No Inventory, High Prices, Can You Still Get A "Deal" In Real Estate?

This week has been an interesting one.  Normally I don't "house shop" with buyers, and rarely am I out reviewing properties in person I haven't done a major research on first.  As an investor buyer, I am very comfortable buying properties I have never seen, or have just driven buy.

In this case the buyers are friends who are working with an agent at another office.  They have been house shopping for some time, and it is making everyone crazy including each other.

At the end of the day, major progress was made, and they are down to their last trade off decision.

Buying real estate is always a major tradeoff decision.  You can be one block from water with no view and get a great house with a three car garage, or be up the hill with a two car garage, smaller house and a great view.  So which is it access or view and how much are each worth.

The most difficult part about being a buyers agent is to get those decisions made first.  If you know what you want before you even start looking, you are much more likely to get a deal, and not get emotionally locked to something you might grow tired of quickly.

Many deals fall apart and buyers get cold feet because they "loved the view" and over the course of the next few weeks realize the house won't meet their needs and they aren't willing to adjust.

The app isn't finished yet, but I am working on it.  The app is a way for one or two people to sit down and build a perfect house by "score".  For instance, would you give up a larger bathroom for a gas kitchen?  If you make those decisions up front, the emotion of buying the home is whittled to the core where it needs to be.  That core emotion is what you are going to be living with while you are in that house.

This is how investors buy homes, and believe it or not, it does work for people buying homes. The key for the buyers agent is to understand the buyer first.  Better yet, if you the buyer will admit up front where you are having difficulty making a decision, your agent can be a lot more helpful.

You might think view is important, and find out that being next to a park for your kids really is the winner for you.  When you sit down and make those decisions up front, you will know a deal the minute you see it.

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? 

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.....

 

Real Estate Marketing Online

Real Estate has been in my blood since I was a little kid.  I never could understand why my dad always rented his buildings instead of buying them.  When I was many years younger, I entered the market during a major upturn and bought several properties which ended up creating a pretty significant cash flow problem for me.

Like all addicts, I couldn't let go of my real estate holdings no matter how much money I was paying for other people to live in them every month.  Then it happened. Positive cash flow.  The reason I have a real estate license stems from that first positive cash flow check.  That check got my wife hooked too.

Today I am still running my online marketing business full time and investing in real estate for my own use.  As an agent at Keller Williams Newport Estates, I am always looking for the "deal".  If I find something that I can't fund or isn't exactly what I am looking for, I have a few friends who are also investors, so I share the deals with them.

When I do find a deal, my friends can't figure out how I found it.  Once in a while one slips in that isn't a deal because the other agent "accidentally" listed the monthly land lease for the home as the annual lease.  That $35,000 per year "accident" made the property a smoking deal on paper, and a horrible deal at the table for an investor.  Showing the property I was admittedly embarrassed that I didn't catch the mistake before wasting my friends time.

My list of clients is only about 15 people at any given time.  I don't want any more because I can't possibly dig for that many deals, and if they are all after the same type of deal, who am I really working for?  I know agents that have a staff of people collecting names and information to send out emails and listings on a daily or weekly basis.  You need a lot of volume to pay for that, and these agents rarely find their clients a great deal.  They are usually closer to market pricing or emotional sales.

For me the emotion should be taken out by clearly defining what the buyer is looking for first.  When they say "I'll know it when I see it" they are saying one of two things.  Usually they mean "I don't have a clue what I want, or what is happening in the market so I want you to show me." or they mean "I don't trust you to find a place for me, I need to look at them all."

Before I was a licensed agent, I was in the second group.   I had so much trouble with agents I created an ap to help them "score" homes before they showed them to me.  The ap isn't yet for sale because I figured out some flaws while I was getting my real estate license.

The real secret to finding a deal is understanding how the internet works and understanding that most agents don't have a clue.  They put their best foot forward on the MLS and maybe on their website and then transition to what my friend and mentor Jeff Walker calls "Hope Marketing".  They hope that somebody stumbles across the home among the thousands of other homes in the area and makes an offer.

With all of the tools and resources out there that teach online marketing I am amazed at how little real estate agents really understand.  When I wrote The Easy Guide To Real Estate Marketing it was intended for brick and mortar businesses, but any agent with an office address can use the same tools.

The biggest mistake I see agents make is using generic auto email programs.  The "new listings" are sent out and eventually end up in the spam box.  The mass mailer approach might land one or two sales a year but just about every agent I talk to complains about the lack of buyer "loyalty".

Buyers don't want spam, they want an agent who listens and gets them the moon for the price of air fare to San Francisco.  The best buyers agents have to educate the buyer and put a lot of work into finding them a home.  In the Orange County coastal market today, there is a lack of inventory or homes for sale and a lack of buyers with the cash and desire to move.  Loans in this market are tough because the home values are still quite high when compared to the national average.

I realize for a solo agent working for a broker, hiring an SEO or online marketing company like the Bourquin Group can be prohibitively expensive.  On the other hand getting a copy of the book containing a big percentage of our secret sauce can be an investment in your business.  Don't get left behind and don't spam your buyers.  Get online and get marketing the right way today.

If you are selling a home, and don't feel like your agent is getting the job done, grab a copy of the book and help them out be doing a little marketing on your own.