Is Now The Right Time To Buy Your First Home?

#BuyFirstHome

As a Realtor I will tell you that just about any time is the right time to buy your first home.  As an investor, I am happy to collect your rent.  What is most important though is how you buy it.  So is now the right time to buy your first home?

Before you tune out and say any time can't be the right time to buy a first home, let me give a little background.  In 2004 I genuinely believed the California Real Estate Market was about to burst.  I missed the call by two years because the big banks got together and figured out how to make it look like loaning people money that didn't have the income wasn't really that risky.

From 2004-2006 I would have told you that it is very hard to "buy right", and probably wouldn't have sold you anything.  I sold my personal home and my investment properties at a substantial profit.  The reality was none of my properties value went below what I originally paid for them, so I would have been petter off sticking to my original plan and holding the properties.

In that little nugget is the truth.  Buying right is everything.  So how do you know if you are buying right.  First of all, you need to be able to afford the payments.  Even if values drop and you can afford to stay, you will be alright.  The mortgage crisis was fueled by people who over bought, banks that extended loans to people who where already over extended, and then it was accelerated by people who just wanted out of their loans because they could.

If the government said "tough luck, if you can afford it, it is yours" the dip might not have been as bad.  At the same time though, they couldn't let people stay in their homes if they couldn't afford it.  A very small percentage who were able to renegotiate the loans to a much lower value or interest rate were the only real winners.  Everyone else got the shaft because the government wouldn't hold people accountable for buying homes they couldn't afford, nor did they really hold the banks accountable for the loans they should have never made.

So here you are today, pondering the question, "Is now the right time to buy your first home?"

And the answer of course is "Yes, if you buy right".  Buying right isn't just buying a house you can afford, it means buying in a place you want to live.  Buying right means buying in a place where you would be willing to spend the time and energy to make the house your home.

If you can get a deal, then you are even better off.  Normally I favor older homes that need work in good areas.  You might not want to do a lot of work though.  If this is the case, then negotiating with a builder can be tough.  Watch the options and compare prices from other contractors.  Don't let the builder overprice your new home with upgrades.

Don't just listen to me, here is a very nice chart from my friend Michael Wright at United American:

Rent vs. Own Comparison JOE RENTER       DON'T THROW YOUR HARD EARNED $$$ DOWN THE DRAIN Joe Renter vs. Joe OwnerCalculation Assumptions Monthly Rent $2500.00 Estimated Yearly Rent Increase - 3% Estimated Yearly Appreciation-3% Estimated Tax Bracket 20% Where would you want to be in 10 years?   Year Annual Rent Annual Payment Federal Tax Savings Estimated Value Loan Balance Estimated Equity 1 $30,000 $37,377 $6,166 $463,500 $433,033 $30,467 2 $30,900 $37,377 $6,079 $477,405 $424,573 $52,832 3 $31,827 $37,377 $5,989 $491,727 $415,789 $75,938 4 $32,782 $37,377 $5,895 $506,479 $406,670 $99,809 5 $33,765 $37,377 $5,797 $521,673 $397,203 $124,470 6 $34,778 $37,377 $5,696 $537,324 $387,375 $149,948 7 $35,822 $37,377 $5,591 $553,443 $377,172 $176,271 8 $36,896 $37,377 $5,482 $570,047 $366,580 $203,466 9 $38,003 $37,377 $5,369 $587,148 $355,584 $231,564 10 $39,143 $37,377 $5,252 $604,762 $344,168 $260,594 Total $343,916 $373,774 $57,315 $604,762 $344,168 $260,594 Loan Type FHA Reg Sales Price Term $450,000 30 Years Rate APR 3.750% 5.168% Dwn Pmt Closing Costs $15,750 $1,475

Who Are The Buyers Right Now?

Warren Buffet said he would like to buy thousands of single family homes.  Why?  Simply put they are a great investment deal right now.  Did he do it?  I don't know but I am sure Berkshire Hathaway didn't just jump into the real estate brokerage business this year for no reason.

In June the Berkshire name replaced Prudential in Florida and recently did so in Newport Beach, CA.

So Who Are The Buyers?

On the buyer side, investors appear to be the main buyers right now.  They are buying the houses that need work, but the prices are rising due to the competition among investors.  For instance, a recent waterfront in my area sold for $1.835 Million and was torn down, several over the sumer sold at or very close to that price only to be knocked down.  

A very nice home just around the corner, is listed at $2.4 Million and can't get even a low ball offer.  It has been on the market for over two years.  Another is listed for nearly $3 Million and as far as I know, also has no offers.

Can you really build a home and make money in that gap?  The answer is yes.  A really good investor can build for $400,000 making a total investment of $2.235, and sell for $2.3 and net $50,000 or so after interest and fees but that isn't what they are doing.  Most of them are only putting 10% of their money into the project so making $50,000 on $200,000 or even $400,000 in one year wouldn't be bad, and again that isn't what most that I talk to are doing.

What they are doing is building very slowly, taking advantage of lower labor and materials costs, locking in a good loan rate and sitting on the homes waiting for prices to go up.  Some have a sign on them, others don't.  One trick to look for as a seller is them dragging out the escrow for as long as possible to minimize their holding costs.

