Rates, Not Home Prices, Worst Enemy In Affordability

With all the talk of softening markets, many buyers have moved to the sidelines hoping to wait out high prices, believing that lower prices will help them along the path to homeownership or to move up into the house they really want. Instead of prices, buyers should really keep their eyes on interest rates ? the most powerful component of the home-buying process.

In a nut shell, if you wait for prices to level and drop while interest rates increase -- your ability to purchase that now-affordable home may have just vanished with interest rates running up along side the price drops.

An information sheet came to my desk from a national mortgage company comparing buying power on a household annual income of $100,000 to demonstrate this point and it was quite telling. Now, I know the national median household income is about half that amount, however, the principles are the same of how powerful interest rates affect purchase power.

For instance, in this example, if you?re waiting for prices to drop $50,000 before you buy, hoping to get a better deal ? well, quit waiting. If interest rates increase as the Mortgage Bankers Association of America forecasts, your payment won?t come down with the lower prices. In fact, you may still sit on the sidelines.

MBAA is predicting 6.7 percent rates into next year. Even with that level of increase, historically, that rate is some of the lowest rates you?ll ever see. However, at that amount, the above buyer will only be able to buy about $399,411 worth of house. Last June (just 5 months ago) that same borrower could have borrowed $450,000 at 5.63 percent on a 30-year fixed mortgage. Neither the buyer?s income nor the home price decreased the buyer?s buying power -- just the interest rate.

Here are the nitty gritty details:

The 30-year fixed rate mortgage for $450,000 at 5.63 percent would cost a borrower $2,591.87 per month. For that same borrower waiting for prices to drop, but watching interest rates jump to 6.7 percent, that same $2591.87 will only fund a mortgage of $401,667.91.

If you want to see what that would do in a lower financial stratosphere: let?s say it?s a loan for a $60,000 household budget, instead of $100,000. The purchasing power for this buyer would be roughly $1,550 per month ? that?s a loan for $217,024 at 5.63 percent (including $300 for taxes and insurance). That same money at 6.7 percent will only purchase $193,715 -- a difference of roughly $24,000.

Two words of advice. To those who are thinking about buying -- look at all your options and run your personal numbers. How long can you wait for prices to reduce while interest rates are on the march upward before you?re priced out of your favorite home again. If housing inventory is on the rise in your market area -- then move sooner than later. Smart sellers are willing to negotiate again -- you may be able to get that lower price just by asking for it.

Case in point: Just a couple weeks ago in the D.C. market, a Realtor told me of how he saved his buyers nearly $75,000 from sellers who realized they needed to get going instead of hanging on to their price. In essence, make an offer -- the worst that can happen is the seller will counter your offer or reject it. What is it they say? Nothing ventured ...

Secondly, if you know you?re going to buy -- lock in early and move in on the contract. By locking in you save money by having a lower rate for your mortgage. Some mortgage programs let you lock in for up to 120 days.

Average interest rates have risen by more than half a percentage point in just the last 6 months from 5.62 percent to 6.28 percent, according to Mortgage-x.com?s rate calendar. Depending where rates go, even one month delay in locking in your rate could make a difference of several hundred dollars on your monthly payment.

Published: December 9, 2005

Selling House May Have to Satisfy Three "Buyers"

When placing a house on the market, the seller must remember early and often that there are going to be three "buyers" who must be satisfied with the eventual price of the property. The buyer, appraiser and underwriter must all agree with the price of the house before it can go to settlement (particularly if there is no large down payment involved.) Here's how it happens.

The Buyer
When you go to the grocery store and look at prices of produce, you normally don't walk up to the check out and offer less than what's on the sticker. The eggs are $1 per dozen all day long and most everyone will pay that amount or go without eggs.

In real estate (and other large ticket items), the price is not necessarily what you're going to pay. It's the list price or asking price. While real estate agents may have a handle on if a house is overpriced or under priced, they're not buying the house -- so the real decision maker is the buyers. Thus, the buyers must be convinced that the value of the house is reflected in the price and/or terms.

The smart seller will make sure the price s/he is asking for is as close to the realistic price to draw offers. In particular, in a transitional market or dropping sales price environment -- don't waste time "waiting for the right buyer" to come along and pay your price. Price trending is price trending both ways -- up and down. Thus the smart seller will recognize the trend and move in front of it.

For sellers over the last few years in various markets -- they have had the benefit of price trending upward. Negotiation for buyers kind of went up on its head -- "You want $350,000. What, are you crazy? I'll pay $375,000 and not a dollar less." Of course, they got beat out by the guy willing to pay $400,000 and include a vacation for the sellers.

When a market levels or begins trending downward, get in front of the trend. This is even more important than a market heading upward if you don't want your house sitting on the market. Every week you wait you literally lose money -- sometimes thousands of dollars each week. Don't wait. When prices trend downward, sellers must forget what their neighbor's sales price two months ago -- it has no bearing the day you receive your contract.

Thus the buyer must believe the house is worth the asking price. Next, you have to convince the appraiser.

The Appraiser
Despite what others may say, this is the most important visitor you're going to have come by your house. Sometimes even the appraiser downplays his/her visit to the property. I've had some say, "Oh, don't worry about cleaning up. I'm going to just be a few minutes." Famous last words.

If you have to "wow" the buyer to write a contract, then you better "mesmerize" the appraiser. This is the person who is going to take a first stab and confirming that the seller and buyer have come up with a realistic price for the property.

With a contract price of $351,990 you want an appraisal of $351,990 or higher. If the appraisal is high, it has no bearing on the contract. If the price comes too far below, and the buyer doesn't have enough down payment funds to cover the difference, then the buyer and seller will have to renegotiate who is going to take the financial hit to make the loan work. Is the seller coming down in price, the buyer up in price or are they going to split the difference?

The Underwriter
Finally, you have to satisfy the person in the back office, the underwriter of the mortgage. Underwriters are determining risk factors for the lending company or group of investors. If they underestimate the risk of default on a loan and the buyer defaults on the mortgage in the future, their investors lose or they must sell the loan at a loss. Because of this, while they are not on the street watching housing prices increase, if their analysis demonstrates that the house may not be worth what the contract is asking, they can halt the loan process and the negotiations must begin anew. (By the way, here's an informative, yet, tedious, document from the University of Illinois' business college on the underwriting rules. Click here.)

So, for example, I could love to sell my house for $1 million. The problem is, while I might think it's worth that amount, I keep running into buyers who don't agree. Thus it's worth $1 million in my mind alone. I must satisfy three other people to get my price. In pricing my property, I must keep these three other people in mind if I want my "asking" price to become my "sold" price.

Published: December 2, 2005

Real Estate Bubble Theorists No More Than Squealers

Have you ever squirted a little kid in the back with a stream of cold water on a hot summer day? I've seen this throughout our neighborhood and it's actually sadistically humorous to watch the little tykes squeal and run away from their parental tormentors.

Those who keep whining about the coming "burst" of the "real estate bubble" remind of these squealers. Sometimes I feel like the lone voice of reason crying out in the wilderness.

The real estate bubble naysayers whine about the "bubble" as if the whole national real estate market were nothing more than another over-inflated stock exchange -- like the New York Stock Exchange and Nasdaq. Folks -- it's not. Real estate, like politics, is local and I wish those real estate journalists scaring the buyers with quotes from their stock market experts would just stop what they're doing and consider some real facts.


Fact: The top hot real estate markets in the U.S.A. are also the top hot job markets.

Fact: Houses are where the jobs go at night.

Fact: Without enough houses in a hot job market, your housing inventory will escalate in price.

Fact: There are "pockets" of over inflated real estate

Fact: Unlike the stock market -- you have to live somewhere. Whether renting or buying, there is an automatic necessity for the ownership of real estate -- either by a homeowner or an investor.
There is no built-in necessity for owning stocks, thus all comparisons between the two products is moot.

In the midst of the hot markets across the country (where the squealing is the loudest and most piercing) citizens of those jurisdictions must look to the local economy to determine their risks.

In the Washington, D.C. area, the Northern Virginia Association of Realtors looks at those numbers every single year at its annual Economic Summit held at George Mason University. Unfortunately, most of the press gives it passing coverage -- I think especially this year, because the economists did not fall in line with "the sky is falling" mantra heard by critics of a strong housing market.

The summit was reported on in the trade association's latest monthly publication, The Update. "In a nutshell, you couldn't be in a better market," according to Dr. Stephen Fuller, Director for the Center for Regional Analysis and School of Public Policy at George Mason University. "If you're worried about some bubble, or slow down, or something that's evil, just put yourself in any other market," he said. "They envy us."

To put it bluntly folks, we're going to have a housing problem in the future -- but it's not the bursting kind. It's the "How can I make $60,000 a year and have to live out of the trunk of my car" kind. You see, in the Washington, D.C. area and other hot job market areas, the reason housing is climbing in value is simply because there's not enough of it.

