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May 14, 2008
Buying a real estate bargain
Why many bargains are not as good as they seem
Having bought several hundred homes for our own companies in the past three decades, I can attest to the fact that in real estate, hindsight is often better than foresight; that what appeared to be a bargain at the time of purchase turns out to be no great deal; sometimes, the deal turns out to be a real dud. Even though I’ve been dudless for a good length of time now, I understand that I must continue to knock on wood and be ever attentive for the many duds lurking around every corner of the real estate market.
Nassim Nicholas Taleb talked about Gerontocracy in his excellent book, Fooled by Randomness. In talking about investing (Wall Street traders in this instance) he says, “A preference for distilled thinking implies favoring old investors and traders, that is, investors who have been exposed to markets the longest, a matter that is counter to the common Wall Street practice of preferring those that have been the most profitable, and preferring the youngest whenever possible.... Survival of the fittest does not seem to be properly understood...it will be unclear who is actually the fittest, and those who will survive are not necessarily those who appear to be the fittest. Curiously, it will be the oldest, simply because older people have been exposed longer to the rare event and can be, convincingly, more resistant to it.”
A recent article by Dan Whitcomb from Reuters perfectly proved Taleb’s point. Whitcomb says, “A California man who has defaulted on nine homes and expects banks to foreclose on all of them, forcing him into bankruptcy, says he now considers it a mistake to have invested in the real estate market.” The article shows a picture of the young investor holding a dog, his wife stands next to him holding their baby; they are both smiling pleasantly. Whitcomb continues by saying that the young investor, “...invested in his first property in North Las Vegas in 2004. He snapped up eight other homes in hot markets like Phoenix and Palm Springs, Calif., over the next two years before he realized that the housing market was softening.”
When everybody was exalting real estate investors who were the most profitable — actually speculators and not investors; most of them were young and inexperienced — during the inflation of the currently deflating housing bubble, many of us who had been kicked in the face by previous duds were afraid of jumping into deals that would leave us holding another dud when the music stopped; and the music has stopped.
This brings us back to our main theme: why many bargains are not as good as they seem. I make offers on many houses during the course of each month; most are intended to be kept as rentals in this market, and some will work as “flippers” (houses that will be rehabbed and sold, hopefully, at a profit); because of my strong dislike for getting kicked in the face by another dud, few of my offers are accepted by sellers (mostly banks and government agencies). I like to track each house on which we make an offer, to stay sharply in tune with the market. I’m amazed at what some people are paying for houses; generally a whole lot more than I had offered. This is a buyers’ market, but buyers still need to follow the old adage, “Let the buyer beware.”
There seems to be no thought given to the fact that houses wear out and become functionally obsolete as do cars and other personal items. I will admit that some people are getting extremely good deals, but many buyers with limited buying experience are paying too much for houses that are well past their prime. Location, of course, is of prime importance; blow the location stage of the buying process, and the rest is unimportant. Beyond location, age comes next in importance. Unless an old house has been COMPLETELY rehabbed — taken down to the bare studs and rebuilt as if it were a new house — there is no way a typical tract house built in 1940 will not have serious flaws today; even well built custom homes from back then will be nearly as bad.
I’m not just talking about inexpensive houses. I toured a relatively new custom home foreclosure that had almost 4,000 square feet with a client recently; it was on a rainy day. Water was pouring into one of the living areas. There was a lot of sheetrock damage; there were major problems with structural and cosmetic items in other parts of the house (the house was only about six years old), and the floor plan had been designed for flair rather than functionality; there was lots of wasted space. The seller (a lender) had it priced in the $300,000 range, the appraisal district had it assessed in the $400,000 range; it was overpriced at anything above $150,000. Just because it’s a buyers’ market you can’t assume what appears to be a good deal is actually a good deal.
In this market, a wise investment (typically free to buyers) is the use of an experienced Realtor when buying any property, new or used. Call us for help in finding the best deal. - ☺md
Apr 22, 2008
The many anachronisms of house design
FHA and the two foot door
Since its inception, the Federal Housing Administration (FHA) has had a great influence on medium to modest priced housing on a number of fronts; for example, most people are not aware that FHA set many design standards for modest priced housing. When I was in college I studied the FHA minimum property standards (MPS) manual as a monk would study his Bible.
The MPS manual set minimums for things such as room sizes and the width of doors. A hallway could be no less than three feet wide. A room to be considered a bedroom had to be at least eight feet wide and ten feet long. If a builder constructed a three bedroom house and one of the bedrooms was seven feet by eleven feet he could not sell it as a three bedroom house to someone buying the house with an FHA loan; it would be appraised and valued as a two bedroom house; the seven by eleven bedroom would be considered a generous closet.
The MPS guidelines for doors gave minimum dimensions for width and height into different parts of the house. The front door had to be at least three feet wide, while the back door could be no less than two feet and eight inches wide. A bedroom door had to be at least two feet and six inches wide, and a bathroom door could be no less than two feet wide.
Well into this century a large number of modest houses were built for buyers who use easy qualifying FHA loans (FHA loans are today becoming more and more popular on modest and relatively upscale houses). In an effort to build competitively, and still have their houses meet MPS guidelines, most builders constructed to minimum sizes: bedrooms had doors that were two feet and six inches wide, and bathrooms had doors that were exactly two feet wide.