Maybe I am seeing more of this as an investor because I have trained myself to spot an empty house three blocks away.  I used to look for the dumpy empty homes, but now I am watching the newly remodeled empty homes.  This is how you get a micro glut.  When prices to recover to 2006 levels many of these homes will hit the market and stall pricing.  That isn't a bad thing, just something to be careful of when buying, and something you can use to your advantage if you don't want a fixer.

Are you ready to buy? 

Is A 4% Home Loan A Good Deal?

It is amazing how many people think rates will keep dropping.  Personally, I think the printing press economics of the Obama administration are going to catch up with stagflation like we saw in the late 70's and early 80's.  I think that Obama is handing his replacement a bigger economic mess than Carter handed Reagan. 

So is 4% a good deal?  If you are in investor, the question is can you make money with it?  Or can you sit on the property until you can?  If you are a home buyer the real question is, can you afford the payment?  If you can answer yes, then 4% is a good deal.

As a Real Estate investor and agent, anything below 4% is a smoking deal when it comes to financing real estate.  Why?  Inflation has been historically calculated at 3% per year.  Since the loan is fixed at 4%, as the home increases in value, the money is essentially free after just a couple of years.  On a 4% loan, nearly half of the payment is going directly to the principle.  You don't get much of a tax deduction but you get a great savings account in your house.  It might even be tax free or tax deferred.

I bought my home at 4% and refinanced at 3.25% a year later.  I did it because if rates went up to just 4.5% I couldn't get the loan for my house.  Remember the late 70's and early 80's?  If you don't, loan rates jumped from 8% to 14% and peaked right at 18%. 

The trick to surviving in the real estate game is to leave some wiggle room.  When money was really easy to borrow from 2004 to 2006 home prices went up based on greed, not economics.  People bought what they couldn't afford on the assumption they could use their home like an ATM and just keep taking money out to keep up with the bills.  Bad plan.

Think of it this way.  If you have a home with a $1000 monthly payment, over $400 is being used to pay down the loan on a 4% loan.  If you had the same loan at 8%, you would have a $1480 monthly payment that still only paid $400 of your loan that first month.  When prices go up or interest goes up, rents usually follow.  If you get transferred in just two years, and rates climb to 6%, the chances are good you can rent the house out for a nice profit.

At 4%, a $200,000 home only needs to rent for $600 a month to cover your real expenses.  Remember, the other $400 is buying you a house.  Think of it as a forced savings account.  If you can afford it, historically it is much better than a savings account.  If you rent it for $1000 per month meaning you have zero cash flow, you are still growing your equity at $400 per month plus the increase in the home value.  That is free wealth.  After five or ten years if you can rent it for $1200, then they are buying you a home and you are getting $200 a month for letting them do it.

So is 4% a good deal?  That is all up to you and your goals.

What Is The Difference In APR and APY?

What is the difference between APR and APY?  In the simplest terms, the APR is the "Rate" you pay on paper, the APY is the actual "Yield" after expenses for the Loan Originator.  Basically, the bigger the difference between the APR and APY, the more costs that are built into the loan, and the more profit for the bank.

This can be built into the loan or fees you pay up front that make the yield higher for the investor or loan broker.  This is why shopping a loan is so important.  If you aren't sure about the differences in loans ask your agent or accountant.

For instance a VA loan will normally have a higher APY because there is a "funding fee" that is standard with every loan.  That funding fee is either paid up front or rolled into the loan.  Rolling it into the loan means you owe more money than the bank pays the seller.  For instance if you bought a house for $200,000 and had a 1% funding fee, the loan would actually be for $202,000 because the 1% fee is added to the loan.  This is "rolling it in".

Is Now The Right Time To Buy Your First House?

There is always a lot of controversy when the discussion of buy or rent starts.  So lets start with a little perspective.  Only half of all the homes in the US are occupied by their owners.  About 5% are vacation homes, so 45% of the homes are rented.  Who do you ask to get a straight answer?  The guy you are renting from?  Your friends that rent? The neighbors that own?  If you did a poll, it makes sense the renters and landlords would say rent.  

This is where I would say two things, 1. "Be careful who you listen to" and 2. "Follow the money".

The Investors Secret

Investors wouldn't rent the property to you if it didn't make them money.  When you follow the money, you realize that you need to be careful who you listen too.

So Rent or Buy?

The answer is a personal choice like no other, and I want to share something with you about how my decision made a difference in my life.  When I was a kid in the 1970's, I was amazed that my parents didn't buy more houses to rent out and make money.  14% increases in prices annually, and peak interest rates of 18%, it just made sense.  My parents told me I was young and that real estate was a bad investment.  I listened.

At 18 years old I was in the military, and rented a small apartment, and rented out a room so I could live in a slightly nicer place and drive a nicer car.  One of the guys I worked with was driving an old crappy VW beetle.  I was driving a new VW Rabbit Diesel with payments.  Another friend in college bought a two bedroom condo, rented out a room and drove a 70's Maverick.  

In 1989, the real estate itch was getting stronger, so I started taking real estate classes at Century 21.  I learned here that a lot of agents don't own a house.  I figured my parents must be right if agents don't even buy homes.  It seemed odd though, can you imagine a car salesman without a car?  A TV salesman without a TV?  A cell phone salesman without a cell phone? It was looking more and more that my parents might just be right, and that houses were different.

