Monday, October 30, 2006

Market Moves Forward with Motivated Buyers, Sellers

I just returned from a conference of top agents from the Washington, D.C., metropolitan area, and while they are working harder this year than last year to turn a deal, they are moving forward with their businesses by working with motivated sellers and buyers.

"The market is the market," one told me. "You have to sell and buy real estate in this market, not last year's market, and not the market you wish it would be."

One thing all top producers had in common was that they "get it" about what kind of market in which they find themselves, which is more than what they could say about most of the buyers and sellers who are trying to move from one property to another. Here are a few of the excuses seller's are using to justify the price of their houses.

What sellers say: "I need X-number of dollars from the sale of my house."

The truth is: With all due respect, it doesn't matter how much you "need." The market determines the sales price of a house. I just saw a home that has now been on the market for 328 days in Loudoun County, Virginia -- the sales price has dropped $150,000. That seller understands it doesn't matter how much he "needs," however, he would probably have sold it earlier if he would have dropped the price quicker.

What sellers say: "I have a bigger lot."

The truth is: You can't live on the lot. While the size of your lot will make the property more desirable (for some buyers), it doesn't necessarily mean it adds more value in a buyers market. Price according to other houses like yours, not other lots. This is particularly true in a subdivision where the lots are mostly created exactly alike.

What sellers say: "There's one special buyer out there … ."

The truth is: While this may be true in some instances, for most properties, there are several buyers -- if you have the house in the right condition and price. Overpricing a property and waiting for a stupid buyer is a waste of everyone's time.

What sellers say: "Advertise more."

The truth is: A property priced right is the best advertising you can use. The best property with the worst price still won't sell. The best property will at least bring about some offers, but not necessarily the asking price.

What sellers say: "If I don't get X-number dollars, then I just won't sell."

The truth is: Most sellers using this line mean they have their house overpriced and will die in it rather than drop the asking price.

There are three determining factors of the salability of a house: location, price, condition.
In areas where commuting is a daily battle, location definitely makes the property more desirable than a house miles and miles away. Location may also mean the location in the desirable community. The former model home facing the four-lane highway may be in great condition and be in the right community, but the location on a busy road could adversely affect the salability of the house.

Price is what most homeowners are battling in today's market. If a house looks great and is over priced it will not sell. Even some "fixer uppers" I've seen these days are overpriced. They may be asking for less than other homes in the community (which are also overpriced), but they're still not moving because there's a great looking house in the neighboring community that sold for the fixer upper price a week earlier.

When a house has more amenities than the competition, this doesn't automatically mean it's worth $50,000 more. In today's market, it may mean it's just going to sell faster.

Finally, the condition of a property is vital to the salability factor. Many of these top producers are challenging sellers to drive around with them to compare the seller's house with those that are already on the market. Those that tour other houses, usually end up pricing the house appropriately, to make their house a "good deal" against all the other comparable homes in the area.

Remember, if someone can remodel a kitchen for $30,000 -- then why would they pay $50,000 more because you have one that was remodeled last year. Sellers and buyers who understand the market are cashing in and getting good deals. Sellers need to focus more on equity gain over the last several years, while buyers need to get off the fence and get a good deal.

Published: September 15, 2006

Determining Rent Determines Your Wealth

One of the most important aspects of the investment game is creating a positive cash flow from your rental properties. The basic principles apply: buy low/sell high; cover your monthly expenses with your monthly rental payments; go to the bank a happier, richer person.

Setting up just how much you want to walk away with each month, however, isn't as simple as adding up all your expenses, tacking on an additional 25 percent and sitting back waiting for the tenants to move in.

There are two basic systems for determining the rent to charge.

The first is "return on investment," directed by how much money you want to make on your investment plus the amount of annual expenses for the investment.

For example: if you put $20,000 down on a property and you want to receive a 10 percent return on that down payment (total of $2,000 per year); First add up all your expenses (say, $12,000 per year for mortgage and $2,000 for maintenance and upkeep). Then add in the desired annual return, thus you would need to bring in $14,000 per year in rental income to meet your goal -- ergo, the rent charged would be $1,200 per month.

Unfortunately, for most investors, the above formula is not how they determine the monthly rental. Instead, you may be at the mercy or blessing of the market analysis method.