Dr. Fuller reports the regions surrounding Washington, D.C. have done a fantastic job of drawing jobs to the area -- 287,000 in the last five years. However, they have done a sorry job in providing houses for all these people. This year, there's a deficit in housing in this region of 463,300 units. That means that while people can take jobs here, they won't be able to live nearby to work them. They'll have to commute in a couple of hours.

The numbers don't get any better, Fuller says. By 2030, there will be a shortfall of housing units in the Washington, D.C. area of 716,000 units.

Okay, bubble squealers -- where's the bubble?

The vocabulary being used by journalists is leftover from when the stock market inexplicably rose in value when there was no reason but hype driving the market. Companies were raising lots of venture capital and creating products that they couldn't sell, meaning they ate through the borrowed funds and finally burst.

In hot real estate markets, there's no hype. There are real jobs being created by real companies, creating real products and selling them to real consumers. Real money is being made and these real companies need real employees to make it happen -- local governments should wake up and realize that we need real houses to put them into as well. If you want to quell the fear -- build more houses.

Now -- would all the squealers please stop? You're giving me a headache.


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Mr. Carr has covered real estate since 1989. He is the author of Real Estate Investing Made Simple. Got a personal real estate issue? Post your questions and comments at Anthony's blog.

Published: November 25, 2005

Decluttering Before Remodeling Key to Sanity

If you're looking to remodel your house this year, as thousands of Americans do, be sure to look beyond just the color swatches, carpet samples and appliances. Remodeling is more about shoveling out the junk than anything else.

Particularly true is if you're redoing several rooms at the same time. When I finished my basement, a week after preparing for the contractor, I figured out that I had to actually get a storage unit to put all my earthly belongings into. So I visited Fred.

Fred is that quintessential good-guy neighbor that you see on the television programs. He's not perfect, but pretty darn near it. He's the one the wife says, "Go ask Fred, he'll know what to do." So I knew he had recently remodeled some parts of his house for a wedding and I knew he had chucked a lot of stuff and stored the rest, because he had borrowed my truck to do it. (Hmm ? who's the good-guy neighbor, now?)

Talking to Fred, I found where he had a storage unit and turned to go back to the house and call, but Fred kind of grimaced and shook his head. "What?" I asked. "Well, I got that unit and it was supposed to be for just a couple of months. I really need to dump all that stuff -- I've now had it for two years." We stood there and calculated it for him and the reality hit that he could now be the owner of a very nice multimedia center in his basement with the latest in surround sound technology for the price of what he had put out on the storage unit. Guys take note -- when the wife is touting you to get a unit just for a while, you may be kissing what really matters in life, good-bye.

What is this connection we have with stuff? We really have a hard time getting rid of stuff that we've purchased and won't let go. There are a myriad of websites on this topic and now television shows on major cable networks where we sit amid our own clutter, watching a professional team of cleaners, declutter someone else's house (i.e., Clean Sweep, Mission: Organization, etc.).

The best thing about all these resources is that they all have the same process, and as you look at remodeling, you most definitely need to follow their steps. While these programs point at three boxes to label: Keep, Give Away, Toss (or some derivative of the three); that's fine if you're doing one room at a time. When it comes to remodeling your house -- you may need to pull in three crates outside on the lawn to go through all your earthly belongings.

During this declutter/chunk/giveaway process, you may need to bring in some help, as well. A trusted friend may be able to counsel you in what can be kept and what can be given/thrown away. If you treasure your marriage -- this trusted person is not your spouse. Every excuse is used to hang on to an item -- "Aunt Sally gave that to me, God rest her soul," "Oh, Fred's wife wants that, don't throw it out," or "That's for the baby when she grows into it," while all sounding harmless are really lies from the very pit of hell designed to clutter you into oblivion.

On the other hand, if you and your spouse have moved everything from three rooms into the living room, making room for the contractors, painters, etc., the frustration of having dinner every night right next to your bedroom furniture, can sometimes help both of you overcome all objections and begin to give all your earthly belongings to every tax-deduction-giving charity in the region.

There are some wise steps to take, as referenced earlier. I like the way that OrganizedHome.com Editor Cynthia Townley Ewer does it using the Four Box Method, which is really three boxes and a large trash can (my addition is a trash can on rollers). Identify the boxes as: Put Away, Give Away/Sell and Storage. The large trash can acts as the Fourth Box and thus, this is why Ms. Ewer wins my award for best method. All the other online resources want you to have four boxes the exact same size ? that's a crock. You have to have the much larger "toss" box or you'll just end up moving "stuff" from one end of the house to the other and never really declutter.

To apply this method to a remodeling project, I would suggest again, putting these items in piles in your garage, carport or one room you're not remodeling at the moment. In addition, instead of a Give Away box, go rent a trailer or truck, which becomes your Give Away (and possibly Trash) box.

Just like moving, the remodeling of your house becomes that once in a lifetime opportunity to really chuck out all the stuff that you've been collecting over the years to make room for the things that really matter in life -- your family -- as they gather around your new plasma, 50-inch, digital surround sound media center in your newly remodeled movie room.


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Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.
Published: November 18, 2005

Should You Remodel or Move?

Unless you've taken a new job in a new location, the decision to move up may involve deciding on whether to remodel or move altogether. Homeowners nationwide will spend $192.8 billion this year to either remodel or repair their homes, according to the U.S. Census.

The Remodeling Index, provided by National Association of Home Builders' Remodeling Council, determines minor alterations at $25,000 or below and major alterations above that amount. Where do you stand? Is it worth $25,000-plus to remodel or should you move up?

There are reasons in favor of both. Let's deal with the remodeling first.


Your community is great, why move? For some homeowners they already live in the best community for their family and lifestyle. The schools are great, it's near their worship center, shopping and they are plugged in with neighbors and the community. So instead of moving, it might be best to expand or remodel.

Sometimes, it's just time to upgrade the house -- even if you're planning on selling in the future. If you bought a home with 15-year-old appliances and décor, it may be time to switch them out, now that they are 20 or 25 years old. I always get frustrated with homeowners who want to remodel right before they move -- they've never had the opportunity to enjoy the house they've just remodeled. Upgrades may include flooring, bathrooms, kitchen, exterior facelift, paint, curtains, furniture -- not just the house itself.

It might be cheaper than selling. If you're needing more space, the remodel may actually be cheaper than selling, especially if you're looking at finishing or remodeling the basement. The basement remodel is the easiest and most affordable remodel available to homeowners because the exterior walls, plumbing and most electric may have already been run throughout.

You're a do-it-yourselfer. Okay, you love those Old House, Fix-It or Nix-It, Saturday morning programs. Living in a dust-ridden environment with tools and power cords strewn throughout is your vision of heaven on earth. Go for it.

You'll have to remodel the new house anyway. Most new homeowners spend upwards to 30 percent of the value of the new house they just bought fixing it up the way they want -- so why move? Just spend that money where you are.
Now, there are just as many reasons to move instead of remodeling.


The move could take less time and hassle. Depending on the condition of your local market, you may be able to list, sell and move in a shorter period of time than it would take to actually remodel your current home. Time is a major factor in our busy lives, and many times it would be quicker to just move.

Remodeling would disrupt your lifestyle more than you're willing to deal with. You have to hire a designer, then a contractor, move furniture from one area to another in your house, find storage for the rest, live with dust, workmen, etc., for several months and then HOPE you like what you get at the end of it. Better to buy the house that's already finished the way you want it than betting on a finished product you're not sure about.

You don't want the hassle of dealing with contractors in case they don't get it right. The challenge for remodelers is that they are being told by a remodeling-challenged homeowner what they want and then try to create that environment. If the homeowner doesn't like it at the end -- it's very expensive to change once it's done.

Remodeling could cost more than moving. For some people, to get what they really want, they would have to double their mortgage anyway -- so it might be better to check out what's available in new construction or even in a move up in the community. Plus, builders in some markets are starting to offer free upgrades -- including rec rooms, decks, and other add-ons that usually are the subject of a remodel job.

Finally, you're family has enlarged. You just may need a larger home because you have more children or your parents/au pair/adult children have moved in with you.
When it's time to remodel, look over the local real estate market before making your final decision, it might be in your best interest to make that move instead of knocking down a wall.

Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.

Published: November 11, 2005

Energy Mortgage Stretches Buying Power

Cooling temperatures around Capitol Hill make me think of ways to get the old home place ready for the winter months in the fickle Mid-Atlantic area and that usually means spending some money on insulation, caulking and the usual home maintenance that keeps the cold air out and warm air in.

There's a mortgage on the market that could be worth a look to help either buy an energy efficient house (or make the one you want to purchase into an energy efficient home). The energy efficient mortgage (EEM) was designed by the U.S. Housing and Urban Development and can also be used to remodel a house into a more energy efficient unit, saving you monthly payments to the power company.

The Residential Energy Services Network (RESN), created by the National Association of State Energy Officials and Energy Rated Homes of America, was established to develop a national market for home energy rating systems and energy efficient mortgages. RESN notes EEM's benefit borrowers in several ways:


The estimated energy savings are added to the borrower's income, allowing him or her to qualify for a higher mortgage amount.