I kept renting until 1998, when I couldn't resist any more and jumped in head first.  Instead of starting with a condo like my friend or a small house, I bought the biggest house I could afford. Even then I was right at the limit to the penny for getting the loan.  When I bought that first home,  my buddy with the VW beetle had just "retired" and pulled up in his new Ferrari to congratulate me.  My buddy that bought the condo also retired.  We were only 28 years old, and I was late to the party.

Better Late Than Never

The guy in the VW, Bob, had a small business on the side painting houses.  He was always saying you have to own a business to succeed.  The painting business gave him connections to buy commercial buildings at good prices that needed work.  It wasn't a full time job and a painting business on the side that let him retire, it was the commercial real estate he bought at good prices.

The guy in the condo, Dan, kept buying units in the same complex.  In 1998 he owned 14, in 2004, he owned all 40 units in the complex and sold the entire place as a high end apartment building.  He flipped the money into a great home for himself and another dozen homes that he used for rentals and income.  

So why did Bob show up to congratulate me?  He wasn't there because I bought my first house, he was there because I bought it right, I bought it like an investor.  There are some things that investors and agents don't want you to know, and I because I knew Bob and Dan I used these "secrets" to get a great deal.  I bought the model home in a new high end tract for 30% less than anyone else in the neighborhood paid.  I had an instant 25% equity after paying all of the fees.   On paper, I had just made more money in one transaction than I had made in any one year.  

So, do I think you should buy your first house now?  Absolutely, and here is one thing that I wish I had known when I was 18.

When you rent, you are buying the landlord a house.  If the landlord had a 30 year loan, and every tenant moved out every two years, he only had to deal with 15 tenants and he owns a house.  Then when he rents it out and he has free money.  Warren Buffet calls this infinite returns.  Someone else bought the investor the house, and he keeps making money forever.   In fact it is better than free because you get business tax deductions if you are an "active investor"*.  Why wouldn't you do this?

If you buy a house, you might have a bigger payment for the first few years, until rents catch up, but here is the part I didn't get early enough.  If you rent a house for $2000 per month, that is $2000 you have to make after taxes.  If you buy a house at 3% interest and pay $2500 per month, $1250 is interest that is tax deductible.  That means half of your payment is reducing your tax bill in many cases.  At the end of the year, they might end up costing you the same amount.

A small part of your payment is for insurance, and the rest is principle.  Principle is like a savings account.  Even if your house doesn't go up in value, about $1000 per month is paying down the loan.  If you stay in your house just 24 months and you sell it for the same price as you paid, even after paying all the fees, you get a check.  

When was the last time your landlord gave you a bigger check than you gave him?  So lets take a simple example, a $200,000 house, that you buy for $200,000.  The 4% interest 30 year loan gives you a payment about $1000 per month including interest and insurance.  When you sell, there is $12,000 equity that you can get as a check.  How is that for a deposit refund?

What if it goes up just 5% per year?  After 12 months it is worth $210,000 and $220,500 after 24 months.  Many homes are available for 0% or 3% down, but lets say you put 10% down.  You put in $20,000 plus $24,000 in payments for a total of $44,000.  Selling the house, you would get back your original $20,000 plus the $20,500 it went up and the $12,000 in principle you put into the house.

Add that up and you are $52,500 on the good side.  Take out the 8% for real estate fees and escrow of $17,600 and you get $34,860.  So you put in $44,000, and you get back $34,860.  Living in a house for two years and it only cost you $9,140.  Or you could have paid $24,000 in rent.  So which one is the better deal?

What If The Price Of The House Drops?

Historically there have been several "flat" periods where house prices remained relatively level and a couple of short periods where home prices dropped.  The key is to do your homework, buy right and make sure you don't buy more than you can afford.  Even if you buy at the top of the market, as long as you can afford the payments, you will make it out the other side just fine.  If you look at the number of homes that sold at a loss during the most recent price drop, it is actually very small.  The media made it look a lot worse than it was.

Buying Smart

In 1998 I bought my first home.  Following the slow path to making money in real estate, I moved into a slightly smaller house 24 months later, buying a VA repo for zero down.  24 months later we did it again, and 24 months later we did it again.  In 2004 I lost a little faith and sold them all thinking the market had peaked.

After the crash in 2006, not one of the houses I used to own fell back to the price I sold them for in 2004.  While the 2006-2007 crash looked bad on paper, for investors who weren't over leveraged it was a windfall.  All of the people that were handing their homes back to the banks still needed a place to live, the rental market grew as the housing market crashed.

While I was out of the rental market for a short while, I was never out of the real estate game completely.  In 2004 I bought some great rural land with a small home that I fixed up and sold in 2006 for a nice profit.  I bought an estate foreclosure in 2006 when the market peaked, and sold it for a nice profit in 2010.  I had to stretch my 24 month plan just 24 more months to pocket a tidy profit.  The people who panicked sold everything, rented and lost big.

So are you ready to buy your first house?  I hope so, and I would like to help you, even if you aren't buying in Orange County Ca where my office is.  Let me know what you want to know.  I am putting together a book that will include the top ten things your real estate agent doesn't want you to know (or doesn't know) about buying your first home.

What else would you like to know to buy your first house?

* Check with your tax advisor about the tax benefits of buying a home, this article is not meant to provide tax advice.

Are Sellers Being Serious Or Are They Testing?

Lately there is a little trend happening.  First as you probably know interest rates have been creeping up.  Yes, they came back down a little, but I still can't find a 30 year fixed with a 3.25% APR and APY.  I have seen some fixed loans at 3.625% APR with up to 7.25% APY!