This method is not unlike conducting a comparative market analysis (CMA) for a property for sale. Find out what the price of the latest sales for properties like yours in your neighborhood or city and list the house at, below or a little above that average (depending on the state of the market).

In rentals, you do the same. What are the rentals going for in your area for your type of property? What's the condition of your investment property compared to those that just rented. Make an adjustment for condition and location, set the rent level and get the house listed.

The blessing of this method is that if you're in a market with job growth and there's a shortage of affordable housing to purchase, you could possibly charge hundreds of dollars more per month than the same period a year ago, if the market demands it.

In Montgomery County, Maryland, a suburb of Washington, D.C., that type scenario exists currently. According to the local MLS, last year at this time the average single-family home rented for about $2,500 per month. This year, the rent average has shot up to more than $2,800 per month -- that's $3,600 more per year. That type of cash flow growth makes any investor very happy.

There are various mistakes to avoid in the setting of your rental level. The first is getting greedy and trying to grab too much rent than the market will allow. Fortunately, most times, the market will tell you pretty quickly if you're listed too high. It just won't rent.

In your research, determine what's the average days on market for a rental. If it's 45 and you've been on the market for 60, then you may have a pricing issue. But also check on the condition or amenities offered in your property. You may have a really nice condo, but the ones across the street have a pool and playground and yours is priced the same as those units; obviously, the consumer is going to choose more for their money.

Leaving the unit vacant too long could eat up all your profit for the year. If your expenses are $2,000 per month, for instance, and you let the unit sit vacant with a price of $2,400 for a month, you're behind now by $2,000. If it rents the next month for $2,200 -- you've not only cut back your cash flow, you've decreased the balance sheet. Now you're income is short $2,200 for the next year (the amount of rental income you could have gotten if it had been priced right to begin with). Put it into a second month without adjusting and you could quickly go into the hole in your investment business.

As you move forward year after year, keep up with the rents in the area long before the term of your tenant's lease comes to an end. Knowing what you're unit will rent for ahead of time, keeps you on track with keeping good tenants in your unit on a consistent level to maximize your rental cash flow.

Published: September 8, 2006

National MLS Created One Listing At A Time

The latest buyer survey by the National Association of Realtors® revealed that 80 percent of all buyers now begin their search online for real estate. That's quite a surge in just a few years, when the number of cyber surfers for real estate was at about 7 percent of all buyers when real estate and the Internet met. If any industry benefits the consumer online, it's the real estate industry. Millions of houses advertised online for buyers to peruse, read over, view floor plans, and watch video tours. It's all there, it's free, but we really take for granted what it takes to create such a system.

Today's electronic MLS system began years ago on paper. Realtors across the country would turn in their listings with a picture into the processing manager, who then turned them into the local Realtor association. Associations would then print up a book or cards and then hand deliver them to the offices -- usually one per agent -- either weekly or twice per week. The MLS book was one of the most highly sought after commodities in the Realtor's tool box.

The ultimate purpose of the MLS is to offer a co-op between competitors so they can sell each others properties and get paid for doing so.

The electronic MLS system starts and ends with these licensees. Without the licensees of the state, belonging to brokerages, who gather millions of data and pay billions in fees, programming costs, etc., there would be no Realtor.com, Homesdatabase.com, homes.com, or any other internet-based real estate database for that matter.

While there would be places online for homeowners to "advertise" their homes for sale, there would not be a pure database, whereby, buyers and sellers could come together with secure data that is updated on a daily basis. I can't think of any other databases of homes for sale online that are operated like the MLS.

The fsbo-type websites are NOT databases, but advertising, much like what you would find in a newspaper website. Once the property is sold, the ad for that property, most times, remains online and buyers don't really know if what they're clicking through is still on the market or not. Meanwhile, Realtor-operated MLS's are internally regulated and agents can be fined for registering erroneous information or not updating information soon enough.

In fact, the information is so good, other website operators have taken aim at these online services to steal the information and place them on their own sites to draw homebuyers. NAR's Center for Realtor Technology, has even released two programs to help stop "scraping" of the data by online data predators.