With more borrowing power, the EEM then allows borrowers to roll over the costs of energy improvements into the borrowed amount. All the costs of the energy improvements (up to 15 percent of the value of the home), is allowed to be financed, thus reserving a borrower's cash for more immediate, move-in costs.

The value of the home is adjusted by the value of the energy efficient improvements.
If the house is already energy efficient, then the borrower can use the program to stretch his buying power. Under an EEM, the traditional debt-to-income qualifying ratios are expanded. The idea being that if you're paying less for monthly energy costs, you can afford more for your mortgage payment.

The Federal Citizen Information Center (FCIC), which is the information/publishing arm of the U.S. General Services Administration, has a great online guide about how the program works.

For instance, borrowers with a monthly income of $5,000 could increase their buying power by nearly $16,000 using an EEM (based on a 30-year fixed rate mortgage at 7.5 percent interest rate).

The group lays out a step-by-step guide to acquiring an EEM:


Find the target house, then inform your lender that you want an Energy Efficient Mortgage.

Have a Home Energy Rating Systems review done on the property.
A HERS rating is conducted by a trained energy rater with a cost between $100 to $300 (which can be negotiated between the buyer and seller or financed with the mortgage). The rating ranges from 1 to 100. The higher the score the more energy efficient the house. The score rates the following:


Recommended cost-effective energy upgrades.

Estimates of the cost, annual savings, and useful life of upgrades.

Improved Rating Score after the installation of recommended upgrades.

Estimated annual total energy cost for the existing home before and after upgrades.

The HERS rating is sent to the lender.

The lender evaluates the rating
At this point, one of two things can happen.

The home can qualify for energy improvements, thus the lender puts the extra funds into escrow for the improvements, you close on the house, move in, and then the improvements are completed, paid for out of the escrow.

Or if the house already qualifies as an energy efficient home, then your debt-to-income rations can be stretched if needed, you close on the house and move in.

There are several versions of the EEM, some even allowing 100 percent loan to value financing (i.e., zero down payment financing). Check with your loan professional for a list of programs that meet the EEM criteria.

Published: November 4, 2005

Radon Gas Still Invades U.S. Homes

It seemed about 10 years ago you couldn't open a real estate section in a newspaper without seeing an article about radon -- a colorless, odorless, radioactive gas -- that is the second leading cause of lung cancer in the United States. Radon dissipates to harmless levels once outside, however, it can cause life-threatening vapors when locked in your basement. The gas can enter through underground areas, such as crawl spaces, gaps between basement floors and walls, sump pumps, and the water supply.

The Environmental Protection Agency has recognized the public's lackadaisical approach to radon, which has spurred the agency to launch a new National Radon Strategy on the heels of a National Radon Health Advisory issued by U.S. Surgeon General Richard Carmona. The Chief Physician pointed out on the group's website that "radon gas in the indoor air of America's homes poses a serious health risk. More than 20,000 Americans die of radon-related lung cancer every year. Millions of homes have an elevated radon level."

EPA's Strategy carries the header "Reinvigorating National Attention and Action on RADON," and points out several national action steps, including the testing of all 100 million homes throughout the country. Nearly 20 percent of the dwellings have been tested already.

As you consider testing your own house for this silent killer gas, the National Environmental Health Association provides several questions to ask a potential vendor interviewing companies:


Will the contractor provide references or photographs, as well as test results of 'before' and 'after' radon levels of past radon reduction work?

Can the contractor explain what the work will involve, how long it will take to complete, and exactly how the radon reduction system will work?

Does the contractor charge a fee for any diagnostic tests? Although many contractors give free estimates, they may charge for diagnostic tests. These tests help determine what type of radon reduction system should be used and in some cases are necessary, especially if the contractor is unfamiliar with the type of house structure or the anticipated degree of difficulty

Did the contractor inspect your home's structure before giving you an estimate?

Did the contractor review the quality of your radon measurement results and determine if appropriate testing procedures were followed?
Compare the contractors' proposed costs and consider what you will get for your money, taking into account: (1) a less expensive system may cost more to operate and maintain; (2) a less expensive system may have less aesthetic appeal; (3) a more expensive system may be best for your house; and, (4) the quality of the building material will affect how long the system lasts.

Keep in mind there are certifications radon testers can attain which provides a basis level of education protection for the consumer. With that in mind, the Association recommends that the proposal and estimate include the following:


Proof of state certification and/or professional proficiency or certification credentials.

Proof of liability insurance and being bonded, and having all necessary licenses to satisfy local requirements.

Diagnostic testing prior to design and installation of a radon reduction system.

Installation of a warning device to caution you if the radon reduction system is not working correctly.

Testing after installation to make sure the radon reduction system works well.

A guarantee to reduce radon levels to acceptable levels or below, and if so, for how long.
The National Radon Safety Board operates an online service provider database that makes the search for a radon testing/mitigation company an easier task. Consumers can search for certain professional designations, such as Measurement Specialist (RMS), Measurement Technician (RMT), and Mitigation Specialist (RRS).

For more information on radon gas and its effects on your health and home, visit the following websites:

Environmental Protection Agency

Centers for Disease Control

National Environmental Health Association

National Radon Safety Board

Published: October 28, 2005

Real Estate Bubble: A Self-Fulfilling Prophecy?

There are plenty of naysayers about the real estate market and its unprecedented growth. Las Vegas-based ReviewJournal.com, for instance, has given cyber-print on a report by Doug Fabian, president of Fabian Wealth Strategies and Josh Lewis, first vice president at Santa Ana, Calif.-based Stearns Lending. The report, "Boom to Bust," says the following issues about current homeownership points to a possible bubble:


Non-owner occupants are now buying more than 25 percent of all homes.

Households are allocating a greater percentage of income to housing than ever before.

More houses are being purchased with no down payment. People are buying primarily because of the expectation of appreciation.

The majority of today's loans involve some combination of adjustable-rate mortgages, interest only or negative amortization.
The report states, "This layered risk will result in a major increase in foreclosures, which will bring the total housing market down in value." Unfortunately, this report brings up nothing new: people have been buying real estate for decades in anticipation of appreciation; also, during those years, households have been allocating a greater percentage of income to housing; and zero percent down payment mortgages have been around for just as long -- all of these factors have been true for the last 20 years.

Now take this report and compare it to the 2nd Quarter 2005 report issued by the U.S. Department of Housing and Urban Development on U.S. Housing Market Conditions and you see a different picture:


The housing sector continued to be a major contributor to the U.S. economy during the second quarter of 2005.

New records were set for single-family permits, new home sales, and existing home sales.

Interest rates remained at less than 6 percent, but the challenge to affordability for new homebuyers grew.

Compared to the most recent quarter, the median sales price of an existing home rose by 10.3 percent, and was 13.7 percent higher than a year earlier.

Compared to the second quarter of 2004, permits for new homes were up 2.1 percent;

Construction starts were up 4.6 percent; and

New housing completions increased by 4.7 percent.

Sales of existing homes and new single-family units rose, by 4.6 percent and 10.2 percent, respectively.

Permits and new starts for multi-family units slowed after the first quarter of 2005, but remained stronger than in the second quarter of 2004.
So why all this good news on the housing front -- basically, the economy is growing. And that, my friends, is why you have to second guess the concept of a bubble in the real estate market.

We've become accustom to the use of "bubble" because of the drop in the stock market of 2001, following unprecedented growth in several exchanges. The difference is that the stocks that inflated the bubble on the stock market were based on the founding of companies on investment money in hopes of finding the next internet-based fortune not on the actual production and profit-making of consumer products.

The inflation we are seeing in the housing market is because of economic growth, more jobs, population growth and the local jurisdictions not providing enough housing for this growth. It's pretty simple -- if you grow the economy, you must grow the housing base. However, in the last five years, metropolitan regions have taken the slow growth or limited growth approach to providing housing instead of pushing for more affordable housing in high density projects.

When the economy slows in any given jurisdiction is when you'll see trouble in your real estate market. For instance, in the Washington, D.C. area, home to the hottest employment growth in the country, the region is projected to create more than 82,000 jobs in 2005, according to the Center for Regional Analysis at George Mason University. However, the Center points out local builders are only allowed to put up about 35,000 houses per year.

If you're bringing in 50,000-plus new jobs into an area every year, but only build 30,000 houses -- is that a bubble or a true reflection of the supply and demand of housing? You be the judge.

Published: October 21, 2005

One-Stop Shopping Serves Consumers and Real Estate Companies

Gone are the days of single-product real estate companies. The company that offers only sales support and consulting for consumers is a company that will have a difficult time competing in the future real estate industry, according to a study from Clareity Consulting in Scottsdale, Ariz.

"With margins becoming tighter in the real estate brokerage community, the revenue and consequent profitability derived from the brokerage fee alone will be insufficient to remain in business," states Clareity's report titled "Broker's Survival Guide: Building Ancillary Relationships."

Clareity provides a wide variety of services to multiple listing services, real estate associations, brokers, franchises, and software and service companies that serve the residential real estate market. The company has been in business since 1996, when MLS-executive Gregg Larson co-founded the company after working with some of the country's largest MLS providers.