The other thing that is slowing the market that is clear, at least along the beach, is that the seller/buyer mix has changed radically.  The high end remodeled homes are now listing at very high prices.  Agents are taking the listings and letting the sign sit, if nothing else for advertising.  Not something I do or suggest in my office but it happens.

The Question Of The Day - So are the sellers of the nicer homes serious or are they testing?

More than one seller that I talked to have given me the "Well the market is hot so I thought I would give it a try"speech.  A couple others said they need to sell, but don't need the money.  Don't ask me how that works, because it makes no sense at all.  Either you need to sell at any price or want to sell for a specific price.  All of these people are clearly testing.

There is still a little middle ground left though.  I have seen a few homes that were close to bull dozer ready sell for slightly higher prices, and the buyers did a minor or middle remodel and moved in.  When I talk to them they said things like "I wanted in the area, but couldn't afford to do it any other way."  This I understand since it is how I bought several homes in areas that were above my income.  This is part of the slow and quiet way to make real money in real estate.

Buying a home is a little like poker, if the seller thinks that you can make money without bull dozing it, they might change their mind and try it themselves.  Twice I have opened my mouth just a little too much and the sellers have tried to back out at the last minute.

Wit a little practice and thought,  seconds after you walk into a home, you will know pretty quickly if the seller is serious or not.  In some cases the agent might be invested and be trying to hold the price up.  In other cases an investor might have "clouded" the title thinking they could get a better price. Either way, with a little practice you'll know the difference between a seller and a tester the minute you walk in the front door.

Oh yeah, I am working on an ap for that.....

 

SoCal Heats Up And So Does Real Estate

Small swings of a pendulum can make big changes.  In Real Estate you can see that happening right now in my little micro market of the Huntington Harbor at the far north end of Huntington Beach.  Three years ago if a home hit the market it was a short sale, auction type deal.  The house would be held open for a day, and the best offer was taken to the bank.  It could take 30 days or 18 months to close escrow.

I bought one of these homes at bargain basement prices.  It wasn't nearly as easy as you would think though.  There was at least one if not two or three houses on each street either for sale, in escrow or waiting for bank approval.  Several owners gave up and walked away.

Almost 24 months to the day after I closed escrow on my home, Huntington Harbor is an entirely different story.  Instead of for sale signs, there are contractors signs on every block.  Homes that sat for $1.8 Million on the market for a year, are now bulldozed and a new home is being built in it's place.

There is a minor renaissance occurring, so the question is what really changed in 24 months?  Unemployment is still high, interest rates are low and yet credit is still tight, so what is happening here?

The answer is the pendulum swung across the middle.  Interest rates dropped making real estate more appealing to investors.  I just refinanced my house at 3.25% on a 30 yr fixed rate.  That is cheap money when Coca-Cola stock was recently yielding 3.62%  If you have the cash, buy Coca-Cola, get a loan on the house and make a little on the spread.  Small changes make big shifts.

Additionally, once the foreclosure rush was over and prices stabilized, fewer people were allowed to short sell their homes so they just took them off the market.  Fewer homes on the market led to slightly upward price pressure.  Gently increasing prices last fall caused more people who where thinking of selling to hold out as the last few foreclosures sold.

By late winter the prices of off water properties started to rise, followed quickly by the waterfronts.  All that was needed was a "breakout property".  The breakout property is the property that sells at a price high enough everyone notices.  Two of them happened at once.  A large very nice custom broke the $3 Million mark, and a tear down broke the $1.6 Million mark.

Those two breakouts added enough confidence that fences started going up and remodeling was up and running in a big way.

I could see all of this happening just walking my dogs and paying attention to the neighborhood.

As some of the remodel project near completion, the moving trucks tell us they aren't selling.  This gave just enough confidence to the market that several homes were listed at near 2006/2007 peak prices.  Two already have gone into escrow.

We won't know for 30 to 60 days if those houses sold near, at or even above the peak value, and if one of them breaks out, you can bet the wave will spread inland.

I have been saying for two years, that if you are thinking of upgrading, now is the time.  Prices are rising, interest rates are at record lows.  If you are thinking about moving and aren't sure about it, give me a call.  If you are living in or looking in Huntington Harbor, Huntington Beach, Sunset Beach or Surfside, give me a call.

If you live outside that area, I can find you someone that can help if you don't already have an agent.  Take advantage while you can.

If you are planning to downsize, then waiting might not be so bad.  That answer depends more on your long term tax situation.  The more you make selling, the more you will pay in property taxes on your new place for as long as you live there.  Make a little less now, or pay a lot more forever?  You decide, and then call me if you have any questions

Huntington Harbor Sunset from my iPhone, no tricks...

Reality and Real Estate

Are Reality and Real Estate connected?  Sometimes I wonder.  I think that at the point where Real Estate, specifically residential real estate stopped being a place we live and became an "investment", Real Estate pricing disconnected with Reality.

Of course city, state and local taxes, schools and businesses all play a little part.  Those things separate one area from the next.

The last housing bubble has been exhaustingly studied, and the problem is clear.  When Freddie Mac and Fannie Mae got greedy and joined the sub prime game, too many people who couldn't afford a home bought one.  Others used their home like an ATM and just kept taking out money because "it was worth more".  Craziest thing I ever heard.