NoScrape is a program that places the data into a rendering, or graphic file, from which data cannot be copied. Computers aimed at scraping data from real estate sites cannot strip the information from this type of web page. A second anti-piracy program is reCaptcha, which "is a way to tell computers and humans apart and is based on CAPTCHA technology. CAPTCHA is short for Completely Automated Public Turing test to tell Computers and Humans Apart. It identifies the party trying to access your site as a human or a computer program by generating questions that only a human can answer correctly," according to Realtor.org.

reCaptcha displays a securitized system whereby the user must retype distorted images of a word to gain passage to parts of the web. These type of programs are also used by financial, ticketing and blogging websites to ensure humans are using the site, rather than computers.

When I read articles about how the Realtors have the MLS locked up and should just open it free to all consumers (i.e., private sellers who want access, other web sites who want to draw buyers and sellers, etc.), I'm reminded of the little red hen, who once having gathered the wheat, ground it up into flour, made the cakes, and baked them, asked, "And who would like to eat the cakes?" The Cat, the Dog, and the Duck all said, "I will, I will."

"No, No." said the Little Red Hen. "I will do that." And she did.

Published: September 1, 2006

Tuesday, October 10, 2006

What Do Agents Really Bring to the Table?

I hate going to the dentist. I've always had good teeth, only one cavity in my head, so why spend all that money (not to mention the dental insurance) on a service I've never really needed. As long as I brush and floss, why do I need someone with a doctor's degree to look over my teeth, clean them, whiten them, etc.?

Besides, I've pulled teeth myself -- when I was just a grade school kid, in fact. So if I can pull teeth at that age, with just a string and a doorknob, why on earth do I have to pay a professionally trained tooth puller now? As I reminisce on those days of my early tooth-pulling, I even recall getting paid for pulling my own teeth! That's right. Every morning after pulling my teeth, I had money under my pillow.

Obviously, anyone who has received quality dental care in the past sees right through the absurdity of this argument. However, when it comes to real estate agents, everyone wants them to provide their services for discounted prices – even free.

Licensed real estate professionals bring state-mandated training and knowledge to the table for buyers and sellers. In fact, agents have to get as much, or more, training than what it would take for some college degrees before being given permission by the state to represent buyers and sellers in the transaction.

By the time a transaction is over, it is chock full of legally-binding documents controlling the transaction, pulling two parties together to exchange hundreds of thousands of dollars to complete a transaction that they may be involved in only a couple of times in their life.

Both the buyer and seller must perform to the contract, and most times, they don't even know how or what they're supposed to do to perform the paragraphs they just agreed to perform.
Nearly half of the buyers are purchasing for the first time, according to the National Association of Realtors. They only think agents are there to usher them into houses and that's it. And that's because hundreds of thousands of agents make that tooth extraction look so easy.

Why should you have a real estate agent on your investing/buying/selling team when it comes to building wealth?

There's talk on Capitol Hill of how the real estate industry has a "strangle hold" on the business. It makes me want to, not so much defend, as much as bring to the forefront what licensed professionals actually bring to the table for consumers.

You've heard the term, "You get what you pay for," and that doesn't go wasted on agents as well. Many sellers would love to get through the transaction themselves, without any help from a "middle man," to save the commission dollars. It sounds like it makes sense, "Hey, why pay thousands of dollars of your money to sell a house when you can do it yourself?"

But every agent has a real estate license regulated by the state. This means they are knowledgeable about various aspects of real estate law, rules and regulations, such as:

  • What rights exist for land and how they can be traded
  • How title can be held and how to ensure clear title to the land
  • Financing: traditional, non-traditional, owner-held, etc.
  • Fair housing laws: federal, state and local
  • Local limits on the sale and trade of real estate
  • State disclosure laws and regulations on the trade of real estate
  • Contracts and forms

Most sellers and buyers I've talked with, while having access to plenty of "information" on the internet about the sales transaction, do not have a handle on the nuances, pitfalls, and inherent dangers of legal problems they can face in the midst of this huge investment.

Published: August 25, 2006

Single Girl Power Growing Influence in Real Estate

Ladies, take note, you've begun taking a larger role in the area of homeownership over the last few years, according to a new study from the Joint Center for Housing Studies at Harvard University.

"Not only are unmarried women a large segment of the home buying population," says Rachel Bogardus Drew, the author of the report, "but they are fast-growing, too, increasing their share of home buyers by 50 percent in eight years. The value of their home purchases over a 3-plus year period totaled more than $550 billion ... ."

