying Your Next Home

05/06/2013 09:11 am ET | Updated Jul 06, 2013
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Man, I woke up the other day sweatin' from a dream that I was a tasty double-double, In N' Out cheeseburger on the run from Charles Barkley, who was in hot pursuit and lickin' his lips . I was drenched. I had just broken a fever and a whole bunch of other 'stuff' -- possible bronchitis, a cold, congestion, dizziness, weakness and more. It was SOME kinda sickness. I was basically out for more than a week.

I snapped out of my long funk and into the reality that much had happened since my fabulous 4-mile run had ended with a slight cough, which then developed into a full-blown illin' n chillin' debacle.

First, Reese Witherspoon had been arrested for ingesting some liquid-courage and poppin' off to the police outside of Hotlanta, Georgia.

Her husband was stopped for DUI. He's an agent. Not Reese's agent, but a agent at the firm where she is represented. BTW, the first thing an agent is supposed to do for the company's clients is to steer them away from trouble. Her agent-husband not only brought his arrest to his company, CAA, he also ensnarled one of the company's brightest and cleanest stars. That's a double-double no one likes. However, the trifecta is that the agent is also her husband. Boom! Goes the dynamite.

Then, I learned the Boston Marathon bomber now has three friends/acquaintances who have been arrested for allegedly trying to dispose of his evidence. Really?

Plus, in the wake of the bombing, I watched as some FOX News idiots continued to try to dismantle most of the first ten amendments of our fabulous constitution, save the for the second, of course.

So, I decide to turn to the sanctuary of sports for some good news only to find my Lakers were swept out of the playoffs!!?? WTF?

Somewhere in the world there must be some good news? Then I read we have Syria and the whole possible nerve gas revelation brewing. No boots on the ground, yet, but we're thinking of doing something of "consequence" to Syrian President Bashar Assad. War #3 or is this War #4?

Damn, I'm ready to crawl back into bed, curl up into a ball and order double-double cheeseburgers from In N' Out Burger until I'm in a serious carb coma for weeks. Is there any good news out there?

Actually there is and it hits close to home. In fact, it is your home. My home. Our homes. Real estate is back... if ever so slightly and I'm excited. Others may shout that "REAL ESTATE IS BACK!" with all the gusto of those almost always incorrect pundits I see on television.

Here's what I say. Just think of the claim that 'real estate is back" as it would be delivered by Mister Rogers in his neighborhood. He'd say, in that soft, calming tone of is, "Real estate is looking up and that is a good thing, right neighbor?" And you'd nod your head in agreement and move on with your day. No fuss. No muss. No hype. Comfortable like a warm, fuzzy sweater.

I've invested in the real estate market in Los Angeles since my move here from New York City in 1997. In addition, I've counseled many of my friends and their friends on all sorts of transactions. Does that make me a Wall Street real estate expert? No, thankfully. Look, they have probably forgotten more than I'll ever know about Wall Street analysis of real estate. I'm fine with that because they completely, save for a very few, missed the last real estate debacle.

People like me, who were on the front lines and not in the ivory tower spewing opinions based on stats that are always, by their very nature, BEHIND the actual trend, knew there was a seminal shift underway.

I got my stats in real time and here's how. I can remember standing on the courthouse steps in Norwalk, Calif., watching as a man in a hat holding a clipboard walked out and began an auction of homes. This was 2004. A Tuesday at 10 a.m. He had 12 homes to auction off that day. Most of the asking bid prices were far below what we could turn around and sell them for at retail. Good profits were abundant. To give you a visual, there were usually about 10 to 14 of us standing outside as the auction commenced. Palm trees, California sun and the opportunity to make or amass a small fortune. All the houses usually received bids and were sold. I would go roughly once or twice a month.

Fast forward to early 2007 and I'm on the courthouse steps again. This time there are about 30 people milling about waiting for the auction houses to be read off. Everything was the same except for two important details. One, the number of houses to be auction had skyrocketed to more than 50. While that's important, here is the most important stat: the bid price of the house was now close to the actual retail price at which we could sell the houses. The profit potential we could make had virtually evaporated.

So, because of that, very few houses received bids. Guess where they ended up? On the desk of banks, usually the desk of just one person, who was use to only a few houses being returned unbid from the auction. Now an AVALANCHE of properties were hitting the banks every single day. They had no way to deal with it. They were like General Custer at the Battle of Little Bighorn who suddenly realized, "Holy shit, we're outnumbered and we're screwed."