Many of those builders were also constructing upscale housing. A few of them would increase the width of a bedroom door by two inches; there is a discernible difference between two feet and six inches and two feet and eight inches. As a rule, the front and back doors remained three feet and two feet eight inches respectively, and bathroom doors almost always remained exactly two feet wide even on the upscale housing. To this day, many houses designed to sell even into the hundreds of thousands of dollars continue receiving rear entry doors which are too narrow at two feet eight inches (they should be three feet like the front door), and the biggest design flaw: bathroom doors that are only two feet wide.
Since we visit many builder model homes and spec houses each year, we get to compare the less expensive to those considerably more so. We have been to houses pushing the million dollar price range (in the Dallas area and other modest-priced areas, mind you, not in over-priced parts of California) that had bathrooms whose entrance doors are only two feet wide; that’s a serious sin by any design standard.
Measure the doors in your home's bathrooms; there's a very good chance they barely meet FHA's MPS standards. Try moving swiftly into a bathroom with a door that’s two feet wide without smacking your elbows against the door jamb unless you tuck in your arms or turn sideways as you enter.
The last house I designed had all doors three feet wide, and the front and rear doors were six inches wider; rarely did I have to increase the size of a room or a hallway to accommodate a wider door on that design. And the cost of a wide door is a miniscule part of the entire cost of today's houses. If you visit model homes, take along a tape measure. If a builder of upscale housing uses a door that's two feet for ANY room or closet, you might wonder how many other design shortcuts he took on the rest of the house.
Narrow door widths (on any size home) are a design anachronism; a nuisance for the home owner and a very minor money saver for the builder. But you might wonder about the biggest anachronism in home building: wood houses (Would any highway engineer in his right mind design a freeway bridge out of wood? Would Ford design a wood car?). Most modern houses in this country are built as they were built two hundred years ago: basically wood boxes wrapped in brick or wrapped in a modern plastic or composite siding. They can easily burn to the ground; thousands of people die each year in house fires. A large number of folks are lost when a strong wind blows them away along with their houses, or are crushed when the wind slams the house down on top of them. And finally, countless thousands of people poison the ground under their houses so bugs won't eat the wood structure.
Wood houses are economical to build, but concrete houses, although somewhat more expensive, last for many generations while providing extreme safety and energy efficiency for their owners. If you’re in the market for a new home, you might want to look into Monolithic Domes. - ☺md
Apr 10, 2008
Bad news for sellers: DFW real estate sales dive in March
Single family home sale closings in the Dallas/Fort Worth MLS system took a steep dive in March; they were down 25%, and condo sales were down 40% compared to a year ago. The median price of single family homes was UP 2% (try that trick in California, where prices have been diving along with sales); however, the days on market increased by 13%.
Pending sales (sales that will take place in the next few weeks) were bleaker: they were down 30% for single family and 37% for condos; new listings were down 23% and 20% respectively. The MLS system had a total of 48,828 residential properties for sale at the end of March. Since there were 6,563 residential sales in March, it means that we have over 7 months supply of residential properties for sale; that isn’t too bad as a bare statistic, but home builders still have a lot of inventory that is not in the system, they’re still starting more houses, and it’s hard to guess how many bank REO, HUD, and VA properties are in inventory that have not been placed in the system yet.
What can sellers do to keep from getting beat up in this market? Condition is absolutely essential; houses in truly mint condition are bringing the best prices; unfortunately, best in this market would be mediocre in a sellers’ market. On the other hand, sellers offering properties in poor condition are getting hammered. It’s important to understand that mint condition means at least new interior and exterior paint, and new carpet; it also means everything else looking and working extremely well. If sellers slap new paint and carpet on a house with a mildly shifting foundation, with beat up door knobs and kitchen cabinets, with a twenty year old range and a condensing unit from the late 1970s, they’ll still get beat up.
Before sellers undertake major renovations on their houses, the market around them must be studied carefully. Even some nearly-new houses are selling at great discounts because their neighborhood is loaded with foreclosed properties for sale. Selling an almost new house in competition with the builder — who’s about to go bankrupt and is unloading properties below cost — is a sure way to get beat up on the sale.
For sellers this is a time to get with a very experienced agent or broker to carefully consider their entire economic position, and their true selling motivation in order to come up with the best property disposition strategy. Call us if you have questions about selling your house. - ☺md
Mar 29, 2008
How to get a good deal in real estate
Not all houses for sale are priced correctly considering their location, condition, and the state of their local market. I’ve sometimes complained out loud when I see an overpriced listing. My son, John, is fond of saying, “The price is only a number.” That’s perfectly true: The asking price is rarely the selling price, especially in this market. Also, the price at which a home sells is not determined by the seller, the Realtor, an appraiser, the county appraisal district, or even a lender. It is set by the market; more specifically, real, honest to goodness value is set by individual buyers willing to pay cash. A more illusive value comes from buyers paying with a loan. And a bogus value often comes from buyers paying with easy-money, zero down financing. The latter is a type of loan quickly heading for extinction (except for VA loans).
Housing oversupply has made pricing a tricky process lately. I won’t go into great detail, but the current housing oversupply was caused by financing that made home buying too easy for people who could not afford current payments unless their economic condition was as stated on their loan application, or unless their economic life never missed a beat. Sadly, too many fraudulent loan applications were accepted by lenders during the last few years, and a declining economy has left many home owners without a job and a means to pay their loans. We’re not out of the water yet; we’re seeing only the tip of the iceberg in foreclosures and in distressed ownership sales. This housing downturn has two or three years to go before we see an upturn.