In Texas a second mortgage was banned for many years.  I don't know if it still is.  This ban if nothing else prevents things like a complete meltdown when houses go down a point or two or interest rates go up a point or two.

They say that history repeats itself.  If this is true, we should be looking back to about 1976 when Jimmy Carter was in office and the long cycle of stagflation started.  During that era, I was a youngster, but I could see that buying homes was a way to make a lot of money and keep up with inflation.  Somehow I understood Warren Buffets philosophy of infinite returns and applied it to homes.

In simple terms, if you buy a house and have a 100% mortgage on it, and rent it out for the same amount as the mortgage after taxes (meaning a slight cash flow loss at first), then raise the rents to match inflation, two things happen.  First, you become cash flow positive in just a few years for doing nothing more than being responsible.  Now there is an observation I hadn't made before.  Second, at some point the house is paid off, you get all of your money back AND now you get free money as long as you own the property and keep it rented.

The same is true of dividend stocks.  If I buy Coca-Cola for $30 and it pays $3.00 per year in dividends, in 10 years, I got all of my money back and I get $3.00 per year for free.  This is why Warren Buffett is so rich.

So how does that make the housing market disconnected from reality?  Just like non-dividend stocks, flipping homes based on speculative price rises rather than real income adds a significant amount of volatility to the the markets.  Just last night I was discussing a property that peaked at $810,000 according to some appraiser trying to push through yet another re-finance for someone who couldn't afford it.

That property bottomed at $299,000 a little over a year ago.   It's real straight line value is about $440,000 in my book.  I look at all property just like stocks, and value it based on average returns to get a straight line value.  Many commercial investors do this.  It is when investors are willing to make a little less that prices go crazy.   Last year Zillow showed the property in the range of $265,000 to $310,000.  A year later Zillow is showing a 20% improvement.  Do the math and it won't be long at that rate to reach $810,000 again.  At 20% per year, it will take a bit over 4 years.  So do you walk away or ride it out?  That is the very question the owner was asking me.

This pattern is very similar to what we saw after the completion of the sales through the RTC or Resolution Trust Corporation when I was much younger, late 70's early 80's for those of you who forgot about the last real estate meltdown.  Last time it was called a "Savings and Loan" crisis.  This time the big banks got caught too.

The owner of the house above is trying to short sell the property and can't get the bank to budge.  Quite frankly he is a little late to the game.  With prices on the rebound, banks are inclined to wait it out.  So are investors.  When investors stop dumping prices level.  When speculators buy prices rise.  How can you tell speculators are buying?  Look at the number of homes that are purchased and are still vacant, without a "for rent" sign.  One investor in my area has announced he wants to buy and hold five waterfront homes.

I like rentals and I like dividend stocks.  I am not much of a flipper or speculator.  Just like dividend stocks that are out of favor with "the street" and yet highly coveted by Warren Buffet, there are certain types of real estate that make great rentals that speculators overlook.  When Coca-Cola makes an error, it loses 8% and recovers quickly.  When Netflix made a bad move it went from over $300 to $64 overnight, that isn't investing, that is speculating or more correctly gambling.

Yes in SoCal the speculators are back.  Eventually they will move back to Vegas, Reno, Phoenix and other areas that were headlines for empty homes just a few years ago.

If I want to gamble, I am going to the craps table in Vegas. At least I know when I lose it all they'll at buy me a drink and if I spent enough they might even let me stay the night before kicking me out.  Wells Fargo and BofA won't do that when your homes start sinking will they?

So is Real Estate connected to Reality?  I guess that depends on what you are looking at.

Orange County Posts Lowest Inventory of Homes in 3 years

The Orange County Association of Realtors has published a report saying that 2013 has the lowest number of new listings in the last three years.  My neighborhood is a perfect example.

When I bought my home two years ago, there was at least one if not two, three or four signs planted in the front yards on every street.  This year you have to go several blocks to find a single home for sale.  What gives?

There are several things going on.  First is uncertainty with the economy.  Simply put, people are still hesitant to sell and move up.  The average time in a home is increasing.  Next the slight rise in home values has slowed the foreclosure and short sale market just a bit.  One of the agents in our office is still moving a noticeable number of short sales, but he is putting a lot of miles on his car to do it now.

Loans are also harder to come by as VA and FHA loan limits were reduced.  This increased the number of homes requiring a traditional 20% or 30% down payment.

So what does this mean to you?  If you are thinking of selling, it means you will likely get a much more reasonable price in a reasonable amount of time this year than you would have since 2006.  If you are considering selling, call me and we can talk more about what is happening.

If you are thinking of moving up, now might be the right time.  All indications are that home loans won't get much lower interest rates for many years, and locking in your property taxes at the lower values will pay off if you stay in your next home for any amount of time.  

If you are trying to buy, you are in a different boat.  The "good deals" go very fast.  Waterfronts in Huntington Harbor under $2 Million were plentiful two years ago and average days on market was nearly 300.  Now, if they aren't a tear down, they sell in days when priced right.  I have several buyers who have cash that we can't find a deal for.  A couple of homes that I felt were a little overpriced and have been on the market over two years have just gone into escrow.  It is a tough time to be a buyer, especially an investor buyer.

Newport Beach, Costa Mesa, Seal Beach, Garden Grove and Fountain Valley are all seeing the same trends as Huntington Beach.  This isn't just a waterfront property issue, it is across all of Orange County.