The Broker's Survival Guide, one of several reports the group has written in the last 12 months, says volumes about the evolution of the American real estate brokerage firm. "Brokers' overarching strategy must include driving revenue from the attendant ancillary business, inclusive of: mortgage, title, home protection, etc.," the report says. "Creating partnerships, joint ventures, and/or marketing agreements with select service providers, supported by the resources of the brokerage company, will prove to be evermore imperative to retain profitability margins, business growth, and even survival."

Fortunately for real estate companies, the harried pace of life makes the above services shift desirable to consumers. The National Association of Realtors released a study years ago that stated a majority of consumers would actually pay more for services provided by one source because of the convenience it provides.

In support of its supposition, Clareity quoted a recent poll, conducted by Harris Interactive, that asked the question: "If a company offered to set up a simplified, one stop shopping process for you in which they provided all required services, how strongly would you consider this process?"

The majority surveyed said they would strongly or somewhat consider a one-stop shopping company:


47 percent would consider strongly

36 percent would consider somewhat
Only a mere 3 percent said they would not consider at all.

Broker Survival quotes Steve Murray, co-editor of industry newsletter RealTrends as saying, "Without ancillary businesses like mortgage and title, many big companies would shut their doors." According to Mr. Murray's group, "The majority of the time, when an agent makes a recommendation on which vendor to use, the consumer will follow that recommendation."

The one-stop shopping concept isn't limited to real estate, of course, just take a look at the local grocery store. All in one stop, you will find groceries, of course, but also photography, pharmaceutical and now banking services.

Online, the concept is even used in greater regularity -- large retailers join forces to sell services and/or products created by other companies. For instance, Swedish furniture manufacturer Ikea makes affordable furniture -- not kitchen appliances. On their website, you can not only purchase and order installation of their kitchen cabinets, you can also purchase kitchen appliances from another company -- all delivered by yet a third company.

Travel sites regularly tout airline, train, cruise line, auto and hotel accommodations in the same location, sitting in the same chair, clicking on the same mouse. For the busy consumer, seeking a good deal and saving of time, the era of one-stop shopping in real estate is also making it easier for the consumer to get through the transaction.

Not only are you now able to get a house through your local Realtor -- but also access to mortgage, title insurance, home warranties and a plethora of other services that the consumer used to have to shop several companies to acquire. While it's a selected few who offer these services, it appears that in the near future only the ones who do will actually be in business.

Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.

Published: October 14, 2005

Real Estate Careers Cost More Than You Think

The real estate sales industry has seen an amazing amount of growth over the last several years as it has morphed into a multiple services industry, rather than simply a sales services business.

Any time an industry experiences amazing growth, you'll find a lot of people move to it to get into the flow of money. The mortgage industry underwent this type of amazing growth in the 1990s and into the 2000s when interest rates dropped into the 5's and 6's from the low teens in the 1980s.

When you can drop your interest rate from 12 to 6 percent, everyone is going to get in line to refinance, which is what happened ferociously during the last 15 years. Mortgage companies hired like crazy. Top loan officers even left their current companies and launched their own companies. Fortunes were made. When everyone refinanced, guess what -- some of those fortunes went stale. The need for more loan officers dissipated and online transactions removed the need for as many mortgage professionals.

The same happened to the real estate industry through the 1980s. The membership rose to nearly 1 million nationwide. Then the early 90's hit, the recession and the drop off began -- down to about 600,000 Realtors in 1995 -- then it turned yet again. Now, 10 years later, the National Association of Realtors has the highest number of members it's ever had.

Real estate is the industry today (even in the face of leveling markets across the country).

So what does it take to really carry on a successful real estate business? It depends. Getting started is the easiest item to calculate. In the Washington, D.C. area, it's about the same for most agents to get into the business. Recruiters here include a sheet with the projected costs of getting started. Albeit, a couple of thousand dollars, it doesn't all have to be paid right up front. Thus if you're wanting to stay in business and hold on to your day job, you can stagger when you pay out the start up costs.

The investment of conducting business, however, depends on your level of commitment to the endeavor. Those who try their hand at a part-time career end up paying out a couple thousand dollars per year, hoping to net enough to pay their expenses and have some profit at the end of the year.

For top producers, it reaches into the tens of thousands of dollars per year just in office and marketing expenses, not including staff and a buyer agent team. Other expenses include insurance coverage in your state, the local and state association charges, and what you determine you're going to spend on business setup.

Below are a few of the charges you can expect if you want to start your career. While the pricing may differ a tad from state to state and jurisdiction to jurisdiction, the categories will generally remain the same. What I've done is provided a range of costs for several items below.

Start Up

School & test: $330
Each state requires a license and you must attend a certified school to attain this. The charges will differ per school.

Business cards: $25
These are for basic cards. Color with your photo may cost more. If you don't order these, you're not really serious.

Training: $100 - $200
Some companies offer in-house training for free, others for a small fee, still others rely on the local association to provide training for your. There's usually a small fee for this service to cover materials.

Trade Association, lockbox services: $400 - $1,000
This also differs according to your local association charges. Your association services will reflect the cost of membership.

Errors & Omissions insurance: $500 - $700
This is a policy you'll pay for every year you're in business. It's a policy to protect you from making, well, errors and omissions in your business when dealing with the public. Be careful about the deductible and ask to read the fine print. Some have no deductible (and cost a bit more each year) while other policies are cheaper up front, but leave the agent responsible for the first $5,000 or $10,000 in damages.

MLS application fees and charges: $400
There are set up charges, then either a monthly or quarterly fee to help maintain this co-op program.

Miscellaneous business set up expenses: $500 - $1,000
This is determined by your own personal plan. Do you need new clothes, PDA, calendar, computer, office supplies, etc.? If you're counting on the office to supply some of these items, be ready to talk to your manager first. Some offices supplies this for agents, others don't.

Total: $2,255 - $3,655

Once you're up and going, then you have regularly scheduled expenses you'll have to pay. When you're running your own business, keep in mind that what the company used to pay for in an employer-employee situation, you now must cover month in and month out as an independent contractor (self-employed).

Ongoing (annual expense):

Monthly mailings: $2,400
This is referred to as "farming" and quite frankly, not all agents carry this out. It's amazing to me how many agents are just waiting for business to ring in on the phone. If you want to build a business, you have to let people know you're in business. The above cost is minimal. Top producers mail to tens of thousands of prospects each year and invest even more.

Networking memberships & events (chamber, network groups, etc.): $500
Again, this is the cost of letting other business people know you're in business. Most of the cost above is for the networking events -- breakfasts, mixers, trade shows, etc.

Cell phone (2,500 minutes, minimum): $1,800 - $2,400
The front-line weapon of today's real estate agent. You're going to need the best plan you can afford.

Website: $500 - $1,000
Some companies offer some sort of web presence (a page, etc.) and it can be free. For a bona fide website, include the above as a minimal expense.

Errors & Omissions insurance: $500 - $700
The policy is usually negotiated through your company. You may be able to get a policy discount through your trade association.

Trade Association memberships: $400 - $1000
For the trade association near you, visit www.Realtor.com and click the link at the bottom of the page.

Office expenses: $3,000
This will be a personal choice, depending on your use of technology and mailings, etc. However, you still need to feed paper into the printer, use paper clips, ink pens, etc., along with various other marketing materials, such as open house brochures, property packets, etc.

Car expenses: $4800
This could be reflected in either a lease, payment or upkeep (tires aren't cheap); and you will be living in this vehicle with your clients.

Gas: $3,000 (based on $3 per gallon; 1,000 gallons)

Total: $16,900 - $18,800

This is a base line of expenses that you'll need to maintain just to be in a full time business. Your expenses will fluctuate according to how much you want to market yourself. Thus, if you want to make $50,000 in this industry, you'll actually need to make about $20,000 more than that to just cover your business investment each year. The industry suggestion is 15 to 25 percent of your income should be used to market you and your business.

One final note, the above numbers don't include your tax expenses and any services you may hire out (assistants, clerical work, etc.). Also, for the self-employed, you must pay for both sides of the Social Security tax, which doubles your rate from 7.5 to 15 percent right off the top. (In an employee environment, the employer pays half of this tax.)

Published: October 7, 2005

Agency Not As Simple As It Looks

It's about that time of year when people start reviewing their professional lives and determine if they want to continue down the same vocational path -- and that thought process leads a lot of people to sign up for real estate classes.

Many real estate agents I've talked to say they made the decision to get into real estate after having purchased a home and seeing a seemingly easy job performed by someone with as much intelligence as they have and then walking away, it seemed, with a big wad of cash.

Now that they have started selling, they have realized that while the job of an agent is not difficult, it does require very hard work (kind of like the job of a ditch digger -- while the concept isn't hard, your back aches at the end of the day). The challenge of agency involves working days on end without any pay; having to fund most of your own business expenses; burning up a lot of gas and spending time with people who eventually don't buy anything; and questioning why you got in this business in the first place when the time between deals (pay checks) is weeks and months at a time.