The study is as much a report on the sociological changes in our country as on the buying practices of women. The continued breakdown of the family has pushed women to start fending for themselves, financially, instead of waiting for the combination of salaries with a mate to purchase a home.

"Two out of three female buyers were previously married, though that share drops significantly for younger buyers," Ms. Drew points out. "They also have lower incomes than unmarried men and married home buyers, but are less apt to finance their home purchase."

Still, the overwhelming buying segment is made up of married couples at 63 percent, but now unmarried women are the second highest buying group (at least when looking at marital status) at 20 percent in the last three years. Unmarried men make up 17 percent of the buying pool.

The demographics paint an admirable picture of the group, being older than their unmarried male counterparts, and facing many obstacles, demonstrating their determination to get in the real estate ownership circle. They also have lower incomes and many of them are buying with children in tow (30 percent).

Financially, they've demonstrated that even with lower incomes, homeownership is available. At $37,000, their median income is 11 percent less than single men, but account for why they are less likely than married couples to live in single family homes -- however, the majority of them were move up buyers in the last three years. They are plodding along with wealth growth, taking a patient path to building their net worth by buying low, selling when the market grows and moving into a larger, more expensive dwelling.

The growth of this demographic has not gone unnoticed, as both for-profit and not-for-profit entities have begun initiatives to help women in their quest for homeownership. One of the groups was the Women's Mortgage Industry Network (WMIN), which was launched four years ago and is sponsored by Freddie Mac. The group's goals include engaging "the mortgage industry and non-financial service providers in a targeted education and counseling campaign that it believes will help close the gap in homeownership rates," according to information from www.FreddieMac.com.

One of the most interesting points of this report was one of the buying options Ms. Drew uncovered in her report of single women, purchasing in a co-housing community.
"Co-housing communities, though relatively small in number -- about 50 in the U.S. -- are an attractive choice for women who want the privacy of their own home with the benefit of a supportive, surrounding community. These communities typically consist of 12 to 42 self-sufficient private dwelling units, but also include a common kitchen/dining space where meals are shared as well as communal outdoor space. Other arrangements help to pair single mothers looking for a shared living situation," she writes.

"By pooling incomes single mothers can often afford to buy a more desirable home, and by living together they can share household tasks and childcare, which can free up valuable time. Living with someone can also provide critical emotional support and help make single parenting less exhausting and lonely."

Obviously, this is a growing segment of the real estate industry and will continue it's upward trend with the aging of the baby boom generation and the natural selection of women living an average seven years longer than men.

Published: August 18, 2006

Do Brokers Compete or Hold a Monopoly?

There's a lot of press these days on how much real estate agents are charging to sell houses. The House Subcommittee on Housing and Community held a hearing a couple weeks ago on residential brokerage services, where groups like the Consumer Federation of America (CFA) and American Homeowners Grassroots Alliance bemoaned the current commission-only business of real estate agents across the country.

To hear the CFA's take on these independent contractors (who have no job security, biweekly pay check, benefits, vacation/sick leave or traditional company support), they are all totally overpaid and consumers are being fleeced by a "fixed" commission rate that's being protected by the industry at large.

Obviously, I know a lot of real estate agents. Some are doing very well financially, on the other hand -- with the current state of the market -- some are looking to get out of the business. Most agents I know make a good living, but nothing extravagant. They draw in about the regional median income, but do not have the benefits that come with a full-time job. In fact, they have to pay for all their expenses – everything from paper clips to expensive advertising and marketing.

They get to pay for all of this, because they're taking a risk to make an above-average income. You won't see too many of them defending the latest commission charges these days because many markets across the country are off by as much as 30 to 40 percent. Instead, they are out looking for business. They're trying to get sellers to price right and buyers to get off the fence; meanwhile, the mortgage is due, the kids still want to eat and they have to market clients' properties with no guarantee of getting paid for it.

Mr. Stephen Brobeck, executive director of the CFA, calls the current residential brokerage system "a cockamamie system that restricts competition and consumer choice," in his testimony on July 25, 2006. Much was said in his testimony, thus I'll limit my response to the part where he calls on the real estate industry to be regulated like a utility -- you know, the power and gas companies.