As a Realtor, our jobs are changing yet again.  There has been some major changes to the laws, lending and paperwork, creating more work for us.  What little we might save on advertising because a property sells quicker is spent advertising to find listings.  Agents are all over each other trying to get the next listing.

At the same time buyers agents have to work a lot harder to find a property that fits their clients needs.  Gone are the days of 30 or 40 homes fitting the size, price and location a buyer wants.  It might take several months now of looking to find even one that fits the buyers wish list.  This week one came up that was close for an out of town buyer and before I could get them in the house, the seller had accepted an offer.

If you are thinking of buying or selling a home along the coast in Orange County, please give me a call.  If you know someone who is interested in buying or selling a home, please pass on my name and number.

Scott Bourquin
Keller-Williams
www.socalbeachrealtor.com
dre# 0191198
714-594-SELL (7355)

Get More Closed Deals And Work Less? Can It Really Be Done?

Can you really get more work with less effort?  Can Realtors close more deals with less work? The simple answer is yes.  That is the whole point of the focused approach.  When you get really good at one thing, that one thing will bring you all of the work you want.  In fact it will bring you work that you don't expect.

I would like to take a little tangent here and talk about a totally different field of work or two.  Since last September, my wife has been a background actress.  I have also been working a couple of times a month as well.  The difference is most of her income is money from acting where mine isn't.  Acting would be like a third or fourth place after marketing, training and writing. 

Last week we saw two events that are worth discussing in this blog an can be related to Real Estate.  First we went to Long Beach to work on a TV show where people from the audience get to speak on TV and give their opinion on camera.  Half of the people were background actors filling in.  It is a way for non-union actors to get some speaking practice on camera.

On Set & In Wardrobe

Most of the regular patrons and background actors were very normal and talked about the product as if two friends were asking each other for advice.  One couple, turned up the acting and really went all out to pick it apart.  The whole room stopped and stared.  The interviewer jumped up and walked out of the room, talked to the director and the interviews were abruptly ended.

Just prior to that we went to Burbank California to meet some casting directors.  There we witnessed another exchange I thought would be worth understanding.  I already posted this on Facebook because I thought it was so important as a lesson in business and life.

A woman in her mid twenties with tattoos all the way down her arms, commonly called gang sleeve's, and those tribal ear hole enlargers, which she called "ear plugs", was asking for more roles as a conservative parent, office worker, lawyer or detective.  Roles my wife gets regularly, and since we aren't parents, she always wonders why they pick her to be a parent.

The woman went on to explain how she has a great wardrobe of "conservative" clothes and has "tricks" to hide her tattoos and ear plugs.  She spent another couple of minutes trying to convince the casting directors to use her more for those roles.

Politely the first casting director said that there are thousands of people that want those jobs and it is easier to pick the ones that don't have tattoos and ear plugs because there is less of a chance the director will send them home and be mad at the casting director.
The woman argued for another couple of minutes.

A second casting director responded, "With all of the shows that allow tattoos and ear plugs why don't you just submit for those?  Looking around the room, you are the only one here that fits that role. "

The woman didn't know.  It is possible that the woman was "conservative" and the ink and ear plugs were just bad choices.  More likely, the ink and ear plugs were a reflection of her real personality.  She looked very comfortable with them, and arguing about them.  My advice would be, don't argue with your boss before they hire you, but that isn't the point here.

Both of the casting directors basically said the same thing.  You will get more work with less effort if you just be the best "you" that you can be.  That is true in any field of work.  If you are in the wrong line of work, the best "you" will eventually find a way to move on to where you belong, or someone will recognize your talent and take you there.

My wife also began to understand that as an 18 year veteran of elementary school classrooms, she is the "look" that Hollywood likes to use as a parent and she is great with kids making her the perfect TV "parent".  She also has an MBA and Real Estate License with a great business wardrobe.  When she gets to the set to be a lawyer or detective, the wardrobe people are always happy and never have to find her clothes or dress her up.  It makes everyone's job easy when she just takes roles as herself.

Last November, I was standing with Jerome Hamilton, so I asked what I could do to move up the food chain.  He said 'Brother, you just keep doing what you are doing.  Look around at the rest of the background, you'll get there faster than you think."  15 minutes later he was right.  I got an "upgrade". It was the best advice he could have given me at that time.


Real Estate isn't any different.  There is a very agressive agent in our office who picked one very narrow and deep niche I honestly thought was dead.  The receptionist said tha tover half of the calls coming in now are his deals.  It took several months, but he found a niche in Real Estate that he fits.  You can see the excitement on his face when he runs out to the next listing presentation.  

Because he is presenting to a very specific seller, and serving a very specific buyer, he is able to move a lot of property.  He is also very good at the paperwork now, and has it down to a simple process where I would be fumbling all over the place.  Who do you think the seller wants to hire?  There is a reason he gets the listings.

Don't get caught up worrying about getting ahead the way other people get ahead.  Don't even worry about the competition.  Look in the mirror and be the best that you can be, enjoy your life as you and things will happen. 

No Inventory in Real Estate - Now What?

In just the last thirty days, there has been another noticeable change in the Southern California Real Estate market.  Homes are selling.

