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.