That said, not all markets will collapse or reinvigorate at the same time or at the same magnitude. Dallas-Fort Worth added more than 162,000 residents between July 2006 and July 2007, more than any other metro area according to Census Bureau estimates. These estimates appear accurate because even though we had a huge inventory of new and existing homes, a lot of houses sold during that time. I believe the DFW area is still at or near the top of the mountain in population inflow; so our market might not sink as deeply, and might come out sooner than those that had a speculative heyday.
With the difficult process of setting values, how do you get a good deal? How do you get a REALLY good deal? There are three keys to this end: Patience, market knowledge, and time. Let’s look at each key.
Patience
Most people buy emotionally. That doesn’t happen only to home owners; most relatively new investors fall into that trap. It’s difficult to get a good deal when emotions rule the deal. Buyers will fall in love with a house and overpay. The best deals are in distressed properties. The patient buyer will study a property carefully using a spreadsheet to figure out the exact cost of the house after all expenses are considered, and base the offer on the sum of those costs. Savvy buyers will make an intelligent offer on a property, and then they’ll go to the next property to make an offer on that one. They’ll continue making offers, realizing that some offers will be completely at odds with what the sellers expect; that’s okay; buyers set price. Patience means it will take time to get a good deal; perhaps it will take a few months of making offers (sometimes on the same properties as sellers realize they’re priced too high and drop price or look at lower offers). At some point an offer is accepted by the sellers.
Market knowledge
If the buyers, and especially if the buyers’ agent don’t have complete knowledge of the market, there’s a strong chance there won’t be a really good deal. Also, if the search is in a very specific, very limited-size location that is desirable to many buyers, there might not be a good deal available there any time in the next twenty years. Those wanting a good deal might need to expand the size of their search area.
Time
Time will tell if today’s deal was good or great. I know today that the houses we bought in the Avenues in south Fort Worth twenty years ago for less than $2,000 each were really good deals; so were some of the houses we picked up a decade ago in the Katy area of Houston. And I also know that some of my great deals from the past were not so great; one or two bombed. Experience allows me have a feel for how a deal will be judged in the future; however, the exact results are never known till we get there in time.
Looking to buy a good deal? We’ll do our best to help you find one. Call us. - ☺md
Mar 11, 2008
Blood runs in the streets
It’s 1988 all over again
I pulled up a list of houses that could be good investment properties from the MLS system this weekend; out of about 250 single family homes, at least 200 were bank foreclosures. Barbara and I previewed a dozen of the bank foreclosures on Sunday. Wow! Every one was a flash back to 1988 and the affirmation of two truths: One, that history repeats; and Two, that the best deals come when a market is overloaded with product. Twenty years ago the DFW real estate market was overloaded with product.
Two of the houses were completely boarded up; no way to get inside. What a fabulous way to buy property for pennies on the dollar. There is no way that those sellers will receive any realistic offer for their Real Estate Owned (REOs); great for the buyer, bad for the seller.
Another house had a real estate broker’s sign as well as a large yellow “Auction” sign, advertising the property auction which happened to be that same day. We entered the property and here’s what we found. There wasn’t one piece of sheetrock that didn’t have a hole in it; and it wasn’t vandalism; someone had taken every piece of copper wire out of the walls and ceilings. The kitchen was gone. The boards covering the back patio door were loose, so the house was accessible to anyone. As we were leaving, the neighbor was coming home in her car; she complained to us that the owner ignored her pleas to clean up and secure its property so thieves and undesirables couldn’t get in it. I had a strong hunch that the house would not sell that day at auction; it didn’t. I have another hunch: that someone will get a real steal on that property; and it comes with at least one very nice neighbor.
One house was an absolute disaster; ceilings were caving in from leaks in the roof; there was sheetrock and insulation all over the floor; the foundation appeared to be mostly gone, the floor boards under the carpet felt as if they were undulating with the dirt on which they rested. The house had been on the market about four months, and the price had not been taken down aggressively enough over that time; at some point, the price will be dropped low enough so that the seller’s asset manager accepts an offer that cuts the price down considerably lower than asking price.
Nathan Rothchild’s famous maxim, “The time to buy is when blood is running in the streets,” was repeated by John D. Rockefeller as, “The way to make money is to buy when blood is running in the streets.” This idea was the basis for three great books by James Dale Davidson and William Rees-Mogg: Blood in the Streets, The Great Reckoning, and The Sovereign Individual. Do yourself a favor; get them and read them; you’ll understand why there are such great deals in real estate right now. When you look at houses that are being sold by ignorant and desperate sellers (banks) in the best condition (abominable) for receiving the lowest offers, you’ll realize that now is the time to buy a home or investment property.
So how’s our market? Here is information from the local MLS system at the end of February. Single family sales are down 10% from a year ago; condo sales down 23%. Rentals are UP 28%; yes, that’s up. The average price of single family houses was down 1% (take that California and Florida which are down in the double digits). Pending sales for single family homes are down 24% and condos are down 41%. Pending rentals are UP 20%. There were 47,497 residential properties for sale in the MLS at the end of February. You can add about 8-10,000 new homes for sale to that figure. There are a few thousand homes that have been foreclosed (we have some) that are not yet on the market, and there are thousands of houses with delinquent loans that will be on the market after foreclosure in the next few months. What does all of this spell? OPPORTUNITY.
If you’re a serious buyer, here are a couple of thoughts. First, the asking price is only a figure; second, call me for help in finding a fabulous deal. - ☺md
Feb 25, 2008
$40,000 off, 4.99% fixed interest rate.