The average agent in the U.S. in 2003 made about $45,640, according to the U.S. Bureau of Labor Statistics, while their broker counterpart brought in about $74,100. The funny thing about averages in this field, however, is that the rule of 80/20 definitely holds. While you may have a market selling $15 billion, about 20 percent of the agents sell 80 percent of it. Meanwhile, more and more people want to get their hands on the money, so more people are getting into the business every day and that means the pie is getting cut into smaller pieces.

As you seek out your new career in real estate sales, you'll invariably come across want ads in your local paper that read something like this:

"Real Estate Sales Your destiny has come knocking! Entrepreneurial challenge, creative passion, economic oppty. Outrageous splits and training that create super earners. New approach. Technology-driven advantage. Ongoing mentoring. Free software."

(By the way, the above is a real ad I saw in New Jersey.) However, the subtext should read something like this:

"Real Estate Sales (Work as long or little as you want). Your destiny has come knocking! (Yeah, go ahead and quit your day job, leaving behind health insurance, the matching 401K plan, paid vacations and sick leave.) Entrepreneurial challenge (Commission-only income, long hours, including nights and weekends, working with fickle clients and people who are also working with another agent without telling you), creative passion (create your own fliers, marketing materials and promotional stuff), economic oppty. (You only get paid if you come in 1st place, but the income is unlimited -- meaning there's no maximum you can make -- but there's no minimum either).

Outrageous splits (Fantastic -- as long as you actually sell something) and training (we'll point you in the right direction, then you have to do all the work) that create super earners. New approach (we have a new web site). Technology-driven advantage (we have a new web site). Ongoing mentoring (a really busy, successful, but tired agent OR one of our new agents who's had a few deals under his belt). Free software (here are some pirated copies of what I bought)."

Yes -- my comments are tongue-in-cheek, but I guarantee agents around the country are saying, "Yep, he's exactly right." The best thing about a career in real estate is the flexibility. The worst thing about it is -- flexibility. To be a six-figure agent requires hard work, business planning, consistent prospecting and learning how to close the deal. If you have these skills or are willing to learn them, then a career in real estate may be right for you.

Next week, I'll bust the myths about how "cheap" it is to get into the business and what kind of expenses you'll face while building your business.

Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." His column appears locally in the Washington Times' Friday Home Guide and worldwide via RealtyTimes.com.

When Is It A Sellers' Market?

The ever elusive bubble that the media discusses has pretty much yet to evolve. I did some research and found the first mention of over-inflated properties back in 2001 when RealtyTimes.com columnist Broderick Perkins interviewed several real estate bubble watchers to find out their definition of a sellers versus a buyers market.

Simply put, you know you're in a sellers market when the buyers have little or no power in the negotiating arena during the sales process. These bubble watchers were defining a buyers market as a market where there was a certain amount of inventory on the market -- generally upwards to nine months of homes. Some brought it down to as low as three months and others pegged it right in the middle at six months.

I would default to the lower end at three to six months of inventory. At this level, while buyers are not in absolute control of the market, if sellers prepare the house well and price it right, they'll find multiple buyers at the door; however, all things being equal, it will linger on the market and sellers are more willing to provide subsidies and drop prices.

The way you determine this supply of inventory is by dividing the number of homes on the market in a given month by the number of houses sold that same month. Example: 5,000 houses on the market; 2,500 of them sell. This equals a 2 months' supply of homes, meaning that if no other houses come on the market, all the houses will be sold within 2 months.

Generally, here are the characteristics of a sellers' market:


Booming local economy. Local businesses are hiring at a brisk pace. New companies are opening up shop.

Low existing housing inventory. More jobs are coming into a market where there's not enough inventory to house all the workers, thus creating financial pressure on local resale units.

Builders are not producing enough homes to fill the job base. In the Washington, D.C. market, for instance, the local economy is pumping out more than 80,000 jobs in 2005, yet only about 35,000 houses are coming on line during the same period of time.

Home sales prices are escalating. Over the last several years, the national increase has been in the five to seven percent range. In a seller's market, it's not unusual to experience double digit increases. Some communities could double in price in just a year or two.

Buyer contracts begin to come in non-contingent. Buyers want to purchase a house, period. They no longer offer under list price, ask to sell their house first before settlement, or try to buy without financing already approved. There is no negotiating for the "perfect" terms. Getting the house, is the perfect term.

Seller subsidies disappear. While buyers used to ask for some sort of assistance -- lower price, points paid, closing costs -- the buyers must come to the table without any help from the seller.

High down payments become the norm. Buyers benefit from high appreciation and begin bringing down payments such as 25-plus percent to the transaction.

Appraisals are no longer needed to qualify for the purchase price. With down payments of $100,000-plus, there's plenty of equity coming to the table to ease the risk factor for most lenders so that the appraised value is not as important as the actual purchasing price. If the appraisal comes in $20,000 less than asking price -- that's okay, because the buyer has enough cash to compensate for the lower value.
When you're looking at the other end of the spectrum, the buyers' market would look like this:


Job growth eases or turns into job losses. Local companies are closing, a particular sector goes bust (telecom, manufacturing, etc.) and there are no longer enough people in town to support the local housing inventory.

The above situation creates a higher standing inventory, thus more houses appear on the market as people move out of town to find jobs elsewhere. Builders, who may have been building homes in the tail end of a seller's market, may find that they are now stuck with speculation homes they can't sell.

Foreclosures increase as the local job market softens. This creates a new venue of market with investors moving in to find good deals.

Home prices begin to depreciate and some homeowners will find themselves "upside down" in their property -- owing more on the house than what it's worth.

Some sellers may have to come to the table with money to sell the house instead of reaping a large amount of equity. Meanwhile, other sellers will option for a short sale where they take action to return the property back to the lender instead of filing foreclosure.

A first-time buyer market emerges as the once high prices drop to a level where some can afford to purchase now. This will bring about the use of low- to no-down payment mortgages in a market where they can negotiate the use of such mortgages.

Seller subsidies increase. Whereby the buyers once had to turn over first-born children to the sellers, now it's the other way around. Price drops, closing costs assistance, and other seller subsidies become the norm.
If you noticed, interest rates and the prices of houses did not determine a sellers' or buyers' market. Some of the hottest markets in the past existed in high priced and high interest rate environments.

Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Post your questions and comments at Anthony's blog.

Are You A Homeowner or A Thief?

A story in This Old House magazine this month details the stealing of a whole house by thieves who deal in used building parts. The crime, in Lindale, Texas, took place, obviously, over several days, in broad daylight and while the hardworking thieves waved to neighbors walking by, assuming the men were just a couple of workmen doing some tasks for the owner.

Antique housing parts -- chandeliers, doorknobs, mantles -- can be very expensive to install or replace and that's why, many times, owners who are selling their homes can turn into thieves when they decide to dismantle such items after the sale of their house without getting permission from the new owners of the house.

Attached items in a house are, indeed, personal property. And though they can be removed, they generally go along with the sale of the house to the purchaser.

Law.com's online legal dictionary, defines this type property as chattel -- "an item of personal property which is movable, as distinguished from real property (land and improvements)."

If an owner has decided to take a piece of chattel along with him once he sells the house, it's best to just remove it before the house goes on the market instead of trying to label it as "does not convey" with postcards or a post-it note during showings and open houses. I've heard home sellers defy all logic when this is suggested by saying, "But it makes the house looks so good." Right. Then why snatch it from the buyers' hands right after they write a contract. If it's a selling point, then it should stay.

A colleague of mine had buyers who fell in love with an older home and especially liked the pewter hardware on the doors throughout the dwelling. And guess what was gone -- not even replaced -- just gone from the house during walkthrough? Have you priced out antique pewter lately? An average 4 bedroom house can have up to 20 interior doors -- these type doorknobs can go for about $35 each – that's $700 worth of hardware if you install all of them yourself. The other challenge presented by snatching chattel at the last minute also angers the buyer and plants a seed of doubt in their mind as to what else is missing and what else the seller has hidden from them in the process?

The removal of chattel explains why most residential sales contracts have a check-off section where traditional chattel items are inventoried. This includes items such as all appliances, ceiling fans, garage door openers and remotes, playground equipment, window treatments, alarm system, etc.

As the purchaser fills out the contract, the buyer agent will check off the items they saw in the house -- the seller should check over this very carefully, just to make sure that they agree with what the buyer believes he's getting with the house. In addition, it could be the buyer has listed items that don't even exist -- such as a refrigerator with an ice maker when no ice maker exists. If the listing agent doesn't notice this and the transaction goes through -- the seller (or agent) could be responsible for a new icemaker installation for the new owners after settlement day.

While you would hope cool heads would prevail over such a small item if a mischeck occurs, however, let's say the above icemaker is checked and during walkthrough the purchasers find it's not in the refrigerator, but it was listed in the contract -- the buyer could demand the seller purchase a new one for them before going through the transaction.

Keep in mind chattel can be used as a negotiation item, as well, which could be why a buyer would request an item that's not even installed in the house at the time of contract.