I know, in 2012, more home sold than anytime since 2007, but there is more to the story.  If you look all around the county, homes that have been sitting for a year or more are now moving into escrow.  When these homes leave the market, then the average Days on Market or DOM drops further.  The key here is with fewer homes on the market these homes moving off market will have an even greater impact statistically.

What does all of this mean?  It means a clear shift in the market is happening.  The bottom diggers have scrapped everything off the bottom there is.  So now the big investors who are a little more conservative are putting up money for people to buy.  One loan agent says that even though "liar loans" have gone the way of the DoDo bird, there are still ways to do creative financing.

Private equity is once again pushing the limits on payment to income ratios' allowing people to buy into the more expensive homes that have been sitting.

A billboard in downtown LA proclaims "Home Loans Up To $10 Million".

The tide is shifting.

From the agents perspective, I am seeing a few very smart agents start to roll with this new market.  Mass marketing in Real Estate hasn't been cost effective since 2007.  Mass mailing email lists to thousands of people is a waste of time, since there are a dozen other agents and websites that will do it for them.

The agents that are starting to roll are adding value.  Private open houses, active buyer lists with qualified buyers and very direct person to person marketing is working.  This will be the new reality for a while I believe and it will filter out the incomes of many agents even further.

Online and mobile marketing tools that reach directly to sellers and buyers are going to continue to grow in popularity and importance.  Why?  Simply put these tools allow the buyers to keep a bit of anonymity until they feel like they have met the right agent or found the right deal.

Agents will need to know everything about a property.  "It is really a great house" won't cut it anymore.  If the internet can tell the prospects more than you can, chances are an internet agent will get the sale.

An app for that?

While the big websites have mobile aps for their potential customers, individual offices and agents have been behind the curve.  New tools are emerging that will change that.

Getting listings may really have to go all the way back to door knocking, which in some areas is very difficult.  Agents will likely need to live in their neighborhood and really know everyone in order to get a listing.   Listings are going to be life for agents moving forward.

Agents who mass market will spend too much time chasing maybe's where the agents that hold the line and only work with qualified buyers are going to move homes.  Imagine someone knocking on the door with three familys that want in your neighborhood and an agent with three signs that have been up for six months.  Who do you want to talk too?  One moves homes, one has signs.

The tide is shifting.

Direct Mail Or Online Marketing, How to sell a home?

As the owner of a marketing company that specializes in using the Internet and Social Media, Direct Mail companies are my biggest competitor.  I say competitor because small businesses don’t have an unlimited budget.  The owners of a small business have to make a decision whether to spend money for online marketing with us or with a direct mail and print ad company like my friends at Damion Hickman.

So is there a right answer?  Yes there is, but it isn’t the same for any business.  As a real estate agent, I see the markets from a different perspective.  The business itself is one variable.  The second is the customer.  The business and the customer define the best media for connecting the two.  Neither side can select the right answer.

On the side of direct mail, think about a business like Cake Tahoe.  Cake Tahoe is a great little cupcake shop in Truckee, California.  The opportunity with direct mail is to send out post cards to the residents in Truckee with a coupon.  For instance they could offer buy one get one free, or buy a cupcake, get free coffee.

This is a great opportunity to reach out to new customers who had no idea they wanted a cupcake.  The postcard is an interrupter of their life that offers them something new they didn’t expect.  This is much more difficult to do online than it is with direct mail.  A great direct mail piece is fantastic tool to seek out new customers who didn’t know they were in your market.

The cost of Online Marketing to reach out and have the same effect can be significantly higher.  Some markets, like Reverse Mortgages, will see significantly better results with direct mail.  People don’t search online for the best Reverse Mortgage deal.  Instead, they get a flyer in the mail that introduces them to something they have never known about.  At some point the market might shift, but it might not.

At the other end of the spectrum are “needs” like a water heater.  When your water heater starts making very loud noises, you don’t look in your mail box for a plumber, you go to the phone book if you still have one, or go online and search for Water Heaters, Plumbers and a number of other keywords.  Online Marketing works in these cases, not so much in the case of Reverse Mortgages or reaching new cup cake customers.  

Cake Tahoe could use online marketing to connect to current customers and find new customers who are looking for custom cupcakes, ice cream or coffee in Truckee California online.  The two customers are very different targets.  The key is to know your customers well enough to know which type of customer offers a better return on marketing dollars.  

Some businesses like TruSpeed Motorcars are able to use both effectively.  Direct Mail is used to remind existing customers of service intervals, and reach out directly to owners of exotic cars that are out of warranty.  Online Marketing is used to step in front of people searching for “Porsche Service”, or “Performance Porsche Upgrades”.  Each is a potential income source to the business, and each must be respected for who they are.

When you truly know your customers, you can decide whether direct mail or online marketing is the best way to connect with them.  

2013 Real Estate Market - Looking Forward

The Real Estate Market is shifting once again.  At the start of 2013, we are moving into really new territory.   Many other pros are a little unsure of where they are going with the 2013 Real Estate Market.  When I say pros, I mean agents, brokers and investors.  A salesperson from one of the major real estate websites called me, asking me to “fill in a great spot” that just opened up in my section of Orange County.  That call led to a very interesting conversation.  Because of that conversation, I decided to write about my observations as a buyer, investor and Realtor©.

It turned out that one of my major competitors and two smaller ones were pulling their ad campaigns from his company’s website.  During the conversation, he made a funny comment.  He said, “It is just like all the agents have decided to roll over and die.  They are all giving up.”  That got me thinking.