No payments for 4 months, and no closing costs!
I receive home builder email offers on a daily basis; they want us to help sell their homes; we often do because the offers are good for the buyers and for us. The offer above is from a large national builder; their prices range from just under $100,000 to just over $400,000 in the Dallas/Fort Worth area. During a very limited time they’re offering various discounts, up to $40,000 on some of their completed homes; they’re also offering a fixed rate that’s about one percent below the normal fixed rate terms (a 17% discount on the interest rate cost to the borrower); they’re paying the first four months of the buyers’ payments; and they’re paying for the buyers’ closing costs; in addition, there are incentives and bonuses for the selling real estate agent. Why would they do that? My guess is that it could be the third time up for air before they drown.
As I pen this, another email, this one from a large local builder, hit my inbox: A completed house previously priced at $141,000 is reduced by $10,000; also included are $3,000 for the buyers’ closing costs, and an additional $3,000 bonus for the selling agent. Oh my, what’s this? Another email just hit my inbox, from another large local builder: Highly discounted houses, with great buyer incentives, in most of their subdivisions, with incentives to selling agents of up to $15,000 bonus over and above the commission they normally pay.
John Caulfield, in an article he wrote last week for Builder Magazine, said that “Kimball Hill Homes is working toward presenting a plan to restructure its debt and its business to lenders by the end of this month. The Illinois-based builder, which continues to leak money, also stated last week that it is considering several options that include petitioning a U.S. bankruptcy court for protection from its creditors.” Kimball Hill ranked number twenty-two in closings nationally in 2006, so it was not a lightweight. Some other heavyweights are struggling; some lightweights have already gone down and drowned; plenty more will follow. I would further guess that more—and perhaps even larger—heavyweights will go down permanently after their third time up for air.
I’ll get back to houses in a moment, but you’ll better understand the importance of failing homebuilders when you look at silver. About four years ago, when silver was selling in the $6 per ounce range, silver analyst and writer Ted Butler was begging his readers to buy silver. He said something like, “This is the greatest buying opportunity of our lifetime.” He wasn’t just talking about a great buying opportunity in silver; he was talking about THE great opportunity of our lifetime—in silver or anything else. Silver crossed $18 per ounce last week; it looks like Ted is right on track. His theory is based on supply and demand; there’s a whole lot more demand for silver than there is supply. Ted’s research shows that there’s more above-ground silver than there is gold. His long term position is that silver will be priced at least in the hundreds of dollars, if not more. Supply and demand, and the sinking value of a hard piece of printed paper called a dollar, are pushing the price of silver (a commodity with real intrinsic value) up at an accelerating pace.
Let’s get back to real estate, which is another commodity with real intrinsic value. Great real estate buying opportunities in the DFW market are available now and should be with us during the next couple of years; some could be THE great real estate buying opportunities of YOUR lifetime. Drowning homebuilders might be the key to a decrease in the local supply of houses. Our market continues to draw people from near and far. A larger population creates increasing demand. The cards don’t look good for many builders who overbuilt here and everywhere else. To get rid of their inventory in houses and lots—which bleeds away money in taxes, maintenance, utilities, and interest—they are selling many houses at a loss; and they are spending huge amounts in selling expenses to sell at a loss. How many pints of economic blood can a builder give, no matter how large it is, before it expires? Kimball Hill appears to be on its last few drops. There will be a point when enough large national and local builders drown that production of new houses in our market will fall enough so that there is a turnaround in the DFW housing supply/demand equation. There is no way that small, custom builders will be able to take up the slack in production that large builders have brought here; national builders had billions of dollars available to them from Wall Street and the large banks tied directly to the Fed; they used those billions to develop lots and build with little thought to overbuilding.
Naturally, there will also have to be a turnaround in the foreclosure situation; but it will all come to pass. When listings in the MLS system begin to decline month after month for several months in a row, prices will stop declining and start their way up, following silver’s climb as a result of our misguided fiat money policies that produce too many pieces of paper and blips on computer screens that chase too few commodities; it’s called inflation. Inflation will be VERY GOOD to those who buy real estate in the DFW area, leveraged with cheap interest rates, during these cheap times.
There are EXTREMELY good deals right now, not just with distressed seller situations (foreclosed REO properties, HUD and VA acquired homes, short sale properties) but with new builder houses. If you’re in the market for a house, whether for investment or a homestead, DO NOT do it without expert help; don’t visit a builder’s model home or a Realtor’s open house without an expert real estate agent or broker—one with lots of experience—by your side. You need your own Buyer’s Agent. He or she will work in your best interest; and best of all, they are free to you. Call us for ideas, information, and help in finding your own great real estate buying opportunity. - ☺md
Feb 12, 2008
Traffic jams, overcrowded roads, hours idling, and your home’s location...
2.9 billion gallons of fuel wasted
According to the Texas Transportation Institute, traffic jams cost the U.S. economy $78 billion annually; they eat away 4.2 billion hours in travel delays and waste 2.9 billion gallons of fuel each year. Buyers must take extreme care when choosing their home’s location.
To understand the connection between waste and location, buyers should understand what’s happened to the country’s road system and the growth of highway demand. Between 1982 and 2006 there has been a 6.6% increase in the number of road miles. In that same period population has increased 28.4%, the number of drivers has increased 36.2%, the number of vehicles has increased 52.4%, the number of vehicle miles has increased 94.5%, and the hours of delay have increased by 171.4%. The average American spends 40 hours per year stuck in gridlock. It’s no wonder some people get so angry and frustrated they take pot shots at other drivers.