What's really scary is that he is saying this in front of some pretty influential and powerful people in this country who may not really understand how a real estate agent makes his or her money.

Yes, they get paid on commission. And when you look at the average price of a house in the Washington, D.C. market, it makes some in Congress wag their heads at how much each agent must be walking away with from the settlement table.

Well, let's work in real numbers. Last year, the local MLS reported the D.C. area real estate market created roughly $44 billion in sales. The average commission, according to Real Trends, an industry watchdog group, stands at 5.1 percent (not the 6 to 7 percent touted in Mr. Brobeck's testimony). At that rate, with a commission split of 50/50 between brokers and their 30,000 agents, the average commission income would be roughly $37,400 each.

To be totally upfront (something I didn't see portrayed in some of the testimonies I read) the 80/20 rule can be applied in real estate -- except I would surmise it's more like a 70/30 rule: about 70 percent of the sales are done by 30 percent of the agents. Thus, you have some very successful agents on the top, and the rest are digging around for the remaining commission dollars.

A lot of money exchanges hands in this business, being divided between a lot of people. So while the dollar amounts sound expensive, they really only create an average income compared to any other industry in the region. But here's the catch -- agents only collect their pay if they are successful.

They only collect their split of the 5.1 percent commission if the transaction actually goes through. There's no reward for second place. If the agent gets the listing, spends her own money up front to market it, charges all her gas to her credit card, then she hopes to get paid back once the sale goes through … if the sale goes through.

Unlike other professions where the attorney gets paid even if his client goes to jail, or the surgeon gets paid even if his patient dies -- the real estate agent only gets paid the commission when the house sells. There's no paycheck for failure in real estate.

Published: August 11, 2006

Vacation Investors: Keep Up or Get Out

I wouldn't say that I'm frothing at the mouth right now while sitting in my vacation rental, but I'm getting close. My bride and I just spent breakfast making a list of why we'll never rent this unit again at one of my favorite beach communities.

I've rented several properties here in the past -- that's why I'm back this year. But this time has been pretty irritating. Not a disaster, mind you. We're still enjoying the beachfront pool club with tennis courts, Olympic swimming and private beach privileges that come with the $2,000 per week rental (after taxes, fees and insurance), as well as the views of a lake with plenty of turtles, cranes and various water fowl.

It's just that when I plop down that much money on a beach rental I have a certain expectation. You know, like there would be remotes for the 5 televisions, 2 VCRs and 4 DVD players that actually work. (And this is just getting started.) Unit L35 is quickly becoming a unit I'll never rent again.

There are two management components to investment property that every investor must take into mind. First is the investor track. Secondly there is a management company track.
Under the investor track, the individual investor has certain responsibilities, such as providing the furnishings, keeping the property in generally good order (painting, carpet, decking, etc.). The property management group is the one that joins the investor to keep the property in daily working order for all the visitors that will pay to stay at the home.

First let's deal with the investor track. A vacation rental can be a cash cow if you set it up right. Purchase with enough cash down so that the rents coming in not only pay your monthly costs (mortgage, insurance, property management fees, etc.), but you also have enough cash at the end of the month to save up for maintenance and upgrades of the unit over the years.

When investing in vacation rentals, keep in mind it's as if you're setting up your own little hotel. The rental not only includes the dwelling, but also all the stuff -- furniture, linens, kitchen utensils, and items needed on a daily basis. It also includes the niceties, i.e., DVD players, hot tubs, bicycles, gas grills, etc.

In residential investing, you only have to make one renter happy all year. In vacation rentals, depending on the length of the season, you could have dozens you have to satisfy in hopes that they will want to come back again and again. Thus, don't be cheap. Cooking wares from the local dollar store will not last long. After the first few uses, they'll look like what they are cheap.

Purchasing electronics on the same basis is really a disaster. While you may not want the top of the line in home entertainment, the cheapest components will break down very quickly. Remember, you are renting to people who are on vacation. They will most likely be watching several movies per week. The $49 component will break down (like the unit in my daughter's room, which has damaged up one of her DVDs).