For instance, if the house has a garage, but no garage door opener, the buyer could write up that they will buy the house, but they want the seller to install a garage door opener as part of the sales contract, thus, that piece of new chattel would have to be installed by settlement.

The biggest thing about chattel is that everyone needs to know what's staying and what's being removed. The avoidance of surprise is the main item to avoid.

Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.

Teardown Housing Becoming Larger Option for Homeowners

When does a house outlive its use and is better torn down than repaired? This question is creating controversy across the country where a shortage in the housing pool has forced this type of infill development.

A teardown is a property that is purchased with a house and then the house is demolished, followed by the construction of a newer, bigger, hopefully, better home. To the new homeowner, the teardown provides an established neighborhood feel in a new home property. In addition, teardowns become more popular in a tight market where land and homes are scarce.

Because the home buyer is purchasing a property at its peak value, it's not an inexpensive venture, either. While the buyer has purchased what is usually a perfectly good house at market price, now he has to absorb the cost of demolition and building a completely new home. One of the most expensive teardowns occurred in Westport, Connecticut earlier this year at the price of $14.6 million. The website keeps track of the Teardown of the Down, which logs the purchasing and tearing down of Westport's aging housing pool.

The teardown phenomenon has even launched a sub-market in the real estate industry where companies establish themselves as go betweens for builders seeking re-buildable lots and buyers who want a teardown property.

So, when should you consider tearing down instead of rehabbing? That was the question I received from a homeowner who had moved into a property that sounded like it needed to be torn down. His list of defects included:


Sagging roof from 3 layers of shingles

Flooding crawl space

Electrical safety hazards throughout

Items that keep creeping up the more we look
The owner is estimating that it will cost about $90,000 to fix up a house on which he already owes $150,000 and that is worth $260,000. Meanwhile, he's priced a modular bi-level home for $125,000 -- but that doesn't include plumbing, electrical and sewer hookup.

Thus, he can either put in an additional $90K or place a new house on the lot and owe more than what the property is worth today, hoping for growth in the equity over the next few years. As you can see from his situation, a teardown could be either a solution or bigger problem. It can also come down to being plainly a financial decision.

One of the most controversial issues that faces local jurisdictions is in the area of urban renewal and how a community's historic character will change with the influx of infill development. Some local governments have established infill surveys or analyses sheets that look at each proposed project to determine its viability and ultimately its approval.

If you're looking to carry out a teardown, your local jurisdiction may have criteria that must be met, such as the city of Davis, California. The municipality's Infill Guidelines, Consistency Analysis report asks questions such as:

Does the project:


Contribute to the development of complete and integrated neighborhoods?

Contribute to a mix of uses in the neighborhood?

Contribute to the variety of housing types, densities, prices and rents, etc.?

Enhance and not erode the existing neighborhood character (this is a real big factor.)?

Create a compatible use with the adjacent community?
The city's website has a really cool that documents with Flash animation the growth of the city over the last 90-plus years.

As communities move forward with land limitations for development, the concept of infill redevelopment will become more prominent. Citizens/homeowners will need to be more aware of the ins and outs, as well as pluses and minuses of this type development as it creeps into our neighborhoods and changes the way and look of how we live.


Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog. Real Estate News and Advice

Outside Factors Determine Leveling Market

Which way is the market headed? And what directs which way it will turn, up or down? These are questions real estate professionals hear on a consistent basis -- especially in light of unprecedented market appreciation across the country.

Currently, the average sales price of a home in the U.S. stands at $219,000 (14 percent more than the same period as last year, according to the National Association of Realtors). So everyone, from the hotdog stand operator to the corner CEO is concerned about what's going to happen.

Frankly, I'm counting on historical growth, national population growth, and the regular cycles of business to take care of any angst I might feel about the market. Nevertheless, there are various factors that effect any real estate market and you'll find all of them at work when the market is moving upward or downward.

Supply and Demand

The first, of course, is supply and demand. If there aren't enough houses to meet the demand, generally, your prices are going to increase, homes are going to sell in a record pace and every Tom, Dick and Harry is going to get a real estate license. In our local market in the Washington, D.C. area, we are seeing an amazing amount of job growth. In the last five years, more than 287,000 jobs have been added to this region's economy -- nearly 100,000 more jobs than the second highest location (Miami), according to George Mason University's Center for Regional Analysis.

Here's the downside, while the region has averaged job growth of 60,000 jobs each year the last 20 years, we've only put up an average of 35,500 houses each year (again, GMU's Center of Regional Analysis numbers). The lack of local plans to allow enough construction of more affordable housing structures has created a housing deficit of which forecasters see no end. In a world of smart growth, local jurisdictions better listen to their Economic Development Authorities in determining development plans, not no-growth advocates who are not anchored in economic reality.

Interest Rates

Though many homebuyers desire prices to drop, this may not always mean lower payments. Again, in the DC market area, a summer leveling off of prices would seemingly provide potential homebuyers with a break on housing affordability -- not so fast.

For instance, in Arlington, the first Virginia suburb outside of Washington, D.C., the median housing price has dipped $20,000 (from $520,000 to $500,000) through the summer, according to the local MLS statistics. Sounds great -- but the interest rates have increased by a quarter point as well, from 5.25 percent to 5.5 percent. Assuming a 20 percent down payment for either mortgage -- the $520,000 purchase with a 5.25 percent interest rate (June's average) would have cost $2,297.17 (principal and interest) per month; while the $500,000 purchase with a 5.5 percent interest rate (August average) will run $2,271.16. The $20,000 price drop saves the buyer a whopping $26.01 per month because of the increased interest expense.

Vacations & Weather

This past Independence Day nearly 13 percent of the DC population left town -- that was 600,000 people, according to AAA. Keeping in mind that at any given time about 7 to 10 percent of home dwellers are looking to move, that means that if the averages held, the Washington area lost anywhere from 42,000 to 60,000 buyers for a week during that holiday season. When buyers leave town, that naturally creates a slowing in the market.

In talking with the Director of Public Affairs at the Mid-Atlantic AAA, John Townsend, his feeling is that we have fewer residents in town this summer than in previous summers. They're finally leaving for vacation and that means fewer buyers in town to purchase, longer times on the market and dropping in prices (though minuscule) until the buying herd returns.

Also, weather can play a large part in what happens in the market. Particularly, weather that shuts down a region, such as a hurricane or snow storm, can reduce the number of buyers flowing through open houses and checking out inventory.

When looking at the effects on real estate, as you can see, it's not always the market. Sometimes it just means everyone's gone to Disney World.


Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.

Slow Market? Sell The Deal, Not House

If you find yourself with a house on the market and it's just not moving, there are several strategies to put in place to speed up the sale and get going with your next purchase.

Psychologically, the seller has to first prepare himself for selling the house -- not marketing it, not holding out for a higher price, not defending your price, not blaming your agent for not doing enough, etc.

Granted, all the above is important and you do want a professional agent with a viable marketing plan to draw as many buyers as possible. Just like any other commodity -- a lot of buyers trouncing through your house is a good thing, because more buyers means more potential offers. Thus, the seller needs to hire a company/agent that's going to create such an environment.

But let's say you've done that. You've even fixed up the house better than anyone else on the block and it's just not moving. Then move from selling the product to selling the deal.

We see this strategy in plenty of other products. The auto industry is famous for it -- zero percent financing, $500 above invoice, employee discount price … none of these items have anything to do with the product -- they are enticing you with the deal.

The Deal for real estate has everything to do about the buyer. Forget that you may still be in a sellers market and you're in the drivers seat. If your house is sitting on the market and you have to move in 45 days -- you're not so much in the drivers seat anymore. Get off your haunches and get the job done.

You could drop the price, but in reality, this doesn't help the buyer as much as cash back at the settlement table.

For every $10,000 you drop on a loan at 6 percent, the buyer saves only $60 per month in a mortgage payment. Is that really enticing enough? Think about it, they're borrowing $250,000 -- a quarter of a million dollars -- and you're dropping the price by $10,000 reduces their principal and interest payment from $1,498 to $1438. Is that one move enough to get me excited?

Let's turn that around and offer $7,500 (3 percent of the loan amount) over to the buyer -- at a full price contract -- and see what it does for the buyer. They could use it for closing costs, which could be a lot of money in their pocket. They could use it to make payments over the next several months (nearly five months worth of payments at the above mentioned payment amount). Is that really more beneficial than $60 per month?

By dropping your price $10,000, it would take them more than 10 years worth of monthly payments to gain the actual financial benefit of simply handing over $7,500 in closing costs to them at the settlement table. Plus, you get to keep the remaining $2,500 for your own bottom line.

It's like this. If you're about to take a hit on the sale of your house, it might as well benefit someone, and the buyer who gets $7,500 at the table is going to get a lot more excited than the one who's price dropped $10,000.

Be sure to check with your mortgage professional to make sure the loan program your buyer is using will allow you to provide this much cash to the buyer.