At present the amount of money invested in roads is not enough to offset the beating they take. The U.S. Department of Transportation (DOT) estimates that over 160,000 miles of federal highway has pavement deemed “unacceptable;” over 153,000 bridges are structurally deficient or functionally obsolete; this might bring to mind the fatal bridge collapse in Minnesota. The need for additional miles of highway will double in the next 30 years; meanwhile, the U.S. will probably add another 100 million people. If we add capacity at a rate no faster than what we've done in the past, the average American could spend up to 160 hours each year in traffic. That’s about four workweeks!
Not everyone has a long highway commute to work; but too many people do. When looking for a home, it’s important to keep this information in mind in order to keep from joining the mad crowd idling on a freeway “parking lot,” and helping waste vast amounts of gasoline. It’s easy for buyers to convince themselves that their dream home is “only” fifteen miles from work. For those who might work 48 weeks per year the math would indicate 7,200 total miles driven. That’s a lot of miles! Even if they could drive them at 60 mph, the time spent driving would be 7,200 minutes, or 120 hours; that’s a total of 5 entire 24-hour days spent driving. There is no way these home owners could manage the entire route at 60 mph unless they live and work next to freeway entrance ramps, so there’s a strong chance that a lot more idling, waste, and frustration will be in their future.
Another way to look at commutes is to figure the value of a home owner’s time: Time wasted multiplied by the amount of money the commuter earns per hour is the amount of money wasted commuting. In the above example, 120 hours multiplied times $30 per hour is $3,600 worth of time wasted; add to that the cost of car repairs, tire replacements, gas consumed, and the commute waste starts to add up to serious change. In addition to cost and waste of time, the danger of an accident has to be added to the equation; there are a number of commuters each year who do not make it to their next birthday because of a serious accident; some make their next birthday with minor or major disabilities.
A home owner in Mesquite called me last year and said that his job had moved from Mesquite to Fort Worth; the commute was taking a serious toll on him. He wanted to know if it was wise to sell his home in this buyers market and buy or rent near his new job location. I suggested that he put the cost of the commute on a spread sheet, come up with an exact cost in time and money wasted, and to call me when he had the figures. He called back the next day with shocking figures. The real cost was so high that he could afford to let his house sit idle while he rented an apartment close to work. But he did better than that; he rented his house in Mesquite to excellent tenants and rented an apartment for himself in Fort Worth; one very close to work. He’ll buy a house in the coming months taking great care to keep the commute distance at a minimum.
Location, location, location is not just about great schools, wonderful atmosphere, the fresh country air, and great property price appreciation in the future. It’s about reducing time on the roads not just to work, but to schools, church, soccer practice and piano lessons. The moral here is to take great care when buying a home. - ☺md
Feb 7, 2008
Buy when everybody else is selling
Only sell when everybody else is buying
The MLS statistics for the Dallas/Fort Worth area for January are almost as dismal as they were for December... for many sellers, that is. For some sellers things are not all that bad; for buyers however, the statistics indicate a great opportunity. If there’s one lesson that’s been hammered into my brain during 43 years in housing is that the best buying deals are found when everybody else is selling; when people read all the bad news and can’t see the end of the bad news tunnel. Pay close attention, buyers: the good news has arrived. There are great buying opportunities in our local market; you can buy houses today for considerably less than reproduction cost.
Here’s a snapshot of the January statistics:
- Single family sales were down 16% from January of last year;
- Condo sales were down 22%;
- Farms and ranches were down 21%;
- Lots and vacant land was down 16%;
- Commercial was down 28%;
- Rentals were UP 20%.
What’s this? Rentals were up? Is that a great anomaly? Not in this market. When there’s a rise in foreclosures lots of owners become tenants; they can’t buy with damaged credit, tightened lender qualifying requirements, and the demise of the sub prime market.
This is a great time to become an investor. You can buy low, rent in a rising market, and wait for your property to increase in value when the market changes. You might ask, what’s the best way to become an investor? The best way is to rent your modest home at a profit and move to a more upscale home (I said upscale, not McMansion) that can become another rental property in the future.
Here’s an example: John and Mary Doe (name changed to protect the successful) bought a home 15 years ago (a brick 3-2-2 with 1,400 square feet of living area). They currently owe $42,000, and their payment is $580 per month; the house is worth $100,000 in a normal market, though it would only sell for $90,000 in this market. They rent their house to GREAT tenants (call me for ideas on how to get great tenants) for $980 per month (rents in their neighborhood for like houses are going for over $1,000 per month; hint: modest rent is one reason they end up with GREAT tenants). Their gross cash flow is $400 per month.
John and Mary call us and we find them a GREAT deal on a more upscale house (address withheld to protect the successful). At the ridiculously low interest rate they receive in this market (well below 6%) their new house payment is right at $1,000 per month. That’s nifty: their tenants make their new house payment, they continue to make their old house payment; of course, John and Mary get to occupy the new house.
Life is rough for those who see the glass as half empty; it’s good for those who see the glass as half full; it’s best for those who realize the glass is actually filled all the way to the brim.
For more ideas; for answers to your questions; give us a call. - ☺md
Jan 29, 2008
National housing data show a steep decline in sales
The Commerce Department reported that sales of new homes fell 4.7% to a seasonally adjusted annual 604,000 in December, far below the 645,000 projected by economists; the lowest pace since February, 1995. December's sales pace was down 40.7% year over year; a lot worse countrywide than we saw in the DFW area.