But here's where it gets interesting and how those of us on the front lines of the real estate market knew a shit-storm was coming. It was the underlying reason why the bid price and the retail price were now suddenly even.

You see, these were the newly financed houses or refinanced houses, not houses that were financed years ago and owners who came into some sort of financial trouble. These were the homes on two, three and five-year adjustable mortgages. Not only had the rates adjusted up, but people had also taken second and third mortgages. This was a bad double-double.

Let me give you a simple scenario and you'll see the shit-storm in the sunshine.

A family buys a $400k house and puts down just 10 percent. They can afford the house only because they can finance $360k on a 2.5 percent "interest only" mortgage. Millions of homebuyers did this very thing. This means they are not paying down any of the loan amount, just the monthly interest. So, they are NOT increasing their equity. They believe the market continuing to rise will give them their equity. Keep in mind, if the rate was 4 percent or more, they probably wouldn't get the loan. However, at this rate, the payment is fabulous and completely manageable.

In two years, the house in now worth $525k. The family decides, holy moly, we have all this equity, let's pull it out and buy a boat, put in a pool and purchase two nice big-ass cars. So, they get a second mortgage for $140k. Now they owe $500k on a house worth $525k. Not a good debt-to-equity ratio, but it's Countrywide financing the deal so nobody really gives a hoot. In addition, everyone is ok with it because the value of the house will continue to go up, right?

Ah, but then it's year three. The 2.5 percent adjustable mortgage rate now adjusts up and their payment increases dramatically. The value of the house is no longer going up. In fact, for the first time, the market is flat.

Within a couple of months, the weight of the new increased mortgage payment and the second loan payment become too much. Within a year, the family is missing payments and they want to sell. But now the market is deteriorating, and the value of their house is the same or less than what they owe. If they try to sell it, they may not get enough to pay off the loan, especially when you add in all the missed payments and penalties. So, now the house is foreclosed and ends up at the bank but NOT at the original loan of $360k. If that were the case, it would have been a wonderful bid price for those of us on the courthouse steps.

Now, with two loans on the house, the bid price is $500k, roughly the same value of the house. In our eyes, there is no profit to be made. So, we don't bid and it ends up back on the banks balance sheet with tens of thousands of other properties.

Keep in mind, this his was now happening thousands of times per day around the country while Wall Street didn't have a clue. This continued to happen for 3 to 4 more years and here's why. All of the adjustable mortgages funded in 2006, 2007 and early 2008 adjusted higher in 2009, 2010 and 2011. By 2009, the market had crashed and people were really screwed. Those of us on the courthouse steps rarely, if ever, saw a deal. Wise investors were snatching them up before they even arrived on the courthouse steps.

Flash forward to today, May of 2013. Nearly all the bad mortgages have cycled through. The banks have got their loan-shit together, kinda. Buyers sitting on the side, those who made the rental market very strong over the past five years, are ready to buy. Rates are insanely low. Inventory is low as well, which is now increasing the selling price of homes. Here in Los Angeles, as in many cities, there are multiple bids, at asking-price or higher, on homes.

Listings in LA are down 48 percent from the same time last year. Consequently, the median list price is up nearly 28 percent. This is according to the lastest Realtor.com stats for March 2013. Basically, the supply of homes for sale has decreased dramatically while the supply of buyers is increasing.

In fact, 98 out of the top 100 cities listed had a decrease in houses available to buy. THAT is incredible. Stunning, actually.

Here's what all this means here on the real estate front lines for the summer (as long as there is not some sort of world wide negative event) Selling will be good. If you bought foreclosures or picked-up a house at the bottom of the market in late 2010 thru early 2012, you can sell for a nice profit. If you're not in the market, get in. Money is cheap. The opportunities are there.

As you head out to find your home, here are two tips.

One, buy the smallest house on the best block. The larger, more expensive houses will help pull up the price of your house. The best block will usually be in the best school district. It's a win-win. Key factors when you want to sell.

Which leads us to tip number two. Before you make an offer, look at your potential new home from a selling, not a buying, standpoint. Will this house sell easily? Are there any factors which will turn away potential buyers? Busy street, large power lines, next to a shopping mall or close to an airport are a few. The more rejection factors, the smaller the pool of potential buyers and the longer it will sit on the market. I've always purchased my houses under the criteria of "if the shit hit the fan tomorrow, will this house still sell?" The best-positioned houses will still sell in a tough market and sell first. Make sure your house has a ton of pluses and few, if any, minuses.

Remember, your house has no value if you can't sell it. All these factors add value or subtract value.

So, grab a cheeseburger, do your homework and go get that dream home!