One last thing. If you decide to market the deal, make it a lot more appealing than "closing costs to buyer." How you say it can be just as important as what you're saying: "No payments for 4 months," "$7,500 back to decorate your house," "Seller will pay off buyers debt (up to $7,500)," are three ways of saying, "Closing costs to buyer."

Which one gets you excited?

Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.

Meeting the Seller Could Affect Deal

Realtors must take care how they approach the buyer and seller client of another real estate professional. To contact a seller directly, for instance, when the seller has listed his or her house with another agent, could be construed as "going behind the sign," as it's called in the industry and violates the National Association of Realtors' Code of Ethics.

On the other hand, it's not uncommon for buyers and sellers to meet each other and talk real estate, the transaction, moving plans, remodeling -- er -- be careful about that last one. It's true -- all the topics above may or may not cause a hubbub between a buyer and seller, but when you start discussing remodeling plans -- buyers beware.

Let's put it this way -- talk about what you love about the house: "The new carpet is exactly what I wanted." "The kitchen is so large. I can't wait to have a party." "Oh, I loooove your garden in the back. We've always wanted to eat our own gourmet vegetables."

When you start discussing remodeling -- you've instantly told the seller you don't like what they've done to the house and, in fact, you're going to change it. Before you may think, "What does it matter? It's going to be my house in a few days." It's not your house until settlement has occurred and keys exchanged.

Many buyers and sellers have met and it sealed the deal. "They were such nice buyers -- let's sell it to them." You never know what can make a seller like one buyer over another when comparing offers. If you have two close offers, it could come down to which buyer was friendlier.

One buyer agent told me of how her buyers wrote a letter about how the sellers had decorated the dining room -- just the way they wanted it. But to really make the letter have merit, the buyer had flowers matching the décor right when the listing agent was arriving to present all the offers to the seller. Obviously, the seller knew the buyers wanted the house -- but they really appreciated the sellers' efforts to make the house a home for themselves and this buyer demonstrated she was going to continue the tradition.

But the meet and greet isn't always the best thing. A colleague told me about a buyer couple in California was so excited that his sellers had accepted their offer in a competitive bid. On a weekend before settlement, the buyers were driving by and noticed the sellers in the yard.

After introducing themselves, the sellers were excited to see how they loved the house. "So what are you going to do when you move in?" the sellers asked. The buyers replied without hesitation -- "Well, we're going to redo the landscape and take out all those rose bushes."

Unbeknownst to the buyers -- the sellers were champion rose growers. Rose growers who then called their agent and called off the deal.

If you don't like something -- keep it to yourself. I'm not condoning lying to the sellers, but a "don't ask, don't tell" policy could be a good bit of advice if you happen to run into your sellers before settlement. Instead, rave about what you like about the house -- location, lot, style, established neighborhood, pet friendliness, friendly neighbors -- something other than the fact that you're about to rip out the gazebo in the backyard. You know, the gazebo where their three daughters all got married over the last 4 years? Yeah, that gazebo.

In a competitive market, meeting the sellers could be a good strategic move that puts your contract on the top of the pile. If played right. Otherwise, your remarks could send it straight to the circular file.

Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.

Professionals Help Get Gain With No Pain

During my last workout at the gym, I watched a professional trainer attempt to instruct a very amateur member in how to build more muscle and prevent injury. The amateur just wouldn't listen, it seemed. Instead of dropping his dumbbell down to 45 pounds in each hand, he argued with the trainer that he wanted to do 60 pounds in each hand to build muscle.

The trainer explained that the lighter weight with higher repetitions would provide him with a complete range of movement and provide more even definition. Again, the man said, "Oh, I can do 50, I'm just doing 60 pounds to build up."

The trainer walked away, shook his head and just chuckled, "Some people just think they know it all." With his expertise and the body to show it, exchanging advice with a string-bean seemed like a waste of time at the least and an insult to his obvious learning and expertise at the worst.

There are many times in your life when doing something yourself, or the way you want to do it, just doesn't make sense. Real estate is no different. You need professionals when it comes to investing, maintaining and selling real estate to make sure you don't commit costly mistakes in regards to your money, energy, and time.

Most professional investors I know have no problem hiring the right person for the job. If the house needs painting, they pick up the phone and find a good, professional painter. They don't have time nor expertise to do it themselves. It's in the world of private owners who are dealing with their personal residence that I see many consumers try to fix up, sell or buy their home on the cheap.

It's the professionals listed below that I see more homeowners try to do themselves and realize many times it would have been worth the effort and financial investment to hire the right person:

General contractor: This is the big one. Most homeowners like to think that they are a bit handy with the toolbox. The thought goes like this: "How hard could it be to fix that dry rot, anyway? Cut it here, insert new wood there, paint it. Why pay someone to do that?"

If your house needs a lot of fixing up, a general contractor can bid out all the different jobs, supervise the work and watch your budget for you and get it done faster than you doing it yourself.

Carpet layer: It's amazing how many people want to take this one on themselves. I saw a house once that had a beautiful curving stairway with white carpet. I guess the owner wanted to preserve this virgin floor covering, so he placed a clear runner down the stairway -- fastened down with roofing nails.

Painter: While most people I know could handle a paint job in their house, this task is fraught with accidents ready to happen: splattered paint along the floor, on the trim, and ceiling; spilled paint buckets; different colors (that were supposed to be the same) painted on adjoining walls -- all of which has happened with paint jobs I've done myself. Why torture yourself?

Plumber/Electrician/HVAC Technician: These three are probably the ones that most homeowners will default to immediately if something goes wrong in the house. Nevertheless, I have seen some finished spaces that homeowners completed themselves without the assistance of these trade specialists. The problem comes when you're home is being inspecting during your sale and the inspector asks for the county permits and certificates. These pros come with certification and specialty training -- it's best to leave such projects to those who know exactly what their doing.

Realtor: Well, you know I couldn't get through a "hire a professional" column without laying this one out there. In many a hot market, a lot of homeowners want to try this one themselves. But just like all the other professionals mentioned above, a good Realtor is worth every penny.

Most homeowners simply don't have the time, negotiation skills, expertise or training to sell their house themselves and maximize their bottom line -- which is the most important service a real estate agent (who's doing her job) brings to the table.

Regardless of the job you need to complete to purchase or sell your home yourself, at least consult with a professional before tackling the job yourself and possibly making a mess of things.

Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.

Eviction Notice Part of the Investment Process

Chris stroked his beard and shook his head, saying: "It's not fun." He was talking about having to walk up to the door of one of his rental properties recently with an armed sheriff and serve eviction papers to one of his tenants.

The couple had been living there about a year and suddenly the check didn't come. He gave notice, per the lease, and the check still didn't come. After meeting with the husband, he was given assurances that the back rent would be paid and that he would make sure his payments would be on time in the future. Another month later, Chris knew he was going to have to evict this man, his wife and children -- not a comfortable thought.

All Chris wanted to do was rent out good, clean, affordable properties to good tenants, now he was having to exercise the "heavy" part of the lease: tell the renter they were no longer welcome to live there, change the locks, put all the furniture outside and go to court for money owed -- even though he knew he would probably never see it. What followed was an emotional explosion from the wife toward her husband (who she thought had settled the debt).

If you ever have to face evicting a tenant, all sorts of thoughts float through your mind. First of all, an investor never wants to believe that the person they were so happy to rent their dwelling to a few months before is not someone they will be walking up to the door with law enforcement and telling (not asking) them to leave.

Second, since most investors have properties leveraged with a mortgage, you start worrying that you won't be able to make the payments on that mortgage and that the lender will start making some threats of his own.

Third, as you enter the property you are clinging on a thin strand of hope that maybe, just maybe, the house doesn't need a lot of repair, causing even more financial setback.

If you ever face evicting someone, the process differs state by state, even county by county. In Chris' case, he had to serve notice five days after the check was late and from that point, he was going to have to wait three weeks before the court met to hear the case (as it does every month). In the meantime, the sheriff calls and sets up a time to visit the tenant's house and serve notice of the court date. As you may calculate, by that time, your tenant may be two months behind in rent and you're two months behind in mortgages to your lender.

In between the filing and court date, he attempted to work out finances with the tenants, warning them that eviction day was coming. (He was, of course, promised that all the household goods would be moved out by then.) Once the court date came and the judge gave approval for the eviction, he then joined the sheriff and walked up to the door to change the locks and inspect the property.

In this case, the worst happened -- all the furniture and belongings were still in the house and the wife never knew what was happening. Chris was the one to break the bad news. She sat there and cried and apologized profusely, promising to pay him back (and payments have begun).

Nevertheless, the furniture had to be moved out and fix up on the unit begin -- which was taking longer and costing more than Chris had anticipated.

As you consider investing, be sure to look over the good, the bad and the ugly of investing. Look through your lease carefully about your rights as the landlord and the process lined up for taking back ownership of your property and evicting the tenants. Especially consider the tenant-landlord laws of your jurisdiction. While they are created to protect the housing rights of both tenant and landlord, they can also cost you a lot of money and you need to be sure you're able to pay.