Those sales figures probably overstate the health of the homebuilding sector, according to analysts, since they don't include cancellations, which have soared in the past year. One new home salesman for a nationwide builder I’ve worked with told me in confidence that their cancellation rate was about 40%.
As to the market as a whole (combined sales of new and existing homes), sales fell 24.6% in December compared with a year earlier, the biggest year-over-year decline since 1982.
The median sales price tumbled a record 10.9% compared with November and was down 10.4% compared with a year earlier. That was the biggest year-over-year drop in the median sales price since 1970. Have we hit bottom yet? I’d bet we’re not close to bottom; however, the Dallas/Fort Worth area, where we had relatively mild increases in prices during this housing bubble, shouldn’t experience anywhere near the plunge that we’ll see in places that had 30% yearly price increases.
How is that affecting buyers in our area? Those home owners selling “perfect” houses - houses that are in near new condition - are doing quite well considering our glut of houses for sale; houses that have even a few sins are selling at moderate to strong discounts; houses in rough shape are beginning to sell at real bargain-basement prices. If you’re a seller, call us to learn how to maximize the price you can get for your property. - ☺md
Jan 22, 2008
What lower Fed interest rates mean to housing
The Fed dropped interest rates by 3/4% today; down to 3.5%. Does that have any impact on housing?
In the short term, it could help lower house mortgage rates for folks with good credit. For the long term, it will weaken the dollar and help push rates higher. The short term strategy is to take this opportunity to buy a house at a strong discount with a low fixed-rate. One of the loan officers we work with told me this morning that a loan he was working on at 6% had dipped to 5.875%. While that tiny dip might seem insignificant, it amounts to a savings of $5,768.81 over the term of a 30 year $200,000 loan.
An added bonus will be that in order to keep the current recession from turning into a depression, the Fed will print more and more money; that will weaken the dollar (inflation); eventually that $200,000 loan will be paid off with much cheaper dollars. Those who look at the big picture and act wisely will reap huge rewards in a few years when the real estate market gets strong again.
Since the DFW area consistently attracts new residents, we will always need more housing; however, we don’t need the over production we’ve had the last few years when every national and regional builder moved into town. I predict we’ll see the demise of more than one large builder in the next year or two (KB Home lost $772.6 million just in the last quarter of 2007; D.R. Horton lost $712.5 million for the year; Centex lost $983 million just in the second quarter last year); at the very least, we’ll see most builders scale back considerably as they take down their lot and land inventory. Since we still have some of the most affordable housing in the nation, we could see prices firm up in the next few months.
What does all this mean? It’s a good time to buy. Call us. We’ll work hard to get you the best deal possible. - ☺md
Jan 10, 2008
Local MLS home sales take a dive in December. Listen up! Is it a good time to buy?
The statistics are out for the Dallas/Fort Worth MLS for December, 2007: It was the worst trending month of the year; actually, one of the worst I’ve seen since the crashing real estate times of the late 80s and early 90s. Single family home sales were down 25% compared to December, 2006.
National Association of Realtors (NAR) economists stated that the pace of U.S. home sales will pick up significantly in the second half of 2008. They are calling for a .7% increase in home sales in 2008; they’ve already given a figure for the number of homes that will sell in 2009 (5.91 million). Can anyone look that clearly into the future? Common sense would doubt it.
Other economists are talking recession (maybe worse?), inflation and deflation, loss of jobs to overseas competitors, bloated government spending, unchecked credit creation, CDOs and thousands of derivatives based on millions of bad loans not just in real estate but those now showing up in commercial and credit card loans that are bad for banking and lending. Is this doom and gloom information? No, this is actually great news for buyers.
Real estate can take a decade or more to wind and unwind; we’ve barely begun to unwind; this downturn only started in earnest in 2006. A big unknown is the worldwide fiat money experiment that has such an unclear future. For an insight into how one of the first great fiat money experiments ended you can read the excellent, short book Fiat Money Inflation in France by Andrew Dickson White (1832-1918). You’ll find more than one reference to the value placed on real estate even way back then. Value will continue to be placed on well-selected, bargain-bought real estate in the future.
In real estate, if there’s good news for sellers it’s usually bad news for buyers; if there’s good news for buyers it’s usually bad news for sellers. The real estate market is really not much different than the stock market. For a good while TV commentators have praised rising stock prices; rising prices are great for sellers. Commentators don’t mention the cost to buyers who must pay more to buy stocks. If the Dow were to drop 50% tomorrow there would be much wailing on Wall Street, perhaps even a few jumps from high places without parachutes. But there would be a good number of buyers licking their chops and actively picking up stock bargains. So it is on the real estate front; this is a great time for bargains.
What about sellers? They’re getting beat up. Those sellers who think it through carefully, accept the market’s values, and prepare and price their properties correctly are escaping major damage. Those who don’t? They’re getting beat up.
Buyers may be thinking that if there are great deals now that it might be better to wait and buy later when prices are even better. Perhaps. But what if NAR economists are right? Or what if just the right property comes on the market tomorrow at the right price? If you miss it maybe there will be others cheaper, but there might not be that one great deal that’s available today; that perfect house just for you. For the non-investor especially, this is truly a time to take advantage of the great selection available at really down to earth prices. For the investor, this will be a tricky period. Those who don’t study the past and fail to run serious scenarios on a spreadsheet might find yesterday’s bargain rental or flipper tomorrow’s overpriced property.