He was right in more ways than he realized.  He was also missing the real issue.  It isn’t the agents that have died, it is the market.   Yes many agents are leaving the business, but that isn’t the big issue with todays Real Estate Market.

In the area I focus on, my “farm”, listings are nearly zero.  Three years ago there would have been 20-30 signs at any given time.  Last weekend, there were just four.  Three of these are simply over priced which will require a very willing cash buyer.  I even like one of the homes, but it is priced too high and out of my budget.  Three of these homes also have been on the market over a year, one of them over two years.  The home that has been on the market the longest is held open just about every weekend now.

That house is an odd case.  It really is a great home and it is in a great location.  The problem is that it is a “middle house”.  There are significantly nicer homes and a few “fixers”.  The cash investors are buying the “fixers” and the cash buyers are going for broke.  My guess is they agree with me on inflation.  I think Real Estate is a better hedge against long term inflation than gold.

In a high dollar market like Orange County California, there is another issue.  Lenders aren’t lending the way they used to.  The ratio’s that we as agents learned to use for the past five or ten years are no longer valid.  Higher credit scores are required just as much as lower payment ratio’s.  

Being self employed, my income is avaeraged.  When I bought my home, I had a 52% ratio. That means the day I bought the house, 52% of my take home pay was going to be used for the monthly payment.  While that sounds crazy, it really wasn’t, if I was right. 

The bet I made was that the market prices had bottomed, interest rates were near bottom and I was buying my home below market due to the sellers stress.  So far it looks like I was right or lucky.   I bought into this market with a fixed rate loan, and knew that my wife would be going back to work bringing the 52% closer to 40%.  

Today, that kind of loan isn’t going to happen.  A payment to income ratio with 40% of take home pay for the house payment would be considered quite high now.   A couple of the loan officers I talked to at the big banks are saying they would like to see 30-35% ranges.

If I were house shopping today that means that I wouldn’t be able to buy anything close to what I live in now.  

This is the root of the problem with the Real Estate Market, not the agents.

When you take out “liar loans” and cut the maximum payments, you can see why the average buyer isn’t buying.  You can also see why sellers aren’t selling.  Nobody can move up.  The few people who I am lucky enough to talk with about listing their home are usually moving inland to lower priced property or out of state because of our new taxes.

House prices are creeping upwards here in Orange County, and I believe this is due to simple inflation, not a recovering market.  Days on Market is usually a great indicator to tell the status of the market.  That number is dropping, which in “normal” markets would indicate a move to recovery.  In this case, it is merely a symptom of the shrinking Real Estate Market.

What does it all mean, and when will the market recover?

For buyers, it means you need to be prepared.  You need at least one if not two loans pre-approved before you even start shopping.  Why?  Because when your agent does find you that house, you’ll need to move quickly before the seller changes their mind or gets an offer from someone better prepared to buy.  Sellers that do sell aren’t playing games and have cash offers lining up.

For sellers, it means that you also need to be prepared.  You should clean up the house to get the most you can for it, and be ready to move when a good offer comes in.  You also need to be ready to find out the buyers really can’t buy.  Even two pre-approvals may not get a loan these days.  

Sellers also have the advantage of being able to select from many hungry agents who are getting back to work.   Some are still figuring out the new rules and others are out door knocking for listings.  Either way, sellers need to be careful.  An agent trying to sell a home under last years rules won’t get you the best price or deal you can get.

There are still a few lazy “experts” that live in an area and have a listing or two.  If you do a little homework before listing your home, they are easy to spot.  All you have to do is read their listings and look at the details.  Don’t select an agent because they are your friend or neighbor, select an agent who will work for you.

When other agents are looking at the wrong information on the MLS, your house is going to have a hard time selling.  Recently I previewed a property after receiving several calls about it.  From the MLS data, the home was a deal, and I had a cash buyer who would be very interested.  While doing my research, I found the listing agent listed the monthly land lease of $4,000 as the annual lease.  Even after I pointed out that he had understated the annual lease by $44,000 he left the listing as is.  $44,000 per year is an entirely different category of buyer in this market.

For agents, the 2013 Real Estate Market means you have to go to work.  Not work like 2006 where you could plug a sign in the ground, and write a contract.  Work like really knowing your buyer before ever start shopping for them.  Anyone can surf the internet and find houses.  Our job as agents is to represent the buyers and find them a home, investment and help them fulfill dreams.  Todays challenge isn’t selling a home, it is fighting for the listing.  

Working with buyers is a whole new dynamic of research.  Knowing your area is key, and knowing when to let go of a buyer is also a skill many have forgotten.  When buyers are willing to go anywhere, you can’t help them.  Even thirty year veterans like my mentor can’t know every area in Orange County.  

While all of this is bad news for the local Real Estate Boards, since membership will likely continue to decline for the next two years or so, it is good news for agents willing to work.  Full commissions will be justified as you become the expert helping buyers and sellers navigate the overload of information and correct the misinformation from the internet and the press.

Like all things, the 2013 Real Estate Market will come and go, and next year will be different.  For now, hold on, it is going to be a rough ride.

Authors Note: Scott Bourquin is a Real Estate Agent and investor with Keller Wiliams Realty in Newport Beach California representing the Orange County Coast.  Not all areas will experience the same Real Estate Market.