Mr. Carr has covered real estate since 1989. He is the author of Real Estate Investing Made Simple. Got a personal real estate issue? Post your questions and comments at Anthony's blog.

Fixer Upper To One Is Cosmetic To Another

I receive emails regularly from people wanting to find the diamond in the rough so they can walk away with tens of thousands of dollars in one transaction like all the people on the infomercials.

Everyone wants the quick fixer upper resulting in the quick buck. In some communities, that's very doable, while others are just unaffordable even when the house is about to fall in. Even I would take such a treasure. I toured one such property recently with a fellow investor and the house truly needed a lot of fixing up.

It had been a rental for several years by the sight of it. The carpet was in a mess with bare spots throughout. It was simply filthy -- there's just no other way to describe it. It wasn't even "broom clean" which is what most contracts require when a renter or former owner moves out.

The walls had needed painting several years ago and the flooring in the kitchen had cuts and gouges all over. On the back deck, we had to be careful not to step too firmly as to not fall through and the back yard (it was a townhouse) was overgrown and unkempt. The fencing was fraught with rot and mold.

The bathrooms were also filthy with rust in the sink and tub, and the faucets needed replacing. The owner had turned off the water, so we couldn't test if it was working or not. There were only a few light bulbs throughout the house so that we could get a good look at the crevices of the dwelling.

In the basement, the ceiling was drooping from previous water damage from above, the carpet needed replacement. There was also a smell of mildew throughout.

We were drawn to the property because the listing remarks said: "Priced below other comps. Needs cosmetic fixes."

Well -- what I was seeing was more than cosmetic. In addition, when you see that the interior is in such disrepair, you have to wonder about all the stuff you can't see in a casual visit -- the attic, roofing, rot around the base of the house, termites, etc.

The investor-owner used the house truly as a commodity and did not take care of the product. However, in our escalated market, the asking price was $359,000. So is this the type of fixer-upper you're looking for? A comparative market analysis of that area today -- 60 days later -- shows properties of that type selling for upwards to $410,000. In a market such as the Washington, D.C. area, such a gamble may be worth it.

The problem with this target property is that the owner was not offering the property up as a fixer upper, but the market showed it could be moving up to that level. The property needed at least $25,000 in repairs and then the marketing costs would be about another $20,000 to $25,000 -- so there goes the equity and your quick-turn profit.

If you're in a more normal market, you need a lot more equity to walk into before being willing to start polishing that diamond. There should be a projected profit margin of at least double your expenses -- thus after fixing up a property and selling it, all those expenses should equal your profit.

Example: You purchase a fixer upper for $150,000, put in $25,000 to fix it up, and sell it for $225,000. Your gross profit would come in at $50,000, subtract commission and closing costs of 7 percent and you're down to $34,250. To be sure that you're going to get the amount of money here that you want, you MUST insist on a thorough home inspection by a qualified (preferably, certified) home inspector. This person will be key in finding out how much money you're about to put out in return for your investment. In addition, you want a Realtor involved who can give you comps of the area so you know what your target price will be.

When it comes time to your first fixer upper investment the key point here is patience and don't let dollar signs in your eyes blind you to the reality of the return on your investment.


Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.

Lien Holders Must Get In Line for Payment

A title search is one of the most important activities of the real estate transaction. Without the ability to convey title, a property owner cannot sell his or her home and a buyer would not want to take possession without this most basic exercise.

"Title" is the right to own land. Thus a title or settlement company conducts searches at the courthouse to determine if one owner has a "clear" title so that they can pass the property over to another owner. If a title has liens or judgments against it, then it creates a "cloudy title" and that's not a good thing, unless the liens are the most common sort, such as a mortgage.

Liens are "a charge or claim against a person's property, made to enforce the payment of money," according to my old principles of real estate text book, "Modern Real Estate Practice," published by Dearborn Real Estate Education. These liens are broken down into two major groups: voluntary (you actually created the lien intentionally, like a mortgage) and involuntary (it was forced on you, like taxes or a creditor's lien seeking payment).

Beginning investors need to be careful that when they go to the courthouse steps to bid on a property, that when they "win" they haven't just purchased a bunch of liens, which are attached to the property and convey with the property. Keeping in mind that if someone has allowed their house to go to foreclosure, then they've had financial problems and that means they could have had liens placed on the property from vendors seeking payment.

As mentioned above, mortgage companies place liens on the property for the mortgage amount. Other liens could be placed on the property for taxes, fees outstanding to contractors (mechanics lien), and even homeowners association dues. You may even find liens for utility companies and local creditors.

When a house goes to foreclosure, the lien holders must get in line for payment. The first one with a hand out is the government for taxes. This lien is the first in priority, even though the general rule is "first-come, first-served." All other lien holders better hope they placed a lien on the property early on.

For example: Mr. Smythe is ordered to go to foreclosure on his home and is able to receive $275,000. He has a tax lien for $5,000 the current year, a first trust mortgage from 1998 for $125,000, a judgment lien from a creditor for $100,000 from 2003, and a mechanics lien for work done by a contractor on his deck for $20,000 from 2002.

The order of payoff would be as such:


Taxes: $5,000

1st Trust: $125,000

Mechanics lien: $20,000

Judgment lien from creditor: $100,000

Mr. Smythe: $25,000
The seller receives the balance of the proceeds (and that's assuming the creditors have not sued him for the cost of the foreclosure or any fees they've incurred that they are allowed to because of the foreclosure).

If Mr. Smythe goes to foreclosure in a down market and only receives $200,000, the roll out of the proceeds may look like this:


Taxes: $5,000

1st Trust: $125,000

Mechanics Lien: $20,000

2nd Trust: $50,000

Mr. Smythe: $0
In many foreclosure cases, the mortgage company will pay the taxes just so they can get first in line for their own money. The only other way a creditor can move ahead in the line may be through a "subordination agreement" between them and another lien holder to change the priority (you might say these are also considered a "fat chance" agreement or "snow ball's chance" agreements). Not too many companies are willing to subordinate to other creditors if they don't have to.

If you find yourself in a must-sell situation, it's best to let your agent know immediately that you might have liens on your property -- she'll find out about it eventually during the title search. For those facing foreclosure, you may have creditors judgment liens on your house and not even know it. The only way to find out about them is to visit the courthouse and look at your records. Obviously, the only way to remove the liens is to pay them off.

Transaction Management Tracking Moves Online

Your next real estate transaction may be managed from an Internet-based transaction management system (TMS). Plenty of companies are beginning the trek toward being the first in line for servicing the transactions of real estate agents. These TMS providers, so far, include title companies, software companies, real estate companies and multiple listing services.

It's the natural progression for the industry; however, standardization and acceptance by various real estate professionals to use the same system (especially if their own company is designing its own program) will be the key to success for any TMS. The fact that so many type of companies want access to the information is what muddles the development and launching of this highly touted tool.

The basic description of a TMS is a web-based software that manages the transaction, beginning with either the buyer or seller and goes from listing the property or approving the loan through settling the transaction. The system allows service-providers to enter new data into the transaction from any place the internet is accessible. Each transaction has plenty of service providers touching it -- real estate agent, title coordinator, settlement agent, home inspector, loan officer, legal firm, insurance agent, pest inspector, etc. Each would input data about their piece of the transaction into one web-linked file hosted by the TMS company and controlled by the subscribing agent.

The challenge in today's paper-intensive real estate transaction file is to keep up with each aspect of the transaction, while ensuring that each task item is completed according to a legally-binding contract. Most times, this is monitored by paper through faxes and emails back and forth from all the above-mentioned parties.

Who owns the transaction is up for debate -- is it the listing or buyer agent, loan officer, settlement/title company? The objects of the transaction are obviously the seller and buyer -- however, they don't have the access, nor expertise, to keep up with the scores of documents, tasks, scheduling, etc,. necessary to move the transaction from contract to settlement.

The National Association of Realtors has designed a Realtor Secure certification for organizations that use the "best online security practices in the real estate industry." So far, only one TMS provider has received certification for its program -- SettlementRoom.

While this certification may give the Vienna, Virginia-based software/web developer a competitive edge in implementing its program with real estate companies and MLS services, there are so many other TMS providers on the horizon that it will be a messy battle to see who wins out or at least becomes the primary TMS service in any given jurisdiction.

NAR reported recently that "SettlementRoom … is the first transaction management vendor to complete the rigorous Realtor Secure program. SettlementRoom successfully demonstrated that it met program requirements to have policies and procedures in place to protect real estate, employee and customer information from internal and external threats and to prevent business interruptions."

NAR based its certification on security standards from the International Standards Organization and the National Institute of Standards and Technology.

"Realtors are harnessing technology to help consumers and making that technology secure. So it's encouraging to see an industry firm like SettlementRoom demonstrate that it takes seriously the security of data from Realtors, consumers, and others involved in the transaction," said Mark Lesswing, NAR vice president and director of CRT, in a press release on Realtor.org.

Of the 42 transaction management sites listed by web directory site ReBuz.com, several are already caput while others redirect the click from the original site URL to another entity altogether. The battle is fierce and the field of winners has already begun to narrow.