If you’re a seller or a buyer, please call us with any of your real estate questions. Better yet, let us help you buy or sell; we’ve bought and sold hundreds of our own properties. Our experience will guide you in making intelligent decisions. - ☺md
Jan 2, 2008
Government helps short sale sellers by modifying the tax laws
H.R. 3648 was passed and signed into law to help people avoid nasty tax consequences after selling their houses through a short sale process. Most lenders were issuing a 1099C form to home owners who lost their house in a foreclosure or a short sale; that meant the distressed owners had to claim as income the amount of the loan that was forgiven by the lender (the lender’s loss amount). It was like giving sellers one last kick after unfortunate circumstances had kicked them economically.
For some home owners this is a real boon; in a sense, it gives them tax free income. For example, a couple who bought a house for $100,000 ten years ago. They refinanced a year ago and borrowed $200,000, giving them almost $100,000 in cash (after closing expenses). They subsequently get in trouble and fail to make their payments. They sell the home in a short sale; the lender receives $100,000 after all selling expenses are paid. There is real income here; however, the new law, called the Mortgage Forgiveness Debt Relief Act of 2007 eliminates the taxable gain. Most home owners who are unable to make their payments are in real economic pain and this law certainly makes sense. Even for those who might have gained some free cash, over the long run they will lose more than they gain because of credit and higher payment consequences.
This law applies to owner occupied properties; it appears that investors are left holding the bag. Consulting a tax advisor might be a good idea for those who find themselves with a high-value 1099C. - ☺md
Dec 14, 2007
Avoid foreclosure
There are two types of sellers:
- Those who want to sell;
- Those who HAVE TO sell.
We hear, almost on a daily basis, from home owners in the second category; they are desperate to get rid of their houses for any number of reasons, such as:
- They are behind on payments and have no hope of getting current before a foreclosure;
- They must move and have no equity to pay selling expenses on their home;
- They must move and they cannot rent the house for the amount of the payments;
- The payments will increase because of taxes or a loan rate adjustment and they won’t be able to meet the new payments.
Home owners who find themselves in any of these positions need to bite the bullet and act fast; that does not mean they should act with thoughtless haste. The immediate goal is to accept the fact that the current ownership situation is unsustainable. No matter how much the owners would like to keep the house, sitting back and letting time pass will not change things. They must make an informed decision and stick with it. The goal will be to avoid foreclosure.
There are several options. The first is to sell the house at a loss—take an economic blood bath—and go to closing with a chunk of money to get rid of the house; not a good choice for most owners; an impossible one for those who aren’t even able to meet current payments. Another option is the prolonged way to take an economic blood bath: rent the house at a loss and bleed money slowly instead of doing so in one large chunk; that’s also not a good way for most folks to unload a house.
Another method is to sell the house through owner financing to someone who is willing to make larger payments—after making a good down payment—for the right to own the house rather than just rent it. In the current market this will work in a few rare instances; but it will become a better and better method as there are more people with damaged credit who cannot get a loan from increasingly-scared or weak lenders who have come to realize that making sub prime loans is a good way to lose a lot of money.
For most home owners the best path will be the sale in compromise, more popularly known as a short sale. A short sale means the lender accepts payment short of what’s owed on the loan. The short sale avoids a foreclosure, and generally helps the lender as much as it does the home seller for more reasons than I have room to go into here. The important point is that if a short sale closes, the home seller avoids the many problems associated with a foreclosure.
Most short sales close with the help of real estate agents; most lenders insist that agents be involved in the process. Do all short sales close? No. Do all real estate agents know how to do a short sale? No. The more experienced the agent is in working with lenders’ loss mitigation and short sale departments, and the entire short sale process, the more likely it is that the deal will eventually close. An inexperienced agent will probably not sell the house in the short sale process; the house will go through foreclosure. The very experienced agents will close 85% of their short sale listings. Some short sale houses don’t sell for a number of reasons, including reasons brought about by the lender, the seller, or the market; that’s the 15% of the listings that experienced agents are not able to sell.
A foreclosure negatively affects the home owner to a much greater extent than does a short sale; that’s the reason for working to get out of a bad situation rather than throwing in the towel and letting the lender take the house. The short sale can help the home owners’ cash positions as well as their credit. We’ve worked with home owners in trouble for over 25 years. If you have questions about a short sale, or know someone who might need more information about one, give us a call. - ☺md
Dec 10, 2007
The bubble continues to pop; advice for sellers
I spoke about the sound of a popping real estate bubble back in 2005; nobody was talking about it then; everybody seems to be aware of it now. We currently have a real buyer’s market, and becoming more so by the day. If you’re a buyer, it’s time to start looking for deals. And there are some real deals out there. Here are some examples. Not long ago we sold a million dollar house for 60 cents on the dollar; we recently closed on a house for 67 cents on the dollar of the loan balance, two lenders took a $100,000 hit; a small house with a $110,000 loan balance netted the lender slightly over $70,000. In this type of market, what can sellers do to maximize their sale price?
The answer is condition. There is nothing better that the home seller can do to a property to help it sell quickly and for maximum price in an extremely competitive market than to make it shine; in other words, you must beat the competition. New paint and carpet are generally of foremost importance in getting a house to look better than the competition; but sellers can’t stop there. Pets, furniture, and the overall “feel” of a house can make a huge difference in how well a property sells.