This brings me to the property management track. Once we walked into the house, we discovered in two days various problems with the property and service of the management team:

  • Mildew spewed out of the Jacuzzi on its first use
  • Missing light bulbs throughout
  • A hot tub that comes on by itself and won't shut off without unplugging it
  • The garbage disposal was jammed and had to be cleaned of seashells and pebbles to get it to work.
  • Out of the eight remotes in the house, only two work. I've had to purchase batteries for them only to find out some of them still don't work.
  • The garage is full of debris
  • The outside shower had to be cleaned of pine needles, leaves and twigs before anyone could use it
  • The gas grill is a mess (okay, maybe now I'm getting picky, because what gas grill ISN'T a mess?). But the igniter doesn't work and I've purchased a lighter to ignite it for grilling tonight.

The owner next door bemoaned that there used to be two separate companies employed for cleaning and inspecting the properties -- now there's one that cleans and then sends its own crew in afterward to inspect. This may be why the cleaning crew put rugs in the washer and left us note to please move it to the dryer.

If you're going to get in the real estate investment game you must show that you care about the property. Besides, if you don't care how it looks when you're renting it out, then why should the vacationers care to come back?

Published: August 4, 2006

Normal Market Produces Buyer Opportunity

by M. Anthony Carr

Buyers scurry, afraid of buying at the height of the market. So why aren't builders running scared? Because the underlying principles of a good market remain sound in the midst of the market fears. While nationally, the industry has cooled to "more sustainable levels," according to the National Association of Home Builders, "The Bureau of Labor Statistics reports strong job gains in many of the fastest-growing states, with 37 states exceeding their pre-recession peak levels of employment in 2005."

The group recently released a mid-year housing report on its real estate trends website, HousingEconomics.com. A cooling of the market this year will still result in the third highest level of housing starts in the last few years.

That's why you keep seeing building projects going up. Definitely, not as many houses are being constructed in 2006 as last year, but the NAHB report points to several positive market growth indicators in various regions across the country.

Job growth is continuing upward. Unemployment is dropping. Businesses continue to expand and economists across the country continue to estimate that the need for more housing will stretch beyond the current inventory surplus.

The National Association of Realtors still is holding to 2006 being another very strong year -- the third highest on record. NAHB members are still bull on the housing market. What we're seeing in '06, it seems, is a transition year. For buyers who have no choice but to buy because of social or lifestyle reasons (birth of new baby, marriage, retirement, in-laws moving in, new job, relocation, etc.) they will buy now and unwittingly pick up a great deal.

For buyers who are too skittish about the market, they will miss a financial boosting opportunity. In markets where it has normalized (D.C., Miami, Chicago, Phoenix) buyers who buy based on rock-hard solid economic evidence, will be excited in a few years that they bought a house low and now stand to earn a handsome profit a few years later.

Ask anyone in the D.C. area if they would have bought property in 1990 (the last time the market took a time out) and held it to today. They would grin.

At that time the average home price was about $179,000, prices were dropping and the job market was faltering. Today, housing prices are up over last year by 4 percent, employment is up nearly 64,000 jobs compared to a year ago and the job market is still chugging along in the D.C. area. Home sales have leveled off and rentals are skyrocketing. I smell opportunity.

We have 20 percent more jobs headed this way in the next four years over the last four years -- that would be 256,000 jobs. While other areas may not be as robust, they are still growing. If the new employees don't buy houses, they'll rent and that's causing pressure on rents as they begin growing nationally at a double-digit rate for some areas.

M/PF YieldStar, a real estate market intelligence firm, estimates that 2006 and 2007 will be boom years for rental markets and multi-family housing starts. Occupancy rates surpassed an average 95 percent mark in the 4th quarter of 2005 for the 57 metropolitan areas the group tracks.

The real item to watch for buyers is the interest rates. As buyers keep waiting for prices to "bottom out," their buying power evaporates with the ever growing interest rates. Just a year ago, a household with an income of $100,000 could afford a $450,000 price range. Today, that same income is now dropped to about $394,000 simply because of the interest rate power. Current rates stand around 6.8 percent nationally and experts are talking about hitting the 7 percent mark before the end of the year.

In addition, as the jobs keep growing, the rentals will disappear and pent up demand will nearly burst forth in another few months. Buyers -- pull out your checkbooks and get on board now while the market has leveled. There's a reason they call it a "buyers" market.
Why aren't the builders fearful? With the job growth, you have to live somewhere, and workers will live in either one of their new units to purchase or one of the new units to rent.

Published: July 28, 2006