Here’s an example of a potential problem. I’ve known several buyers who would not buy a house whose owners had pets because their children have allergies aggravated by animals; the allergens will not be completely eliminated with carpet cleaning. If the carpet is replaced, pets should be kept off the carpet till the house sells; preferably, remove pets from the property to avoid that possible selling obstacle.
Colors can kill a sale. Repainting the interior of a house in colors that are pleasing to the seller can result in colors that offend the buyer. Neutral, light colors in floors and walls is the best way to prep a house for the selling process.
You must also understand what is worth fixing, and what might be a huge waste of money. Sold By Owner covers a range of items that the home seller can do to help sell the property without breaking the bank. - ☺md
Dec 1, 2007
Understanding a good deal...why price per square foot is important
In a buyers' market it's easy to imagine that nearly every property is a good deal; prices in our market are not climbing enough to keep up with inflation (real inflation, and not the sugar-coated lies we're getting from Federal agencies); in fact, due to the bloated residential market and the increasing number of foreclosures and government-agency-acquired properties, plus all the new homes available, a host of properties have declined in price, some quite significantly. How can buyers possibly determine which sellers are offering a good deal, and which ones are in what we call La-La Land?
Price per square foot ($/sf or p/sf) is an excellent way to separate La-La Land from the Real Deal. Back in the mid to late 80s we bought a good number of investment properties; many of them were in south Fort Worth. Our goal was to buy the houses for less than $30/sf; generally we were looking for houses considerably under that figure, often hitting under $20/sf; a good number of very modest houses we bought under $2/sf (that's not a typo, that's two dollars/sf). This meant that we wouldn't even consider a house that was priced above $30/sf. It was a convenient way to search for the kind of deals we were looking for.
For this house hunting shortcut to be effective, buyers must be careful to segregate type and size of houses. For example, there's a huge difference in p/sf between a 5000 sf house in relatively-modestly priced Mesquite or north Fort Worth and the luxury Park Cities areas; things won't compute when lush hardwood panelings and slate floors are compared to the more lowly painted sheetrock walls and vinyl floors.
On the other hand, comparing a 5000 sf house and a 1000 sf house of similar construction in Lewisville won't compute either. It is always cheaper p/sf to build bigger; that's because simply adding square footage does not involve increasing the cost of items like the lot, the garage, the concrete flatwork, main plumbing and electric lines, and expensive items like kitchen cabinets and major appliances. There's a more detailed discussion in Home Buyer's Confidential on this and other time and money saving subjects.
The key is to look at the p/sf of sold properties in and around areas where you contemplate on purchasing. Once you have a handle on figures for different types, sizes, and seller types, you'll easily and quickly differentiate Good Deals from La-La Land ones. - ☺md
Nov 27, 2007
I don’t want to rent my house...the tenants will trash it!
Yes, and if you loan your Lexus to a sixteen year old who’s had ten beers he’ll trash it; maybe even kill himself in the process.
Not a week goes by that we don’t hear from home owners about the fear of renting a home because they can’t chance being stuck with “bad” tenants. Those of us who have managed rental properties for a few decades have all known “bad” tenants; we’ve had our share of trashed houses. But we all learn the hard way; or we learn from others the easy way. We’ve not had a bad tenant, or a trashed house in years.
For some home owners with little, zero, or even negative equity, renting is the only alternative to throwing in the towel and either letting the bank have the house, or working for a sale in compromise (two easy ways to hurt credit ratings). There are three easy steps to becoming a happy landlord:
- Rent only to “good” tenants;
- Understand that your tenants are your customers and treat them that way;
- Maintain the property as if all your wealth depends on it.
The biggest hurdle is economics: understand your position, accept what the market gives you, and refuse to let your emotions guide you. In other words, don’t rent your property without a spreadsheet; that way you’ll rent at the right price to obtain the right tenants.
If you have a property you must vacate and either sell or rent, call us for ideas on selling or getting good tenants, becoming a top notch landlord, and your overall best course of action depending on your economic position. - ☺md
Nov 16, 2007
"We have not seen a nationwide decline in housing like this since the Great Depression..."
This is a quote from John Stumpf, chief executive of Wells Fargo. He added, “I don’t think we’re in the ninth inning of unwinding this. If we are, it’s going to be an extra inning game.” It’s an interesting way to explain banks’ troubles. Citigroup wrote down $11.28 billion worth of bad loans for the third and fourth quarter. Merrill Lynch $8.48 billion, Morgan Stanley $4.68 billion, Bank of America $3.88 billion, Barclay’s $2.7 billion, Wachovia $2.48 billion...there are too many more to mention.
Bad loans on housing has caused much of the grief; there’s a real domino effect here. Since I like to look at the half-full glass rather than the half-empty one, I think all of this grief will be good for buyers; extremely good. Not long ago we closed a deal where two lenders wrote off over a third of the loan amounts; believe it or not, the deal helped the seller and the banks avoid more pronounced losses. But it was such a great deal for the buyers - to the tune of a hundred grand.
I see the housing market during the next two or three years going through the “lost sack of money” syndrome. Imagine a jogger finds a sack of money on the side of the road; it has $100,000 cash in it; there are no identifying marks on the sack; the bills are legitimate, of different denominations. Whoever dropped the sack took a great loss; the jogger has a great gain. The banks will be the ones dropping the sacks; buyers will be the joggers finding them. - ☺md
Nov 9, 2007
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